Inter Parfums
Annual Report 2015

Plain-text annual report

Table of ConTenTs Financial Highlights 02 Letter to our Shareholders 04 The Company 08 The Products 14 The Organization 64 INTER PARFUMS, INC. 2015 ANNUAL REPORT2 financial Highlights $654.1 $615.2 $563.6 $499.3 $468.5 $131.1 $407.2 $381.5 $382.1 $365.6 $252.7 $39.2 $32.3 $29.4 $30.4 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 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) Years Ended December 31, income statement data: Net Sales Cost of Sales Selling, General and Administrative Expenses Operating Income Income Before Taxes 228,268 61,203 60,496 Net Income Attributable to the 8,532 Noncontrolling Interest Net Income Attributable to Inter Parfums, Inc. 30,437 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 0.98 0.98 30,996 31,100 9,078 176,967 82,847 337,674 687,659 – 98,606 365,587 0.52 2015 2014 2013 2012 2011 $468,540 179,069 $499,261 212,224 $563,579 $654,117 $615,220 234,800 246,931 231,746 233,634 53,403 56,715 7,909 29,436 0.95 0.95 30,931 31,060 10,166 90,138 190,152 382,935 604,506 298 – 382,065 0.48 250,025 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 – 407,211 0.96 325,799 278,414 274,765 45,754 131,136 4.29 4.26 30,575 30,716 15,554 307,335 – 366,680 759,920 27,776 – 381,476 0.32 315,698 66,939 67,393 10,646 32,303 1.06 1.05 30,515 30,678 13,073 35,856 – 205,730 516,034 11,826 4,480 252,674 0.32 INTER PARFUMS, INC. 2015 ANNUAL REPORT 4 2015 letter to our Shareholders dear fellow shareholders, 2015 financial hiGhliGhts compared to 2014 Much was accomplished at Inter Parfums, Inc., in 2015, including: • Net sales declined 6.2% to $468.5 million from $499.3 • Steady sales growth for most major brands; million in 2014; at comparable foreign currency • Improved profitability; exchange rates, net sales actually increased 1.5% year- • The addition of two prominent names, Rochas and Coach, over-year. to our brand portfolio; • Sales by European based operations were $362.7 million • The extension of our license agreement with Montblanc, versus $394.0 million in 2014, but at comparable foreign our largest fragrance brand; and, currency exchange rates, net sales for European based • The launch of new scents for Montblanc, Jimmy Choo, operations were up a modest 1.8%. Lanvin, Paul Smith, Balmain, Boucheron, Repetto, Karl • U.S. based operations generated net sales of $105.8, Lagerfeld, Dunhill, Oscar de La Renta and Anna Sui. up 1% from 2014’s $105.3 million. financial oVerView • Gross margin was 61.8% compared to 57.5% in 2014. • S, G & A expense as a percentage of sales was 48.7% In a review of our performance for the year, it is useful to keep in compared to 46.8%. mind that our reported financial results were impacted by chang- • Net income attributable to Inter Parfums, Inc. was $30.4 es in foreign currency exchange rates. In that regard, the average million or $0.98 per diluted share, up from $29.4 million dollar/euro exchange rate for 2015 was 1.11, as compared to or $0.95 per diluted share in 2014. 1.33 for 2014. The strong U.S. dollar in 2015 had a negative im- • Our business generated cash flows from operating activities pact on our net sales. However, earnings were positively affected of approximately $50.1 million in 2015, up from 2014’s by the strong dollar, because approximately 40% of net sales of $36.6 million. our European operations are denominated in U.S. dollars, while • We closed the year with working capital of $338 almost all costs of our European operations are incurred in euro. million, including approximately $260 million in cash, letter to shareholders 5 When we look at our three largest European based brands, we see a similar story. For our largest brand, Montblanc, sales in- creased 6% in local currency in 2015, but declined 12% in dol- lars to just under $100 million. Even in dollars, Montblanc brand sales growth has been nothing short of phenomenal, producing a four year compound annual growth rate of 23.1%. Therefore we were delighted to extend our license agreement with Montblanc by five years through December 31, 2025. Similarly we recorded $92.4 million in Jimmy Choo fragrance sales in 2015, an 18% year-over-year increase in dollars, but in local currency, the increase was a far more impressive 41%. For Jimmy Choo fragrances, our second largest brand, our track re- cord in dollars is nearly as impressive with a four year compound annual growth rate of 22.7%. With only line extensions and flank- ers in 2015, Lanvin brand sales were off 6% in local currency as compared to 2014, but in dollars the decline was 21%. We had a number of new product launches and brand exten- sions in 2015. These include the Lady Emblem line for Mont- blanc, which was built upon the brand’s foundational fragrance families, Legend and Emblem. The Jimmy Choo Blossom flanker, Jimmy Choo Illicit, and the excellent performance of Jimmy Choo Man which debuted in 2014, were the catalysts for brand growth in 2015. In 2015, although there were no major launches for our Philippe Benacin and Jean Madar third largest brand, Lanvin, we brought to market two brand