Inter Parfums Annual Report 2014

Plain-text annual report

1 TABLE OF CONTENTS Financial Highlights 02 Letter to Shareholders 04 The Company 08 The Products 14 The Organization 52 INTER PARFUMS, INC. 2014 ANNUAL REPORT2 financial Highlights $ 131.1 $ 407.2 $ 381.5 $ 382.1 $ 654.1 $ 615.2 $ 563.6 $ 499.3 $ 460.4 $ 252.7 $ 235.0 $ 39.2 $ 29.4 $ 32.3 $ 26.6 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 NET SALES (In millions ) NET INCOME ATTRIBUTABLE TO INTER PARFUMS, INC. (In millions ) INTER PARFUMS, INC. STOCKHOLDERS’ EQUITY (In millions ) ﬁnancial highlights 3 SELECTED FINANCIAL DATA The following selected ﬁnancial data have been derived from our ﬁnancial statements, and should be read in conjunction with those ﬁnancial statements, including the related footnotes. (In thousands, except per share data) INCOME STATEMENT DATA: Net Sales Cost of Sales Selling, General and Administrative Expenses Operating Income Income Before Taxes 2014 $499,261 212,224 233,634 53,403 56,715 Net Income Attributable to the 7,909 Noncontrolling Interest Net Income Attributable to Inter Parfums, Inc. 29,436 Net Income Attributable to Inter Parfums, Inc. Common Shareholders’ per Share: Basic Diluted Average Common Shares Outstanding: Basic Diluted Depreciation and Amortization BALANCE SHEET AND OTHER DATA: Cash and Cash Equivalents Short-Term Investments Working Capital Total Assets Short-Term Bank Debt Long-Term Debt (including current portion) Inter Parfums, Inc. Shareholders’ Equity Dividends Declared per Share 0.95 0.95 30,931 31,060 10,166 90,138 190,152 382,935 604,506 298 – 382,065 0.48 2013 2012 Years Ended December 31, 2010 2011 $563,579 $654,117 $615,220 $460,411 234,800 246,931 231,746 187,501 250,025 78,754 80,646 11,755 39,211 1.27 1.27 30,764 30,954 11,110 125,650 181,677 399,344 664,058 6,104 – 325,799 278,414 274,765 45,754 131,136 4.29 4.26 30,575 30,716 15,554 315,698 216,474 66,939 67,393 10,646 32,303 1.06 1.05 30,515 30,678 13,073 56,436 53,840 9,082 26,593 0.88 0.87 30,361 30,482 9,188 307,335 35,856 37,548 – 366,680 759,920 27,776 – – 205,730 516,034 11,826 4,480 – 183,594 438,105 5,250 16,129 407,211 381,476 252,674 234,976 0.96 0.32 0.32 0.26 INTER PARFUMS, INC. 2014 ANNUAL REPORT 4 2014 letter to our Shareholders DEAR FELLOW SHAREHOLDERS, 2014 was a highly successful and productive year for Inter Parfums 2013 ﬁrst quarter sales, gross margin, operating margin and as exempliﬁed by: net margin. Then, in the 2013 second quarter, our sale to • Our ongoing brands delivering excellent growth; Burberry of the remaining Burberry inventory depressed gross • Achieving top line growth in all the geographic markets margins for that period. So please keep that in mind in the we serve; following comparative review and again, note that ongoing • Enlarging our portfolio of brands with two very promising brand sales exclude Burberry brand sales from 2013. Starting new names, Abercrombie & Fitch and Hollister; in the second half of 2013 and for all of 2014, our net sales • The launch of our ﬁrst new fragrances for the were exclusively ongoing brand sales. Karl Lagerfeld and Agent Provocateur brands; and, • Bringing to market new scents for the Montblanc, Lanvin, 2014 COMPARED TO 2013 Jimmy Choo, Paul Smith, S.T. Dupont, Balmain, Anna Sui, • Net sales increased 15.3% to $499.3 million compared to Dunhill and bebe brands. FINANCIAL OVERVIEW 2013’s net sales of ongoing brands of $433.3 million. In 2013, reported net sales of $563.6 million included $130.3 million of Burberry brand sales recorded in the ﬁrst Prefacing our ﬁnancial review with a little history is once again half of the year. At comparable foreign currency exchange in order. In the 2012 fourth quarter, we agreed to terminate rates, net sales increased 16% in 2014, compared to 2013’s our license with Burberry, and Burberry paid us a $240 mil- ongoing brand sales. lion early termination fee. We also entered into a transition • Sales by European-based operations were $394.0 million agreement to operate certain aspects of the business during in 2014, up 18% from of ongoing brand sales of $334.0 the first quarter of 2013, which resulted in unusually high million in 2013. letter to shareholders 5 BUSINESS OVERVIEW EUROPEAN-BASED OPERATIONS A combination of new product launches and the enduring appeal of our several star performers produced stellar sales growth for our European-based operations. The Montblanc brand exem- pliﬁed both drivers with steady gains from Legend fragrances which debuted in 2011 along with the 2014 launch of Emblem. Once again, Montblanc brand sales continued to outperform expectations and became our best selling brand with 2014 brand sales rising 33% in 2014 to $110 million. 2014 was a year of “ﬁrsts”. Our ﬁrst creation for Karl Lager- feld, featuring a fragrance duo for men and women, launched in the spring of 2014. Another new initiative was our ﬁrst product for men under the Jimmy Choo brand, aptly named Jimmy Choo Man. Among the other ﬁrsts was the collaboration between the S.T. Dupont brand and the very popular Paris Saint-Germain football team. Other 2014 new product launches for European- operations include Extatic, a women’s scent for the Balmain brand; S.T. Dupont So Dupont, one each for men and women, and Paul Smith Extreme Sport for men. The new fragrance line-up is rich in 2015 and has already begun with a men’s and women’s fragrance, Boucheron Quatre. There will also be a women’s version of Emblem by Montblanc, a new Jimmy Choo women’s scent, and still another for Van Cleef Philippe Benacin and Jean Madar & Arpels. New entrants for men are also in the works. We will be unveiling one for Balmain, the ﬁrst new men’s scent created by Inter Parfums, and one each for men and women for Lanvin, our • U.S.-based operations generated net sales of $105.3 million, second largest brand. up 6% from $99.3 million. The big news for our European-based operations is our pend- • Gross margin was 57.5% compared to 58.3% in 2013. ing acquisition of the Rochas brand and trademarks, which we • S, G & A expense as a percentage of sales was 46.8% announced in the ﬁrst quarter of 2015. Founded as a luxury compared to 44.4% in 2013. fashion house by Marcel Rochas in 1925, the brand expanded • Net income attributable to Inter Parfums, Inc. was $29.4 into fragrance in the 1950s, which remains the largest part of million or $0.95 per diluted share as compared to $39.2 the Rochas business, with, among others, the enduring Eau de million or $1.27 per diluted share in 2013. Rochas fragrance line. In addition to the fragrance business, we • Our business generated cash ﬂows from operating will be acquiring the fashion and accessory business operating activities of approximately $36.6 million in 2014. through a portfolio of license agreements. We closed the year with no long-term debt and $383 For the ﬁrst time for our company, the Rochas acquisition will million in working capital including $280 million in cash, integrate both fragrances and fashion, opening new opportuni- cash equivalents and short-term investments resulting ties in terms of creativity as well as aesthetic design and mar- in a working capital ratio of 4.7 to 1. keting choices. It will also allow us to apply a global approach to managing a fragrance brand. This acquisition has generated One ﬁnal point in this ﬁnancial overview; our strong balance enormous enthusiasm within our ranks along with the motivation sheet and consistent cash ﬂows were among the reasons why to reawaken the sleeping beauty within the Rochas brand, much as in early 2015, our Board of Directors increased our regular we’ve done with the Lanvin name since 2004. Before year end, we quarterly cash dividend by 8% to $0.13 per share, or $0.52 intend to develop a business plan on which to build the Rochas per share annually. business, without the demands of third party brand owners. INTER PARFUMS, INC. 2014 ANNUAL REPORT 6 This acquisition will be payable in cash on the closing date retailer of high-quality, casual apparel for men, women and kids for US $108 million, ﬁnanced through a medium term loan, to with an active, youthful lifestyle under its Abercrombie & Fitch take advantage of low interest rates. This transaction should be and Hollister brands, among others. completed within the ﬁrst half of 2015, subject to customary Initially, we will distribute the fragrances we develop and closing conditions. produce for these brands internationally in high-end department Still another major event took place in April 2015, when we stores and duty free shops. With our global distribution network, announced an 11-year exclusive worldwide fragrance license we plan to build this fragrance enterprise by capitalizing on the agreement with Coach, Inc., a leading New York design house popularity of the brands in international markets. Work has begun of modern luxury accessories and lifestyle collections. Under on developing new scents that capture the essence and energy this agreement, we will create and produce new Coach perfumes of both the Abercrombie & Fitch and Hollister brands, with new and related products for men and women, which we will distrib- men’s and women’s fragrances planned for both brands in 2016. ute globally to department and specialty stores and duty free Longer term, we hope that the Abercrombie & Fitch and shops, as well as in Coach retail stores. Based upon our track Hollister fragrance business will evolve into one where Inter record of cultivating and growing fragrance lines for fashion and Parfums becomes the development arm for fragrances that will luxury goods brands, Coach entrusted us with its fragrance en- also be sold in their North American stores. terprise with conﬁdence in our ability to leverage this category 2015 is gearing up to be a year of great promise for our U.S.- into a much larger global opportunity. We look forward to devel- based operations. Already unveiled at Harrod’s in London, Icon, oping new fragrances that capture the spirit of the Coach brand, Dunhill’s new men’s scent, is generating strong sales right out and taking the portfolio to a larger audience by expanding the of the gate. A new women’s fragrance for which we have high distribution globally and capitalizing on the growing recognition expectations is Oscar de la Renta’s Extraordinary, which debuts of the brand in international markets. We contemplate new fra- domestically this spring. Among the other highlights of 2015 grance launches for the Coach brand in the fall of 2016. are new women’s scents for Anna Sui and bebe, along with the rollout of the Shanghai Tang Silk Road Collection. U.S.-BASED OPERATIONS Our U.S.-based operations have become an increasingly promi- CONCLUSION nent contributor to our success, thanks in great part to many of We are extremely enthusiastic about the future of our Company. the newer prestige brands in the portfolio. For example, Dunhill We are growing our business with creative discipline, planting new legacy scents added $16.2 million to 2014 sales, up 25% roots on which to extend our reach, while nurturing the contin- from 2013, while sales of Oscar de la Renta legacy products, ued growth of our well-established names. At the same time, which began in 2014, aggregated $15.8 million. In addition, we remain on the lookout for additional suitable brands and the spring 2014 launches of Fatale and Fatale Pink for Agent related opportunities. Provocateur added $5.3 million in incremental sales. That said, Finally, our deepest thanks go out to the nearly 300 members we faced a difﬁcult market in Asia which is where the Anna Sui of the Inter Parfums team. We are very fortunate to have such a brand is most popular, that resulted in a 16% year over year de- talented, hardworking group of people committed to the success cline in brand sales to $21.5 million in 2014. As noted, prestige of our company and to our growth in the years to come. product sales represent a larger piece of our U.S.-based opera- tions. While we are looking to partner with additional specialty Sincerely yours, retailers, our model is evolving by the realization that certain specialty retail names are in fact prestige brands. Naturally, this is dependant upon the brand, its geographic reach, and demo- graphic appeal, as was the case with the latest additions to our Jean Madar Philippe Benacin U.S.-based operations fragrance operations, the Abercrombie & Chairman of the Board Vice Chairman of the Board Fitch and Hollister brands. Chief Executive Ofﬁcer & President In December we entered into a 7-year agreement to create, produce and distribute new perfumes and fragrance related products under the Abercrombie & Fitch and Hollister brand names. Abercrombie & Fitch Co. is a leading global specialty letter to shareholders 7 Philippe Benacin Vice Chairman of the Board & President Montblanc Emblem for Men INTER PARFUMS, INC. 2014 ANNUAL REPORT 8 the Company Oscar de la Renta Extraordinary W E AR E INTER PAR FUMS, INC. W E OPER ATE IN THE FR AGR ANCE BUSINESS, AND M ANUFACTUR E, M ARK ET AND DISTRIBUTE A WIDE ARR AY OF FR AGR ANCES AND FR AGR ANCE RELATED PRODUCTS. ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE IN MAY 1985 AS JEAN PHILIPPE FR AGR ANCES, INC., WE CHANGED OUR NAME TO INTER PARFUMS, INC. IN JULY 1999. W E HAVE ALSO RETAINED OUR BR AND NAME, JEAN PHILIPPE FRAGRANCES, FOR SOME OF OUR MASS MARKET PRODUCTS. Our worldwide headquarters and the office of our three one (1) distribution subsidiary, Interparfums Deutschland Gmbh, (3) wholly-owned United States subsidiaries, Jean Philippe covering territory in Germany, and is the sole owner of three Fragrances, LLC and Inter Parfums USA, LLC, both New York (3) distribution subsidiaries, Interparfums srl, covering the terri- limited liability companies, and IP Beauty, Inc. (formerly tory of Italy, Inter España Parfums et Cosmetiques, SL, covering Nickel USA, Inc.), a Delaware corporation, are located at 551 the territory of Spain and Interparfums Luxury Brands, Inc., a Fifth Avenue, New York, New York 10176, and our telephone Delaware corporation, for distribution of prestige brands in the number is 212.983.2640. We also own 100% of Inter Par- United States. Interparfums SA is also the sole owner of Inter- fums USA Hong Kong Limited indirectly through our 100% parfums (Suisse) SARL, a company formed to hold and manage owned subsidiary, Inter Parfums USA, LLC. certain brand names, and Interparfums Singapore Pte., Ltd., an Our consolidated wholly-owned subsidiary, Inter Parfums Asian sales and marketing ofﬁce. Holdings, S.A., and its majority-owned subsidiary, Interparfums Our common stock is listed on The Nasdaq Global Select SA, maintain executive offices at 4, Rond Point des Champs Market under the trading symbol “IPAR”. The common Elysees, 75008 Paris, France. Our telephone number in Paris shares of our subsidiary, Interparfums SA, are traded on the is 331.5377.0000. Interparfums SA is the majority owner of NYSE Euronext. the company 9 Dunhill ICON We maintain our internet website at www.interparfumsinc.com, as a general contractor and source our needed components which is linked to the Securities and Exchange Commission from our suppliers. These components are received at one of Edgar database. You can obtain through our website, free of our distribution centers and then, based upon production needs, charge, our annual reports on Form 10-K, quarterly reports on the components are sent to one of several third party ﬁllers which Form 10-Q, interactive data ﬁles, current reports on Form 8-K, manufacture the ﬁnished product for us and deliver them to one beneﬁcial ownership reports (Forms 3, 4 and 5) and amend- of our distribution centers. ments to those reports ﬁled or furnished pursuant to Section Our prestige products focus on niche brands, each with a 13(a) of the Securities Exchange Act of 1934 as soon as devoted following. By concentrating in markets where the brands reasonably practicable after they have been electronically ﬁled are best known, we have had many successful launches. We with or furnished to the SEC. typically launch new fragrance families for our brands every year We operate in the fragrance business and manufacture, market or two, with some frequent “seasonal” fragrances introduced and distribute a wide array of fragrances and fragrance related as well. products. We manage our business in two segments, European- The creation and marketing of each product family is intimately based operations and United States-based operations. Certain linked with the brand’s name, its past and present positioning, prestige fragrance products are produced and marketed by our customer base and, more generally, the prevailing market European operations through our 73% owned subsidiary in Paris, atmosphere. Accordingly, we generally study the market for each Interparfums SA, which is also a publicly traded company, as proposed family of fragrance products for almost a full year 27% of Interparfums SA shares trade on the NYSE Euronext. before we introduce any new product into the market. This study Our business is not capital intensive, and it is important is intended to deﬁne the general position of the fragrance family to note that we do not own manufacturing facilities. We act and more particularly its scent, bottle, packaging and appeal to INTER PARFUMS, INC. 2014 ANNUAL REPORT 10 the buyer. In our opinion, the unity of these four elements of fragrances utilizing internationally renowned brand names. By the marketing mix makes for a successful product. identifying and concentrating in the most receptive market seg- As with any business, many aspects of our operations are ments and territories where our brands are known, and executing subject to inﬂuences outside our control. We discuss in great- highly targeted launches that capture the essence of the brand, er detail risk factors relating to our business in Item 1A of we have had a history of successful launches. Certain fashion our Annual Report on Form 10-K for the fiscal year ended designers and other licensors choose us as a partner because December 31, 2014, and the reports that we ﬁle from time to our Company’s size enables us to work more closely with them time with the Securities and Exchange Commission. in the product development process as well as our successful EUROPEAN OPERATIONS track record. We produce and distribute prestige fragrance products GROW PORTFOLIO BRANDS THROUGH primarily under license agreements with brand owners, and NEW PRODUCT DEVELOPMENT AND MARKETING prestige product sales through our European operations We grow through the creation of fragrance family extensions represented approximately 79% of net sales for 2014. We have within the existing brands in our portfolio. Every year or two, we built a portfolio of prestige brands, which include Balmain, create a new family of fragrances for each brand in our portfo- Boucheron, Jimmy Choo, Karl Lagerfeld, Lanvin, Montblanc, lio. We frequently introduce “seasonal” fragrances as well. With Paul Smith, S.T. Dupont, Repetto and Van Cleef & Arpels, new introductions, we leverage our ability and experience to gauge whose products are distributed in over 100 countries around trends in the market and further leverage the brand name into the world. different product families in order to maximize sales and proﬁt Burberry was our most signiﬁcant license, and net sales potential. We have had success in introducing new fragrance fami- of Burberry products represented 0%, 23% and 46% of net lies (sub-brands, or ﬂanker brands) within our brand franchises. sales for the years ended December 31, 2014, 2013 and Furthermore, we promote the smooth and consistent performance 2012, respectively. As discussed below, Burberry exercised of our prestige perfume operations through knowledge of the market, its option to buy-out the license rights effective December 31, detailed analysis of the image and potential of each brand name, 2012 and we entered into a transition agreement that provided a “good dose” of creativity and a highly professional approach to for certain license rights and obligations to continue through international distribution channels. March 31, 2013. In addition, we own the Lanvin brand name for our class of trade, and license the Montblanc and Jimmy CONTINUE TO ADD NEW BRANDS Choo brand names; for the year ended December 31, 2014, TO OUR PORTFOLIO THROUGH NEW LICENSES sales of product for these brands represented 18%, 22% and OR ACQUISITIONS 16% of net sales, respectively. Prestige brands are the core of our business and we intend to add new prestige beauty brands to our portfolio. Over the past twenty UNITED STATES OPERATIONS years, we have built our portfolio of well-known prestige brands Prestige brand and specialty retail fragrance and fragrance through acquisitions and new license agreements. We intend to further related products are marketed through our United States build on our success in prestige fragrances and pursue new licenses operations and represented 21% of sales for the year ended and acquire new brands to strengthen our position in the prestige December 31, 2014. These fragrance products are sold under beauty market. To that end, as of December 31, 2014, we had cash, trademarks owned by us or pursuant to license or other agree- cash equivalents and short-term investments of approximately $280 ments with the owners of brands, which include Abercrombie million, which we believe should assist us in entering new brand & Fitch, Agent Provocateur, Anna Sui, Banana Republic, bebe, licenses or outright acquisitions. However, we cannot assure you Dunhill, Gap, Hollister, Oscar de la Renta, and Shanghai Tang that we will be able to enter into any future agreements, or acquire brands. BUSINESS STRATEGY brands or assets on terms favorable to us, or if we do, that any such transaction will be successful. We identify prestige brands that can be developed and marketed into a full and varied product families FOCUS ON PRESTIGE BEAUTY BRANDS and, with our technical knowledge and practical experience gained Prestige beauty brands are expected to contribute signiﬁcantly over time, take licensed brand names through all phases of