10-Q 1 v376346_10q.htm 10-Q

 

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, 2014.

 

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 5, 2014, there were 30,932,408 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, 2014 and December 31, 2013 2
   
Consolidated Statements of Income for the Three Months Ended March 31, 2014 and March 31, 2013 3
   
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and March 31, 2013 4
   
Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2014 and March 31, 2013 5
   
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and March 31, 2013 6
   
Notes to Consolidated Financial Statements 7
   
Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations 13
   
Item 3.     Quantitative and Qualitative Disclosures About Market Risk 25
   
Item 4.    Controls and Procedures 26
   
Part II.   Other Information 26
   
Item 6.     Exhibits 27
   
Signatures 27

 

 
 

  

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, 2013 included in our annual report filed on Form 10-K.

 

The results of operations for the three months ended March 31, 2014 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,
2014		   December 31,
2013		 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $45,594   $125,650 
Short-term investments   227,315    181,677 
Accounts receivable, net   100,409    79,932 
Inventories   117,957    117,347 
Receivables, other   2,022    2,418 
Other current assets   6,057    4,775 
Income taxes receivable   7,347    6,435 
Deferred tax assets   6,811    7,257 
           
Total current assets   513,512    525,491 
           
Equipment and leasehold improvements, net   10,262    10,444 
           
Trademarks, licenses and other intangible assets, net   114,788    116,243 
           
Other assets   12,716    11,880 
           
Total assets  $651,278   $664,058 
           
LIABILITIES AND EQUITY          
Current liabilities:          
Loans payable – banks  $3,236   $6,104 
Accounts payable – trade   57,547    56,736 
Accrued expenses   39,172    58,333 
Income taxes payable   789    1,270 
Dividends payable   3,712    3,704 
           
Total current liabilities   104,456    126,147 
           
Deferred tax liability   2,570    2,555 
           
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 30,932,408 and 30,863,421 shares at March 31, 2014 and December 31, 2013, respectively   31    31 
Additional paid-in capital   58,634    57,877 
Retained earnings   364,670    359,459 
Accumulated other comprehensive income   24,941    25,860 
Treasury stock, at cost, 9,924,500 and 9,940,977 shares at March 31, 2014 and December 31, 2013, respectively   (36,266)   (36,016)
           
Total Inter Parfums, Inc. shareholders’ equity   412,010    407,211 
           
Noncontrolling interest   132,242    128,145 
           
Total equity   544,252    535,356 
           
Total liabilities and equity  $651,278   $664,058 

 

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,		 
   2014   2013 
         
Net sales  $121,730   $213,810 
           
Cost of sales   52,500    79,167 
           
Gross margin   69,230    134,643 
           
Selling, general and administrative expenses   51,807    67,667 
           
Income from operations   17,423    66,976 
           
Other expenses (income):          
Interest expense   273    457 

(Gain) loss on foreign currency 

   (49)   1,443 
Interest and dividend income   (1,111)   (1,189)
           
    (887)   711 
           
Income before income taxes   18,310    66,265 
           
Income taxes   6,160    23,323 
           
Net income   12,150    42,942 
           
Less: Net income attributable to the noncontrolling interest   3,256    11,246 
           
Net income attributable to Inter Parfums, Inc.  $8,894   $31,696 
           
Net income attributable to Inter Parfums, Inc. common shareholders:          
Basic  $0.29   $1.03 
Diluted  $0.29   $1.03 
           
Weighted average number of shares outstanding:          
Basic   30,900    30,687 
Diluted   31,058    30,847 
           
Dividends declared per share  $0.12   $0.12 

 

See notes to consolidated financial statements.