ex- tensions for the very enduring Éclat Lanvin pillar, Éclat de Fleurs and Éclat d’Arpège Pour Homme. It’s interesting to note, if not cash equivalents and short-term investments, resulting counterintuitive, that the brand turned in a good performance in in a working capital ratio of 3.6 to 1. Eastern Europe, including Russia, one of its dominant markets, • At year-end, long-term debt including current maturities despite prevailing difficult economic conditions. aggregated $98.6 million, which relates to the financing of Also in 2015, two men’s and women’s fragrance duos de- our May 2015 acquisition of the Rochas brand. Once again, buted, Quatre for Boucheron and Private Klub for Karl Lager- based on our strong balance sheet, consistent cash flows, and feld. In addition, there were new scents created and introduced favorable outlook, our Board of Directors increased our for some of our smaller niche brands, including Paul Smith, regular quarterly cash dividend, this time by 15% to $0.15 Balmain and Repetto. per share, or $0.60 per share annually. Two major events took place in 2015 for our European BUsiness oVerView based operations. The first was in April 2015 when we an- nounced an 11-year exclusive worldwide fragrance license hiGhliGhts of eUropean-Based operations agreement with Coach, Inc., a leading New York design house It is hard to understate the currency impact and its obscu- of modern luxury accessories and lifestyle collections. Since ration of the performance on sales of our European oper- signing that agreement, we have begun the development and ations in 2015. As noted, our reported sales were down production of new Coach perfumes for international distribu- year-over-year, however, in local currency, our sales in our tion to department stores, specialty stores, duty free shops three largest markets for European operations, namely and Coach retail stores. Our first new Coach fragrance launch North America, Western Europe and Asia turned in growth will be a women’s scent scheduled for the fall of 2016, initial- of 25%, 10% and 3%, respectively. Top line growth was also ly debuting in the U.S. and Asia. Then in 2017, the first new achieved in some of the smaller markets, such as Middle men’s line, which is now in the works, will come to market in East and Eastern Europe. the second half of the year. INTER PARFUMS, INC. 2015 ANNUAL REPORT 6 The other major event of 2015 was the May acquisition of the the brand, the geographic market where the product is sold and Rochas brand and trademarks for $108 million. Founded as a lux- the demographics of the target customer. We will have the oppor- ury fashion house by Marcel Rochas in 1925, the brand expanded tunity to put this observation, backed by past experience, to the into fragrance in the 1950s, which remains the largest part of the test with the Abercrombie & Fitch and Hollister brands. Under the Rochas business, with, among others, the enduring Eau de Rochas 7-year agreement inked in December 2014, we are developing and fragrance line. In addition to the fragrance business, we acquired producing new perfumes and fragrance-related products under the the fashion and accessory business operating through a portfolio Abercrombie & Fitch and Hollister brand names. Abercrombie & of license agreements. The purchase price was financed by a five- Fitch Co. is a leading global specialty retailer of high-quality, casual year €100 million loan; however, we subsequently entered into a apparel for men, women and children with an active, youthful life- swap transaction effectively exchanging the variable interest rate to style under its Abercrombie & Fitch and Hollister brands. We are a fixed rate of approximately 1.2%, thus reducing our exposure to gearing up for our initial fragrance launches in 2016, starting with a rising variable interest rates while keeping high levels of cash, cash men’s scent for Abercrombie & Fitch and a duo for Hollister during equivalents and short-term investments intact, ready for future op- the spring and summer time frame, which will be sold in depart- portunities that may require quick responsiveness. ment stores and duty free shops internationally and in Abercrombie Our initial focus for Rochas was on existing fragrance lines, and & Fitch and Hollister retail and on-line stores. we updated and refreshed the brand’s images from packaging to ad- 2016 should be an excellent year for our U.S. operations. vertising. By year-end the Rochas brand was successfully integrated In addition to initial product launches for Abercrombie & Fitch and produced $13.4 million in brand sales, including over $1 million and Hollister, Dunhill is building on its Icon pillar with still an- in royalties, most of which were recorded in the fourth quarter. It is other flanker, Icon Elite. For the Oscar de la Renta brand, our worth noting that Spain and France are dominant markets for Ro- first flanker for Extraordinary, Extraordinary Pétale, is now in chas. Therefore, we have a very large opportunity ahead when we stores. Oscar Gentleman will make its debut as will two varia- launch our first new women’s scent