concept, to our growth. We focus on developing and launching quality development, manufacturing, marketing and distribution. the company 11 Abercrombie & Fitch FIERCE INTER PARFUMS, INC. 2014 ANNUAL REPORT 12 EXPAND EXISTING PORTFOLIO INTO NEW CATEGORIES and fragrance related products under the Abercrombie & Fitch and Hollister brand names. The Company will distribute these We intend to continue to broaden our product offering beyond fragrances internationally in specialty retailers, high-end depart- the fragrance category and offer other fragrance related prod- ment stores and duty free shops, and in the U.S., in duty free ucts and personal care products under some of our existing shops and potentially in Abercrombie & Fitch and Hollister retail brands. We believe such product offerings meet customer stores. The agreement is subject to certain minimum sales, needs and further strengthen customer loyalty. advertising expenditures and royalty payments as is customary CONTINUE TO BUILD GLOBAL DISTRIBUTION FOOTPRINT in our industry. New men’s and women’s scents are planned for both Abercrombie & Fitch and Hollister for 2016. Our business is a global business and we intend to continue BURBERRY to build our global distribution footprint. In order to adapt Burberry exercised its option to buy-out the license rights effec- to changes in the environment and our business, we have tive December 31, 2012. In October 2012, the Company and modiﬁed our distribution model and have formed and are op- Burberry entered into a transition agreement that provided for erating joint ventures or distribution subsidiaries in the major certain license rights and obligations to continue through March markets of the United States, Italy, Spain and Germany for 31, 2013. The Company continued to operate certain aspects distribution of prestige fragrances. We may look into future of the business for the brand including product development, joint ventures arrangements or acquire distribution companies testing, and distribution. The transition agreement provided for within other key markets to distribute certain of our prestige non-exclusivity for manufacturing, a cap on sales of Burberry brands. While building a global distribution footprint is part products, a reduced advertising requirement and no minimum of our long-term strategy, we may need to make certain deci- royalty amounts. sions based on the short-term needs of the business. We believe that in certain markets, vertical integration of our PRODUCTION AND SUPPLY distribution network may be one of the keys to future growth THE STAGES OF THE DEVELOPMENT AND PRODUCTION of our Company, and ownership of such distribution should PROCESS FOR ALL FRAGRANCES ARE AS FOLLOWS: enable us to better serve our customers’ needs in local markets • Simultaneous discussions with perfume designers and and adapt more quickly as situations may determine. creators (includes analysis of esthetic and olfactory trends, target clientele and market communication approach); BUILD SPECIALTY RETAIL BUSINESS • Concept choice; We believe that certain specialty retailers are growing their • Produce mock-ups for ﬁnal acceptance of bottles beauty business by partnering with companies like Inter Parfums. and packaging; This partnership enables specialty retailers to have a continuous • Receive bids from component suppliers pipeline of new fragrance products developed for sale in their (glass makers, plastic processors, printers, etc.) stores, while beneﬁtting from worldwide advertising and distri- and packaging companies; bution of such products bearing their brand names primarily • Choose suppliers; outside the United States. RECENT DEVELOPMENTS • Schedule production and packaging; • Issue component purchase orders; • Follow quality control procedures for ABERCROMBIE & FITCH AND HOLLISTER incoming components; and In December 2014, the Company entered into a 7-year exclusive • Follow packaging and inventory control procedures. worldwide license to create, produce and distribute new perfumes the company 13 SUPPLIERS WHO ASSIST US WITH PRODUCT many for distribution of prestige fragrances. In addition we formed DEVELOPMENT INCLUDE: Interparfums Luxury Brands, Inc., a Delaware corporation and sub- • Independent perfumery design companies sidiary of our French subsidiary Interparfums SA, for distribution (Aesthete, Carré Basset, PI Design, Cent Degres); of European-based prestige brands in the United States. It has • Perfumers (IFF, Givaudan, Firmenich, Robertet, also entered into an agreement with Clarins Fragrance Group US Takasago, Mane) which create a fragrance consistent with (a Division of Clarins Group) effective January 1, 2011 to share our expectations and, that of the fragrance designers sales and distribution personnel and facilities. and creators; Our third party distributors vary in size depending on the • Bottle manufacturers (Pochet du Courval, SGD, Verreries number of competing brands they represent. This extensive Brosse, Bormioli Luigi, Stoelzle Masnières), caps (Qualipac, and diverse network together with our own distribution sub- ALBEA, RPC, Codiplas, Jackel, CMSI) or boxes (Edelmann, sidiaries provides us with a significant presence in over 100 Autajon, Alliora, Nortier, Draeger); countries around the world. • Production specialists who carry out packaging Approximately 40% of our European-based prestige fra- (CCI, Edipar, Jacomo, SDPP, MF Productions, Biopack) grance net sales are denominated in U.S. dollars. We address or logistics (SAGA for storage, order preparation certain financial exposures through a controlled program of and shipment). risk management that includes the use of derivative ﬁnancial instruments. We primarily enter into foreign currency forward For our prestige products, component and contract filling exchange contracts to reduce the effects of ﬂuctuating foreign needs are purchased from many different suppliers located currency exchange rates. around the world. The suppliers’ accounts for our European The business of our European operations has become operations are primarily settled in euro and for our United increasingly seasonal due to the timing of shipments by our States operations, suppliers’ accounts are primarily settled majority-owned distribution subsidiaries to their customers, in U.S. dollars. The components for our specialty retail products which are weighted to the second half of the year. are sourced and our specialty retail products are primarily produced and ﬁlled in the United States, and our mass market SPECIALTY RETAIL AND MASS MARKET PRODUCTS products are primarily manufactured, produced or ﬁlled in the For products sold to specialty retailers for sale in their United States or China. MARKETING AND DISTRIBUTION PRESTIGE PRODUCTS stores in the United States, we do not typically incur any marketing and distribution expenses. Such expenses are the responsibility of the specialty retailer. We do not presently market and distribute Banana Republic products to third Our prestige products are distributed in over 100 countries parties in the United States although we do market and around the world through a selective distribution network. For the distribute Banana Republic product internationally, includ- majority of our international distribution of prestige products, we ing duty free and other travel-related retailers. With respect contract with independent distribution companies specializing in to the Abercrombie & Fitch, Hollister and bebe brands, we luxury goods. In each country, we designate anywhere from one have the right to distribute product to their stores as well as to three distributors on an exclusive basis for one or more of our to approved retailers and distributors in the United States name brands. We also distribute our prestige products through a and internationally, including duty free and other travel- variety of duty free operators, such as airports and airlines and related retailers. select vacation destinations. We utilize our in house sales team to reach our third party As our business is a global one, we intend to continue to build distributors and customers outside the United States. In addi- our global distribution footprint. For distribution of prestige brands tion, the business of our United States operations has become of our European operations we presently operate through our dis- increasingly seasonal as shipments to our specialty retail cus- tribution subsidiaries in the major markets of Italy, Spain and Ger- tomers are weighted toward the second half of the year. INTER PARFUMS, INC. 2014 ANNUAL REPORT 14 the Products W E PRODUCE AND DISTRIBUTE OUR PR ESTIGE FR AGR ANCE PRODUCTS PRIM ARILY UNDER LICENSE AGR EEMENTS W ITH BR A ND OW NERS. U NDER LICENSE AGR EEMENTS, W E OBTA IN THE R IGHT TO USE THE BR A ND NA ME , CR E ATE NE W FR AGR A NCE S A ND PACK AGING, DETER MINE POSITIONING A ND DISTR IBUTION, A ND M A R K ET A ND SELL THE LICENSED PRODUCTS, IN E XCH A NGE FOR THE PAYMENT OF ROYALTIES. OUR RIGHTS UNDER LICENSE AGREEMENTS ARE ALSO GENER ALLY SUBJECT TO CERTAIN MINIMUM SALES R EQUIR EMENTS AND ADV ERTISING EXPENDITUR ES. We are the owner of the Lanvin brand name and trademark for our class of trade and we have built a portfolio of licensed prestige brands. Our exclusive worldwide licenses for these brands expire on the following dates: Brand Name Agent Provocateur Expiration Date December 31, 2023 Anna Sui Balmain Boucheron Dunhill Jimmy Choo Karl Lagerfeld Montblanc December 31, 2021, plus two 5-year optional terms if certain conditions are met December 31, 2023 December 31, 2025, plus a 5-year optional term if certain sales targets are met September 30, 2023, subject to earlier termination on September 30, 2019, if certain minimum sales are not met December 31, 2021 October 31, 2032 December 31, 2020 Oscar de la Renta December 31, 2025, plus a 5-year optional term if certain sales targets are met Paul Smith Repetto December 31, 2017 December 31, 2024 Shanghai Tang December 31, 2025, subject to earlier termination on December 31, 2019, if certain minimum sales are not met; subject to 2-year extensions unless 1-year advance notice S.T. Dupont December 31, 2016 not to renew is provided Van Cleef & Arpels December 31, 2018, plus a 5-year optional term if certain sales targets are met In connection with the acquisition of the Lanvin brand names and trademarks, we granted Lanvin the right to repurchase the brand names and trademarks in 2025 for the greater of €70 million (approximately $85 million) or one times the average of the annual sales for the years ending December 31, 2023 and 2024. the products 15 prestige Fragrances INTER PARFUMS, INC. 2014 ANNUAL REPORT 16 Agent Provocateur Fatale Intense the products 17 AGENT PROVOCATEUR In July 2013, we entered into a 10.5-year exclusive worldwide Agent Provocateur is an iconic, globally-recognized brand, license to create, produce and distribute perfumes and related breaking new ground with every collection and rightfully earn- products under London-based luxury lingerie brand, Agent ing its place as a benchmark brand in the world of lingerie. Provocateur. The agreement commenced on August 1, 2013 It is a brand that is confident, sensual and irreverent. Agent and is subject to certain minimum advertising expenditures Provocateur celebrates and empowers women with a unique as is customary in our industry and we have taken over dis- brand image renowned for being provocative and yet always tribution of selected fragrances within the brand’s current leaving something to the imagination. perfume portfolio. Agent Provocateur contributed to our sales In recent years, Agent Provocateur has been opening doors in 2014 with the spring launches of Fatale and Fatale Pink in at a steady growth and plans to continue to grow its door international markets followed by an exclusive U.S. launch at count, especially in Asia. Currently, its products which extend Saks Fifth Avenue. into swimwear, bridal and accessories, are sold globally, at Founded in 1994 by Joseph Corré, and Serena Rees and 96 of its own boutiques and shop-in-shops within the finest acquired by the private equity firm, 3i Group plc in 2007, department stores, as well as specialty retailers and on-line. INTER PARFUMS, INC. 2014 ANNUAL REPORT 18 ANNA SUI In June 2011, we entered into a 10-year exclusive worldwide devoted customer base, which spans the world, is especially fragrance license agreement to produce and distribute perfumes strong in Asia. and fragrance related products under the Anna Sui brand. Our We have high expectations for growing the Anna Sui fra- rights under the agreement commenced on January 1, 2012 grance franchise by developing new products and expanding when we took over production and distribution of the existing the brand’s fragrance presence in North America, Europe and Anna Sui fragrance collections. the Middle East. With help from the Fall 2013 launch of La Vie We are working in partnership with American designer, de Bohème, sales of Anna Sui products were up 29% in 2013, Anna Sui, and her creative team to build upon the brand’s reaching approximately $25.8 million. Without a major new growing customer appeal, and develop new fragrances that product launch and a difficult Asian market, Anna Sui brand capture the brand’s very sweet feminine girly aspect, combined sales declined 16% to approximately $21.5 million in 2014. with a touch of nostalgia, hipness and rock-and-roll. Anna Sui’s A new Anna Sui fragrance, Romantica, is in the works for 2015. the products 19 Anna Sui Romantica INTER PARFUMS, INC. 2014 ANNUAL REPORT 20 Balmain Homme the products 21 BALMAIN In July 2011, we entered into a 12-year exclusive worldwide license agreement to create, produce and distribute per- fumes and ancillary products under the Balmain brand. Our rights under the agreement commenced on January 1, 2012 when we took over the production and distribution of existing Balmain fragrances for men and women. The Balmain couture house was founded in 1945 by Pierre Balmain. In recent years, Balmain has undergone a signiﬁcant transformation. With the redefinition of its image in ready- to-wear, the brand has become a reference for style, while retaining its distinctive design codes from the haute couture universe. In doing so, the brand has become a major trend- setter. Our ﬁrst new Balmain women’s fragrance, Extatic, made its debut in 2014 in selective distribution. We also have a men’s scent launching for Balmain in 2015. INTER PARFUMS, INC. 2014 ANNUAL REPORT 22 BOUCHERON In December 2010, we entered into an exclusive worldwide Our ﬁrst new fragrance under the Boucheron brand, Jaïpur license agreement for the creation, development and distribu- Bracelet, debuted in 2012, and Boucheron Place Vendôme, tion of fragrance and related bath and body products under which has a beautiful glasswork bottle with a cabochon, the the Boucheron brand. emblematic stone of House Boucheron, was released in Fall Boucheron is the French jeweler “par excellence”. Founded 2013. Boucheron fragrance sales increased 10% to $23.1 by Frederic Boucheron in 1858, the House has produced some million in 2013, driven in particular by the launch of the of the world’s most beautiful and precious creations. Today Boucheron Place Vendôme line. With a difficult comparison Boucheron creates jewelry and timepieces and, under license and no major product launch, brand sales declined 20% in from global brand leaders, fragrances and sunglasses. Currently 2014. For 2015, we are launching a new fragrance duo for the Boucheron operates through over 40 boutiques worldwide as Boucheron brand around its iconic Quatre ring. well as an e-commerce site. the products 23 Boucheron Quatre INTER PARFUMS, INC. 2014 ANNUAL REPORT 24 Dunhill ICON the products 25 DUNHILL In December 2012, we entered into a 10-year exclusive world- British men’s style, the brand continues to blend innovation wide fragrance license to create, produce and distribute and creativity with traditional craftsmanship. perfumes and fragrance related products under the Dunhill We took over production and distribution of Dunhill legacy brand, which commenced on April 3, 2013. fragrances beginning in April 2013, and we introduced a legacy The house of Dunhill was established in 1893 and since scent flanker, Desire Black, which launched in the Spring of that time has been dedicated to providing high quality men’s 2014. We have supported the new men’s scent with a distribution luxury products, with core collections offered in menswear, strategy that recognizes and utilizes Dunhill’s luxury position- leather goods and accessories. The brand has global reach ing, along with brand appropriate marketing materials and a through a premium mix of self-managed retail outlets, high-level media campaign. Dunhill legacy scents added $16.2 million to department stores and specialty retailers. Known for its com- 2014 sales, up 25% from $13.0 million in 2013. For 2015, we mitment to elegance and innovation and being a leader of are rolling out the new Dunhill scent, Icon. INTER PARFUMS, INC. 2014 ANNUAL REPORT 26 JIMMY CHOO In October 2009, we entered into an exclusive worldwide license qualities to ensure the ambitious development of fragrance agreement for the creation, development and distribution of lines that will be supported by significant advertising commit- fragrances under the Jimmy Choo brand. ments over the coming years. With a heritage in luxury footwear, Jimmy Choo today en- Our first fragrance under the Jimmy Choo brand, a signature compasses a complete luxury lifestyle accessory brand with scent, rolled out globally in 2011. Jimmy Choo product sales women’s shoes, handbags, small leather goods, sunglasses exceeded our expectations and sales topped $40 million in that and eyewear. Its products are available in the growing network first year. Sales growth has continued, reaching $51.5 million in of Jimmy Choo freestanding stores as well as in the most pres- 2012 and $72.4 million in 2013, a year marked by the launch tigious department, specialty and duty free stores worldwide. by our second Jimmy Choo line, Flash, in February. The suc- We believe that this relationship with Jimmy Choo offers a cessful 2014 launch of Jimmy Choo Man enabled Jimmy Choo perfect fit with our strategy of expanding our brand portfolio to brand sales to maintain its positive sales momentum resulting in include new universes and represents an important milestone 2014 brand sales of $78.5 million, up 8% as compared to 2013. in our development. This brand possesses the quintessential the products 27 JC_MAN_INT_ADV_133.indd 1 Jimmy Choo Man 10/06/2014 15:32 INTER PARFUMS, INC. 2014 ANNUAL REPORT 28 Karl Lagerfeld Private Klub the products 29 K ARL LAGERFELD In October 2012, we entered into a 20-year exclusive world- wide license agreement with Karl Lagerfeld B.V., the internation- ally renowned haute couture fashion house, to create, produce and distribute perfumes under the Karl Lagerfeld brand. Under the creative direction of Karl Lagerfeld, one of the world’s most influential and iconic designers, the Lagerfeld Portfolio represents a modern approach to distribution, an in- novative digital strategy and a global 360 degree vision that reﬂects the designer’s own style and soul. Our ﬁrst new line, a premium namesake duo scent for both men and women, launched in the Spring of 2014 and yielded $24.2 million in sales in 2014. INTER PARFUMS, INC. 2014 ANNUAL REPORT 30 LANVIN In July 2007, we acquired the worldwide rights to the Lanvin brand names and international trademarks listed in Class 3, our class of trade. A synonym of luxury and elegance, the Lanvin fashion house, founded in 1889 by Jeanne Lanvin, expanded into fragrances in the 1920s. With Lanvin brand sales of $90.3 million in 2014, Lanvin now is our second largest brand. Lanvin fragrances occupy an impor- tant position in the selective distribution market in France, Europe and Asia. Current lines in distribution include: Arpège (1927), Lanvin L’Homme (1997), Eclat d’Arpège (2002), Rumeur 2 Rose (2007), Jeanne Lanvin (2008), Marry Me! (2010), Jeanne Lanvin Couture (2012), Lanvin Me (2013), which was designed by Lanvin designer, Alber Elbaz, and Me L’Eau (2014). Our Eclat d’Arpège line accounts for approximately 50% of this brand’s sales. the products 31 Lanvin_ME_EAU_ADV_133.indd 1 Lanvin Me L’Eau 17/12/2013 15:49 INTER PARFUMS, INC. 2014 ANNUAL REPORT 32 Montblanc Legend the products 33 MONTBLANC In January 2010, we entered into an exclusive worldwide worldwide and high standards of product design and quality, license agreement for the creation, development and distri- Montblanc has quickly grown to be our largest and fastest bution of fragrances and fragrance related products under the growing fragrance brand. Montblanc brand. In 2011, we launched our first new Montblanc fragrance, Montblanc has achieved a world-renowned position in the lux- Legend, which quickly became our best-selling men’s line. In ury segment and has become a purveyor of exclusive products, 2012, we launched our ﬁrst women’s fragrance under the Mont- which reflect today’s exacting demands for timeless design, blanc brand, and our second men’s line, Emblem, was launched tradition and master craftsmanship. Through its leadership in 2014. Montblanc product sales increased 40% in 2013 positions in writing instruments, watches and leather goods, to $83.2 million and in 2014 sales of Montblanc fragrances promising growth outlook in women’s jewelry, active presence topped $110 million, a 33% increase from 2013. Montblanc in more than 70 countries, network of more than 350 boutiques has now become our top selling brand. INTER PARFUMS, INC. 2014 ANNUAL REPORT 34 OSCAR DE LA RENTA In October 2013, we entered into a 12-year exclusive worldwide license to create, produce and distribute perfumes and related products under the Oscar de la Renta brand, which closed in December 2013. In 2014, we took over distribution of fragrances within the brand’s current perfume portfolio generating $15.8 million in sales. Our first new women’s fragrance under the Oscar de la Renta brand, Extraordinary, is planned for an early 2015 