XNAS:IPAR Inter Parfums Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

( MARK ONE )

 

xQuarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2012.

 

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 8, 2012, there were 30,561,773 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  
       
    Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 2
       
    Consolidated Statements of Income for the Three Months Ended  
    March 31, 2012 and March 31, 2011 3
       
    Consolidated Statements of Comprehensive Income for the Three Months Ended  
    March 31, 2012 and March 31, 2011 4
       
    Consolidated Statements of Changes in Equity for the Three Months Ended  
    March 31, 2012 and March 31, 2011 5
       
    Consolidated Statements of Cash Flows for the Three Months Ended  
    March 31, 2012 and March 31, 2011 6
       
    Notes to Consolidated Financial Statements 7
       
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
       
  Item 4. Controls and Procedures 29
       
Part II.   Other Information 30
       
  Item 6. Exhibits 30
       
Signatures 31

 

 
 

 

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, 2011 included in our annual report filed on Form 10-K.

 

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

Page 1
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share data)

(Unaudited)

 

   March 31,
2012
   December 31,
2011
 
 ASSETS          
Current assets:          
Cash and cash equivalents  $27,410   $35,856 
Accounts receivable, net   164,030    175,223 
Inventories   183,932    164,077 
Receivables, other   2,009    3,258 
Other current assets   5,807    4,258 
Income taxes receivable   56    1,404 
Deferred tax assets   7,338    7,270 
           
Total current assets   390,582    391,346 
           
Equipment and leasehold improvements, net   17,002    14,525 
Trademarks, licenses and other intangible assets, net   109,585    105,750 
Goodwill   2,847    2,763 
Other assets   2,161    1,650 
           
Total assets  $522,177   $516,034 
           
LIABILITIES AND EQUITY          
Current liabilities:          
Loans payable – banks  $13,599   $11,826 
Current portion of long-term debt   3,148    4,480 
Accounts payable - trade   96,936    112,726 
Accrued expenses   43,265    52,042 
Income taxes payable   4,255    2,099 
Dividends payable   2,444    2,443 
           
Total current liabilities   163,647    185,616 
           
Deferred tax liability   6,169    6,068 
           
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 30,561,616 and 30,541,506 shares at March 31, 2012 and December 31, 2011, respectively
   31    31 
Additional paid-in capital   51,264    50,883 
Retained earnings   241,259    228,164 
Accumulated other comprehensive income   14,938    7,747 
Treasury stock, at cost, 10,009,492 common shares at March 31, 2012 and December 31, 2011   (34,151)   (34,151)
           
Total Inter Parfums, Inc. shareholders’ equity   273,341    252,674 
Noncontrolling interest   79,020    71,676 
           
Total equity   352,361    324,350 
           
Total liabilities and equity  $522,177   $516,034 

 

See notes to consolidated financial statements.

 

Page 2
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share data)

(Unaudited)

 

   Three months ended
March 31,
 
   2012   2011 
         
Net sales  $165,368   $133,363 
           
Cost of sales   58,690    46,772 
           
Gross margin   106,678    86,591 
           
Selling, general and administrative expenses   74,924    61,049 
           
Income from operations   31,754    25,542 
           
Other expenses (income):          
Interest expense   362    440 
(Gain) loss on foreign currency   248    (419)
Interest and income   (524)   (317)
           
    86    (296)
           
Income before income taxes   31,668    25,838 
           
Income taxes   11,414    8,498 
           
Net income   20,254    17,340 
           
Less: Net income attributable to the noncontrolling interest   4,757    4,581 
           
Net income attributable to Inter Parfums, Inc.  $15,497   $12,759 
           
Net income attributable to Inter Parfums, Inc. common shareholders:          
Basic  $0.51   $0.42 
Diluted  $0.51   $0.41 
           
Weighted average number of shares outstanding:          
Basic   30,551    30,474 
Diluted   30,686    30,634 
           
Dividends declared per share  $0.08   $0.08 

 

See notes to consolidated financial statements.

 

Page 3
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands except per share data)

(Unaudited)

 

   Three months ended
March 31,
 
   2012   2011 
Comprehensive income:          
           
Net income  $20,254   $17,340 
           
Other comprehensive income:          
           
Net derivative instrument gain, net of tax   102    20 
           
Translation adjustments, net of tax   9,517    17,419 
           
Comprehensive income   29,873    34,779 
           
Comprehensive income attributable to the noncontrolling interests:          
           
Net income   4,757    4,581 
           
Other comprehensive income:          
           
Net derivative instrument gain, net of tax   25    1 
           
Translation adjustments, net of tax   2,403    4,322 
           
Comprehensive income attributable to the noncontrolling interests   7,185    8,904 
           
Comprehensive income attributable to Inter Parfums, Inc.  $22,688   $25,875 

 

See notes to consolidated financial statements.