in 50 countries in 2017. tions of the 1977 signature women’s scent, customized for the Coming to market in 2016, we have Montblanc and Jimmy geographic markets where they will be sold. Agent Provoca- Choo brand extensions, Legend Spirit and Illicit Flower, respec- teur unveils Aphrodisiaque and Pure Aphrodisiaque, and new tively; a new women’s line for Lanvin unveiling in France with scents for Anna Sui are also in the works. global distribution to follow in 2017; a new men’s and wom- en’s line for Van Cleef & Arpels; and as noted earlier, our first conclUsion Coach scent for women. We are also well along in our planning We have every reason for confidence in the future of Inter for 2017, which will include launches for a new women’s scent Parfums. This confidence comes from the breadth of our for Lanvin, a new collection for Boucheron, a line extension for established brand portfolio, our track record of turning new the Jimmy Choo signature scent along with, as already noted, brand associations into successful partnerships, our global a men’s scent for Coach, and a women’s scent for Rochas. distribution footprint, our more than 300 members of our high- ly disciplined, dedicated and creative staff, and a very strong hiGhliGhts of U.s.-Based operations financial position. We have the flexibility to disengage from The transition of our U.S. based operations into a prestige fra- brands and businesses that no longer fit our model along with grance business has made it an increasingly important contrib- the know-how and resources to evaluate and act upon potential utor to our overall growth and success. For example, our Dunhill promising new opportunities. fragrance business achieved 2015 sales of $22.3 million, up nearly 37% from 2014 due in great part to the launch of Dunhill Sincerely yours, Icon and flanker Icon Absolute. Similarly, 2015 sales of Oscar de la Renta fragrances were up 18% to $18.6 million from one year earlier benefitting from the launch of Extraordinary. Disappointing but understandable, Anna Sui fragrance sales suf- fered a significant decline as the brand’s primary market, China, is undergoing economic difficulties. Jean madar philippe Benacin We have come to recognize that in the world of fragrance, the Chairman of the Board Vice Chairman of the Board line between specialty retail and prestige often blurs depending Chief Executive Officer & President 7 Montblanc Legend Spirit INTER PARFUMS, INC. 2015 ANNUAL REPORT8 the Company Balmain Homme We aRe InTeR PaRfUMs, InC. We oPeRaTe In THe fRaGRanCe bUsIness, anD ManUfaCTURe, MaRKeT anD DIsTRIbUTe a WIDe aRRaY of fRaGRanCes anD fRaGRanCe RelaTeD PRoDUCTs. oRGanIZeD UnDeR THe laWs of THe sTaTe of DelaWaRe In MaY 1985 as Jean PHIlIPPe fRaGRanCes, InC., We CHanGeD oUR naMe To InTeR PaRfUMs, InC. In JUlY 1999. We HaVe also ReTaIneD oUR bRanD naMe, Jean PHIlIPPe fRaGRanCes, foR soMe of oUR Mass MaRKeT PRoDUCTs. Our worldwide headquarters and the office of our three (3) whol- (3) distribution subsidiaries, Inter Parfums srl for Italy, Inter España ly-owned United States subsidiaries, Jean Philippe Fragrances, LLC Parfums et Cosmetiques, SL, covering the territory of Spain, and and Inter Parfums USA, LLC, both New York limited liability com- Interparfums Luxury Brands, Inc., a Delaware corporation for distri- panies, and IP Beauty, Inc. (formerly Nickel USA, Inc.), a Delaware bution of prestige brands in the United States. In connection with corporation, are located at 551 Fifth Avenue, New York, New York the recent acquisition of the Rochas brand, Interparfums SA has 10176, and our telephone number is 212.983.2640. We also own also formed Parfums Rochas Spain, SL, a Spanish limited liability 100% of Inter Parfums USA Hong Kong Limited indirectly through company, 51% owned by Interparfums SA. Interparfums SA is also our 100% owned subsidiary, Inter Parfums USA, LLC. the sole owner of Interparfums (Suisse) SARL, a company formed to Our consolidated wholly-owned subsidiary, Inter Parfums Hold- hold and manage certain brand names, and Interparfums Singapore ings S.A., and its majority-owned subsidiary, Interparfums SA, main- Pte., Ltd., an Asian sales and marketing office. tain executive offices at 4, Rond Point des Champs Elysées, 75008 Our common stock is listed on The Nasdaq Global Select Paris, France. Our telephone number in Paris is 331.5377.0000. Market under the trading symbol “IPAR”. The common shares Interparfums SA is the majority owner of Inter Parfums Gmbh, a of our subsidiary, Interparfums SA, are traded on the NYSE distr bution subsidiary for Germany, and is the sole owner of three Euronext Exchange. the company 9 Rochas We maintain our internet website at www.interparfumsinc. Our business is not capital intensive, and it is important to com, which is linked to the Securities and Exchange Com- note that we do not own manufacturing facilities. We act as a mission Edgar database. You can obtain through our website, general contractor and source our needed components from free of charge, our annual reports on Form 10-K, quarterly our suppliers. These components are received at one of our