 

Page 3
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

   Three months ended
March 31,		 
   2014   2013 
Comprehensive income:          
           
Net income  $12,150   $42,942 
           
Other comprehensive income:          
           
Net derivative instrument gain, net of tax   —    9 
           
Translation adjustments, net of tax   (1,397)   (14,371)
           
Comprehensive income   10,753    28,580 
           
Comprehensive income attributable to the noncontrolling interests:          
           
Net income   3,256    11,246 
           
Other comprehensive income:          
           
Net derivative instrument gain, net of tax   —    5 
           
Translation adjustments, net of tax   (478)   (3,987)
           
Comprehensive income attributable to the noncontrolling interests   2,778    7,264 
           
Comprehensive income attributable to Inter Parfums, Inc.  $7,975   $21,316 

 

See notes to consolidated financial statements.

 

Page 4
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

 

   Three months ended
March 31,		 
   2014   2013 
         
Common stock, beginning and end of period  $31   $31 
           
Additional paid-in capital, beginning of period   57,877    54,679 
Shares issued upon exercise of stock options   908    256 
Stock-based compensation   168    123 
Sale of subsidiary shares to noncontrolling interest   (319)   — 
Additional paid-in capital, end of period   58,634    55,058 
           
Retained earnings, beginning of period   359,459    349,672 
Net income   8,894    31,696 
Dividends   (3,712)   (3,686)
Stock-based compensation   29    42 
Retained earnings, end of period   364,670    377,724 
           
Accumulated other comprehensive income, beginning of period   25,860    12,498 
Foreign currency translation adjustment   (919)   (10,384)
Net derivative instrument gain, net of tax   —    4 
Accumulated other comprehensive income, end of period   24,941    2,118 
           
Treasury stock, beginning of period   (36,016)   (35,404)
Shares issued upon exercise of stock options   101    — 
Shares received as proceeds of option exercises   (351)   — 
Treasury stock, end of period   (36,266)   (35,404)
           
Noncontrolling interest, beginning of period   128,145    118,505 
Net income   3,256    11,246 
Foreign currency translation adjustment   (478)   (3,987)
Net derivative instrument gain, net of tax   —    5 
Sale of subsidiary shares to noncontrolling interest   1,309    — 
Stock-based compensation   10    15 
Noncontrolling interest, end of period   132,242    125,784 
           
Total equity  $544,252   $525,311 

 

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,		 
   2014   2013 
Cash flows from operating activities:          
Net income  $12,150   $42,942 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   2,545    3,663 
Provision for doubtful accounts   8    29 
Noncash stock compensation   230    212 
Deferred tax provision   447    6,262 
Changes in:          
Accounts receivable   (20,927)   (46,281)
Inventories   (850)   29,260 
Other assets   (1,821)   1,332 
Accounts payable and accrued expenses   (17,616)   (28,878)
Income taxes payable, net   (1,425)   10,983 
           
Net cash provided by (used in) operating activities   (27,259)   19,524 
           
Cash flows from investing activities:          
Purchases of short-term investments   (142,110)   (172,118)
Proceeds from sale of short-term investments   96,146    — 
Purchases of equipment and leasehold improvements   (709)   (1,425)
Payment for intangible assets acquired   (522)   (518)
           
Net cash used in investing activities   (47,195)   (174,061)
           
Cash flows from financing activities:          
(Repayments of) loans payable – banks, net   (2,866)   (278)
Proceeds from exercise of options   695    256 
Proceeds from sale of stock of subsidiary   990    — 
Dividends paid   (3,704)   (2,453)
Purchase of treasury stock   (37)   — 
           
Net cash used in financing activities   (4,922)   (2,475)
           
Effect of exchange rate changes on cash   (680)   (4,118)
           
Net decrease in cash and cash equivalents   (80,056)   (161,130)
           
Cash and cash equivalents - beginning of period   125,650    307,335 
           
Cash and cash equivalents - end of period  $45,594   $146,205 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $248   $446 
Income taxes   5,086    8,273 

 

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, 2013. 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:

 

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

 

3.Termination of Burberry License:

 

Burberry exercised its option to buy-out the license rights effective December 31, 2012. On October 11, 2012 the Company and Burberry entered into a transition agreement that provided for certain license rights and obligations to continue through March 31, 2013. The Company continued to operate certain aspects of the business for the brand including product development, testing, and distribution. The transition agreement provided for non-exclusivity for manufacturing, a cap on sales of Burberry products, a reduced advertising requirement and no minimum royalty amounts.