 

Page 4
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

 

  Inter Parfums, Inc. shareholders       
           Accumulated          
     Additional      other          
  Common   paid-in   Retained   comprehensive   Treasury   Noncontrolling    
  stock   Capital   earnings   income   stock   interest   Total 
Balance – January 1, 2011  $30   $48,887   $205,453   $14,757   $(34,151)  $64,970   $299,946 
Net income           12,759            4,581    17,340 
Foreign currency translation adjustment               13,097        4,322    17,419 
Net derivative instrument gain, net of tax               19        1    20 
Shares issued upon exercise of stock options       445                    445 
Sale of subsidiary shares to noncontrolling interests       213                915    1,128 
Dividends           (2,439)               (2,439)
Stock compensation       176    45            15    236 
Balance – March 31, 2011  $30   $49,721   $215,818   $27,873   $(34,151)  $74,804   $334,095 
                                    
Balance – January 1, 2012  $31   $50,883   $228,164   $7,747   $(34,151)  $71,676   $324,350 
Net income           15,497            4,757    20,254 
Foreign currency translation adjustment               7,114        2,403    9,517 
Net derivative instrument gain, net of tax               77        25    102 
Shares issued upon exercise of stock options       247                    247 
Sale of subsidiary shares to noncontrolling interest                       145    145 
Dividends           (2,444)               (2,444)
Stock compensation       134    42            14    190 
Balance – March 31, 2012  $31   $51,264   $241,259   $14,938   $(34,151)  $79,020   $352,361 

 

See notes to consolidated financial statements.

 

Page 5
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   Three months ended
March 31,
 
   2012   2011 
Cash flows from operating activities:          
Net income  $20,254   $17,340 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:   

    

 
Depreciation and amortization   3,691    2,980 
Provision for doubtful accounts   75    980 
Noncash stock compensation   220    266 
Deferred tax (benefit)   31    (297)
Change in fair value of derivatives   (30)   (119)
Changes in:          
Accounts receivable   16,008    (19,458)
Inventories   (15,155)   (25,269)
Other assets   (370)   687 
Accounts payable and accrued expenses   (29,220)   17,285 
Income taxes payable, net   3,411    3,773 
           
Net cash used in operating activities   (1,085)   (1,832)
           
Cash flows from investing activities:          
Purchases of short-term investments       (3,930)
Proceeds from sale of short-term investments       12,996 
Purchases of equipment and leasehold improvements   (3,953)   (3,287)
Payment for intangible assets acquired   (2,341)   (286)
           
Net cash provided by (used in) investing activities   (6,294)   5,493 
           
Cash flows from financing activities:          
Proceeds from loans payable – banks, net   1,443    756 
Repayment of long-term debt   (1,418)   (2,856)
Proceeds from exercise of options   247    445 
Proceeds from sale of stock of subsidiary   145    1,128 
Dividends paid   (2,443)   (1,979)
           
Net cash used in financing activities   (2,026)   (2,506)
           
Effect of exchange rate changes on cash   959    2,276 
           
Net increase (decrease) in cash and cash equivalents   (8,446)   3,431 
           
Cash and cash equivalents - beginning of period   35,856    37,548 
           
Cash and cash equivalents - end of period  $27,410   $40,979 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $369   $447 
Income taxes   8,062    3,792 

 

See notes to consolidated financial statements.

 

Page 6
 

 

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, 2011. 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.New Accounting Pronouncements - adopted:

 

In May 2011, new accounting guidance on fair value measurements was issued, which requires updates to fair value measurement disclosures to conform US GAAP and International Financial Reporting Standards. This guidance includes additional disclosure requirements about Level 3 fair value measurements and is effective for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance did not affect the Company’s financial position, results of operations and cash flows.

 

In September 2011, new accounting guidance on testing goodwill for impairment was issued, which allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. This guidance is effective for interim and annual goodwill impairment tests for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance did not affect the Company’s financial position, results of operations and cash flows.

 

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

 

3.Status of Burberry License:

 

Burberry

 

In December 2011, the Company and Burberry began to explore ways in which we can work more closely together to realize the brand’s potential and are currently in discussion regarding the potential establishment of a new operating structure for the Burberry fragrance and beauty business. As there can be no assurance that an agreement will be reached, Burberry exercised its right to evaluate the purchase price for the unexpired term of the existing license. In this process, Burberry has until July 31, 2012 to determine whether it wishes to buy out the unexpired portion of the license as of December 31, 2012 or continue the existing contract which runs through December 31, 2017. As previously disclosed, if Burberry were to buy back the license, then the purchase price will be the greater of the fair market value of the unexpired term of the license or 70% of 2010 net wholesale sales of Burberry products.

 

4.Inventories:

 

Inventories consist of the following:

(In thousands)  March 31,
 2012
   December 31,
2011
 
         
Raw materials and component parts  $65,755   $64,411 
Finished goods   118,177    99,666 
           
   $183,932   $164,077 

 

Page 7
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

5.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. In measuring the fair value of our assets and liabilities, we use market data or assumptions that we believe market participants would use in pricing an asset or liability including assumptions about risk when appropriate. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

 

(In thousands)      Fair Value Measurements at March 31, 2012 
       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  $   $   $   $ 
Foreign currency forward exchange contracts not accounted for using hedge accounting   748        748     
                     
   $748   $   $748   $ 
Liabilities:                    
Interest rate swaps  $40   $   $40   $ 

 

       Fair Value Measurements at December 31, 2011 
       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  $   $   $   $ 
Liabilities:                    
Foreign currency forward exchange contracts not accounted for using hedge accounting  $3,532   $   $3,532   $ 
Interest rate swaps   69        69     
                     
   $3,601   $   $3,601   $ 

 

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. The fair value of the Company’s long-term debt was estimated based on the current rates offered to companies for debt with the same remaining maturities and is approximately equal to its carrying value.