launch. Oscar de la Renta is one of the world’s leading luxury goods ﬁrms. The New York-based company was established in 1965, and encompasses a full line of women’s accessories, bridal, childrenswear, fragrance, beauty and home goods, in addi- tion to its internationally renowned signature women’s ready to wear collection. Oscar de la Renta products are sold globally in ﬁne department and specialty stores, oscardelarenta.com and through wholesale channels. the products 35 Oscar de la Renta Extraordinary INTER PARFUMS, INC. 2014 ANNUAL REPORT 36 Paul Smith Extreme Sport the products 37 PAUL SMITH We signed an exclusive worldwide license agreement with Paul Smith in December 1998 for the creation, development and distribution of Paul Smith perfumes. In 2008, we extended this license for an additional seven years through December 31, 2017. Paul Smith is an internationally renowned British designer who creates fashion with a clear identity. Paul Smith has a modern style which combines elegance, inventiveness and a sense of humor and enjoys a loyal following, especially in the UK and Japan. Fragrances include: Paul Smith (2000), Paul Smith Extrême (2002), Paul Smith Rose (2007), Paul Smith Man 2 (2010) and Optimistic (2011). A new men’s and women’s line, Portrait, was released in Spring 2013 and Extreme Sport for men was introduced in 2014. INTER PARFUMS, INC. 2014 ANNUAL REPORT 38 REPETTO In December 2011, we entered into a 13-year exclusive worldwide license agreement to create, produce and distribute perfumes and ancillary products under the Repetto brand. Created in 1947 by Rose Repetto at the request of her son, dancer and choreographer Roland Petit, Repetto is today a legendary name in the world of dance. For a number of years it has developed timeless and must-have collections with a fully modernized signature style ranging from dance shoes, ballet slippers, ﬂat shoes, and sandals to more recently handbags and high-end accessories. With an ambitious plan of international expansion focusing mainly on Europe, the brand is now branching out into Asia, notably South Korea and Japan where its mix of cross-generational appeal and French chic has been met with unprecedented enthusiasm. Our ﬁrst fragrance line was launched in 2013 generating ﬁrst year sales of $12 million. Sales reached $12.4 million in 2014 as our Repetto fragrances experienced gradual sales penetration in France, and slower acceptance internationally. the products 39 Repetto Eau Florale INTER PARFUMS, INC. 2014 ANNUAL REPORT 40 Shanghai Tang Gold Lily the products 41 SHANGHAI TANG In July 2013, we created a wholly-owned Hong Kong subsid- Founded in 1994, Shanghai Tang is the leading Chinese iary, Inter Parfums USA Hong Kong Limited, which entered luxury brand with international recognition and distribution. into a 12-year exclusive worldwide license to create, produce As the global curator of modern Chinese chic, Shanghai Tang and distribute perfumes and related products under China’s champions the richness and beauty of the Chinese culture through leading luxury brand, Shanghai Tang. The agreement com- its contemporary lifestyle offer of apparel and accessories for menced on July 1, 2013 and is subject to certain minimum men, women and children, as well as home collections. Shang- sales, advertising expenditures and royalty payments as are hai Tang supports an international network of 45 boutiques, customary in our industry. Our ﬁrst Shanghai Tang fragrance including the world’s largest lifestyle ﬂagship–The Shanghai collection for men and women is set for a 2015 rollout. Tang Mansion in Hong Kong, and its largest ﬂagship Boutique, The Cathay Mansion in Shanghai, China and on-line. INTER PARFUMS, INC. 2014 ANNUAL REPORT 42 S.T. DUPONT In June 1997, we signed an exclusive worldwide license agreement with S.T. Dupont for the creation, manufacture and distribution of S.T. Dupont perfumes. In 2011, the agreement was renewed and now runs through December 31, 2016. S.T. Dupont is a French luxury goods house founded in 1872, which is known for its fine writing instruments, lighters and leather goods. S.T. Dupont fragrances include: S.T. Dupont (1998), S.T. Dupont Essence Pure (2002), S.T. Dupont Noir (2006), S.T. Dupont Blanc (2007), S.T. Dupont Passenger (2008), S.T. Dupont Intense (2009), S.T. Dupont Passenger Cruise (2011), and 58 avenue Montaigne (2012). In 2014, we launched our So Dupont duo, as well as a new men’s line, Paris Saint Germain. the products 43 SoDupont_Adv_141_A4.indd 1 S.T. Dupont So Dupont 01/04/2014 13:16 INTER PARFUMS, INC. 2014 ANNUAL REPORT 44 Van Cleef & Arpels RÊVE Elixir VCAreve_Elixir_ADV_141.indd 1 30/01/2014 08:35 the products 45 VAN CLEEF & ARPELS In September 2006, we entered into an exclusive worldwide license agreement for the creation, development and distribu- tion of fragrance and related bath and body products under the Van Cleef & Arpels brand and related trademarks. Van Cleef & Arpels fragrances in current distribution include: First (1976), Van Cleef pour Homme (1978), Tsar (1989), Van Cleef (1994), First 1er Bouquet (2008), Féerie (2008), Collection Extraordinaire (2009), Oriens (2010), Midnight in Paris (2010). In 2013, sales increased 11% to $25.5 million due to the launch of the new Rêve line and steady performances by the First and Collection Extraordinaire. Although overall brand sales declined 7% in 2014, certain lines like Collection Extraordinaire, performed exceptionally well. We have a new women’s scent for Van Cleef & Arpels prepared for a 2015 debut. INTER PARFUMS, INC. 2014 ANNUAL REPORT 46 Specialty Retail the products 47 Banana Republic Modern Man SPECIALTY RETAIL PRODUCTS In connection with our specialty retail agreements in our United States operations, we design, produce and manufacture fragrance and fragrance related products for brand name specialty retailers. These agreements are very similar to our prestige license agreements, as they include a licensing component for worldwide sales to select third party retailers and distributors in return for royalty payments and required advertising expenditures as are customary in our industry, in addition to the possibility of selling product we create to the specialty retailer for sale in its retail stores. Our exclusive agreements for specialty retail brands and their expiration dates are as follows: Brand Name Expiration Date Abercrombie & Fitch and Hollister December 31, 2021 The Gap August 31, 2015 for 1969 Fragrances only Banana Republic bebe Stores December 31, 2016 June 30, 2017, plus three, 3-year optional terms, if certain sales targets are met INTER PARFUMS, INC. 2014 ANNUAL REPORT 48 ABERCROMBIE & FITCH AND HOLLISTER In December 2014, the Company entered into a 7-year ex- clusive worldwide license to create, produce and distrib- ute new perfumes and fragrance related products under the Abercrombie & Fitch and Hollister brand names. The Company will distribute these fragrances internationally in specialty re- tailers, high-end department stores and duty free shops, and in the U.S., in duty free shops and potentially in Abercrombie & Fitch and Hollister retail stores. New men’s and women’s scents are planned for both Abercrombie & Fitch and Hollister for 2016. GAP AND BANANA REPUBLIC In July 2005, we entered into an exclusive agreement with The Gap, Inc. to develop, produce, manufacture and distribute fragrance and fragrance related products for Gap and Banana Republic brand names to be sold in Gap and Banana Republic retail stores in the United States and Canada. In March 2006, the agreement was amended to include fragrance and fra- grance related products for Gap Outlet and Banana Republic Factory Stores in the United States and Canada. In 2008, we expanded our relationship with Gap Inc. to include a licens- ing agreement for international distribution of personal care products created for the Gap and Banana Republic brands. After several renewals, our rights to develop, produce, man- ufacture and distribute fragrances for Gap brand names to be sold in Gap retail stores in the United States and Canada expired in December 2014, and we have a verbal agreement to retain the right to sell certain products internationally until August 31, 2015. Abercrombie & Fitch FIERCE bebe STORES In July 2008, we entered into an exclusive 6-year worldwide agreement with bebe Stores, Inc., under which we design, In 2015, we reached a verbal agreement to renew our rights manufacture and supply fragrance, bath and body products to develop, produce, manufacture and distribute fragrances for and color cosmetics for company-owned bebe stores in the Banana Republic brand names to be sold in Banana Republic United States and Canada, as well as select specialty and retail stores in the United States and Canada and our license department stores worldwide. We have incorporated bebe’s agreement for international distribution of fragrances of signature look into fragrance and cosmetics for the brand’s Banana Republic stores as well as select specialty and depart- strong, hip, sexy, and sophisticated clientele. ment stores outside the United States, including duty free Our bebe signature fragrance was unveiled at more than and other travel related retailers. Banana Republic products 200 bebe stores in the U.S. in August 2009, which was fol- currently available include: Classic (1995), W (1995), Alabaster lowed by worldwide distribution shortly thereafter. Scents (2006), Rosewood (2006), Slate (2006), Black Walnut (2006), currently available for domestic and international markets in- Cordovan (2007), Malachite (2007), and Wildbloom (2011). To clude: bebe (2009), bebe sheer (2010) and bebe gold (2011). complement the women’s scent Wildbloom, we launched several In 2012, we introduced a new bebe scent, Wishes & Dreams brand extensions, Wildbloom Vert and Wildblue in 2012 followed and we introduced two other scents, bebe Desire and bebe Nou- in 2013, with Wildbloom Rouge and Wildblue Noir. In 2014, we veau in 2013. In 2014, we introduced bebe Nouveau Chic and a launched Modern, a new collection for men and women. new fragrance family is planned for later in 2015. quarterly ﬁnancial data 49 QUARTERLY FINANCIAL DATA: (UNAUDITED) (In thousands, except per share data) 2014 Q1 Q2 Q3 Q4 Full Year Net Sales Gross Margin Net Income Net Income Attributable to Inter Parfums, Inc. Net Income Attributable to Inter Parfums, Inc. per Share: Basic Diluted Average Common Shares Outstanding: Basic Diluted 2013 Net Sales Gross Margin Net Income (Loss) Net Income (Loss) Attributable to $121,730 69,230 12,150 $118,192 68,116 7,667 $134,206 75,328 13,764 $125,133 74,363 3,764 $499,261 287,037 37,345 8,894 6,109 11,113 3,320 29,436 $0.29 $0.29 30,900 31,058 $0.20 $0.20 30,938 31,069 $0.36 $0.36 30,941 31,054 $0.11 $0.11 30,945 31,061 $0.95 $0.95 30,931 31,060 Q1 Q2 Q3 Q4 Full Year $213,810 $117,485 $126,753 $105,531 $563,579 134,643 42,942 63,607 4,521 70,007 9,903 60,522 (6,400) 328,779 50,966 Inter Parfums, Inc. 31,696 3,815 7,854 (4,154) 39,211 Net Income (Loss) Attributable to Inter Parfums, Inc. per Share: Basic Diluted Average Common Shares Outstanding: Basic Diluted $1.03 $1.03 30,687 30,847 $0.12 $0.12 30,748 30,953 $0.26 $0.25 30,796 30,986 $(0.13) $(0.13) 30,826 30,826 $1.27 $1.27 30,764 30,954 INTER PARFUMS, INC. 2014 ANNUAL REPORT 50 NORTH AMERICA 27% United States export sales were approximately $52.3 million, $50.4 million and $38.8 million in 2014, 2013 and 2012, respectively. Consolidated net sales to customers by region are as follows: CONSOLIDATED NET SALES TO CUSTOMERS BY REGION (in thousands) North America Europe Central and South America Middle East Asia Other 2014 $134,600 177,900 49,200 40,300 85,500 11,800 $499,300 Year Ended December 31, 2013 2012 $154,300 $175,400 215,600 241,300 42,400 43,300 53,000 62,100 98,600 115,300 9,400 7,000 $563,600 $654,100 CENTRAL & SOUTH AMERICA 10% CONSOLIDATED NET SALES TO CUSTOMERS IN MAJOR COUNTRIES (in thousands) Year Ended December 31, 2014 2012 $128,000 37,000 50,000 United Kingdom United States $150,000 $167,000 46,000 47,000 46,000 48,000 France 2013 51 ASIA 17% EUROPE 36% MIDDLE EAST 8% INTER PARFUMS, INC. 2014 ANNUAL REPORT52 the Organization ALL CORPORATE FUNCTIONS, OPERATIONS: Including product analysis and development, production and Henry B. Clarke and Alex Canavan in the United States and sales, and finance are coordinated at the Company’s corpo- Axel Marot in France: rate headquarters in New York and at the corporate ofﬁces of • Product development; Interparfums SA in Paris. Each company is organized into two • Logistics and transportation; operational units that report directly to general management, • Purchasing and industrial relations; and European operations ultimately report to Mr. Benacin and • Quality control and inventory cost supervision. United States operations ultimately report to Mr. Madar. FINANCE, INVESTOR RELATIONS AND ADMINISTRATION: EXPORT SALES: Herve Bouillonnec in the United States and Frédéric Garcia- Pelayo in France: Russell Greenberg in the United States and Philippe Santi • International development strategy; in France: • Establishment of distributor networks and negotiation of • Financial policy and communication, investor relations; contracts; • Financial accounting, cost accounting, budgeting and cash • Monitoring of proﬁt margins and advertising expenditures. ﬂow management; • Disclosure requirements of the Securities and Exchange DOMESTIC (HOME COUNTRY) SALES: Commission and Commission des Operations de Bourse; Michel Bes in the United States and Jérôme Thermoz • Labor relations, tax and legal matters and management in France: information systems. • Establish and apply domestic sales strategy and distribution policy; • Sales team management and development; • Monitoring of proﬁt margins and advertising expenditures. the organization 53 SIMPLIFIED CHART OF THE ORGANIZATION 46% 54% philippe benacin jean madar inter parfums, inc. (nasdaq - “ipar”) public shareholders 100% 100% 100% interparfums holdings, sa jean philippe fragrances, llc inter parfums usa, llc 100% inter parfums usa hong kong ltd 73% interparfums sa (euronext – paris) 100% 100% 100% 100% 100% interparfums luxury brands, inc. interparfums (suisse) sarl interparfums singapore pte, ltd 51% interparfums deutschland gmbh (germany) pãpãna inter es pa rfums et cosmetiques, sl (spain) interparfums srl (italy) INTER PARFUMS, INC. 2014 ANNUAL REPORT 54 CONTENTS Management’s Discussion and Analysis of 00 Financial Condition and Results of Operations 55 Reports on Internal Control Over Financial Reporting 67 Report of Independent Registered Public Accounting Firm 68 Financial Statements 69 Directors and Executive Officers 87 Corporate and Market Information 88 management’s discussion and analysis of ﬁnancial condition and results of operations 55 management’s discussion and analysis of ﬁnancial condition and Results of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REGULATION S-K ITEM 10(e) Regulation S-K, Item 10(e), “Use of Non-GAAP Financial traded company as 27% of Interparfums SA shares trade on Measures in Commission Filings,” prescribes the conditions the NYSE Euronext. for use of non-GAAP ﬁnancial information in ﬁlings with the We produce and distribute our European-based pres- Securities and Exchange Commission. tige products primarily under license agreements with brand In July 2012, Burberry exercised its option to buy-out our owners, and European-based prestige product sales rep- license rights effective December 31, 2012. Due to the signif- resented approximately 79%, 82% and 87% of net sales for icance of this transaction as well as its non-recurring nature, 2014, 2013 and 2012, respectively. We have built a portfolio exclusion of such gain in the non-GAAP financial measures of prestige brands, which include Balmain, Boucheron, Jim- provides a more complete disclosure and facilitates a more my Choo, Karl Lagerfeld, Lanvin, Montblanc, Paul Smith, S.T. accurate comparison of current results to historic results. In Dupont, Repetto and Van Cleef & Arpels, whose products are addition, providing comparable sales information excluding distributed in over 100 countries around the world. sales relating to a terminated license provides investors with a Burberry was our most significant license, and net sales more accurate picture of current sales trends. Based upon the of Burberry products represented 0%, 23% and 46% of net foregoing, we believe that our presentation of the non-GAAP sales for the years ended December 31, 2014, 2013 and ﬁnancial information is an important supplemental measure of 2012, respectively. (See Note 2 “Termination of Burberry Li- operating performance to investors. cense” in notes to consolidated ﬁnancial statements on page OVERVIEW 77 of this Annual Report). In addition, we own the Lanvin brand name for our class of trade, and license the Montblanc and We operate in the fragrance business, and manufacture, mar- Jimmy Choo brand names; for the year ended December 31, ket and distribute a wide array of fragrances and fragrance 2014, sales of product for these brands represented 18%, related products. We manage our business in two segments, 22% and 16% of net sales, respectively. European-based operations and United States-based opera- Through our United States operations we also market pres- tions. Certain prestige fragrance products are produced and tige brands as well as specialty retail fragrance and fragrance marketed by our European operations through our 73% owned related products. United States operations represented 21%, subsidiary in Paris, Interparfums SA, which is also a publicly 18% and 13% of net sales in 2014, 2013 and 2012, respec- INTER PARFUMS, INC. 2014 ANNUAL REPORT 56 tively. These fragrance products are sold or to be sold under ens or is prolonged, then there will likely be a negative effect trademarks owned by us or pursuant to license or other on ongoing consumer conﬁdence, demand and spending and agreements with the owners of the Abercrombie & Fitch, Agent as a result, our business. Currently, we believe general eco- Provocateur, Anna Sui, Banana Republic, bebe, Dunhill, Gap, nomic, political and other uncertainties still exist in select Hollister, Oscar de la Renta, and Shanghai Tang brands. markets in which we do business and we continue to monitor Quarterly sales ﬂuctuations are inﬂuenced by the timing of global economic and political uncertainties and other risks new product launches as well as the third and fourth quarter that may affect our business. holiday season. In certain markets where we sell directly to Our reported net sales are impacted by changes in foreign retailers, seasonality has been more evident in the past few currency exchange rates. A strong U.S. dollar has a negative years. We operate distribution subsidiaries in Italy, Germany, impact on our net sales. However, earnings are positively Spain, and the United States. In addition, our specialty retail affected by a strong dollar, because approximately 40% of product lines sold to U.S. retailers are also concentrated in net sales of our European operations are denominated in U.S. the second half of the year. dollars, while almost all costs of our European operations are We grow our business in two distinct ways. First, we grow by incurred in euro. Our Company addresses certain ﬁnancial ex- adding new brands to our portfolio, either through new licens- posures through a controlled program of risk management that es or other arrangements or out-right acquisitions of brands. includes the use of derivative ﬁnancial instruments. We primarily Second, we grow through the introduction of new products and enter into foreign currency forward exchange contracts to reduce supporting new and established products through advertising, the effects of ﬂuctuating foreign currency exchange rates. merchandising and sampling as well as phasing out existing products that no longer meet the needs of our consumers. The RECENT IMPORTANT EVENTS economics of developing, producing, launching and supporting BURBERRY products inﬂuence our sales and operating performance each Burberry exercised its option to buy-out the license rights year. Our introduction of new products may have some can- effective December 31, 2012. In October 2012, the Company nibalizing effect on sales of existing products, which we take and Burberry entered into a transition agreement that provided into account in our business planning. for certain license rights and obligations to continue through Our business is not capital intensive, and it is important to March 31, 2013. The Company continued to operate certain note that we do not own manufacturing facilities. We act as a aspects of the business for the brand including product devel- general contractor and source our needed components from opment, testing, and distribution. The transition agreement our suppliers. These components are received at one of our provided for non-exclusivity for manufacturing, a cap on sales distribution centers and then, based upon production needs, of Burberry products, a reduced advertising requirement and the components are sent to one of several third party ﬁllers, no minimum royalty amounts. which manufacture the ﬁnished product for us and then deliver them to one of our distribution centers. ABERCROMBIE & FITCH AND HOLLISTER As with any global business, many aspects of our operations In December 2014, the Company entered into a 7-year are subject to inﬂuences outside our control. We believe we exclusive worldwide license to create, produce and distribute have a strong brand portfolio with global reach and potential. new perfumes and fragrance related products under the As part of our strategy, we plan to continue to make invest- Abercrombie & Fitch and Hollister brand names. The Company ments behind fast-growing markets and channels to grow mar- will distribute these fragrances internationally in specialty ket share. retailers, high-end department stores and duty free shops, and During 2014, the economic and political uncertainty and in the U.S., in duty free shops and potentially in Abercrombie financial market volatility taking place in certain European & Fitch and Hollister retail stores. The agreement is subject to countries and the Middle East did not have a signiﬁcant impact certain minimum sales, advertising expenditures and royalty on our business, and at this time we do not believe it will payments as are customary in our industry. New men’s and have a signiﬁcant impact on our business for the foreseeable women’s scents are planned for both Abercrombie & Fitch and future. However, if the degree of uncertainty or volatility wors- Hollister for 2016. management’s discussion and analysis of ﬁnancial condition and results of operations 57 DISCUSSION OF CRITICAL ACCOUNTING POLICIES upon historic trends and relevant current data, including infor- We make estimates and assumptions in the preparation of our mation provided by retailers regarding their inventory levels. In ﬁnancial statements in conformity with accounting principles addition, as necessary, speciﬁc accruals may be established generally accepted in the United States of America. Actual for signiﬁcant future known or anticipated events. The types results could differ significantly from those estimates under of known or anticipated events that we have considered, and different assumptions and conditions. We believe the follow- will continue to consider, include, but are not limited to, the ing discussion addresses our most critical accounting poli- ﬁnancial condition of our customers, store closings by retailers, cies, which are those that are most important to the portrayal changes in the retail environment and our decision to continue of our financial condition and results of operations. These to support new and existing products. We record estimated accounting policies generally require our management’s most reserves for sales returns as a reduction of sales, cost of sales difficult and subjective judgments, often as a result of the and accounts receivable. Returned products are recorded as need to make estimates about the effect of matters that inventories and are valued based upon estimated realizable are inherently uncertain. Management of the Company has value. The physical condition and marketability of returned discussed the selection of signiﬁcant accounting policies and products are the major factors we consider in estimating real- the effect of estimates with the Audit Committee of the Board izable value. Actual returns, as well as estimated realizable of Directors. REVENUE RECOGNITION values of returned products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as economic conditions, inventory levels or competitive condi- We sell our products to department stores, perfumeries, tions differ from our expectations. specialty retailers, mass market retailers, supermarkets and domestic and international wholesalers and distributors. INVENTORIES Sales of such products by our domestic subsidiaries are de- Inventories are stated at the lower of cost or market value. nominated in U.S. dollars and sales of such products by our Cost is principally determined by the ﬁrst-in, ﬁrst-out method. foreign subsidiaries are primarily denominated in either euro We record adjustments to the cost of inventories based upon or U.S. dollars. We recognize revenues when merchandise is our sales forecast and the physical condition of the inventories. shipped and the risk of loss passes to the customer. Net sales These adjustments are estimates, which could vary signifi- are comprised of gross revenues less returns, trade discounts cantly, either favorably or unfavorably, from actual require- and allowances. ments if future economic conditions or competitive conditions differ from our expectations. ACCOUNTS RECEIVABLE Accounts receivable represent payments due to the Company EQUIPMENT AND OTHER LONG-LIVED ASSETS for previously recognized net sales, reduced by allowances Equipment, which includes tools and molds, is recorded at cost for sales returns and doubtful accounts. Accounts receivable and is depreciated on a straight-line basis over the estimated balances are written-off against the allowance for doubtful useful lives of such assets. Changes in circumstances such as accounts when they become uncollectible. Recoveries of ac- technological advances, changes to our business model or changes counts receivable previously recorded against the allowance in our capital spending strategy can result in the actual useful are recorded in the consolidated statement of income when lives differing from our estimates. In those cases where we received. We generally grant credit based upon our analysis of determine that the useful life of equipment should be short- the customer’s ﬁnancial position as well as previously estab- ened, we would depreciate the net book value in excess of the lished buying patterns. SALES RETURNS 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 prod- Generally, we do not permit customers to return their unsold ucts, could result in shortened useful lives. products. However, for U.S. distribution of our prestige prod- We evaluate indeﬁnite-lived intangible assets for impairment ucts, we allow returns if properly requested, authorized and at least annually during the fourth quarter, or more frequently approved. We regularly review and revise, as deemed necessary, when events occur or circumstances change, such as an un- our estimate of reserves for future sales returns based primarily expected decline in sales, that would more likely than not in- INTER PARFUMS, INC. 2014 ANNUAL REPORT 58 dicate that the carrying value of an indeﬁnite-lived intangible levels and future cost of goods and operating expense levels, asset may not be recoverable. When testing indefinite-lived as well as economic conditions, changes to our business model intangible assets for impairment, the evaluation requires a or changes in consumer acceptance of our products which are comparison of the estimated fair value of the asset to the carry- more subjective in nature. We believe that the assumptions we ing value of the asset. The fair values used in our evaluations have made in projecting future cash ﬂows for the evaluations are estimated based upon discounted future cash ﬂow projections described above are reasonable and currently no impairment using a weighted average cost of capital of 6.7%. The cash ﬂow indicators exist for our intangible assets subject to amortiza- projections are based upon a number of assumptions, including, tion. In those cases where we determine that the useful life of future sales levels and future cost of goods and operating expense long-lived assets should be shortened, we would depreciate the levels, as well as economic conditions, changes to our business net book value in excess of the salvage value (after testing for model or changes in consumer acceptance of our products impairment as described above), over the revised remaining use- which are more subjective in nature. If the carrying value of ful life of such asset thereby increasing amortization expense. an indefinite-lived intangible asset exceeds its fair value, an In determining the useful life of our Lanvin brand names impairment charge is recorded. and trademarks, we applied the provisions of ASC topic 350- We believe that the assumptions we have made in projecting 30-35-3. The only factor that prevented us from determining future cash ﬂows for the evaluations described above are rea- that the Lanvin brand names and trademarks were indeﬁnite sonable and currently no impairment indicators exist for our life intangible assets was Item c. “Any legal, regulatory, or indefinite-lived intangible assets. However, if future actual contractual provisions that may limit the useful life.” The exis- results do not meet our expectations, we may be required to tence of a repurchase option in 2025 may limit the useful life record an impairment charge, the amount of which could be of the Lanvin brand names and trademarks to the Company. material to our results of operations. The following table presents However, this limitation would only take effect if the repur- the impact a change in the following signiﬁcant assumptions chase option were to be exercised and the repurchase price would have had on the calculated fair value in 2014 assuming was paid. If the repurchase option is not exercised, then the all other assumptions remained constant: Lanvin brand names and trademarks are expected to continue to contribute directly to the future cash ﬂows of our Company (In millions) Increase and their useful life would be considered to be indeﬁnite. (decrease) to With respect to the application of ASC topic 350-30-35-8, Change fair value the Lanvin brand names and trademarks would only have a Weighted average cost of capital Weighted average cost of capital Future sales levels Future sales levels +10% -10% +10% -10% $(1.0) ﬁnite life to our Company if the repurchase option were exer- $ 1.3 $ 1.0 cised, and in applying ASC topic 350-30-35-8, we assumed that the repurchase option is exercised. When exercised, Lanvin $(1.0) has an obligation to pay the exercise price and the Company would be required to convey the Lanvin brand names and Intangible assets subject to amortization are evaluated for trademarks back to Lanvin. The exercise price to be received impairment testing whenever events or changes in circum- (Residual Value) is well in excess of the carrying value of the stances indicate that the carrying amount of an amortizable Lanvin brand names and trademarks, therefore no amortiza- intangible asset may not be recoverable. If impairment indica- tion is required. tors exist for an amortizable intangible asset, the undiscounted future cash ﬂows associated with the expected service potential DERIVATIVES of the asset are compared to the carrying value of the asset. If We account for derivative ﬁnancial instruments in accordance our projection of undiscounted future cash ﬂows is in excess with ASC topic 815, which establishes accounting and report- of the carrying value of the intangible asset, no impairment ing standards for derivative instruments, including certain charge is recorded. If our projection of undiscounted future derivative instruments embedded in other contracts, and for cash flows is less than the carrying value of the intangible hedging activities. This topic also requires the recognition of asset, an impairment charge would be recorded to reduce the all derivative instruments as either assets or liabilities on the intangible asset to its fair value. The cash ﬂow projections are balance sheet and that they are measured at fair value. based upon a number of assumptions, including future sales We currently use derivative ﬁnancial instruments to hedge management’s discussion and analysis of ﬁnancial condition and results of operations 59 certain anticipated transactions and interest rates, as well QUANTITATIVE ANALYSIS as receivables denominated in foreign currencies. We do not During the 3-year period ended December 31, 2014, we have utilize derivatives for trading or speculative purposes. Hedge not made any material changes in our assumptions underlying effectiveness is documented, assessed and monitored by these critical accounting policies or to the related signiﬁcant employees who are qualified to make such assessments and estimates. The results of our business underlying these assump- monitor the instruments. Variables that are external to us such tions have not differed signiﬁcantly from our expectations. as social, political and economic risks may have an impact on While we believe the estimates we have made are proper and our hedging program and the results thereof. the related results of operations for the period are presented INCOME TAXES fairly in all material respects, other assumptions could reason- ably be justified that would change the amount of reported The Company accounts for income taxes using an asset and net sales, cost of sales, and selling, general and administra- liability approach that requires the recognition of deferred tax tive expenses as they relate to the provisions for anticipated assets and liabilities for the expected future tax consequences sales returns, allowance for doubtful accounts and inven- of events that have been recognized in its ﬁnancial statements tory obsolescence reserves. For 2014, had these estimates or tax returns. The net deferred tax assets assume sufﬁcient been changed simultaneously by 5% in either direction, our future earnings for their realization, as well as the continued reported gross profit would have increased or decreased by application of currently anticipated tax rates. Included in net approximately $0.5 million and selling, general and admin- deferred tax assets is a valuation allowance for deferred tax istrative expenses would have changed by approximately assets, where management believes it is more-likely-than-not $0.02 million. The collective impact of these changes on that the deferred tax assets will not be realized in the relevant operating income, net income attributable to Inter Parfums, jurisdiction. If the Company determines that a deferred tax Inc., and net income attributable to Inter Parfums, Inc. per asset will not be realizable, an adjustment to the deferred tax diluted common share would be an increase or decrease of asset will result in a reduction of net income at that time. In approximately $0.5 million, $0.26 million and $0.01 mil- addition, the Company follows the provisions of uncertain tax lion, respectively. positions as addressed in ASC topic 740-10-65-1. RESULTS OF OPERATIONS See information regarding Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” on page 55 of this Annual Report. As a result of the termination of the Burberry license, after declining 14% in 2013, net sales in 2014 declined 11% to $499.3 million, as compared to $563.6 million in 2013. However, with respect to the Company’s ongoing brands (excluding Burberry brand sales), after increasing 23% in 2013, net sales in 2014 increased 15% to $499.3 million, as compared to $433.3 million in 2013. NET SALES (In millions) European-based ongoing brand product sales United States-based product sales Total ongoing brand net sales Burberry brand net sales Total net sales 2014 $394.0 105.3 499.3 – $499.3 % Change 2013 Years Ended December 31, 2012 % Change 18% 6% 15% n/a (11)% $334.0 99.3 $433.3 130.3 $563.6 23% 21% 23% n/a (14)% $270.4 82.3 $352.7 301.4 $654.1 At comparable foreign currency exchange rates, ongoing brand net sales increased 16% in 2014, as there was no discernible effect of currency rates on net sales in 2013. The average U.S. dollar/euro exchange rates were 1.33 in both 2014 and 2013 and 1.28 in 2012. INTER PARFUMS, INC. 2014 ANNUAL REPORT 60 Ongoing European-based prestige product sales increased network. For 2015, we expect continued strong performances 18% in 2014 to $394.0 million, as compared to 2013. New from the existing scents within our major European-based pres- product launches were the primary catalyst for sales growth tige brands. In addition, our plans in 2015 call for a number in 2014. Karl Lagerfeld’s signature scents for both men and of new product launches including new scents for Montblanc, women yielded $24.2 million in incremental sales in 2014. Jimmy Choo, Boucheron, Lanvin, Balmain and Van Cleef & Ar- Steady gains from Legend fragrances along with the 2014 pels. Lastly, the Company hopes to benefit from its substantial launch of Emblem, enabled Montblanc brand sales to con- resources to potentially acquire one or more brands, either on a tinue to outperform expectations with sales reaching $110.8 proprietary basis or as a licensee. million in 2014, up 33% as compared to 2013. Montblanc United States prestige and specialty retail product sales in- has now become our top selling brand. The successful sum- creased 6% in 2014 to $105.3 million as compared to $99.3 mer launch of Jimmy Choo Man enabled Jimmy Choo brand million in 2013. Recently licensed prestige brands within our sales to resume positive sales momentum resulting in 2014 U.S.-based operations were the stars of 2014. Dunhill legacy brand sales of $78.5 million, up 8% as compared to 2013. scents added $16.2 million to 2014 sales, up 25% from $13.0 Lanvin brand sales faced a difficult comparison against the million in 2013. Sales of Oscar de la Renta legacy products launch of Lanvin Me in 2013; however, a strong performance began in 2014 and aggregated $15.8 million for the year. In by Eclat d’Arpège and the launch of Lanvin Me L’Eau resulted addition, the spring launches, Fatale and Fatale Pink for Agent in brand sales increasing 5% to $90.3 million in 2014 as com- Provocateur, have been well received in international markets, pared to 2013. generating $5.3 million in 2014 sales. Declines in our specialty These 2014 results for ongoing European-based prestige retail and mass market product lines mitigated some of these product sales are even more gratifying as they come on the heels gains. In addition, a difficult Asian market resulted in a 16% of a very strong 2013 where overall ongoing European-based decline in Anna Sui brand sales aggregating $21.5 million in prestige product sales increased 23% as compared to 2012. 2014, as compared to $25.8 million in 2013. Sales of Montblanc Legend fragrances performed exceptionally United States prestige brand and specialty retail products, well with brand sales increasing 40% in 2013. For Jimmy Choo, sales increased 21% in 2013 and benefited from strong con- the introduction of its second fragrance line, Jimmy Choo Flash, sumer demand and expanded retail distribution for Anna Sui contributed to the 41% increase in brand sales for 2013. With fragrances. Initial sales of Anna Sui fragrances began in 2012 the continued growth of Eclat d’Arpège along with the launch and gained further momentum following the launch of La Vie de of Lanvin Me and the steady performance of the Jeanne Lanvin Bohème in 2013. Anna Sui fragrance sales increased 29% to line, Lanvin product sales increased 11% in 2013, as compared $25.8 million in 2013, as compared to $20.0 million in 2012. to 2012. In addition, the launches of the Repetto signature In April 2013, our U.S.-based operations took over the manu- scent, along with Place Vendôme from Boucheron had exceeded facture and distribution of legacy Dunhill fragrances, and brand our expectations and were meaningful contributors to the sales aggregated $13.0 million, providing an incremental contri- growth in sales of ongoing brands in 2013. bution to 2013 growth for our U.S. business. As expected, sales within our European operations have been Future growth within our United States-based operations is affected as a result of the termination of the Burberry license. expected to come from our prestige fragrance licenses. We plan In addition, 2015 is expected to be a very challenging year to grow our brands by launching new products and pursuing ex- from a currency perspective. As mentioned above, the average panded distribution. In that regard, we began shipping our first U.S. dollar/euro exchange rate for 2014 and 2013 was 1.33. all new Dunhill fragrance, Icon, in January 2015, which will be However, first quarter 2015 exchange rates have averaged ap- in selective distribution until spring 2015. We have also recently proximately 1.15 or 14% below that of 2014. This is expected launched our inaugural fragrance collection for Shanghai Tang to have a significant negative impact on 2015 reported sales. in certain duty free markets, which will be followed by a select Despite the severe and anticipated continuing change in such international roll-out throughout 2015. In addition, our plans in currency exchange rates, we maintain confidence in our future 2015 call for a number of other product launches including new as we have strengthened advertising and promotional invest- scents for Oscar de la Renta, Anna Sui and bebe. Finally, we ments supporting all portfolio brands and accelerated brand will continue the development process for the new Abercrombie development. Our expectations reflect plans to continue to build & Fitch and Hollister fragrance lines planned for international upon the strength of our brands and our worldwide distribution distribution in 2016. management’s discussion and analysis of ﬁnancial condition and results of operations 61 ONGOING BRAND NET SALES TO CUSTOMERS BY REGION inventory, the sale of certain inventory to Burberry at cost, re- (In millions) Years Ended December 31, 2012 2013 sulted in a lower gross margin. In addition, the discontinuance of Burberry product sales, which were sold at higher margins than ongoing brand sales, had a negative effect on margins. North America Western Europe Eastern Europe Central & South America Middle East Asia Other 2014 $134.6 130.9 47.0 49.2 40.3 85.5 11.8 $499.3 $118.4 114.4 46.3 33.2 34.1 78.2 8.7 $96.0 For U.S. operations, gross profit margin was 48% in 2014 90.6 38.0 29.4 29.7 63.9 5.1 and 46% for both 2013 and 2012. Sales growth for our U.S. operations has primarily come from higher margin prestige product licenses while sales of lower margin specialty retail and mass market products have been in a decline. We carefully watch movements in foreign currency ex- change rates as approximately 40% of our European-based $433.3 $352.7 operations net sales are denominated in U.S. dollars, while our costs are incurred in euro. From a proﬁt standpoint, a stronger In 2014, ongoing brand sales were ahead in all regions. Our U.S. dollar has a positive effect on our gross margin while three largest markets Western Europe, North America and a weak dollar has a negative effect. The average dollar/euro Asia had sales growth of 14.4%, 13.6% and 9.2%, respec- exchange rate was 1.33 in both 2014 and 2013. As such, tively. Eastern Europe, which has been a difﬁcult market all there was no discernable effect on gross margin in 2014 from year as a result of political and economic turmoil in the area, changes in currency exchange rates. However, first quarter was up 1.4% in 2014. In 2013, ongoing brand sales were also 2015 dollar/euro exchange rates have averaged approximately ahead in all regions, and our three largest markets Western 1.15 or 14% below that