 

4.Inventories:

 

Inventories consist of the following:

 

(In thousands)  March 31,   December 31, 
   2014   2013 
         
Raw materials and component parts  $38,034   $47,800 
Finished goods   79,923    69,547 
           
   $117,957   $117,347 

 

5.Fair Value Measurement:

 

The following tables present our financial assets 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.

 

Page 7
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(In thousands)      Fair Value Measurements at March 31, 2014 
       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  $227,315   $—   $227,315   $— 
                     
Foreign currency forward exchange contracts not accounted for using hedge accounting   96    —    96    — 
                     
   $227,411   $—   $227,411   $— 

 

(In thousands)      Fair Value Measurements at December 31, 2013 
       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  $181,677   $—   $181,677   $— 
                     
Foreign currency forward exchange contracts not accounted for using hedge accounting   157    —    157    — 
                     
   $181,834   $—   $181,834   $— 

 

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.

 

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. The Company had no cash flow hedges during the three month periods ended March 31, 2014 and 2013. Gains and losses in derivatives not designated as hedges are included in gain (loss) on foreign currency on the accompanying income statement and were immaterial for the three months ended March 31, 2014 and 2013.

 

Page 8
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of foreign currency forward exchange contracts not accounted for using hedge accounting as of March 31, 2014 and December 31, 2013 resulted in an asset and is included in other current assets on the accompanying balance sheets. 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, 2014, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $13.8 million, GB pounds £2.8 million and JPY ¥102.4 million which all have maturities of less than one year.

 

7.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, 2014 and 2013 aggregated $0.03 million and $0.04 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, 2014:

 

       Weighted Average 
   Number of Shares   Grant  Date Fair Value 
Nonvested options – beginning of period   367,470   $6.68 
Nonvested options granted   3,500   $8.37 
Nonvested options vested or forfeited   (9,375)  $5.50 
Nonvested options – end of period   361,595   $6.72 

 

Share-based payment expense decreased income before income taxes by $0.23 million and $0.21 million for the three months ended March 31, 2014 and 2013, respectively, and decreased net income attributable to Inter Parfums, Inc. by $0.11 million and $0.12 million for the three months ended March 31, 2014 and 2013, respectively. The following table summarizes stock option information as of March 31, 2014:

 

       Weighted Average 
   Shares   Exercise Price 
         
Outstanding at January 1, 2014   643,595   $19.58 
Options granted   3,500    32.12 
Options cancelled   (3,950)   16.62 
Options exercised   (80,260)   12.56 
           
Outstanding at March 31, 2014   562,885   $20.68 
           
Options exercisable   201,290   $14.36 
Options available for future grants   461,525      

 

Page 9
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

As of March 31, 2014, the weighted average remaining contractual life of options outstanding is 3.80 years (2.51 years for options exercisable), the aggregate intrinsic value of options outstanding and options exercisable is $8.7 million and $4.4 million, respectively, and unrecognized compensation cost related to stock options outstanding of Inter Parfums, Inc. aggregated $2.0 million. The amount of unrecognized compensation cost related to stock options outstanding of our majority-owned subsidiary, Interparfums SA, was approximately $0.12 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, 2014 and March 31, 2013 were as follows:

 

(In thousands)  March 31,   March 31, 
   2014   2013 
         
Cash proceeds from stock options exercised  $695   $256 
Tax benefits   —    21 
Intrinsic value of stock options exercised   1,455    235 

 

The weighted average fair values of the options granted by Inter Parfums, Inc. during the three months ended March 31, 2014 and 2013 were $8.37 and $6.17 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, 2014 and 2013 are set forth in the following table:

 

   March 31,   March 31, 
   2014   2013 
         
Weighted-average expected stock-price volatility   37%   38%
Weighted-average expected option life   5 years    5 years 
Weighted-average risk-free interest rate   1.55%   0.89%
Weighted-average dividend yield   2.8%   2%

 

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.