 

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 obtained from financial institutions.

 

Page 8
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

6.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. The Company had no cash-flow hedges during the three month periods ended March 31, 2011 and 2012.

 

The following table presents gains and losses in derivatives not designated as hedges and the location of those gains and losses in the financial statements (in thousands):

 

Derivatives Not Designated
as Hedging Instruments
  Location of Gain recognized in
Income on Derivative
  March 31, 2012     March 31, 2011  
             
Interest rate swaps   Interest income   $ 30     $ 119  
Foreign exchange contracts   Gain on foreign currency   $ 114     $ 36  

 

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 not accounted for using hedge accounting as of March 31, 2012 resulted in an asset and is included in other current assets and at December 31, 2011 such valuation resulted in a liability and is included in accrued expenses on the accompanying balance sheet. Generally, increases or decreases in the fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative instrument is designated and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument will be recorded as a separate component of shareholders’ equity.

 

At March 31, 2012, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $67 million and GB pounds 6.6 million which all have maturities of less than one year.

 

Page 9
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

  

Notes to Consolidated Financial Statements

 

7.Goodwill and Other Intangible Assets:

 

We review goodwill and trademarks with indefinite lives for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When testing goodwill for impairment the Company performs a qualitative assessment before calculating the fair value of a reporting unit in the first step of the goodwill impairment test. If we determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test is performed. Otherwise, further testing is not needed. No triggering events have been identified in 2012. The following table presents our assets and liabilities that are measured at fair value on a nonrecurring basis and are categorized using the fair value hierarchy.

 

       Fair Value Measurements at March 31, 2012 
       Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
Description                    
Trademark - Nickel  $2,336   $   $   $2,336 
                     
Goodwill  $2,847   $   $   $2,847 

 

       Fair Value Measurements at December 31, 2011 
       Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
Description                    
Trademark - Nickel  $2,263   $   $   $2,263 
                     
Goodwill  $2,763   $   $   $2,763 

 

Goodwill relates to our Nickel skin care business, which is primarily a component of our European operations. Testing goodwill for impairment requires us to estimate the fair value of the reporting unit using significant estimates and assumptions. The assumptions we make will impact the outcome and ultimate results of the testing. In making our assumptions and estimates, we use industry accepted valuation models and set criteria that are reviewed and approved by management. We have determined that we may be inclined to sell the Nickel business within the next few years and therefore, we engaged a third party valuation specialist to advise us and assist in a potential transaction. As a result, the Company has determined that as of December 31, 2011, the carrying amount of the goodwill exceeded fair value resulting in an impairment loss of $0.8 million. We expect Nickel brand sales to remain steady over the next few years as the result of new product initiatives. In estimating future sales, we use our internal budgets developed from recent sales data for existing products and planned timing of new product launches. If sales for the reporting unit decreased 10%, we could incur an additional goodwill impairment charge of $0.5 million.

 

Page 10
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

To determine fair value of indefinite-lived intangible assets, we use an income approach, including the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. The relief-from-royalty calculations require us to make a number of assumptions and estimates concerning future sales levels, market royalty rates, future tax rates and discount rates. We use this method to determine if an impairment charge is required relating to our Nickel brand trademarks. No impairment charges have been required since 2009. We assumed a market royalty rate of 6% and a discount rate of 7.7%.

 

The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2011 assuming all other assumptions remained constant:

 

In thousands      Increase (decrease) 
   Change   to fair value 
         
Weighted average cost of capital   +10  $(272)
Weighted average cost of capital   -10%  $365 
Future sales levels   +10%  $273 
Future sales levels   -10%  $(273)

 

8.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 the three months ended March 31, 2012 and 2011 aggregated $0.51 million and $0.05 million, respectively. Compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. 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, 2012:

 

   Number of Shares   Weighted Average
Grant  Date Fair Value
 
         
Nonvested options – beginning of period   456,923   $4.40 
Nonvested options granted   4,500   $4.99 
Nonvested options vested or forfeited   (139,343)  $3.91 
Nonvested options – end of period   322,080   $4.62 

 

Share-based payment expense decreased income before income taxes by $0.22 million and $0.27 million for the three months ended March 31, 2012 and 2011, respectively, and decreased net income attributable to Inter Parfums, Inc. by $0.12 million and $0.15 million for the three months ended March 31, 2012 and 2011, respectively.