reports on Form 10-Q, interactive data files, current reports distribution centers and then, based upon production needs, on Form 8-K, beneficial ownership reports (Forms 3, 4 and 5) the components are sent to one of several third party fillers and amendments to those reports filed or furnished pursuant which manufacture the finished product for us and deliver to Section 13(a) of the Securities Exchange Act of 1934 as them to one of our distribution centers. soon as reasonably practicable after they have been electron- Our prestige products focus on niche brands, each with ically filed with or furnished to the SEC. a devoted following. By concentrating in markets where the We operate in the fragrance business and manufacture, brands are best known, we have had many successful launch- market and distribute a wide array of fragrance and fra- es. We typically launch new fragrance families for our brands grance related products. We manage our business in two every year or two, with some frequent “seasonal” fragrances segments, European-based operations and United States- introduced as well. based operations. Prestige fragrance products are produced The creation and marketing of each product family is in- and marketed by both our United States operations, and our timately linked with the brand’s name, its past and present European operations, the latter, through our 73% owned positioning, customer base and, more generally, the prevailing subsidiary in Paris, Interparfums SA, which is also a public- market atmosphere. Accordingly, we generally study the mar- ly traded company, as 27% of Interparfums SA shares trade ket for each proposed family of fragrance products for almost on the NYSE Euronext. a full year before we introduce any new product into the mar- INTER PARFUMS, INC. 2015 ANNUAL REPORT10 ket. This study is intended to define the general position of of the brand, we have had a history of successful launches. the fragrance family and more particularly its scent, bottle, Certain fashion designers and other licensors choose us as a packaging and appeal to the buyer. In our opinion, the unity partner because our Company’s size enables us to work more of these four elements of the marketing mix makes for a closely with them in the product development process as well successful product. as our successful track record. As with any business, many aspects of our operations are subject to influences outside our control. We discuss GRoW PoRTfolIo bRanDs THRoUGH in greater detail risk factors relating to our business in neW PRoDUCT DeVeloPMenT anD MaRKeTInG Item 1A of our Annual Report on Form 10-K for the fiscal We grow through the creation of fragrance family extensions year ended December 31, 2015, and the reports that we within the existing brands in our portfolio. Every year or two, file from time to time with the Securities and Exchange we create a new family of fragrances for each brand in our Commission. eURoPean oPeRaTIons portfolio. We frequently introduce “seasonal” fragrances as well. With new introductions, we leverage our ability and expe- rience to gauge trends in the market and further leverage the We produce and distribute our fragrance products primarily brand name into different product families in order to maxi- under license agreements with brand owners, and fragrance mize sales and profit potential. We have had success in intro- product sales through our European operations represented ducing new fragrance families (sub-brands, flanker brands or approximately 77% of net sales for 2015. We have built flankers) within our brand franchises. Furthermore, we pro- a portfolio of prestige brands, which include Balmain, mote the smooth and consistent performance of our prestige Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, perfume operations through knowledge of the market, detailed Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas and Van analysis of the image and potential of each brand name, a Cleef & Arpels, whose products are distributed in over 100 “good dose” of creativity and a highly professional approach countries around the world. to international distribution channels. We own the Lanvin brand name for our class of trade, and license the Montblanc and Jimmy Choo brand names; ConTInUe To aDD neW bRanDs for the year ended December 31, 2015, sales of product for To oUR PoRTfolIo THRoUGH neW lICenses these brands represented 15%, 21% and 20% of net sales, oR aCQUIsITIons respectively. Prestige brands are the core of our business and we intend to add new prestige beauty brands to our portfolio. Over UnITeD sTaTes oPeRaTIons the past twenty years, we have built our portfolio of well- Prestige brand fragrance products are also marketed through known prestige brands through acquisitions and new license our United States operations, and represented 23% of sales agreements. We intend to further build on our success in for the year ended December 31, 2015. These fragrance prod- prestige fragrances and pursue new licenses and acquire ucts are sold under trademarks owned by us or pursuant to new brands to strengthen our position in the prestige