 

Page 10
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

8.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:

 

   Three months ended 
(In thousands, except per share data)  March 31, 
   2014   2013 
Numerator:          
Net income attributable to Inter Parfums, Inc.  $8,894   $31,696 
Denominator:          
Weighted average shares   30,900    30,687 
Effect of dilutive securities:          
Stock options   158    160 
Denominator for diluted earnings per share   31,058    30,847 
           
Earnings per share:          
Net income attributable to Inter Parfums, Inc. common shareholders:          
Basic  $0.29   $1.03 
Diluted   0.29    1.03 

 

Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.13 million shares of common stock for both three month periods ended March 31, 2014 and 2013.

 

9.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 and specialty retail fragrance and fragrance related products. Information on our operations by geographical areas is as follows:

 

Page 11
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(In thousands)  Three months ended
March 31,		 
   2014   2013 
Net sales:          
United States  $19,392   $18,549 
Europe   102,376    195,203 
Eliminations   (38)   58 
   $121,730   $213,810 
           
Net income attributable to Inter Parfums, Inc.:          
United States  $(67)  $662 
Europe   8,961    31,021 
Eliminations   —    13 
   $8,894   $31,696 

 

   March 31,   December 31, 
   2014   2013 
Total Assets:          
United States  $71,014   $76,980 
Europe   589,481    596,153 
Eliminations of investment in subsidiary   (9,217)   (9,075)
   $651,278   $664,058 

 

10.Accrued Expenses:

 

Accrued expenses include approximately $10.0 million and $22.4 million in advertising liabilities as of March 31, 2014 and December 31, 2013, respectively.

 

Page 12
 

 

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, 2013 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.

 

Regulation S-K Item 10(e)

 

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in commission filings,” prescribes the conditions for use of non-GAAP financial information in commission filings. We believe that our presentation of the non-GAAP financial information included in this Form 10-Q is important supplemental measures of operating performance to investors as comparable sales information excluding sales related to a terminated license provides investors with a more accurate picture of current sales trends.

 

Overview

 

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

 

We produce and distribute our European based prestige products primarily under license agreements with brand owners, and European based prestige product sales represented approximately 84% and 91% of net sales for the three months ended March 31, 2014 and 2013, respectively. Burberry was our most significant license, as sales of Burberry products represented 51% of net sales for the three months ended March 31, 2013. (See Note 3 “Termination of Burberry License” in notes to consolidated financial statements on page 7 of this Form 10-Q). In addition, we own the Lanvin brand name for our class of trade, and license the Montblanc, Jimmy Choo and Karl Lagerfeld brand names; for the three months ended March 31, 2014, sales of product for these brands represented 17%, 23%, 14% and 11% of net sales, respectively.

 

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Through our United States operations we also market prestige brand as well as specialty retail fragrance and fragrance related products. United States operations represented 16% and 9% of net sales for the three months ended March 31, 2014 and 2013, respectively. These fragrance products are sold under trademarks owned by us or pursuant to license or other agreements with the owners of the Anna Sui, Alfred Dunhill, Oscar de la Renta, Shanghai Tang, Agent Provocateur, Gap, Banana Republic, Brooks Brothers, bebe and Betsey Johnson brands.

 

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 directly to retailers, seasonality is more evident. We operate distribution subsidiaries in Italy, Germany, Spain, and the United States. In addition, our specialty retail product lines sold to U.S. retailers are also concentrated in the second half of the year.

 

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses 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 global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share. 

 

During the three month period ended March 31, 2014, the economic uncertainty and financial market volatility taking place in certain European countries did not have a significant impact on our business, and at this time we do not believe it will have a significant impact on our business for the foreseeable future. However, if the degree of uncertainty or volatility worsens or is prolonged, then there will likely be a negative effect on ongoing consumer confidence, demand and spending and as a result, our business. Currently, we believe general economic and other uncertainties still exist in select markets in which we do business and we continue to monitor global economic uncertainties and other risks that may affect our business.