 

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Notes to Consolidated Financial Statements

 

The following table summarizes stock option information as of March 31, 2012:

  

   Shares   Weighted Average
Exercise Price
 
         
Outstanding at January 1, 2012   823,275   $13.20 
Options granted   4,500    17.07 
Options cancelled   (8,030)   15.21 
Options exercised   (20,110)   12.28 
           
Outstanding at March 31, 2012   799,635   $13.22 
           
Options exercisable   477,555   $12.15 
Options available for future grants   715,325      

 

As of March 31, 2012, the weighted average remaining contractual life of options outstanding is 2.88 years (1.83 years for options exercisable), the aggregate intrinsic value of options outstanding and options exercisable is $2.3 million and $1.8 million, respectively, and unrecognized compensation cost related to stock options outstanding of Inter Parfums, Inc. aggregated $1.3 million. The amount of unrecognized compensation cost related to stock options outstanding of our majority-owned subsidiary, Inter Parfums S.A., was approximately $0.81 million. Options under Interparfums SA plans vest over a four-year period.

 

Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the three months ended March 31, 2012 and March 31, 2011 were as follows:

 

(In thousands)  March 31,
 2012
   March 31,
 2011
 
         
Cash proceeds from stock options exercised  $247   $445 
Tax benefits   25     
Intrinsic value of stock options exercised   78    228 

 

No tax benefit was realized or recognized from stock options exercised in 2011 as valuation reserves were allocated to those potential benefits.

 

The weighted average fair values of the options granted by Inter Parfums, Inc. during the three months ended March 31, 2012 and 2011 were $4.99 and $5.27 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, 2012 and 2011 are set forth in the following table:

 

   March 31,
 2012
   March 31,
 2011
 
         
Weighted-average expected stock-price volatility   40%   38%
Weighted-average expected option life   4.5 years    4.5 years 
Weighted-average risk-free interest rate   0.84%   2.0%
Weighted-average dividend yield   1.7%   1.7%

 

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Notes to Consolidated Financial Statements

 

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.

 

9.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 and warrants using the treasury stock method.

 

The reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:

 

   Three months ended 
(In thousands)  March 31, 
   2012   2011 
Numerator:          
Net income attributable to Inter Parfums, Inc.  $15,497   $12,759 
Effect of dilutive securities of consolidated subsidiary       (54)
Numerator for diluted earnings per share  $15,497   $12,705 
Denominator:          
Weighted average shares   30,551    30,474 
Effect of dilutive securities:          
Stock options and warrants   135    160 
Denominator for diluted earnings per share   30,686    30,634 
           
Earnings per share:          
Net income attributable to Inter Parfums, Inc. common shareholders:          
Basic  $0.51   $0.42 
Diluted   0.51    0.41 

 

Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.23 million and 0.12 million shares of common stock for the three month periods ended March 31, 2012 and 2011, respectively.

 

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Notes to Consolidated Financial Statements

 

10.Net Income Attributable to Inter Parfums, Inc. and Transfers From the Noncontrolling Interest:

 

(In thousands)  Three months ended
March 31,
 
   2012   2011 
         
Net income attributable to Inter Parfums, Inc.  $15,497   $12,759 
Increase in Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions       213 
Change from net income attributable to Inter Parfums, Inc. and transfers from noncontrolling interest  $15,497   $12,972 

 

11.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 specialty retail and mass market fragrances. Information on our operations by geographical areas is as follows:

 

(In thousands)  Three months ended
March 31,
 
   2012   2011 
Net sales:          
United States  $21,352   $11,794 
Europe   145,197    121,569 
Eliminations   (1,181)    
   $165,368   $133,363 
           
Net income (loss) attributable to Inter Parfums, Inc.:          
United States  $1,564   $(294)
Europe   13,981    13,053 
Eliminations   (48)    
   $15,497   $12,759 
           
    March 31,    December 31, 
    2012    2011 
Total Assets:          
United States  $61,398   $59,841 
Europe   471,059    465,747 
Eliminations of investment in subsidiary   (10,280)   (9,554)
   $522,177   $516,034 

 

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Notes to Consolidated Financial Statements

 

12.Accrued Expenses:

 

Accrued expenses include approximately $13.8 million and $16.4 million in advertising liabilities as of March 31, 2012 and December 31, 2011, respectively.

 

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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, 2011 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 74% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 26% of Interparfums SA shares trade on the Euronext. Prestige cosmetics and prestige skin care products represent less than 2% of consolidated net sales.

 

We produce and distribute our European based prestige products primarily under license agreements with brand owners, and European based prestige product sales represented approximately 88% and 91% of net sales for the three months ended March 31, 2012 and 2011, respectively. We have built a portfolio of prestige brands, which include Burberry, Lanvin, Jimmy Choo, Van Cleef & Arpels, Montblanc, Paul Smith, Boucheron, S.T. Dupont, Balmain and Repetto, whose products are distributed in over 120 countries around the world. Shipments to our distribution subsidiaries are not recognized as sales until that merchandise is sold by our distribution subsidiary to their customers.