of 2014. Although this is expected to Europe, North America and Asia had sales growth of 26.3%, have a signiﬁcant negative impact on 2015 reported sales, we 23.3% and 22.5%, respectively. expect to see an increase in our gross margin as over 40% of Years Ended December 31, 2012 2013 GROSS MARGINS (In millions) Net sales Cost of sales Gross margin Gross margin as a 2014 $499.3 212.3 $287.0 net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Costs relating to purchase with purchase and gift with purchase promotions are reflected in cost of sales and $563.6 234.8 $654.1 aggregated $24.4 million, $25.7 million and $46.5 million in 246.9 2014, 2013 and 2012, respectively, and represented 4.9%, $328.8 $407.2 4.6% and 7.1% of net sales, respectively. The decline in 2014 and 2013 is the result of the discontinuance of Burberry prod- percent of net sales 57.5% 58.3% 62.2% uct sales. Generally, we do not bill customers for shipping and han- As a percentage of net sales, gross profit margins were dling costs and such costs, which aggregated $5.2 million, 57.5%, 58.3%, and 62.2% in 2014, 2013 and 2012, respec- $6.1 million and $8.4 million in 2014, 2013 and 2012, tively. For European operations, gross proﬁt margin was 60%, respectively, are included in selling, general and administrative 61% and 64% in 2014, 2013 and 2012, respectively. The expenses in the consolidated statements of income. As such, gross margin decline in 2014 and 2013 was directly related our Company’s gross margins may not be comparable to other to the resolution of the Burberry inventory and the termination companies, which may include these expenses as a compo- of the Burberry license. Although reserves were established in nent of cost of goods sold. 2012 and used in 2013 to cover losses on the disposition of INTER PARFUMS, INC. 2014 ANNUAL REPORT 62 SELLING, GENERAL & ADMINISTRATIVE EXPENSES in 2014, with the decline directly related to the termination of (In millions) the Burberry license. In addition, service fees, which are fees Years Ended December 31, paid to third parties relating to the activities of our distribution 2014 2013 2012 subsidiaries, aggregated $11.1 million, $15.1 million and $26.3 Selling, general & million in 2014, 2013 and 2012, respectively. The declines in administrative expenses $233.6 $250.0 $325.8 both 2014 and 2013 are directly related to the termination of Selling, general & administrative expenses the Burberry license and related discontinuation of our United Kingdom distribution subsidiary. as a percent of net sales 47% 44% 50% The impairment loss in 2012 related to our Nickel business. In December 2013, we sold our Nickel brand and trademarks Selling, general and administrative expenses decreased 7% in for $3.5 million, which was approximately equal to the then 2014 as compared to 2013 and decreased 23% in 2013 as current book value of the goodwill and trademark; therefore, compared to 2012. As a percentage of sales, selling, general there was no material gain or loss as a result of the sale. and administrative expenses were 47%, 44% and 50% in 2014, See information regarding Regulation S-K Item 10(e), “Use of 2013 and 2012, respectively. For European operations, selling, Non-GAAP Financial Measures in Commission Filings”, on page general and administrative expenses decreased 9% in 2014, as 55 of this Annual Report. As a result of the termination of the compared to 2013 and represented 50% of sales in 2014 as Burberry license, the Company recognized a gain of $198.8 mil- compared to 47% in 2013. A signiﬁcant portion of the expenses lion as of December 31, 2012. On an after tax basis and after associated with the Burberry brand were variable in nature. allocation to the noncontrolling interests on an after tax basis, However, with only limited reorganization measures employed, the net gain on termination of license attributable to Inter the Company is attempting to absorb its ﬁxed costs through Parfums, Inc. common shareholders’ aggregated $93.0 million. increased sales of other brands in our prestige fragrance The following analysis excludes the 2012 net gain on termi- portfolio as well as with the sale of products of recently licensed nation of license. new brands. For U.S. operations, selling, general and adminis- Income from operations decreased 32% to $53.4 million in trative expenses increased 11% in 2014 and represented 36% 2014 as compared to 2013, and decreased 1% to $78.8 million of sales, as compared to 34% in 2013. in 2013 as compared to $79.6 million in 2012. Operating mar- Promotion and advertising included in selling, general and gins aggregated 10.7%, 14.0% and 12.2% for the years ended administrative expenses aggregated $86.7 million, $94.0 mil- December 31, 2014, 2013 and 2012, respectively. Results for lion and $132.7 million in 2014, 2013 and 2012, respectively. 2013 were inﬂuenced by an exceptional ﬁrst quarter, whereby Promotion and advertising as a percentage of sales represent- operating pursuant to the termination agreement with Burberry, ed 17.4%, 16.7% and 20.3% of net sales in 2014, 2013 and proﬁts were extraordinarily strong due to a substantial increase 2012, respectively. In 2013, pursuant to the requirements of in sales, coupled with low promotional expenses. The remainder the transition agreement with Burberry, advertising require- of the 2013 year was inﬂuenced by lower sales and proﬁtability ments were reduced. Almost all promotional spending in 2013 relating to the termination of the Burberry license. Lower gross was for continuing brands and represented approximately 22% margins were partially offset by lower promotional spending. In of continuing brand sales. As planned, we invested heavily in 2014, we experienced a slight decline in gross margin; however, promotional spending in the latter part of 2013 to support new and more importantly, we still need higher sales levels to appro- product launches and continued worldwide building of brand priately leverage our selling, general and administrative expenses. awareness of our brand portfolio. With only limited reorganization measures employed, the Com- Royalty expense included in selling, general and adminis- pany’s business model is expected to continue to demonstrate trative expenses aggregated $35.6 million, $40.5 million and effectiveness. A signiﬁcant portion of the expenses associated $58.8 million in 2014, 2013 and 2012, respectively. Royalty with the Burberry brand were variable in nature. The Company expense as a percentage of sales represented 7.1%, 7.2% and plans to continue to absorb substantially all of its ﬁxed costs 9.0% of net sales in 2014, 2013 and 2012, respectively. Roy- through increased sales of other brands in our prestige fragrance alty expense in 2014 includes a $2.3 million increase to the portfolio as well as with the sale of products of recently licensed estimated royalty liability due to Burberry. Without this adjust- new brands. Our goal is to reach an operating margin of at least ment, royalty expense would have represented 6.7% of net sales 14% in the next several years. management’s discussion and analysis of ﬁnancial condition and results of operations 63 OTHER INCOME AND EXPENSES INCOME TAXES Interest expense aggregated $1.5 million, $1.4 million and $1.7 Our effective income tax rate was 34.2%, 36.8% and 35.6% million in 2014, 2013 and 2012, respectively. We use the credit in 2014, 2013 and 2012, respectively. Our effective tax rates lines available to us, as needed, to ﬁnance our working capital differ from statutory rates due to the effect of state and lo- needs as well as our ﬁnancing needs for acquisitions. Loans cal taxes and tax rates in foreign jurisdictions. In 2013, the payable – banks and long-term debt including current maturi- Company incurred a new tax levied by the French Government ties aggregated $0.3 million, $6.1 million and $27.8 million equal to 3% on any dividend paid by a French company to its as of December 31, 2014, 2013 and 2012, respectively. In shareholders. This tax aggregated approximately $0.8 million October 2012, the Company entered into a 1-year, €20 million in 2014 and $1.6 million in 2013. Excluding this tax, our ef- credit facility to finance payments required pursuant to the fective tax rate of European operations was 31.7%, 34.0% and Karl Lagerfeld license. This credit facility was repaid in full in 35.4% in 2014, 2013 and 2012, respectively. Proﬁts in lower 2013 and we had no long-term debt as of December 31, 2014 tax rate foreign jurisdictions are the primary factor in the con- and 2013. tinued decline in the effective tax rate of our European opera- Foreign currency gains or (losses) aggregated $0.9 million tions. In addition, changes in allocation percentages related to ($1.2) million and ($3.1) million in 2014, 2013 and 2012, state and local taxes of our U.S. operations reduced our U.S. respectively. We enter into foreign currency forward exchange operations effective tax rate to 36.5% in 2014 as compared to contracts to manage exposure related to receivables denomi- 39.8% in 2013. We expect our effective tax rate to continue nated in a foreign currency as over 40% of net sales of our to decline as a result of our business interests in lower tax European operations are denominated in U.S. dollars. However, rate jurisdictions. Other than as discussed above, we did not as coverage is never one hundred percent, gains and losses experience any signiﬁcant changes in tax rates, and none were are incurred. expected in jurisdictions where we operate. Interest income aggregated $3.9 million, $4.4 million and See information regarding Regulation S-K Item 10(e), “Use $1.1 million in 2014, 2013 and 2012, respectively. Cash and of Non-GAAP Financial Measures in Commission Filings”, cash equivalents and short-term investments are primarily in- on page 55 of this Annual Report. vested in certiﬁcates of deposit. NET INCOME AND EARNINGS PER SHARE (AS REPORTED) (In thousands, except share and per share data) Year Ended December 31, Net income attributable to European operations Net income attributable to United States operations Net income Less: Net income attributable to the noncontrolling interest Net income attributable to Inter Parfums, Inc. Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted Weighted average number of shares outstanding: Basic Diluted 2014 $29,276 8,069 $37,345 7,909 $29,436 $0.95 0.95 2013 $44,147 6,819 $50,966 11,755 $39,211 2012 $171,799 5,091 $176,890 45,754 $131,136 $1.27 1.27 $4.29 4.26 30,931,308 31,060,326 30,763,955 30,574,772 30,953,882 30,715,684 INTER PARFUMS, INC. 2014 ANNUAL REPORT 64 ON AN AFTER TAX BASIS (THE TAX RATE OF INTERPARFUMS SA WAS 36.1% IN 2012) AND AFTER ALLOCATION TO THE NONCONTROLLING INTEREST (26.8%) OF THE AFTER TAX GAIN, THE 2012 NET GAIN ON TERMINATION OF LICENSE ATTRIBUTABLE TO INTER PARFUMS, INC. COMMON SHAREHOLDERS AGGREGATED $93.0 MILLION. THEREFORE, HAD THIS TRANSACTION NOT OCCURRED, NET INCOME AND EARNINGS PER SHARE IN 2012 WOULD HAVE BEEN AS FOLLOWS: (In thousands, except share and per share data) Year Ended December 31, Net income attributable to European operations Net income attributable to United States operations Net income Less: Net income attributable to the noncontrolling interest Net income attributable to Inter Parfums, Inc. Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted 2014 $29,276 8,069 $37,345 7,909 $29,436 $0.95 0.95 2013 $44,147 6,819 $50,966 11,755 $39,211 2012 $44,742 5,091 $49,833 11,741 $38,092 $1.27 1.27 $1.25 1.24 Excluding the 2012 net gain on termination of license, on a respectively. Net income attributable to Inter Parfums, Inc. consolidated basis, and after its allocation to the noncontrolling aggregated $29.4 million, $39.2 million and $38.1 million in interests on an after tax basis, net income was $37.3 million, 2014, 2013 and 2012, respectively. Net margins attributable to $51.0 million and $49.8 million in 2014, 2013 and 2012, Inter Parfums, Inc. aggregated 5.9%, 7.0% and 5.8% in 2014, respectively. Net income attributable to European operations 2013 and 2012, respectively. was $29.3 million, $44.1 million and $44.7 million in 2014, 2013 and 2012, respectively, while net income attributable LIQUIDITY AND CAPITAL RESOURCES to United States operations was $8.1 million, $6.8 million The Company’s ﬁnancial position remains strong. At December and $5.1 million in 2014, 2013 and 2012, respectively. The 31, 2014, working capital aggregated $383 million and we had a reasons for significant fluctuations in net income for both working capital ratio of 4.7 to 1. Cash and cash equivalents and European operations and United States operations are di- short-term investments aggregated $280 million, most of which rectly related to the previous discussions relating to changes is held in euro by our European operations and is readily con- in sales, gross margin and selling, general and administrative vertible into U.S. dollars. We have not had any liquidity issues expenses. In summary, for European operations in 2014, the to date, and do not expect any liquidity issues relating to such absence of Burberry brand sales and related decline in gross cash and cash equivalents and short-term investments held by margin as a percentage of sales were partially mitigated by our European operations. Approximately 88% of the Company’s the decline in Burberry related selling, general and admin- total assets are held by European operations. In addition to the istrative expenses. However, we need higher sales levels to cash and cash equivalents and short-term investments referred appropriately leverage our selling, general and administrative to above, approximately $87 million of trademarks, licenses and expenses. For United States operations in 2014, higher gross other intangible assets are held by European operations. margins combined with a lower effective tax rate mitigated an The Company hopes to beneﬁt from its substantial resources 11% increase in selling, general and administrative expenses to potentially acquire one or more brands, either on a proprietary resulting in net income growth. basis or as a licensee. Opportunities for external growth con- The noncontrolling interest arises from our 73% owned tinue to be examined, with the priority of maintaining the quality subsidiary in Paris, Interparfums SA, which is also a publicly and homogeneous nature of our portfolio. However, we cannot traded company as 27% of Interparfums SA shares trade on assure you that any new license or acquisition agreements will the NYSE Euronext. Net income attributable to the noncon- be consummated. trolling interest is directly related to the profitability of our Cash provided by operating activities aggregated $36.6 mil- European operations, and aggregated 27.0%, 26.6% and 26.4% lion, $49.2 million and $60.6 million in 2014, 2013 and 2012, of European operations net income in 2014, 2013 and 2012, respectively. In 2014, working capital items used $11 million in management’s discussion and analysis of ﬁnancial condition and results of operations 65 cash from operating activities, as compared to $18 million in In December 2013, the Company sold its Nickel brand and 2013 and $72 million being provided by working capital items trademarks for $3.5 million, which was approximately equal to in 2012. The 2014 increase in accounts receivable is consistent the then current book value of the goodwill and trademark; there- with the 2014 increase in sales and the accounts receivable bal- fore, there was no material gain or loss as a result of the sale. ances in 2014, 2013 and 2012 reﬂect favorable collection activ- Our short-term ﬁnancing requirements are expected to be ity as day’s sales outstanding declined to 66 days in 2014 as met by available cash on hand at December 31, 2014, cash compared to 73 days in 2013 and 90 days in 2012. Inventory generated by operations and a short-term credit lines provided day’s on hand has also shown improvement and aggregated 198 by domestic and foreign banks. The principal credit facilities in 2014, down from 199 in 2013 and 225 in 2012. As noted for 2015 consist of a $20.0 million unsecured revolving line of above, in 2013, working capital items used $18 million in cash credit provided by a domestic commercial bank and approxi- from operating activities. The primary factor contributing to this mately $30.0 million in credit lines provided by a consortium use is the payment of taxes relating to the gain on termination of international financial institutions. Short-term borrowings of license. The decline in accounts receivable, inventories and aggregated $0.3 million and $6.1 million as of December 31, payables reﬂects the wind down associated with the termination 2014 and 2013, respectively. Proceeds from sale of stock of of the Burberry license. subsidiary reﬂect the proceeds from shares issued by our French Cash ﬂows used in investing activities reﬂect the purchase subsidiary, Interparfums SA, pursuant to options exercised. and sales of short-term investments by our European opera- In January 2013, the Board of Directors authorized a 50% in- tions. These investments are primarily certiﬁcates of deposit crease in the annual dividend to $0.48 per share. In November with maturities greater than three months. At December 31, 2013, our Board of Directors authorized a special cash dividend 2014, approximately $79 million of such certiﬁcates of deposit of $0.48 per share, payable in one lump sum on December 16, contain penalties where we would forfeit a portion of the interest 2013 to shareholders of record on December 2, 2013. In Janu- earned in the event of early withdrawal. ary 2014, the Board of Directors authorized the continuation of Purchases of equipment and leasehold improvements aggre- the $0.48 per share dividend for 2014 and in January 2015, gated $3.3 million, $5.0 million and $9.5 million in 2014, 2013 the Board of Directors authorized an 8% increase in the annual and 2012, respectively. In 2012, the amounts include the pur- dividend to $0.52 per share. The next quarterly cash dividend chase of stands and counters for the Burberry cosmetic lines, of $0.13 per share is payable on April 15, 2015 to sharehold- some of which were sold for $2.8 million in 2013. Investing ers of record on March 31, 2015. Dividends paid, including activities in 2012 reﬂect the proceeds from the termination of dividends paid once per year to noncontrolling stockholders the Burberry license received in December 2012. Our business of Interparfums SA, aggregated $19.5 million, $36.7 million is not capital intensive as we do not own any manufacturing and $13.1 million for the years ended December 31, 2014, facilities. However, on a full year basis, we spend approximately 2013 and 2012, respectively. The cash dividends to be paid in $3 million to $4 million on tools and molds, depending on our 2015 are not expected to have any signiﬁcant impact on our new product development calendar. Capital expenditures ﬁnancial position. also include amounts for ofﬁce ﬁxtures, computer equipment We believe that funds provided by or used in operations can be and industrial equipment needed at our distribution centers. supplemented by our present cash position and available credit fa- Payments for intangible assets aggregated $0.9 million, $7.8 cilities, so that they will provide us with sufﬁcient resources to meet million and $19.7 million in 2014, 2013 and 2012, respectively. all present and reasonably foreseeable future operating needs. When acquiring new licenses for brands that have current dis- Inﬂation rates in the U.S. and foreign countries in which we tribution, we may pay an entry fee in connection with securing operate did not have a signiﬁcant impact on operating results for the license rights. the year ended December 31, 2014. INTER PARFUMS, INC. 2014 ANNUAL REPORT 66 CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations ($ in thousands). Contractual Obligations Long-Term Debt Capital Lease Obligations Operating Leases Purchase Obligations (1) Less than Total 1-year — — — — $34,901 $984,309 Years 2-3 — — Payments Due by Period Years More than 4-5 — — 5-years — — $5,306 $10,410 $8,884 $10,301 $102,752 $210,181 $217,308 $454,068 Other Long-Term Liabilities Reﬂected on the Registrant’s Balance Sheet under GAAP — — — — — Total $1,019,210 $108,058 $220,591 $226,192 $464,369 (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, 2014, without consideration for potential renewal periods and do not reﬂect the fact that our distributors share our advertising obligations. QUANTITATIVE AND QUALITATIVE DISCLOSURES All derivative instruments are required to be reﬂected as ei- ABOUT MARKET RISK GENERAL ther assets or liabilities in the balance sheet measured at fair value. Generally, increases or decreases in fair value of derivative We address certain financial exposures through a controlled instruments will be recognized as gains or losses in earnings in program of risk management that primarily consists of the use of the period of change. If the derivative is designated and qualiﬁes derivative ﬁnancial instruments. We primarily enter into foreign as a cash ﬂow hedge, then the changes in fair value of the deriva- currency forward exchange contracts in order to reduce the tive instrument will be recorded in other comprehensive income. effects of ﬂuctuating foreign currency exchange rates. We do not Before entering into a derivative transaction for hedging purpos- engage in the trading of foreign currency forward exchange es, we determine that the change in the value of the derivative will contracts or interest rate swaps. effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the FOREIGN EXCHANGE RISK MANAGEMENT effectiveness of each hedge throughout the hedged period. Any We periodically enter into foreign currency forward exchange hedge ineffectiveness is recognized in the income statement. contracts to hedge exposure related to receivables denominated At December 31, 2014, we had foreign currency contracts in in a foreign currency and to manage risks related to future the form of forward exchange contracts in the amount of approxi- sales expected to be denominated in a currency other