 

Our reported net sales are impacted by changes in foreign currency exchange rates. A weak U.S. dollar has a positive impact on our net sales. However, our 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

 

Burberry exercised its option to buy-out the license rights effective December 31, 2012. On October 11, 2012, the Company and Burberry entered into a transition agreement that provided for certain license rights and obligations to continue through March 31, 2013. The Company continued to operate certain aspects of the business for the brand including product development, testing, and distribution. The transition agreement provided for non-exclusivity for manufacturing, a cap on sales of Burberry products, a reduced advertising requirement and no minimum royalty amounts.

 

Shanghai Tang

 

In July 2013, the Company created a wholly-owned Hong Kong subsidiary, Inter Parfums USA Hong Kong Limited, which entered into a 12-year exclusive worldwide license to create, produce and distribute perfumes and related products under China’s leading luxury brand, Shanghai Tang. The agreement commenced on July 1, 2013 and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The Company plans to launch its first fragrance under the Shanghai Tang brand in late 2014.

 

Agent Provocateur

 

In July 2013, the Company entered into a 10.5-year exclusive worldwide license to create, produce and distribute perfumes and related products under London-based luxury lingerie brand, Agent Provocateur. The agreement commenced on August 1, 2013 and is subject to certain minimum advertising expenditures as is customary in our industry. The Company launched its first fragrances under the Agent Provocateur brand in March 2014. In addition, the Company has taken over distribution of selected fragrances within the brand’s current perfume portfolio, and plans to revitalize the Agent Provocateur signature scent.

 

Oscar de la Renta

 

In October 2013, the Company entered into a 12-year exclusive worldwide license to create, produce and distribute perfumes and related products under the Oscar de la Renta brand. The agreement closed on December 2, 2013 and is subject to certain minimum advertising expenditures as is customary in our industry. We purchased certain inventories and paid an up-front entry fee of $5.0 million. The Company has taken over distribution of fragrances within the brand’s current perfume portfolio, and plan to launch its first fragrance under the Oscar de la Renta brand in 2015.

 

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

 

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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 we incur 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 indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 6.7%. The cash flow projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment charge is recorded.

 

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We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable and currently no impairment indicators exist for our indefinite-lived intangible assets. However, if future actual results do not meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results of operations. The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2013 assuming all other assumptions remained constant:

 

In millions      Increase (decrease) 
   Change   to fair value 
         
Weighted average cost of capital   +10%  $(1.32)
Weighted average cost of capital   -10%  $1.67 
Future sales levels   +10%  $1.27 
Future sales levels   -10%  $(1.27)

 

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.

 

Results of Operations

 

Three Months Ended March 31, 2014 as Compared to the Three Months Ended March 31, 2013

 

See information regarding Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in commission filings,” on page 13 of this Form 10-Q.

 

Net sales for the three months ended March 31, 2014 declined 43% to $121.7 million, as compared to $213.8 for the corresponding period of the prior year as Burberry brand sales were included in the prior year period. Net sales for the three months ended March 31, 2014 of the Company’s ongoing brands (excluding Burberry brand sales) increased 17% to $121.7 million, as compared to $104.1 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales from ongoing brands in 2014 increased 16%.