 

Burberry is our most significant license, as sales of Burberry products represented 43% and 50% of net sales for the three months ended March 31, 2012 and 2011, respectively. In addition, we own the Lanvin brand name for our class of trade and sales of Lanvin product represented 12% and 14% of net sales for the three months ended March 31, 2012 and 2011, respectively.

 

Through our United States operations we market specialty retail and mass market fragrance and fragrance related products, which represented 12% and 9% of net sales for the three months ended March 31, 2012 and 2011, respectively. These fragrance products are sold under trademarks owned by us or pursuant to license or other agreements with the owners of the Gap, Banana Republic, Anna Sui, Brooks Brothers, bebe, Betsey Johnson, Nine West, Lane Bryant and Jordache brands.

 

 

 

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

 

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

 

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

 

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

 

At this time, we do not believe the recent economic uncertainty and financial market volatility taking place in certain European countries will have a significant impact on our business. This is due in part to our belief that we are well positioned as a result of our strategy to manage our business effectively and efficiently. However, if the degree of uncertainty or volatility worsens or is prolonged, then there will likely be a negative effect on ongoing consumer confidence, demand and spending and as a result, our business. Currently, we believe general economic and other uncertainties still exist in select markets in which we do business. We continue to monitor global economic uncertainties and other risks that may affect our business.

 

Our reported net sales are impacted by changes in foreign currency exchange rates. A weak U.S. dollar has a positive impact on our net sales. However, earnings are negatively affected by a weak dollar because over 40% of net sales of our European operations are denominated in U.S. dollars, while all costs of our European operations are incurred in euro. Our Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments.  We primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. 

 

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Recent Important Events

 

Burberry

 

In December 2011, the Company and Burberry began to explore ways to work more closely together to realize the brand’s potential and we are currently in discussions regarding the potential establishment of a new operating structure for the Burberry fragrance and beauty business. As there can be no assurance that an agreement will be reached, Burberry has exercised its right to evaluate the purchase price for the unexpired term of the existing license. In this process, Burberry has until July 31, 2012 to determine whether it wishes to buy out the unexpired portion of the license as of December 31, 2012 or continue the existing contract which runs through December 31, 2017. As previously disclosed, if Burberry were to buy back the license, then the purchase price will be the greater of the fair market value of the unexpired term of the license or 70% of 2010 net wholesale sales of Burberry products.

 

Repetto

 

In December 2011, we entered into a thirteen-year exclusive worldwide license agreement to create, produce and distribute perfumes and ancillary products under the Repetto brand. Our rights under the agreement commenced on January 1, 2012. The agreement is subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

 

Pierre Balmain

 

In July 2011, we entered into a twelve-year exclusive worldwide license agreement to create, produce and distribute perfumes and ancillary products under the Balmain brand. Our rights under the agreement commenced on January 1, 2012 when we took over production and distribution of existing Balmain fragrances. The agreement is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. In 2011, the Company paid an up front entry fee of €2.1 million (approximately $2.7 million) for this license.

 

Anna Sui

 

In June 2011, we entered into a ten-year exclusive worldwide fragrance license agreement, with two five-year renewal options, to create, produce and distribute perfumes and fragrance-related products under the Anna Sui brand. Our rights under the agreement commenced on January 1, 2012 when we took over production and distribution of the existing Anna Sui fragrance collections. The agreement is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The Company agreed to pay an upfront entry fee of $2.0 million for this license which was paid in 2012 and we agreed to purchase current inventory and certain other assets of the former licensee. As of December 31, 2011, approximately $2.8 million of current inventory was purchased.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

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 retailers, mass-market retailers, supermarkets and domestic and international wholesalers and distributors. Sales of such products by our domestic subsidiaries are denominated in U.S. dollars and sales of such products by our foreign subsidiaries are primarily denominated in either euro or U.S. dollars. We recognize revenues when merchandise is shipped and the risk of loss passes to the customer. Net sales are comprised of gross revenues less returns, trade discounts and allowances.

 

Accounts Receivable

 

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

 

Sales Returns

 

Generally, we do not permit customers to return their unsold products. However, commencing in January 2011, we took over U.S. distribution of our European based prestige products and for U.S. based customers we allow customer returns if properly requested, authorized and approved. We regularly review and revise, as deemed necessary, our estimate of reserves for future sales returns based primarily upon historic trends and relevant current data including information provided by retailers regarding their inventory levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The types of known or anticipated events that we have considered, and will continue to consider, include, but are not limited to, the financial condition of our customers, store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products. We record estimated reserves for sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products are recorded as inventories and are valued based upon estimated realizable value. The physical condition and marketability of returned products are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as economic conditions, inventory levels or competitive conditions differ from our expectations.

 

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Promotional Allowances

 

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

 

Inventories

 

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

 

Equipment and Other Long-Lived Assets

 

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

 

We evaluate goodwill and indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not (i) reduce the fair value of the reporting unit below its fair value or (ii) indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable. Impairment of goodwill is evaluated using a two-step process. The first step involves a comparison of the estimated fair value of the reporting unit to the carrying value of that unit to determine if there is an indication of impairment. In accordance with ASU 2011-08, the Company has the option of performing a qualitative assessment before calculating the fair value of a reporting unit in the first step of the goodwill impairment test. If the Company determines, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, the second step of the process involves comparison of the implied fair value of goodwill with its carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized as an amount equal to the excess.