than mately U.S. $14.8 million, GB £2.6 million and JPY ¥75.0 mil- our functional currency. We enter into these exchange con- lion which all have maturities of less than one year. We believe tracts for periods consistent with our identiﬁed exposures. The that our risk of loss as the result of nonperformance by any of purpose of the hedging activities is to minimize the effect of such ﬁnancial institutions is remote. foreign exchange rate movements on the receivables and cash ﬂows of Interparfums SA, our French subsidiary, whose func- INTEREST RATE RISK MANAGEMENT tional currency is the euro. All foreign currency contracts are We mitigate interest rate risk by monitoring interest rates, denominated in currencies of major industrial countries and and then determining whether fixed interest rates should be are with large ﬁnancial institutions, which are rated as strong swapped for ﬂoating rate debt, or if ﬂoating rate debt should be investment grade. swapped for ﬁxed rate debt. reports on internal control over ﬁnancial reporting 67 MANAGEMENT’S ANNUAL REPORT We conducted our audit in accordance with the standards ON INTERNAL CONTROL OVER FINANCIAL REPORTING of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective The management of Inter Parfums, Inc. is responsible for estab- internal control over ﬁnancial reporting was maintained in all lishing and maintaining adequate internal control over ﬁnancial material respects. Our audit of internal control over ﬁnancial reporting as deﬁned in Rule 13(a)-15(f) under the Securities reporting included obtaining an understanding of internal control Exchange Act of 1934. With the participation of the Chief over ﬁnancial reporting, assessing the risk that a material weak- Executive Officer and the Chief Financial Officer, our man- ness exists, and testing and evaluating the design and operat- agement conducted an evaluation of the effectiveness of our ing effectiveness of internal control based on the assessed risk. internal control over ﬁnancial reporting based on the framework Our audit also included performing such other procedures as we and criteria established in Internal Control – Integrated Framework considered necessary in the circumstances. We believe that our (1992), issued by the Committee of Sponsoring Organizations of audit provides a reasonable basis for our opinion. the Treadway Commission. Based on this evaluation, our manage- A company’s internal control over ﬁnancial reporting is a pro- ment has concluded that our internal control over ﬁnancial report- cess designed to provide reasonable assurance regarding the ing was effective as of December 31, 2014. reliability of ﬁnancial reporting and the preparation of ﬁnancial Our independent auditor, WeiserMazars LLP, a registered statements for external purposes in accordance with generally public accounting firm, has issued its report on its audit of accepted accounting principles. A company’s internal control our internal control over financial repor ting. This repor t over ﬁnancial reporting includes those policies and procedures appears below. that (1) pertain to the maintenance of records that, in reason- able detail, accurately and fairly reﬂect the transactions and dis- positions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit Jean Madar Russell Greenberg preparation of ﬁnancial statements in accordance with generally Chief Executive Ofﬁcer, Executive Vice President accepted accounting principles, and that receipts and expendi- Chairman of the Board of Directors and Chief Financial Ofﬁcer tures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition REPORT OF INDEPENDENT REGISTERED of the company’s assets that could have a material effect on the PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL ﬁnancial statements. OVER FINANCIAL REPORTING Because of its inherent limitations, internal control over TO THE BOARD OF DIRECTORS AND STOCKHOLDERS ﬁnancial reporting may not prevent or detect misstatements. OF INTER PARFUMS, INC. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become in- We have audited Inter Parfums, Inc.’s internal control over adequate because of the changes in conditions, or that the ﬁnancial reporting as of December 31, 2014, based on criteria degree of compliance with the policies or procedures may established in Internal Control – Integrated Framework (1992) deteriorate. issued by the Committee of Sponsoring Organizations of the In our opinion, Inter Parfums, Inc. maintained, in all mate- Treadway Commission (the COSO criteria). Inter Parfums, Inc.’s rial respects, effective internal control over financial report- management is responsible for maintaining effective internal ing as of December 31, 2014, based on the COSO criteria. control over ﬁnancial reporting, and for its assessment of the We have also audited, in accordance with the standards effectiveness of internal control over financial reporting, of the Public Company Accounting Oversight Board (United included in the accompanying Management’s Annual Report on States), the consolidated balance sheet of Inter Parfums, Internal Control over Financial Reporting. Our responsibility is Inc. as of December 31, 2014 and the related consolidated to express an opinion on the company’s internal control over statements of income, changes in shareholders’ equity, com- ﬁnancial reporting based on our audit. prehensive income and cash ﬂows for the year ended December INTER PARFUMS, INC. 2014 ANNUAL REPORT 68 report of independent registered public accounting ﬁrm 31, 2014 and our report dated March 11, 2015 expressed an financial statements are free of material misstatement. An unqualiﬁed opinion thereon. audit includes examining, on a test basis, evidence support- WeiserMazars LLP New York, New York March 11, 2015 ing the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presenta- tion. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inter Parfums, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the REPORT OF INDEPENDENT REGISTERED 3-year period ended December 31, 2014, in conformity with PUBLIC ACCOUNTING FIRM U.S. generally accepted accounting principles. BOARD OF DIRECTORS AND SHAREHOLDERS We also have audited, in accordance with the standards INTER PARFUMS, INC. NEW YORK, NEW YORK of the Public Company Accounting Oversight Board (United States), Inter Parfums, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria es- We have audited the accompanying consolidated balance sheets tablished in Internal Control – Integrated Framework (1992) of Inter Parfums, Inc. and subsidiaries (the “Company”) as of issued by the Committee of Sponsoring Organizations of the December 31, 2014 and 2013, and the related consolidated Treadway Commission (COSO), and our report dated March statements of income, comprehensive income (loss), changes 11, 2015 expressed an unqualiﬁed opinion thereon. in shareholders’ equity and cash ﬂows for each of the years in the 3-year period ended December 31, 2014. These ﬁnancial WeiserMazars LLP statements are the responsibility of the Company’s manage- ment. Our responsibility is to express an opinion on these ﬁnan- cial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform New York, New York the audit to obtain reasonable assurance about whether the March 11, 2015 ﬁnancial statements 69 CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Receivables, other Other current assets Income taxes receivable Deferred tax assets Total current assets Equipment and leasehold improvements, net Trademarks, licenses and other intangible assets, net Other assets Total assets LIABILITIES AND EQUITY Current liabilities: Loans payable – banks Accounts payable – trade Accrued expenses Income taxes payable Dividends payable Total current liabilities Deferred tax liability Commitments and contingencies Equity: Inter Parfums, Inc. shareholders’ equity: Preferred stock, $0.001 par value. Authorized 1,000,000 shares; none issued Common stock, $0.001 par value. Authorized 100,000,000 shares; outstanding, 30,977,293 and 30,863,421 shares, at December 31, 2014 and 2013, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock, at cost, 9,987,995 and 9,940,977 common shares at December 31, 2014 and 2013 Total Inter Parfums, Inc. shareholders’ equity Noncontrolling interest Total equity Total liabilities and equity (See accompanying notes to consolidated ﬁnancial statements.) 2014 $90,138 190,152 90,124 102,326 1,542 4,504 929 6,848 486,563 9,187 98,531 10,225 $604,506 $298 46,646 49,194 3,773 3,717 103,628 2,154 31 60,200 374,121 (15,823) (36,464) 382,065 116,659 498,724 $604,506 December 31, 2013 $125,650 181,677 79,932 117,347 2,418 4,775 6,435 7,257 525,491 10,444 116,243 11,880 $664,058 $6,104 56,736 58,333 1,270 3,704 126,147 2,555 31 57,877 359,459 25,860 (36,016) 407,211 128,145 535,356 $664,058 INTER PARFUMS, INC. 2014 ANNUAL REPORT 70 CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share data) Net sales Cost of sales Gross margin Selling, general, and administrative expenses Gain on termination of license Impairment of goodwill Total operating expenses Income from operations Other expenses (income): Interest expense (Gain) loss on foreign currency Interest and dividend income Income before income taxes Income taxes Net income Less: Net income attributable to the noncontrolling interest 2014 $499,261 212,224 287,037 233,634 – – 233,634 53,403 1,478 (902) (3,888) (3,312) 56,715 19,370 37,345 7,909 Years Ended December 31 2013 2012 $563,579 $654,117 234,800 328,779 250,025 – – 250,025 78,754 1,380 1,168 (4,440) (1,892) 80,646 29,680 50,966 11,755 246,931 407,186 325,799 (198,838) 1,811 128,772 278,414 1,654 3,128 (1,133) 3,649 274,765 97,875 176,890 45,754 Net income attributable to Inter Parfums, Inc. $29,436 $39,211 $131,136 Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted $0.95 0.95 $1.27 1.27 $4.29 4.26 Weighted average number of shares outstanding: Basic Diluted Dividends declared per share (See accompanying notes to consolidated ﬁnancial statements.) 30,931,308 30,060,326 30,763,955 30,574,772 30,953,882 30,715,684 $0.48 $0.96 $0.32 ﬁnancial statements 71 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share data Years Ended December 31, Net income Other comprehensive income (loss): Net derivative instrument gain, net of tax Transfer from OCI into earnings Translation adjustments, net of tax Comprehensive income (loss) Comprehensive income (loss) attributable to noncontrolling interests: Net income Net derivative instrument gain, net of tax Transfer from OCI into earnings Translation adjustments, net of tax 2014 $37,345 – – (57,806) (57,806) (20,461) 7,909 – – (16,123) (8,214) 2013 $50,966 2012 $176,890 – (327) 19,027 18,700 69,666 22 – 6,419 6,441 183,331 11,755 45,754 – (87) 5,425 17,093 6 – 1,684 47,444 Comprehensive income (loss) attributable to Inter Parfums, Inc. $(12,247) $52,573 $135,887 (See accompanying notes to consolidated ﬁnancial statements.) INTER PARFUMS, INC. 2014 ANNUAL REPORT 72 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands except share and per share data) Years Ended December 31, Common stock, beginning and end of period Additional paid-in capital, beginning of period Shares issued upon exercise of stock options Sale of subsidiary shares to noncontrolling interests Stock compensation Additional paid-in capital, end of period Retained earnings, beginning of period Net income Dividends Stock compensation Retained earnings, end of period Accumulated other comprehensive income, beginning of period Foreign currency translation adjustment Transfer from OCI into earnings Net derivative instrument gain, net of tax Accumulated other comprehensive income (loss), end of period Treasury stock, beginning of period Shares issued upon exercise of stock options Shares received as proceeds of option exercises Treasury stock, end of period Noncontrolling interest, beginning of period Net income Foreign currency translation adjustment Net derivative instrument gain, net of tax Transfer from OCI into earnings Sale of subsidiary shares to noncontrolling interest Dividends Stock-based compensation Noncontrolling interest, end of period 2014 $31 57,877 1,981 (335) 677 60,200 359,459 29,436 (14,855) 81 374,121 25,860 (41,683) – – (15,823) (36,016) 219 (667) (36,464) 128,145 7,909 (16, 123) – – 1,365 (4,667) 30 116,659 2013 $31 54,679 2,882 (173) 489 2012 $31 50,883 2,568 737 491 57,877 54,679 349,672 39,211 (29,582) 158 359,459 12,498 13,602 (240) – 228,164 131,136 (9,789) 161 349,672 7,747 4,735 – 16 25,860 12,498 (35,404) 203 (815) (36,016) 118,505 11,755 5,425 – (87) 830 (8,341) 58 (34,151) 409 (1,662) (35,404) 71,676 45,754 1,684 6 – 2,659 (3,333) 59 128,145 118,505 Total equity $498,724 $535,356 $499,981 (See accompanying notes to consolidated ﬁnancial statements.) ﬁnancial statements 73 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash ﬂows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Impairment of goodwill Provision for doubtful accounts Noncash stock compensation Gain on termination of license Excess tax beneﬁts from stock-based compensation arrangements Deferred tax expense (beneﬁt) Change in fair value of derivatives Changes in: Accounts receivable Inventories Other assets Accounts payable and accrued expenses Income taxes, net Net cash provided by operating activities Cash ﬂows from investing activities: Purchases of short-term investments Proceeds from sale of short-term investments Proceeds from termination of license, net of transaction fees and other settlements Purchase of equipment and leasehold improvements Payment for intangible assets acquired Proceeds from sale of equipment Proceeds from sale of trademark Net cash provided by (used in) investing activities Cash ﬂows from ﬁnancing activities: Proceeds from (repayments of) loans payable – banks Repayment of long-term debt Purchase of treasury stock Proceeds from exercise of options Excess tax beneﬁts from stock-based compensation arrangements Proceeds from sale of stock of subsidiary Dividends paid Dividends paid to noncontrolling interests Net cash provided by (used in) ﬁnancing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents – beginning of year Cash and cash equivalents – end of year Supplemental disclosures of cash ﬂow information: Cash paid for: Interest Income taxes (See accompanying notes to consolidated ﬁnancial statements.) 2014 $37,345 10,166 – 412 856 – (670) (557) – (19,607) 4,344 780 (4,996) 8,540 36,613 (245,810) 212,762 – (3,302) (922) – – (37,272) (5,765) – (90) 953 670 1,030 (14,841) (4,667) (22,710) (12,143) (35,512) 125,650 $90,138 $1,508 10,430 Years Ended December 31, 2013 2012 $50,966 $176,890 11,110 – 574 838 – (700) 4,844 – 71,776 29,240 426 (33,156) (86,724) 49,194 (381,843) 207,082 – (5,015) (7,769) 2,801 3,481 15,554 1,811 914 832 (198,838) (100) (7,903) (68) 27,302 13,568 (9,611) (40,773) 81,063 60,641 – – 235,650 (9,474) (19,717) – – (181,263) 206,459 (21,835) – (98) 1,668 700 657 (28,331) (8,341) 15,300 (4,379) (90) 1,305 100 3,396 (9,780) (3,333) (55,580) 2,519 5,964 1,860 (181,685) 307,335 $125,650 271,479 35,856 $307,335 $1,524 104,992 $1,799 20,584 INTER PARFUMS, INC. 2014 ANNUAL REPORT 74 notes to consolidated ﬁnancial statements (in thousands except share and per share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS are translated at average rates of exchange prevailing during (1) The Company and its Signiﬁcant Accounting Policies the year. Gains and losses from translation adjustments are BUSINESS OF THE COMPANY accumulated in a separate component of shareholders’ equity. Inter Parfums, Inc. and its subsidiaries (the “Company”) are in the fragrance business, and manufacture and distribute a wide CASH AND CASH EQUIVALENTS array of fragrances and fragrance related products. AND SHORT-TERM INVESTMENTS Substantially all of our prestige fragrance brands are All highly liquid investments purchased with a maturity of licensed from unaffiliated third parties, and our business is three months or less are considered to be cash equivalents. dependent upon the continuation and renewal of such licenses. From time to time, the Company has short-term investments Burberry was our most significant license and net sales of which consist of certiﬁcates of deposit with maturities greater Burberry products represented 0%, 23% and 46% of net sales than three months. The Company monitors concentrations of in 2014, 2013 and 2012, respectively (see Note (2) “Termi- credit risk associated with financial institutions with which nation of Burberry License”). In addition, the Company owns the Company conducts significant business. The Company the Lanvin brand name for its class of trade, and licenses the believes its credit risk is minimal, as the Company primarily Montblanc and Jimmy Choo brand names among others. As a conducts business with large, well-established ﬁnancial insti- percentage of net sales, product sales for the Company’s larg- tutions. Substantially all cash and cash equivalents are held at est brands were as follows: ﬁnancial institutions outside the United States and are readily Year Ended December 31, convertible into U.S. dollars. Montblanc Lanvin Jimmy Choo 2014 22% 18% 16% 2013 2012 15% 15% 13% 9% 12% 8% ACCOUNTS RECEIVABLE Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for sales returns and doubtful accounts or balances which are No other brand represented 10% or more of consolidated net sales. estimated to be uncollectible, which aggregated $6.9 million BASIS OF PREPARATION and $6.4 million as of December 31, 2014 and 2013, respec- tively. Accounts receivable balances are written-off against The consolidated financial statements include the accounts the allowance for doubtful accounts when they become of the Company, including 73% owned Interparfums SA uncollectible. Recoveries of accounts receivable previously (“IPSA”), a subsidiary whose stock is publicly traded in France. recorded against the allowance are recorded in the consoli- All material intercompany balances and transactions have dated statement of income when received. We generally grant been eliminated. MANAGEMENT ESTIMATES credit based upon our analysis of the customer’s financial position, as well as previously established buying patterns. Management makes assumptions and estimates to prepare ﬁnancial INVENTORIES statements in conformity with accounting principles generally ac- Inventories, including promotional merchandise, only include cepted in the United States of America. Those assumptions and esti- inventory considered saleable or usable in future periods, and mates directly affect the amounts reported and disclosures included is stated at the lower of cost or market, with cost being de- in the consolidated ﬁnancial statements. Actual results could differ termined on the first-in, first-out method. Cost components from those assumptions and estimates. Signiﬁcant estimates for include raw materials, components, direct labor and overhead which changes in the near term are considered reasonably possible (e.g., indirect labor, utilities, depreciation, purchasing, receiv- and that may have a material impact on the ﬁnancial statements are ing, inspection and warehousing) as well as inbound freight. disclosed in these notes to the consolidated ﬁnancial statements. Promotional merchandise is charged to cost of sales at the FOREIGN CURRENCY TRANSLATION Overhead included in inventory aggregated $3.3 million, $3.6 For foreign subsidiaries with operations denominated in a million and $4.0 million as of December 31, 2014, 2013 and foreign currency, assets and liabilities are translated to U.S. 2012, respectively. Included in inventories is an inventory dollars at year end exchange rates. Income and expense items reserve, which represents the difference between the cost time the merchandise is shipped to the Company’s customers. INTER PARFUMS, INC. 2014 ANNUAL REPORT notes to consolidated ﬁnancial statements (in thousands except share and per share data) 75 of the inventory and its estimated realizable value, based upon testing indeﬁnite-lived intangible assets for impairment, the sales forecasts and the physical condition of the inventories. evaluation requires a comparison of the estimated fair value of In addition, and as necessary, speciﬁc reserves for future known the asset to the carrying value of the asset. The fair values used or anticipated events may be established. Inventory reserves in our evaluations are estimated based upon discounted future aggregated $6.0 million and $6.8 million as of December 31, cash ﬂow projections using a weighted average cost of capital of 2014 and 2013, respectively. 