 

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Net Sales  Three months ended March 31, 
(in millions)  2014   % Change   2013   % Change   2012 
                     

European based ongoing brand product sales

  $102.3    20%   $85.4    15%   $74.0 
United States based product sales   19.4    4%    18.7    (7)%    20.2 
Total ongoing brand net sales  121.7    17%   104.1    11%   94.2 
                          
Burberry brand net sales   –0–    n/a    109.7   54%    71.2 
Total net sales  $121.7    (43)%   $213.8    29%   $165.4 

 

Ongoing European based prestige product sales increased 20% to $102.3 million, as compared to $85.4 million for the corresponding period of the prior year. New product launches were the primary catalyst for the strong start in 2014. Karl Lagerfeld’s signature scents for both men and women yielded more than $13 million in incremental sales. Montblanc sales rose 37% as a result of steady gains from Legend fragrances along with the recent launch of Emblem, the second men’s scent created for the brand. Boucheron and Van Cleef & Arpels performed well during the quarter due, in part, to increasing momentum from the 2013 introductions of Place Vendôme and Rêve, respectively. In last year’s first quarter, Jimmy Choo brand sales rose 50% driven by the launch of Flash, which explains why Jimmy Choo sales declined 25% in the current first quarter when no new products were introduced. However, based on higher than expected backorders for Jimmy Choo Man to be launched in the fall, more robust sales are anticipated for the second half. Lanvin also had a challenging comparison to the prior year period, which benefited from the launch of Lanvin Me and the exceptional performance of Eclat d’Arpège, resulting in a reduction in sales of 16% in the first quarter of 2014. With the introduction of Lanvin Me L’Eau later in the year, Lanvin brand sales are expected to increase.

 

United States prestige brand and specialty retail product sales increased 4% to $19.4 million, as compared to $18.7 million for the corresponding period of the prior year. We have significantly expanded the brand portfolio of our U.S.-based operations over the past 18 months and will be aggressively building on this platform throughout 2014 with new products. Most recently, in March we launched Fatale and Fatale Pink for Agent Provocateur and the initial response has been very favorable. Later in the year, we plan to debut our inaugural fragrances for Shanghai Tang, Alfred Dunhill and Oscar de la Renta. In the first quarter of 2014, the growth for our U.S.-based operations was primarily attributable to incremental sales of Alfred Dunhill legacy scents which aggregated $3.3 million. A challenging Asian market resulted in a decline in Anna Sui brand sales of 17% to $4.6 million, as compared to $5.5 million for the corresponding period of the prior year.

 

Ongoing Brand Net Sales to Customers by Region

(in millions)

   Three months ended March 31, 
   2014   2013 
         
North America  $31.0   $25.4 
Western Europe   33.3    25.9 
Eastern Europe   9.0    10.6 
Central and South America   12.2    9.0 
Middle East   12.9    10.9 
Asia   20.7    20.8 
Other   2.6    1.5 
   $121.7   $104.1 

 

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For the three months ended March 31, 2014, top line growth was strong in all major markets other than Eastern Europe and Asia. A difficult Russian market and a depreciating currency accounted for the decline in Eastern Europe and the 17% decline in Anna Sui brand sales accounted for the small decline in Asia.

 

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

 

Gross margin  Three months ended March 31, 
(in millions)  2014   2013 
         
Net sales  $121.7   $213.8 
Cost of sales   52.5    79.2 
Gross margin  $69.2   $134.6 
           
Gross margin as a % of net sales   56.9%   63.0%

 

Gross margin was 56.9% of net sales for the three months ended March 31, 2014, as compared to 63.0% for the corresponding period of the prior year. For European operations, gross profit margin was 59.6% and 64.6% in 2014 and 2013, respectively. The gross margin decline in 2014 is directly related to the termination of the Burberry license and resulting discontinuance of Burberry product sales, which were sold at higher margins than ongoing brand sales. For U.S. operations, gross profit margin was 42.5% and 45.9% in 2014 and 2013, respectively. The decline is primarily the result of a shift in product mix during the period.

 

We carefully monitor movements in foreign currency exchange rates as over 40% of our European based operations net sales are denominated in U.S. dollars, while our costs are incurred in euro. From a profit standpoint, a stronger U.S. dollar has a positive effect on our gross margin while a weak dollar has a negative effect. The average dollar/euro exchange rate for the three months ended March 31, 2014 was 1.37, as compared to 1.32 for the 2013 period. As such, there was no material effect on gross margin in 2014 from changes in currency exchange rates.