 

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For indefinite-lived intangible assets, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, impairment is recorded. To determine fair value of indefinite-lived intangible assets, we use an income approach, including the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. The relief-from-royalty calculations require us to make a number of assumptions and estimates concerning future sales levels, market royalty rates, future tax rates and discount rates. We use this method to determine if an impairment charge is required relating to our Nickel brand trademarks.

 

The fair values used in our evaluations are also estimated based upon discounted future cash flow projections using a weighted average cost of capital of 7.7%. The cash flow projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. 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.

 

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

 

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

 

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

 

Derivatives

 

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

 

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

 

Income Taxes

 

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently anticipated tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of net earnings at that time. In addition, the Company follows the provisions of uncertain tax positions as addressed in ASC topic 740-10-65-1.

 

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Results of Operations

 

Three Months Ended March 31, 2012 as Compared to the Three Months Ended March 31, 2011

 

Net Sales  Three months ended March 31, 
(in millions)  2012   %Change    2011   %Change   2010 
     
     
European based product sales  $145.2    19%  $121.6    12%  $108.3 
United States based product sales   20.2    71%   11.8    6%   11.1 
Total net sales  $165.4    24%  $133.4    12%  $119.4 

 

After increasing 12% in the 2011 period as compared to 2010, net sales for the three months ended March 31, 2012 increased 24% to $165.4 million, as compared to $133.4 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales in 2012 increased 26%. Our results for the three months ended March 31, 2012 are in line with our net sales and profitability expectations and our performance reflects strong momentum by our main brands and a solid start for our newest brands. The Company’s three major launches in 2011 as compared with a more modest launch schedule for 2012, set a very high bar for full year-over-year comparisons.

 

European based prestige product sales increased 19% to $145.2 million, as compared to $121.6 million for the corresponding period of the prior year. The continued strong performance of the Jimmy Choo and Montblanc fragrances were significant factors contributing to growth in European based prestige product sales. The Jimmy Choo signature fragrance was first introduced in 2011 and an Eau de Toilette was recently added. In local currency, Jimmy Choo product sales increased 68% to €11.8 million for the three months ended March 31, 2012, as compared to €7.0 million for the corresponding period of the prior year. Montblanc fragrances also delivered high growth with sales in local currency reaching €11.0 million for the three months ended March 31, 2012, up 77% from €6.2 million in sales for the corresponding period of the prior year.

 

Burberry product sales increased 12% in local currency aggregating €54.3 million for the three months ended March 31, 2012, as compared to €48.7 million for the corresponding period of the prior year. A strong contribution from the newest Burberry fragrance, Burberry Body, as well as the continued strong performance of established Burberry scents were offset by a decline in sales for the Burberry Sport line. Lanvin, our second largest prestige brand also performed well with local currency sales aggregating €15.7 million for the three months ended March 31, 2012, 12% ahead of the corresponding period of the prior year. Lanvin brand sales growth was led by the Eclat d’Arpège line and steady performances from the Jeanne Lanvin and Marry Me! scents.

 

In response to commercial efforts of our U.S. distribution subsidiary for European based prestige product, first quarter sales in the North American market increased 68% in local currency, as compared to the corresponding period of the prior year. Other markets that were especially strong during the period include the Middle East, Asia and South America, where comparable quarter prestige product sales in local currency were up 35%, 21% and 10%, respectively. Despite the difficult economic environment in certain markets, sales in Europe have been growing so far, with Eastern and Western Europe generating comparable quarter sales increases of 7% and 4%, respectively.

 

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Our growth expectations for the remainder of 2012 for our European based product lines reflect our plans to continue to build upon the strength of our brands and worldwide distribution network. While we are not expecting any significant contributions in 2012 from our newest lines, Balmain and Repetto, where we are just beginning the product development process, we do expect continued strong performances from Jimmy Choo and Montblanc. In addition, the recent launch of Burberry Body will enjoy a full year of sales supported by a very aggressive marketing campaign. We also have new products for Lanvin, Montblanc and Boucheron planned for a 2012 debut.

 

With respect to our United States specialty retail and mass-market products, net sales increased 71% for the first quarter of 2012 following an increase of 6% for the first quarter of 2011. The initial launch of our first Nine West fragrance and the commencement of sales pursuant to our Anna Sui license were the primary contributors to first quarter 2012 sales growth. In January 2012, Love Fury, a women’s fragrance created for Nine West launched at over 650 Macy’s stores and 282 Nine West stores in the U.S. and internationally. In 2011, we entered into a ten-year exclusive worldwide fragrance license agreement to create, produce and distribute perfumes and fragrance-related products under the Anna Sui brand. Our rights under the agreement commenced on January 1, 2012 when we took over production and distribution of the existing Anna Sui fragrance collections.