6.7%. The cash ﬂow projections are based upon a number of as- DERIVATIVES sumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, All derivative instruments are recorded as either assets or li- changes to our business model or changes in consumer accep- abilities and measured at fair value. The Company uses derivative tance of our products which are more subjective in nature. If the instruments to principally manage a variety of market risks. For carrying value of an indeﬁnite-lived intangible asset exceeds its derivatives designated as hedges of the exposure to changes in fair value, an impairment charge is recorded. fair value of the recognized asset or liability or a ﬁrm commitment Intangible assets subject to amortization are evaluated for (referred to as fair value hedges), the gain or loss is recognized in impairment testing whenever events or changes in circumstanc- earnings in the period of change together with the offsetting loss es indicate that the carrying amount of an amortizable intangible or gain on the hedged item attributable to the risk being hedged. asset may not be recoverable. If impairment indicators exist for The effect of that accounting is to include in earnings the extent an amortizable intangible asset, the undiscounted future cash to which the hedge is not effective in achieving offsetting changes ﬂows associated with the expected service potential of the asset in fair value. For cash ﬂow hedges, the effective portion of the are compared to the carrying value of the asset. If our projection derivative’s gain or loss is initially reported in equity (as a com- of undiscounted future cash ﬂows is in excess of the carrying ponent of accumulated other comprehensive income) and is sub- value of the intangible asset, no impairment charge is recorded. sequently reclassiﬁed into earnings in the same period or periods If our projection of undiscounted future cash ﬂows is less than during which the hedged forecasted transaction affects earnings. the carrying value of the intangible asset, an impairment charge The ineffective portion of the gain or loss of a cash ﬂow hedge is would be recorded to reduce the intangible asset to its fair value. reported in earnings immediately. The Company also holds cer- tain instruments for economic purposes that are not designated CONCENTRATION OF CREDIT RISK for hedge accounting treatment. For these derivative instruments, The Company is a worldwide manufacturer, marketer and dis- changes in their fair value are recorded in earnings immediately. tributor of fragrance and fragrance related products, and sells its products to department stores, perfumeries, specialty retailers, EQUIPMENT AND LEASEHOLD IMPROVEMENTS mass market retailers, supermarkets and domestic and interna- Equipment and leasehold improvements are stated at cost less tional wholesalers and distributors. The Company grants credit accumulated depreciation and amortization. Depreciation and to all qualiﬁed customers and does not believe it is exposed amortization are provided using the straight line method over signiﬁcantly to any undue concentration of credit risk. the estimated useful lives for equipment, which range between No one customer represented 10% or more of net sales in three and ten years and the shorter of the lease term or estimated 2014, 2013 or 2012. useful asset lives for leasehold improvements. Depreciation pro- vided on equipment used to produce inventory, such as tools REVENUE RECOGNITION and molds, is included in cost of sales. The Company sells its products to department stores, perfumer- LONG-LIVED ASSETS ies, specialty retailers, mass market retailers, supermarkets and domestic and international wholesalers and distributors. Sales Indeﬁnite-lived intangible assets principally consist of trademarks of such products by our domestic subsidiaries are denominated in which are not amortized. The Company evaluates indeﬁnite-lived U.S. dollars and sales of such products by our foreign subsidiar- intangible assets for impairment at least annually during the ies are primarily denominated in either euro or U.S. dollars. The fourth quarter, or more frequently when events occur or circum- Company recognizes revenues when merchandise is shipped and stances change, such as an unexpected decline in sales, that the risk of loss passes to the customer. Net sales are comprised would more likely than not indicate that the carrying value of an of gross revenues less returns, trade discounts and allowances. indeﬁnite-lived intangible asset may not be recoverable. When The Company does not bill its customers’ freight and handling INTER PARFUMS, INC. 2014 ANNUAL REPORT 76 charges. All shipping and handling costs, which aggregated chase promotions that are reflected in cost of sales aggregated $5.2 million, $6.1 million and $8.4 million in 2014, 2013 and $24.4 million, $25.7 million and $46.5 million in 2014, 2013 2012, respectively, are included in selling, general and admin- and 2012, respectively. Accrued expenses include approximately istrative expenses in the consolidated statements of income. $16.5 million and $22.4 million in advertising liabilities as of December 31, 2014 and 2013, respectively. SALES RETURNS Generally, the Company does not permit customers to return their PACKAGE DEVELOPMENT COSTS unsold products. However, for United States-based customers, Package development costs associated with new products and we allow returns if properly requested, authorized and approved. redesigns of existing product packaging are expensed as incurred. The Company regularly reviews and revises, as deemed neces- sary, its estimate of reserves for future sales returns based pri- OPERATING LEASES marily upon historic trends and relevant current data including The Company recognizes rent expense from operating leases information provided by retailers regarding their inventory levels. with various step rent provisions, rent concessions and escalation In addition, as necessary, specific accruals may be established clauses on a straight-line basis over the applicable lease term. for significant future known or anticipated events. The types of The Company considers lease renewals in the useful life of its known or anticipated events that we consider include, but are not leasehold improvements when such renewals are reasonably limited to, the financial condition of our customers, store closings assured. In the event the Company receives capital improve- by retailers, changes in the retail environment and our decision ment funding from its landlord, these amounts are recorded as to continue to support new and existing products. The Company deferred liabilities and amortized over the remaining lease term records estimated reserves for sales returns as a reduction of as a reduction of rent expense. sales, cost of sales and accounts receivable. Returned products are recorded as inventories and are valued based upon estimated LICENSE AGREEMENTS realizable value. The physical condition and marketability of re- The Company’s license agreements provide the Company with turned products are the major factors we consider in estimating worldwide rights to manufacture, market and sell fragrance and realizable value. Actual returns, as well as estimated realizable fragrance related products using the licensors’ trademarks. The values of returned products, may differ significantly, either licenses typically have an initial term of approximately 5 years to favorably or unfavorably, from our estimates, if factors such 15 years, and are potentially renewable subject to the Company’s as economic conditions, inventory levels or competitive condi- compliance with the license agreement provisions. The remaining tions differ from our expectations. terms, including the potential renewal periods, range from ap- PAYMENTS TO CUSTOMERS proximately 1 year to 14 years. Under each license, the Company is required to pay royalties in the range of 5% to 10% to the The Company records revenues generated from purchase with licensor, at least annually, based on net sales to third parties. purchase and gift with purchase promotions as sales and the In certain cases, the Company may pay an entry fee to acquire, costs of its purchase with purchase and gift with purchase pro- or enter into, a license where the licensor or another licensee was motions as cost of sales. Certain other incentive arrangements operating a pre-existing fragrance business. In those cases, the require the payment of a fee to customers based on their entry fee is capitalized as an intangible asset and amortized attainment of pre-established sales levels. These fees have over its useful life. been recorded as a reduction of net sales. Most license agreements require minimum royalty payments, incremental royalties based on net sales levels and minimum ADVERTISING AND PROMOTION spending on advertising and promotional activities. Royalty Advertising and promotional costs are expensed as incurred and expenses are accrued in the period in which net sales are rec- recorded as a component of cost of goods sold (in the case of free ognized while advertising and promotional expenses are accrued goods given to customers) or selling, general and administrative at the time these costs are incurred. expenses. Advertising and promotional costs included in selling, In addition, the Company is exposed to certain concentra- general and administrative expenses were $86.7 million, $94.0 tion risk. Substantially all of our prestige fragrance brands million and $132.7 million for 2014, 2013 and 2012, respec- are licensed from unaffiliated third parties, and our business is tively. Costs relating to purchase with purchase and gift with pur- dependent upon the continuation and renewal of such licenses. notes to consolidated ﬁnancial statements (in thousands except share and per share data) 77 LOSS CONTINGENCY revenue in a way that depicts the transfer of goods or services The Company has accrued a loss contingency based on best to customers in an amount that reﬂects the consideration which estimates relating to a dispute with a former licensor. It is pos- the entity expects to be entitled to in exchange for those goods sible, that when the loss contingency is resolved, actual costs or services. This guidance is effective for annual and interim could exceed amounts in reserve. However, the potential impact reporting periods beginning after December 15, 2016, with early of such exposure, if any, is deemed to be immaterial to the adoption not permitted. We are currently evaluating the standard overall ﬁnancial statements. to determine the impact of its adoption on our consolidated ﬁnancial statements. INCOME TAXES In July 2013, new accounting guidance was issued regarding The Company accounts for income taxes using an asset and ﬁnancial statement presentation of an unrecognized tax beneﬁt liability approach that requires the recognition of deferred tax when a net operating loss carry-forward, a similar tax loss, or a assets and liabilities for the expected future tax consequences of tax credit exists. This guidance is effective for interim and annual events that have been recognized in its ﬁnancial statements or periods beginning after December 15, 2014. The adoption of this tax returns. The net deferred tax assets assume sufﬁcient future new guidance did not have a material effect on the Company’s earnings for their realization, as well as the continued applica- ﬁnancial position, results of operations or cash ﬂows. tion of currently anticipated tax rates. Included in net deferred There are no other recent accounting pronouncements issued tax assets is a valuation allowance for deferred tax assets, where but not yet adopted that would have a material effect on our management believes it is more-likely-than-not that the deferred consolidated ﬁnancial statements. tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be (2) Termination of Burberry License realizable, an adjustment to the deferred tax asset will result Burberry exercised its option to buy-out the license rights effec- in a reduction of net earnings at that time. tive December 31, 2012. In October 2012, the Company and ISSUANCE OF COMMON STOCK BY CONSOLIDATED SUBSIDIARY 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 The difference between the Company’s share of the proceeds of the business for the brand including product development, received by the subsidiary and the carrying amount of the por- testing, and distribution. The transition agreement provided for tion of the Company’s investment deemed sold, is reﬂected as non-exclusivity for manufacturing, a cap on sales of Burberry an equity adjustment in the consolidated balance sheets. products, a reduced advertising requirement and no minimum royalty amounts. TREASURY STOCK The Company had determined that the transaction was sub- The Board of Directors may authorize share repurchases of the stantially completed as of December 31, 2012. The following Company’s common stock (Share Repurchase Authorizations). table sets forth a summary of the gain on termination of license Share repurchases under Share Repurchase Authorizations which is included in income from operations on the accompany- may be made through open market transactions, negotiated ing statement of income for the year ended December 31, 2012: purchase or otherwise, at times and in such amounts within the parameters authorized by the Board. Shares repurchased under Share Repurchase Authorizations are held in treasury for Exit payment (received December 21, 2012) general corporate purposes, including issuances under various Expenses of termination: employee stock option plans. Treasury shares are accounted for Inventory reserves under the cost method and reported as a reduction of equity. Wages including $13.8 million in $239,075 10,037 Share Repurchase Authorizations may be suspended, limited or Interparfums SA proﬁt sharing requirements 14,391 terminated at any time without notice. Write-off of intangible assets Writedown of ﬁxed assets RECENT ACCOUNTING PRONOUNCEMENTS Write-off of unused modeling rights 7,675 3,483 1,226 In May 2014, the Financial Accounting Standards Board Legal, professional and other agreed settlements 3,425 (“FASB”) issued an Accounting Standards Update which super- sedes the most current revenue recognition requirements. The Gain on termination of license new revenue recognition standard requires entities to recognize 40,237 $198,838 INTER PARFUMS, INC. 2014 ANNUAL REPORT 78 (3) Recent Agreements ing expenditures and royalty payments as are customary in our ABERCROMBIE & FITCH AND HOLLISTER industry. The Company is in the process of launching its initial In December 2014, the Company entered into a 7-year exclusive fragrance collection under the Shanghai Tang brand. worldwide license to create, produce and distribute new perfumes and fragrance related products under the Abercrombie DUNHILL & Fitch and Hollister brand names. The Company will distribute In December 2012, we entered into a 10-year exclusive world- these fragrances internationally in specialty retailers, high-end wide license to create, produce and distribute perfumes and department stores and duty free shops, and in the U.S., in duty fragrance-related products under the Alfred Dunhill Limited free shops and potentially in Abercrombie & Fitch and Hollister (“Dunhill”) brand. Our rights under the agreement commenced retail stores. The agreement is subject to certain minimum sales, on April 3, 2013 when we took over production and distribution advertising expenditures and royalty payments as are customary of the existing Dunhill fragrance collections. The agreement is in our industry. New men’s and women’s scents are planned for subject to certain minimum sales, advertising expenditures and both Abercrombie & Fitch and Hollister for 2016. royalty payments as are customary in our industry. The Company paid an upfront entry fee of $0.9 million. The Company is OSCAR DE LA RENTA launching a new men’s scent for Dunhill in 2015. In October 2013, the Company entered into a 12-year exclusive worldwide license to create, produce and distribute perfumes KARL LAGERFELD and related products under the Oscar de la Renta brand. The In October 2012, we entered into a 20-year exclusive worldwide agreement closed on December 2, 2013 and is subject to cer- license agreement to create, produce and distribute perfumes tain minimum advertising expenditures as is customary in our under the Karl Lagerfeld brand. Our rights under such license industry. The Company purchased certain inventories and paid agreement are subject to certain minimum sales, advertising an up-front entry fee of $5.0 million. Upon closing, the Company expenditures and royalty payments as are customary in our indus- took over distribution of fragrances within the brand’s existing try. In connection with our entry into this license, the Company perfume portfolio and is launching its ﬁrst fragrance under the paid a license entry fee to the licensor of €9.6 million, (approxi- Oscar de la Renta brand in 2015. mately $12.5 million). In addition, the Company has made an AGENT PROVOCATEUR advance royalty payment to the licensor of €9.6 million, (approximately $12.5 million). This advance royalty payment is In July 2013, the Company entered into a 10.5-year exclusive to be credited against future royalty payments as follows: every worldwide license to create, produce and distribute perfumes year in which the royalties due are higher than €0.5 million, the and related products under London-based luxury lingerie brand, amount of royalties exceeding €0.5 million will be credited up Agent Provocateur. The agreement commenced on August 1, to €0.5 million in each such year. 2013 and is subject to certain minimum advertising expen- The advance royalty has been discounted to its net present value ditures as is customary in our industry. The Company took over which is included in other assets on the accompanying balance distribution of selected fragrances within the brand’s existing sheet and the resulting discount of approximately $4.4 million has perfume portfolio and launched its ﬁrst fragrances under the been added to intangible assets and will be amortized together Agent Provocateur brand in 2014. with the license entry fee, over the initial term of the license. SHANGHAI TANG (4) Inventories 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 Raw materials and distribute perfumes and related products under China’s leading component parts luxury brand, Shanghai Tang. The agreement commenced on Finished goods July 1, 2013 and is subject to certain minimum sales, advertis- 2014 $36,383 65,943 $102,326 December 31, 2013 $47,800 69,547 $117,347 notes to consolidated ﬁnancial statements (in thousands except share and per share data) 79 (5) Fair Value of Financial Instruments The following tables present our financial assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2014 Quoted Prices In Signiﬁcant Other Signiﬁcant Active Markets for Observable Unobservable Identical Assets Total (Level 1) Assets: Short-term investments $190,152 Liabilities: Foreign currency forward exchange contracts not accounted for using hedge accounting 355 FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2013 – – Inputs (Level 2) $190,152 355 Inputs (Level 3) – – Assets: Short-term investments Foreign currency forward exchange contracts not accounted for using hedge accounting Quoted Prices In Signiﬁcant Other Signiﬁcant Active Markets for Observable Unobservable Identical Assets Total (Level 1) $181,677 157 $181,834 – – – Inputs (Level 2) $181,677 157 $181,834 Inputs (Level 3) – – – 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 did not enter into any cash flow hedges during the 3-year period ended December 31, 2014. 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 in each of the years in the 3-year period ended December 31, 2014. 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 in 2014 resulted in a liability that is included in accrued expenses and in 2013 resulted in an asset that is included in other current assets on the accompanying bal- ance 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. INTER PARFUMS, INC. 2014 ANNUAL REPORT 80 At December 31, 2014, the Company had foreign currency Amortization expense was $6.6 million, $6.2 million and $7.0 contracts in the form of forward exchange contracts in the million for 2014, 2013 and 2012, respectively. Amortization amount of approximately U.S. $14.8 million, GB £2.6 million expense is expected to approximate $6.2 million in 2015 and JPY ¥75.0 million, which all have maturities of less than and 2016, and $5.4 million in 2017, 2018 and 2019. The one year. weighted average amortization period for trademarks, licenses and other intangible assets with ﬁnite lives are 18 years, 14 (7) Equipment and Leasehold Improvements years and 2 years, respectively, and 15 years in the aggregate. Equipment Leasehold Improvements Less accumulated depreciation and amortization 2014 $26,006 1,581 27,587 18,400 $9,187 December 31, There were no impairment charges for trademarks with in- 2013 deﬁnite useful lives in 2014, 2013 and 2012. The fair values $25,597 used in our evaluations are estimated based upon discounted 2,952 future cash ﬂow projections using a weighted average cost of 28,549 capital of 6.7%. The cash flow projections are based upon a number of assumptions, including, future sales levels and 18,105 future cost of goods and operating expense levels, as well $10,444 as economic conditions, changes to our business model or changes in consumer acceptance of our products which are Depreciation and amortization expense was $3.6 million, $4.9 more subjective in nature. The Company believes that the million and $8.6 million for 2014, 2013 and 2012, respectively. assumptions the Company has made in projecting future cash (8) Trademarks, Licenses and Other Intangible Assets 2014 ﬂows for the evaluations described above are reasonable and currently no impairment indicators exist for our indefinite- lived assets. However, if future actual results do not meet our Gross Accumulated Net Book expectations, the Company may be required to record an Amount Amortization Value impairment charge, the amount of which could be material to Trademarks (indeﬁnite lives) $4,252 Trademarks (ﬁnite lives) Licenses (ﬁnite lives) 46,889 our results of operations. $– 53 $4,252 46,836 The cost of trademarks, licenses and other intangible assets with ﬁnite lives is being amortized by the straight line method over the term of the respective license or the intangible assets estimated useful life which range from three to twenty years. 