beauty license or other agreements with the owners of brands, which market. To that end, during 2014, we signed fragrance li- include Abercrombie & Fitch, Agent Provocateur, Anna Sui, censes for Abercrombie & Fitch and Hollister brands, and in Banana Republic, bebe, Dunhill, Hollister, French Connection, 2015, we signed the fragrance license for Coach and French Oscar de la Renta, and Shanghai Tang brands. Connection, extended our Montblanc fragrance license and BUsiness strateGy purchased the Rochas brand. As of December 31, 2015, we had cash, cash equivalents and short-term investments of foCUs on PResTIGe beaUTY bRanDs approximately $260 million, which we believe should assist Prestige beauty brands are expected to contribute significantly us in entering new brand licenses or outright acquisitions. to our growth. We focus on developing and launching quality However, we cannot assure you that we will be able to enter fragrances utilizing internationally renowned brand names. into any future agreements, or acquire brands or assets on By identifying and concentrating in the most receptive mar- terms favorable to us, or if we do, that any such transaction ket segments and territories where our brands are known, and will be successful. We identify prestige brands that can be executing highly targeted launches that capture the essence developed and marketed into a full and varied product fam- the company 11 Abercrombie & Fitch First Instinct INTER PARFUMS, INC. 2015 ANNUAL REPORT12 ilies and, with our technical knowledge and practical expe- advertising expenditures and royalty payments as are cus- rience gained over time, take licensed brand names through tomary in our industry. all phases of concept, development, manufacturing, market- ing and distribution. fRenCH ConneCTIon eXPanD eXIsTInG PoRTfolIo InTo neW CaTeGoRIes In September 2015, we entered into a 12-year license agree- ment to create, produce and distribute fragrances and fra- grance related products under the French Connection brand We intend to continue to broaden our product offering beyond names. The agreement is subject to certain minimum adver- the fragrance category and offer other fragrance related prod- tising expenditures and royalty payments as are customary in ucts and personal care products under some of our existing our industry. The license agreement was subject to certain brands. We believe such product offerings meet customer conditions precedent, which have now been satisfied, and the needs and further strengthen customer loyalty. Company took over distribution of selected fragrances within the brand’s existing fragrance portfolio in 2016. ConTInUe To bUIlD Global DIsTRIbUTIon fooTPRInT RoCHas Our business is a global business and we intend to continue In May 2015, we acquired the Rochas brand from The to build our global distribution footprint. In order to adapt Procter & Gamble Company. This transaction includes to changes in the environment and our business, we have all brand names and registered trademarks for Rochas formed and are operating joint ventures or distribution sub- (Femme, Madame, Eau de Rochas, etc.), mainly for class sidiaries in the major markets of the United States, Italy, 3 (cosmetics) and class 25 (fashion). Substantially the Spain and Germany for distribution of prestige fragrances. entire €106 million purchase price for the assets ac- We may look into future joint ventures arrangements or ac- quired (approximately $118 million), including approxi- quire distribution companies within other key markets to mately $5.4 million in acquisition related expenses, was distribute certain of our prestige brands. While building a allocated to trademarks with indefinite lives including global distribution footprint is part of our long-term strat- approximately $21 million of which was allocated to fash- egy, we may need to make certain decisions based on the ion trademarks. An additional $4.4 million was paid for short-term needs of the business. We believe that in certain related inventory. markets, vertical integration of our distribution network may The cost of the acquisition was paid in cash on the clos- be one of the keys to future growth of our Company, and ing date and was financed entirely through a 5-year term ownership of such distribution should enable us to better loan payable in equal quarterly installments plus interest. serve our customers’ needs in local markets and adapt more In order to reduce exposure to rising variable interest quickly as situations may determine. rates, the Company entered into a swap transaction effec- recent deVelopments MonTblanC tively exchanging the variable interest rate to a fixed rate of approximately 1.2%. The swap is a derivative instru- ment and is therefore recorded at fair value and changes In October 2015, we extended our license agreement with in fair value are reflected in the accompanying consolidat- Montblanc by five years. The original agreement, signed ed statements of income. in 2010, provided us with the exclusive worldwide license rights to create, produce and distribute fragrances and CoaCH fragrance