 

For the Banana Republic brand, to complement the women’s scent Wildbloom, introduced in 2011, we launched a brand extension Wildbloom Vert, in early 2012. Building upon the success of the Gap brand’s fragrances, for 2012 we are currently launching a new fragrance concept for Gap in an effort to capture the heritage of the brand. The new scents for men and women, Gap Established 1969, launched in March 2012 at over 650 Gap stores in the U. S. International distribution is planned for later in the year. We are also in the development stage for several new fragrance concepts and line extensions for our other specialty retail brands.

 

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

 

Gross margin  Three months ended March 31, 
(in millions)  2012   2011 
         
Net sales  $165.4   $133.4 
Cost of sales   58.7    46.8 
Gross margin  $106.7   $86.6 
           
Gross margin as a % of net sales   65%   65%

 

Gross margin was 65% of net sales in both the first quarters of 2012 and 2011. Now that it has been over a year since taking over prestige product distribution in the U.S. by our subsidiary, Interparfums Luxury Brands, Inc., gross margins from one period to the next should be much more comparable. For the three months ended March 31, 2012, as compared to the corresponding period of the prior year, gains in margin from currency fluctuations were offset by changes from product mix.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

We carefully watch movements in foreign currency exchange rates as over 40% of our European based operations net sales are denominated in dollars, while our costs are incurred in euro. Therefore, from a profit standpoint, a stronger U.S. dollar has a positive effect on our gross margin. The average euro to dollar exchange rate for the three months ended March 31, 2012 was 1.31, as compared to 1.37 for the 2011 period. We occasionally enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. 

 

Generally, we do not bill customers for shipping and handling costs and such costs, which aggregated $2.0 million and $1.4 million for the three month period ended March 31, 2012 and 2011, 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.

 

Selling, general and administrative expenses

(in millions)  Three months ended March 31, 
   2012   2011 
         
Selling, general & administrative expenses  $74.9   $61.0 
Selling, general & administrative expenses  as a % of net sales   45%   46%

 

Selling, general and administrative expenses increased 23% for the three months ended March 31, 2012, as compared to the corresponding period of the prior year. As a percentage of sales selling, general and administrative expenses were 45% and 46% for the three month period ended March 31, 2012 and 2011, respectively.

 

Promotion and advertising included in selling, general and administrative expenses aggregated approximately $26.7 million (16.2% of net sales) and $18.3 million (13.7% of net sales) for the three month period ended March 31, 2012 and 2011, respectively. The global launch of Burberry Body continues to be supported by strong visuals on a scale without precedent. Although the level of spending is not near what was incurred during the third and fourth quarters of 2011, we significantly increased our overall advertising budget for all brands to maintain the positive sales momentum which we believe will contribute to sustained growth in market share.

 

Royalty expense included in selling, general, and administrative expenses aggregated $13.7 million (8.3% of net sales) and $11.5 million (8.6% of net sales), for the three month periods ended March 31, 2012 and 2011, respectively. In addition service fees, which are fees paid to third parties relating to the activities of our distribution subsidiaries, aggregated $5.7 million (3.5% of net sales) and $4.8 million (3.6% of net sales), for the three month periods ended March 31, 2012 and 2011, respectively.

 

As a result of the above analysis, income from operations increased 24% to $31.8 million for the three months ended March 31, 2012, as compared to $25.5 million for the corresponding period of the prior year. Operating margins were 19.2% of net sales in the current period as compared to 19.1% for the corresponding period of the prior year.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Interest expense aggregated $0.4 million for both the three months ended March 31, 2012 and 2011. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions. Loans payable – banks and long-term debt including current maturities aggregated $16.3 million as of December 31, 2011, as compared to $21.4 million as of December 31, 2010.

 

Foreign currency gains or (losses) aggregated ($0.2) million and $0.4 million for the three months ended March 31, 2012 and 2011, respectively. We enter into foreign currency forward exchange contracts to manage 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. Hedge effectiveness excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings.

 

Our effective income tax rate was 36% and 33% for the three months ended March 31, 2012 and 2011, respectively. Our effective tax rates differ from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions. Our foreign tax rate had been declining as a result of the 2008 formation of Interparfums (Suisse) SARL, which receives a favorable tax rate on a portion of Interparfums SA taxable income. The higher rate in 2012 is the result of a tax rate increase enacted by the French Government retroactive to 2011. The impact of such rate increase for the year ended December 31, 2011, was recorded during the fourth quarter of 2011. The tax rate for our French operations increased from 34.4% to 36.1%. 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,
 
   2012   2011 
         
Net income  $20,254   $17,340 
Less: Net income attributable to the noncontrolling interest   4,757    4,581 
           
Net income attributable to Inter Parfums, Inc.  $15,497   $12,759 
           
Earnings per share:          
Net income attributable to Inter Parfums, Inc. common shareholders:          
Basic  $0.51   $0.42 
Diluted  $0.51   $0.41 
           
Weighted average number of shares outstanding:          
Basic   30,551    30,474 
Diluted   30,686    30,634 

 