 

Generally, we do not bill customers for shipping and handling costs and such costs, which aggregated $1.2 million and $2.0 million for the three month periods ended March 31, 2014 and 2013, 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, 
   2014   2013 
         
Selling, general and administrative expenses  $51.8   $67.7 
Selling, general and administrative expenses as a % of net sales   43%   32%

 

Selling, general and administrative expenses decreased 23% for the three months ended March 31, 2014, as compared to the corresponding period of the prior year. As a percentage of sales, selling, general and administrative expenses were 43% and 32% for the three month period ended March 31, 2014 and 2013, respectively. For European operations, selling, general and administrative expenses decreased 28% in 2014, as compared to 2013 and represented 43% of sales in 2014 as compared to 31% in 2013. For U.S. operations, while sales increased 4% in 2014, as compared to 2013, selling, general and administrative expenses increased 12% for the same period and represented 43% of sales, as compared to 40% in 2013.

 

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Promotion and advertising included in selling, general and administrative expenses aggregated approximately $14.5 million (11.9% of net sales) and $14.7 million (6.9% of net sales) for the three month period ended March 31, 2014 and 2013, respectively. Promotion and advertising expenditures for ongoing brands was practically the same for both periods. In 2013, pursuant to the requirements of the transition agreement with Burberry, advertising requirements were eliminated, thus resulting in the lower cost as a percentage of sales.

 

Royalty expense included in selling, general and administrative expenses aggregated $7.8 million (6.4% of net sales) and $18.0 million (8.4% of net sales), for the three month periods ended March 31, 2014 and 2013, respectively. In addition service fees, which are fees paid to third parties relating to the activities of our distribution subsidiaries, aggregated $3.3 million (2.7% of net sales) and $6.5 million (3.1% of net sales), for the three month periods ended March 31, 2014 and 2013, respectively. The decline in both royalties and service fees in 2014 are directly related to the termination of the Burberry license.

 

As a result of the above analysis, income from operations aggregated $17.4 million for the three months ended March 31, 2014, as compared to $67.0 million for the corresponding period of the prior year. Operating margins were 14.3% of net sales in the current period as compared to 31.3% for the corresponding period of the prior year. Results for the first quarter of 2013 were atypical as profits were extraordinarily strong due to a substantial increase in sales, coupled with low promotional expenses resulting primarily from the Burberry transition agreement.

 

Interest expense aggregated $0.3 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for brand acquisitions.

 

Foreign currency gains and (losses) aggregated $0.1 million and ($1.4) million for the three months ended March 31, 2014 and 2013, 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. Over 40% of net sales of our European operations are denominated in U.S. dollars. The weakening euro relative to the dollar in 2013 accounts for the foreign currency losses in 2013.

 

Our effective income tax rate was 34% and 35% for the three months ended March 31, 2014 and 2013, respectively. Our effective tax rates differ from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions. We expect our effective tax rate to decline 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. However, tax rate increases enacted by the French Government have mitigated much of that savings.

 

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Net Income and Earnings per Share

   Three months ended 
(in thousands except per share data)  March 31, 
   2014   2013 
         
Net income attributable to European operations  $12,217   $42,267 
Net income (loss) attributable to United States operations   (67)   675 
Net Income   12,150    42,942 
Less: Net income attributable to the noncontrolling interest   3,256    11,246 
           
Net income attributable to Inter Parfums, Inc.  $8,894   $31,696 
           
Net income attributable to Inter Parfums, Inc. common shareholders:          
Basic  $0.29   $1.03 
Diluted  $0.29   $1.03 
           
Weighted average number of shares outstanding:          
Basic   30,900    30,687 
Diluted   31,058    30,847 

 

Net income decreased to $12.2 million for the three months ended March 31, 2014, as compared to $42.9 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. For European operations, the absence of Burberry brand sales and related decline in gross margin as a percentage of sales were partially mitigated by the decline in Burberry related selling, general and administrative expenses. For United States operations, the 4% increase in sales, 3% decline in gross margin and 12% increase in selling, general and administrative expense are the primary contributors to the decline in net income.