72,171 26,976 45,195 If the residual value of a finite life intangible asset exceeds Other intagible assets (ﬁnite lives) Subtotal Total 11,572 130,632 $134,884 9,324 36,353 $36,353 2,248 94,279 $98,531 its carrying value, then the asset is not amortized. The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Trademarks (finite lives) primarily represent Lanvin brand names and trademarks and in connection with their purchase, 2013 Trademarks Gross Accumulated Net Book Lanvin was granted the right to repurchase the brand names Amount Amortization Value and trademarks in 2025 for the greater of €70 million (approxi- mately $85 million) or one times the average of the annual sales (indeﬁnite lives) $4,257 $– $4,257 for the years ending December 31, 2023 and 2024 (residual Trademarks value). Because the residual value of the intangible asset (ﬁnite lives) 53,319 102 53,217 exceeds its carrying value, the asset is not amortized. Licenses (ﬁnite lives) 80,842 24,747 56,095 (9) Loans Payable – Banks Other intagible assets Loans payable – banks consist of the following: (ﬁnite lives) Subtotal Total 11,964 146,125 9,290 2,674 The Company and its domestic subsidiaries have available a 34,139 111,986 $20 million unsecured revolving line of credit due on demand, $150,382 $34,139 $116,243 which bears interest at the prime rate minus 0.5% (the prime notes to consolidated ﬁnancial statements (in thousands except share and per share data) 81 rate was 3.25% as of December 31, 2014). The line of credit Future advertising commitments are estimated based on which has a maturity date of May 1, 2015 is expected to be planned future sales for the license terms that were in effect at renewed on an annual basis. Borrowings outstanding pursu- December 31, 2014, without consideration for potential ant to this line of credit were zero as of December 31, 2014 renewal periods. The above ﬁgures do not reﬂect the fact that and $5.8 million as of December 31, 2013. our distributors share our advertising obligations. Royalty The Company’s foreign subsidiaries have available credit expense included in selling, general, and administrative expenses, lines, including several bank overdraft facilities totaling aggregated $35.6 million, $40.5 million and $58.8 million, in approximately $30 million. These credit lines bear interest 2014, 2013 and 2012, respectively, and represented 7.1%, at EURIBOR plus between 0.5% and 0.8% (EURIBOR was 7.2% and 9.0% of net sales for the years ended December 31, 0.2% at December 31, 2014). Outstanding amounts were 2014, 2013 and 2012. $0.3 million as of both December 31, 2014 and December 31, 2013. (11) Equity The weighted average interest rate on short-term bor- SHARE-BASED PAYMENTS: rowings was 0.8% and 2.8% as of December 31, 2014 and The C ompany maintains a stock option program for key 2013, respectively. (10) Commitments LEASES employees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the grant- ing of both nonqualiﬁed and incentive options. Options granted under the plans typically have a 6-year term and vest over a The Company leases its office and warehouse facilities un- four to ﬁve-year period. The fair value of shares vested in 2014 der operating leases which are subject to various step rent and 2013 aggregated $0.7 million and $0.5 million, respec- provisions, rent concessions and escalation clauses expiring tively. Compensation cost is recognized on a straight-line basis at various dates through 2023. Escalation clauses are not over the requisite service period for the entire award. It is material and have been excluded from minimum future an- generally the Company’s policy to issue new shares upon nual rental payments. Rental expense, which is calculated on exercise of stock options. a straight-line basis, amounted to $10.1 million, $10.8 mil- The following table sets forth information with respect to lion and $11.8 million in 2014, 2013 and 2012, respectively. nonvested options for 2014: Minimum future annual rental payments are as follows: 2015 2016 2017 2018 2019 Thereafter LICENSE AGREEMENTS $5,306 $5,343 $5,067 $4,663 $4,221 $10,301 $34,901 Number of Shares Weighted Average Grant Date Fair Value Nonvested options – beginning of year Nonvested options granted Nonvested options vested or forfeited Nonvested options – 367,470 139,250 (121,215) 385,505 $6.68 7.42 6.06 $7.14 The Company is party to a number of license and other agree- end of year ments for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various Share-based payment expenses decreased income before dates through 2032. In connection with certain of these income taxes by $0.9 million in 2014 and $0.8 million in license agreements, the Company is subject to minimum 2013 and 2012, decreased net income attributable to Inter annual advertising commitments, minimum annual royalties Parfums, Inc. by $0.5 million in 2014, 2013 and 2012 and, and other commitments as follows: reduced diluted earnings per share attributable to Inter 2015 2016 2017 2018 2019 Thereafter $102,752 $103,899 $106,282 $110,639 $106,669 $454,068 $984,309 Parfums, Inc. by $0.01 in 2014, 2013 and 2012. INTER PARFUMS, INC. 2014 ANNUAL REPORT 82 The following table summarizes stock option activity and related information for the years ended December 31, 2014, Year Ended December 31, 2013 2012 2014 2013 and 2012: Weighted average expected 2014 Shares under option- beginning of year Options granted Options exercised Options cancelled Shares under option- end of year Year Ended December 31, stock-price volatility 34% 37% 38% Weighted Average Weighted average expected Options Exercise Price option life 5.0 yrs 5.0 yrs 5.0 yrs 643,595 139,250 (136,640) (6,710) 639,495 $19.58 27.93 11.19 19.37 $23.19 Weighted average risk-free interest rate Weighted average dividend yield 1.7% 1.8% 1.7% 0.7% 2.7% 1.7% 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 Year Ended December 31, the U.S. Treasury yield curve in effect at the time of the grant of Weighted Average the option and the dividend yield reﬂects the assumption that 2013 Options Exercise Price the dividend payout as authorized by the Board of Directors would maintain its current payout ratio as a percentage of earnings. $14.41 Proceeds, tax beneﬁts and intrinsic value related to stock options exercised were as follows: Shares under option- beginning of year Options granted Options exercised Options cancelled Shares under option- 716,235 136,350 (204,240) (4,750) 34.84 11.68 17.47 end of year 643,595 $19.58 options exercised Tax beneﬁts Year Ended December 31, Intinsic value of Weighted Average stock options Proceeds from stock 2014 $1,529 670 Year Ended December 31, 2013 2012 $1,668 $1,305 700 100 2012 Shares under option- beginning of year Options granted Options exercised Options cancelled Shares under option- Options Exercise Price exercised $2,733 4,088 1,359 $13.20 The following table summarizes additional stock option infor- 823,275 128,850 (226,160) (9,730) mation as of December 31, 2014: 19.25 12.72 15.37 end of year 716,235 $14.41 Options Outstanding Weighted Average Remaining At December 31, 2014, options for 329,535 shares were Exercise Number Contractual Options available for future grant under the plans. The aggregate Prices Outstanding Life Exercisable intrinsic value of options outstanding is $3.8 million as of December 31, 2014 and unrecognized compensation cost $12.14 13.45 57,440 1.00 Years 57,440 250 0.08 Years 250 related to stock options outstanding aggregated $2.6 million, 15.59 - 15.62 100,370 2.98 Years 55,810 which will be recognized over the next ﬁve years. 17.07 - 17.94 4,375 1.71 Years 2,000 The weighted average fair values of options granted by 19.03 - 19.33 203,410 3.13 Years 111,410 Inter Parfums, Inc. during 2014, 2013 and 2012 were $7.42, $9.20 and $5.54 per share, respectively, on the date of grant 21.76 22.20 4,000 4,000 3.09 Years 4.09 Years 1,000 800 using the Black-Scholes option pricing model to calculate the 27.80 133,750 6.00 Years fair value. The assumptions used in the Black-Scholes pricing model are set forth in the following table: 29.36 32.12 2,000 3,500 4.69 Years 4.09 Years — — — 35.75 126,400 5.00 Years 25,280 Totals 639,495 3.89 Years 253,990 notes to consolidated ﬁnancial statements (in thousands except share and per share data) 83 As of December 31, 2014, the weighted average exercise pursuant to these option exercises were issued from treasury price of options exercisable was $18.43 and the weighted stock of the Company. In addition, the Chief Executive Ofﬁcer average remaining contractual life of options exercisable is 2.64 tendered in 2014, 2013 and 2012 an additional 3,112, 2,573 years. The aggregate intrinsic value of options exercisable at and 4,710 shares, respectively, for payment of certain withhold- December 31, 2014 is $2.5 million. ing taxes resulting from his option exercises. The Chief Executive Ofﬁcer and the President each exercised 32,875, 28,500 and 60,000 outstanding stock options of the DIVIDENDS: Company’s common stock in 2014, 2013 and 2012, respectively. The quarterly dividend of $3.7 million ($0.12 per share) The aggregate exercise prices of $0.6 million in 2014, $0.7 declared in December 2013 was paid in Januar y 2014. million in 2013 and $1.6 million in 2012 were paid by them Furthermore, in January 2015, the Board of Directors of the tendering to the Company in 2014, 2013 and 2012, an aggre- Company authorized an 8% increase in the annual dividend to gate of 19,656, 18,880 and 82,322 shares, respectively, of the $0.52 per share. The next quarterly dividend of $0.13 per Company’s common stock, previously owned by them, valued share will be paid on April 15, 2015 to shareholders of record at fair market value on the dates of exercise. All shares issued on March 31, 2015. (12) 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 income attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net income 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: Numerator: Net income attributable to Inter Parfums, Inc. Effect of dilutive securities of consolidated subsidiary Numerator for diluted earnings per share Denominator: Weighted average shares Effect of dilutive securities: Stock options Denominator for diluted earnings per share Earnings per share: Net income attributable to Inter Parfums, Inc. common shareholders: 2014 $29,436 – 29,436 Year Ended December 31, 2013 2012 $39,211 $131,136 – 39,211 (168) 130,968 30,931,308 129,018 31,060,326 30,763,955 30,574,772 189,927 140,912 30,953,882 30,715,684 Basic Diluted $0.95 0.95 $1.27 1.27 $4.29 4.26 Not included in the above computations is the effect of anti dilutive potential common shares, which consist of outstanding options to purchase 130,000, 32,000, and 230,000 shares of common stock for 2014, 2013, and 2012, respectively. (13) Segments 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 the prestige brand name fragrances, and United States operations represent the sale of prestige brand name and specialty retail fragrances. Information on the Company’s operations by segments is as follows: INTER PARFUMS, INC. 2014 ANNUAL REPORT 84 SEGMENTS AND GEOGRAPHICAL AREAS Net sales: United States Europe Eliminations of intercompany sales Net income attributable to Inter Parfums, Inc.: United States Europe Eliminations Depreciation and amortization expense: United States Europe Interest and dividend income: United States Europe Interest expense: United States Europe Income tax expense: United States Europe Eliminations Total assets: United States Europe Eliminations of investment in subsidiary Additions to long-lived assets: United States Europe Total long-lived assets: United States Europe Deferred tax assets: United States Europe Eliminations 2014 $105,270 394,164 (173) $499,261 $8,069 $21,367 – $29,436 $1,554 8,612 $10,166 $3 3,885 $3,888 $73 1,405 $1,478 $4,643 14,727 – $19,370 $78,740 535,049 (9,283) $604,506 $1,165 3,059 $4,224 $13,433 94,285 $107,718 $396 6,452 – $6,848 Year Ended December 31, 2013 2012 $99,158 464,562 (141) $83,106 571,877 (866) $563,579 $654,117 $6,806 32,392 $5,078 126,045 13 13 $39,211 $131,136 $1,216 9,894 $11,110 $16 4,424 $4,440 $13 1,367 $1,380 $4,512 25,159 9 $958 14,596 $15,554 $7 1,126 $1,133 $38 1,616 $1,654 $3,804 94,063 8 $29,680 $97,875 $76,980 596,153 (9,075) $64,278 704,464 (8,822) $664,058 $759,920 $7,629 5,155 $12,784 $13,823 112,864 $126,687 $341 6,916 – $7,257 $3,131 26,060 $29,191 $7,572 118,712 $126,284 $762 12,361 9 $13,132 notes to consolidated ﬁnancial statements (in thousands except share and per share data) 85 SEGMENTS AND GEOGRAPHICAL AREAS continued United States export sales were approximately $52.3 million, $50.4 million and $38.8 million in 2014, 2013 and 2012, respectively. Consolidated net sales to customers by region are as follows: Year Ended December 31, North America Europe Central and South America Middle East Asia Other 2014 $134,600 177,900 49,200 40,300 85,500 11,800 $499,300 2013 $154,300 215,600 42,400 43,300 98,600 9,400 2012 $175,400 241,300 53,000 62,100 115,300 7,000 $563,600 $654,100 Consolidated net sales to customers in major countries are as follows: Year Ended December 31, United States United Kingdom France (14) Income Taxes 2014 $128,000 $37,000 $50,000 2013 2012 $150,000 $167,000 $46,000 $47,000 $48,000 $46,000 The Company or its subsidiaries ﬁle income tax returns in the U.S. federal, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal, state, and local or non-U.S. income tax examinations by tax authorities for years before 2011. The Company follows the provisions of uncertain tax positions as addressed in FASB Accounting Standards Codification 740-10-65-1. The Company did not recognize any increase in the liability for unrecognized tax beneﬁts and has no uncertain tax position at December 31, 2014. The Company recognizes interest accrued related to unrecognized tax beneﬁts in interest expense and penalties as a component of the provision for income taxes. No interest or penalties were recognized during the periods presented and there is no accrual for interest and penalties at December 31, 2014. The components of income before income taxes consist of the following: U.S. operations Foreign operations 2014 $12,712 44,003 $56,715 Year Ended December 31, 2013 $11,340 69,306 $80,646 2012 $8,904 265,861 $274,765 The provision for current and deferred income tax expense (beneﬁt) consists of the following: Current: Federal State and local Foreign Deferred: Federal State and local Foreign Total income tax expense 2014 $4,374 323 15,229 19,926 (84) 30 (502) (556) $19,370 Year Ended December 31, 2013 2012 $3,638 454 20,744 24,836 370 59 4,415 4,844 $2,511 558 102,717 105,786 703 40 (8,654) (7,911) $29,680 $97,875 INTER PARFUMS, INC. 2014 ANNUAL REPORT 86 The tax effects of temporary differences that give rise to (15) Accumulated Other Comprehensive Income (Loss) signiﬁcant portions of the deferred tax assets and deferred tax The components of accumulated other comprehensive income liabilities are as follows: (loss) consists of the following: 2014 December 31, 2013 2014 Year Ended December 31, 2013 2012 Deferred tax assets: Foreign net operating loss carry-forwards Inventory and accounts receivable Proﬁt sharing Stock option compensation Effect of inventory proﬁt elimination Other Total gross deferred tax assets Valuation allowance Net deferred tax assets Deferred tax liabilities (long-term): Trademarks and licenses Other Total deferred tax liabilities Net deferred tax assets 419 2,655 2,570 545 1,757 (679) 7,267 (419) 6,848 (2,154) – (2,154) $4,694 Net derivative instruments, 707 626 4,805 526 beginning of year Transfer from OCI into earnings Gain on derivative instruments Net derivative instruments, 1,710 end of year (410) Cumulative translation 7,964 adjustments, (707) beginning of year 7,257 Translation adjustments Cumulative translation (2,555) adjustments, – – – – $240 $224 (240) – – – 16 240 25,860 (41,683) 12,258 13,602 7,523 4,735 – end of year (15,823) 25,860 12,258 (2,555) Accumulated other $4,702 comprehensive income (loss) $(15,823) $25,860 $12,498 Valuation allowances are provided for foreign net operating loss carry-forwards, as future proﬁtable operations from certain (16) Net Income Attributable to Inter Parfums, Inc. foreign subsidiaries might not be sufﬁcient to realize the full and Transfers from the Noncontrolling Interest amount of net operating loss carry-forwards. In 2014, as a result of a tax examination in a foreign jurisdiction, foreign net 2014 Year Ended December 31, 2013 2012 operating loss carry-forwards were reduced. Net income attributable No other valuation allowances have been provided as man- to Inter Parfums, Inc. $29,436 $39,211 $131,136 agement believes that it is more likely than not that the asset Increase (decrease) in will be realized in the reduction of future taxable income. Inter Parfums, Inc.’s The Company has not provided for U.S. deferred income taxes additional paid-in capital on $339 million of undistributed earnings of its non-U.S. sub- for subsidiary share sidiaries as of December 31, 2014 since the Company intends transactions (335) (173) 737 to reinvest most of these earnings in its foreign operations Change from net income indeﬁnitely and the Company believes it has sufﬁcient foreign tax attributable to credits available to offset any potential tax on amounts that have Inter Parfums, Inc. been and are planned to be repatriated. and transfers from Differences between the United States Federal statutory in- noncontrolling come tax rate and the effective income tax rate were as follows: interest $29,101 $39,038 $131,873 2014 34.0% Year Ended December 31, 2013 34.0% 2012 34.0% Statutory rates State and local taxes, net of Federal beneﬁt 0.1 0.4 0.1 Effect of foreign taxes greater than U.S. statutory rates Other Effective rates 0.4 (0.3) 34.2% 2.0 1.4 0.4 0.1 36.8% 35.6% directors and executive ofﬁcers 87 DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS: Jean Madar Jean Madar Chief Executive Ofﬁcer, Chief Executive Ofﬁcer, EXECUTIVE OFFICERS: CORPORATE INFORMATION: Inter Parfums, Inc. 551 Fifth Avenue and Chairman of the Board of Directors and Chairman of the Board of Directors New York, NY 10176 Inter Parfums, Inc. Inter Parfums, Inc. Tel. (212) 983-2640 Fax: (212) 983-4197 Philippe Benacin Philippe Benacin www.interparfumsinc.com President, and Vice Chairman of the President, and Vice Chairman of the Board of Directors, Inter Parfums, Inc. Board of Directors, Inter Parfums, Inc. Interparfums SA Chief Executive Ofﬁcer, Chief Executive Ofﬁcer, 4 Rond Point des Champs Elysées Interparfums SA Interparfums SA Russell Greenberg Russell Greenberg Executive Vice President, Executive Vice President, 75008 Paris, France Tel. (1) 53-77-00-00 Fax: (1) 40-76-08-65 and Chief Financial Ofﬁcer and Chief Financial Ofﬁcer Auditors Inter Parfums, Inc. Inter Parfums, Inc. Henry B. Clarke President, Inter Parfums USA, LLC Transfer Agent WeiserMazars, LLP 135 West 50th Street New York, NY 10020 Philippe Santi Executive Vice President Director General Delegue Interparfums SA Francois Heilbronn Executive Vice President Managing Partner M.M. Friedrich, Director General Delegue Heilbronn & Fiszer Interparfums SA Philippe Santi Jean Levy Frédéric Garcia-Pelayo Business Consultant - Former President Director of Export Sales and Chief Executive Ofﬁcer, Cosmair Interparfums SA Former President and Chief Executive Ofﬁcer, Sanoﬁ Beauté (France) Axel Marot Robert Bensoussan-Torres Interparfums SA Director of Production & Logistics Co-founder of Sirius Equity, a retail and branded luxury goods investment company Patrick Choël Business Consultant and Former President and Chief Executive Ofﬁcer Parfums Christian Dior and the LVMH Perfume and Cosmetics Division Michel Dyens Chairman, and Chief Executive Ofﬁcer, Michel Dyens & Co. American Stock Transfer and Trust Company 6201 15th Avenue Brooklyn, NY 11219 INTER PARFUMS, INC. 2014 ANNUAL REPORT 88 corporate and market information THE MARKET FOR OUR COMMON STOCK Our Company’s common stock, $.001 par value per share, is one lump sum on December 16, 2013 to shareholders of record traded on The Nasdaq Global Select Market under the symbol on December 2, 2013. “IPAR”. The following table sets forth in dollars, the range of In January 2014, our Board of Directors determined to main- high and low closing prices for the past two ﬁscal years for our tain the quarterly dividend of $0.12 per share, or $0.48 on an common stock. ﬁscal 2014 Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2013 Fourth Quarter Third Quarter Second Quarter First Quarter annual basis and in January 2015, our Board of Directors autho- rized an 8% increase in the annual dividend to $0.52 per share. High Closing Low Closing The next quarterly cash dividend of $0.13 per share is payable Price Price 24.81 29.98 25.62 31.39 27.59 36.78 30.38 37.74 on April 15, 2015 to shareholders of record on March 31, 2015. FORM 10K A copy of the company’s 2014 Annual Report on Form 10-K, as ﬁled with the Securities and Exchange Commission, is available without charge to shareholders upon request (except for exhibits) High Closing Low Closing To: Inter Parfums, Inc. 551 Fifth Avenue New York, NY 10176 Price 38.94 34.96 33.19 25.71 Price 28.94 26.02 24.43 19.55 Attention: Corporate Secretary. CORPORATE PERFORMANCE GRAPH The following graph compares the performance for the periods indicated in the graph of our common stock with the performance of the Nasdaq Market Index and the average performance of As of February 20, 2015, the number of record holders, a group of the Company’s peer corporations consisting of: which include brokers and broker’s nominees, etc., of our com- Avon Products Inc., Blyth Inc., CCA Industries, Inc., Colgate- mon stock was 47. We believe there are approximately 6,500 Palmolive Co., Elizabeth Arden, Inc., Estee Lauder Cosmetics, beneﬁcial owners of our common stock. Inc., Inter Parfums, Inc., Kimberly Clark Corp., Natural Health DIVIDENDS Trends Corp., Revlon, Inc., Spectrum Brands, Inc., Stephan Company, Summer Infant, Inc., The Procter & Gamble Company In January 2013, our Board of Directors authorized a 50% and United Guardian, Inc. The graph assumes that the value of increase in the cash dividend to $0.48 per share on an annual the investment in our common stock and each index was $100 basis. In November 2013, our Board of Directors declared a at the beginning of the period indicated in the graph, and that special cash dividend of $0.48 per share, which was payable in all dividends were reinvested. COMPARISON 0F 5 YEAR CUMULATIVE TOTAL RETURN* Among Inter Parfums, Inc., The NASDAQ Composite Index, and a Peer Group $350 $300 $250 $200 $150 $100 $50 $0 12/09 12/10 12/11 12/12 12/13 12/14 INTER PARFUMS INC NASDAQ COMPOSITE PEER GROUP *$100 INVESTED ON DECEMBER 31, 2009 IN STOCK OR INDEX, INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31. Below is the list of the data points for each year that corresponds to the lines on the above graph Inter Parfums, Inc. NASDAQ Composite Peer Group 12/09 100.00 100.00 100.00 12/10 157.33 117.61 107.99 12/11 132.30 118.70 117.98 12/12 168.51 139.00 127.68 12/13 319.38 196.83 159.90 12/14 248.79 223.74 180.24

Continue reading text version or see original annual report in PDF format above