Net income increased 17% to $20.3 million for the three months ended March 31, 2012, as compared to $17.3 million for the corresponding period of the prior year. Net income attributable to the noncontrolling interest aggregated 23.5% of net income in 2012 and 26.4% in 2011. The decline is the result of fluctuations in the interim financial results of our 51% owned distribution subsidiaries in the United Kingdom and Germany. Net income attributable to Inter Parfums, Inc. increased 21% to $15.5 million for the three months ended March 31, 2012, as compared to $12.8 million for the corresponding period of the prior year.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Diluted earnings per share increased 24% to $0.51 for the three months ended March 31, 2012, as compared to $0.41 for the corresponding period of the prior year. Weighted average shares outstanding aggregated 30.6 million and 30.5 million for the three months ended March 31, 2012 and 2011, respectively. On a diluted basis, average shares outstanding were 30.7 million for the three months ended March 31, 2012, as compared to 30.6 million for the corresponding period of the prior year.

 

Liquidity and Capital Resources

 

Our financial position remains strong. At March 31, 2012, working capital aggregated $227 million and we had a working capital ratio of 2.4 to 1. Cash and cash equivalents aggregated $27 million.

 

Cash used in operating activities aggregated $1.1 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012, working capital items used $25.3 million in cash from operating activities, as compared to $23.0 million in the 2011 period. The decrease in accounts receivable reflects strong collection activity as days sales outstanding hovers around the 90 day mark. The $15.2 million increase in inventories for the three months ended March 31, 2012, as shown on the statement of cash flows, reflects the inventory build needed to support our sales growth and new licensing activities in both European operations and U.S. operations.

 

Cash flows used in investing activities in 2012 reflects $4.0 million spent for capital items, most of which relates to stands used for the Burberry Beauty line. Our business is not capital intensive as we do not own any manufacturing facilities. However, on a full year basis, we spend upwards of $4 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers. Payments for intangible assets aggregated $2.3 million in 2012 which is primarily the entry fee paid for the Anna Sui license. When acquiring new licenses for brands that have current distribution we may agree to pay an entry fee in connection with securing the license rights.

 

Our short-term financing requirements are expected to be met by available cash on hand at March 31, 2012, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2012 consist of a $15.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $25.0 million in credit lines provided by a consortium of international financial institutions. As of March 31, 2012, short-term borrowings aggregated $13.6 million. Our long-term credit facilities provide for principal and interest to be repaid in 20 quarterly installments. As of March 31, 2012, total long-term debt including current maturities aggregated $3.1 million.

 

In December 2011, our board of directors authorized the continuation of our cash dividend on an annual basis to $.32 per share for 2012. The next quarterly dividend of $0.08 per share will be paid on July 13, 2012 to shareholders of record on June 29, 2012. The annual cash dividend for 2012 represents a small part of our cash position and is not expected to have any significant impact on our financial position.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

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, 2012.

 

Contractual Obligations

 

The following table sets for a schedule of our contractual obligations as of December 31, 2011 over the periods indicated in the table, as well as our total contractual obligations.

 

($ in thousands).

 

Contractual Obligations  Payments due by period 
   Total   Less than
1 year
   Years
2-3
   Years
4-5
   More than
5 years
 
Long-Term Debt (1)  $4,600   $4,600                
Capital Lease Obligations                         
Operating Leases  $22,900   $4,600   $6,600   $5,100   $6,600 
Purchase obligations(2)  $1,268,700   $155,800   $343,800   $344,100   $425,000 
Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP                         
Total  $1,296,200   $165,000   $350,400   $348,500   $432,300 

 

(1)Includes long-term debt and related interest costs including interest rate swap amounts. Interest due as the result of interest rate swaps is all at a fixed rate and is payable $0.08 million in 2012.

 

(2)Consists of purchase commitments for advertising and promotional items, minimum royalty guarantees, including fixed or minimum obligations, and estimates of such obligations subject to variable price provisions. Future advertising commitments were estimated based on planned future sales for the license terms that were in effect at December 31, 2011, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations.

 

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.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Foreign Exchange Risk Management

 

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

 

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

 

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

 

At March 31, 2012, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $67 million and GB pounds 6.6 million which all have maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.

 

Interest Rate Risk Management

 

We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt. We entered into an interest rate swap in September 2007 on €22 million of debt, effectively exchanging the variable interest rate of 0.6% above the three month EURIBOR to a fixed rate of 4.42%. The remaining balance owed pursuant to this facility is as of March 31, 2012 was €2.2 million. 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.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

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

 

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  

 32

         
31.2   Certifications required by Rule 13a-14(a) of Chief Financial Officer  

33

         
32.1   Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer  

34

         
32.1   Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer  

35

         
101*   Interactive data files    

 

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these Sections.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

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 9th day of May 2012.

 

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

 

Page 31

 

XNAS:IPAR Inter Parfums Inc Quarterly Report 10-Q Filling

Inter Parfums Inc XNAS:IPAR Stock - Get Quarterly Report SEC Filing of Inter Parfums Inc XNAS:IPAR stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:IPAR Inter Parfums Inc Quarterly Report 10-Q Filing - 3/31/2012
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