 

The noncontrolling interest arises from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is directly related to the profitability of our European operations, and aggregated 26.7% of European operations net income in both 2014 and 2013. Net income attributable to Inter Parfums, Inc. was $8.9 million in 2014, as compared to $31.7 million in 2013. Net margins attributable to Inter Parfums, Inc. aggregated 7.3% and 14.8% in the first quarters of 2014 and 2013, respectively.

 

Liquidity and Capital Resources

 

The Company’s financial position remains strong. At March 31, 2014, working capital aggregated $409 million and we had a working capital ratio of 4.9 to 1. Cash and cash equivalents and short-term investments aggregated $273 million practically all of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments held by our European operations. Approximately 90% of the Company’s total assets are held by European operations. In addition to the cash and cash equivalents and short-term investments referred to above, approximately $103 million of trademarks, licenses and other intangible assets are held by European operations.

 

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

 

Cash provided by (used in) operating activities aggregated ($27.3) million and $19.5 million for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014, working capital items used $42.6 million in cash from operating activities, as compared to $33.6 million in the 2013 period. Although accounts receivable is up 26%, the balance is reasonable based on first quarter 2014 sales levels and reflects strong collection activity as day’s sales outstanding is less than 70 days, as compared to the 90 days achieved in the recent past. Inventory levels are relatively unchanged from year end and reflect levels needed to support upcoming launches. The decline in accrued expenses primarily reflects the payments of advertising liabilities from 2013.

 

Cash flows used in investing activities in 2014 reflect the purchase and sales, in our European operations, of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. Approximately $107 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. Our business is not capital intensive as we do not own any manufacturing facilities. However, on a full year basis, we spend 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.

 

Our short-term financing requirements are expected to be met by available cash on hand at March 31, 2014, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2014 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, 2014, short-term borrowings aggregated $3.2 million.

 

In January 2014, the Board of Directors authorized the continuation of the $0.48 per share dividend for 2014. The next quarterly cash dividend of $0.12 per share is payable on July 15, 2014 to shareholders of record on June 30, 2014. The annual cash dividend for 2014 represents a small part of our cash position and is not expected to have any significant impact on our financial position.

 

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

 

Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the three month period ended March 31, 2014.

 

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Contractual Obligations

 

The following table summarizes our contractual obligations as of December 31, 2013 over the periods indicated, as well as our total contractual obligations ($ in thousands).

 

   Payments due by period 
       Less than 1   Years   Years   More than 
Contractual Obligations  Total   year   2-3   4-5   5 years 
                     
Long-Term Debt                         
Capital Lease Obligations                         
Operating Leases  $33,491   $4,993   $9,790   $8,684   $10,024 
Purchase obligations(1)  $1,119,360   $102,123   $236,243   $240,785   $540,209 
Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP                         
Total  $1,152,851   $107,116   $246,033   $249,469   $550,233 

 

(1)Consists of purchase commitments for advertising and promotional items, minimum royalty guarantees, including fixed or minimum obligations, and estimates of such obligations subject to variable price provisions. Future advertising commitments were estimated based on planned future sales for the license terms that were in effect at December 31, 2013, 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.

 

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.

 

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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, 2014, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $13.8 million, GB pounds £2.8 million and JPY ¥102.4 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.

 

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.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Item 6.Exhibits.

 

The following documents are filed herewith:

 

Exhibit No.   Description   Page Number
         
10.160   Consulting Agreement with Philippe Benacin Holding SAS   28 
         
31.1   Certifications required by Rule 13a-14(a) of Chief Executive Officer   37
         
31.2   Certifications required by Rule 13a-14(a) of Chief Financial Officer   38
         
32.1   Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer   39
         
32.1   Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer   40
         
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.

 

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 7th day of May 2014.

 

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

 

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