related products under the Montblanc brand In April 2015, we entered into an 11-year exclusive world- through December 31, 2020. The new 10-year agreement, wide license with Coach, Inc. to create, produce and dis- which went into effect on January 1, 2016, extends the tribute new men’s and women’s fragrances and fragrance partnership through December 31, 2025 without any mate- related products under the Coach brand name. We will rial changes in operating conditions from the prior license. distribute these fragrances globally to department stores, The license agreement is subject to certain minimum sales, specialty stores and duty free shops, as well as in Coach the company 13 retail stores beginning in 2016. The agreement is subject to contract filling needs are purchased from many different sup- certain minimum sales, advertising expenditures and royalty pliers located around the world. For United States operations, payments as are customary in our industry. components for our prestige fragrances are primarily sourced, produced and filled in the United States, and our mass market prodUction and sUpply products are primarily manufactured, produced or filled in the THe sTaGes of THe DeVeloPMenT United States or China. anD PRoDUCTIon PRoCess foR all fRaGRanCes aRe as folloWs: marketinG and distriBUtion • Simultaneous discussions with perfume designers and Our products are distributed in over 100 countries around creators (includes analysis of aesthetic and olfactory trends, the world through a selective distribution network. For the target clientele and market communication approach) majority of our international distribution, we contract with • Concept choice independent distribution companies specializing in luxury • Produce mock-ups for final acceptance of bottles goods. In each country, we designate anywhere from one to and packaging three distributors on an exclusive basis for one or more of • Receive bids from component suppliers (glass makers, our name brands. We also distribute our products through plastic processors, printers, etc.) variety of duty free operators, such as airports and airlines and packaging companies • Choose suppliers • Schedule production and packaging • Issue component purchase orders • Follow quality control procedures for and select vacation destinations. As our business is a global one, we intend to continue to build our global distribution footprint. For distribution of brands within our European based operations we operate through our distri- bution subsidiaries in the major markets of the United States, incoming components; and Italy, Spain and Germany. Our third party distributors vary in • Follow packaging and inventory control procedures. size depending on the number of competing brands they repre- sent. This extensive and diverse network together with our own sUPPlIeRs WHo assIsT Us WITH PRoDUCT distribution subsidiaries provides us with a significant presence DeVeloPMenT InClUDe: in over 100 countries around the world. • Independent perfumery design companies Approximately 40% of our European based prestige fra- (Aesthete, Carré Basset, PI Design, Cent Degres) grance net sales are denominated in U.S. dollars. We address • Perfumers (IFF, Givaudan, Firmenich, Robertet, certain financial exposures through a controlled program of Takasago, Mane) which create a fragrance consistent risk management that includes the use of derivative financial with our expectations and, that of the fragrance designers instruments. We primarily enter into foreign currency forward and creators; exchange contracts to reduce the effects of fluctuating foreign • Bottle manufacturers (Pochet du Courval, SGD, currency exchange rates. Verreries Brosse, Bormioli Luigi, Stoelzle Masnières), The business of our European operations has become in- caps (Qualipac, ALBEA, RPC, Codiplas, Jackel, CMSI) creasingly seasonal due to the timing of shipments by our or boxes (Edelmann, Autajon, Alliora, Nortier, Draeger); majority-owned distribution subsidiaries to their customers, • Production specialists who carry out packaging which are weighted to the second half of the year. (CCI, Edipar, Jacomo, SDPP, MF Productions, Biopack) For our United States operations, we distribute product to or logistics (SAGA for storage, order preparation approved retailers and distributors in the United States as and shipment). well as internationally, including duty free and other travel-re- lated retailers. We utilize our in house sales team to reach Suppliers’ accounts for our European operations are pri- our third party distributors and customers outside the United marily settled in euro and for our United States operations, States. In addition, the business of our United States oper- suppliers’ accounts are primarily settled in U.S. dollars. For ations has become increasingly seasonal as shipments are our European operations, prestige fragrances, components and weighted toward the second half of the year. INTER PARFUMS, INC. 2015 ANNUAL REPORT 14 the Products We aRe THe oWneR of THe RoCHas bRanD, anD lanVIn bRanD naMe anD TRaDeMaRK foR oUR Class of TRaDe. In aDDITIon, We HaVe bUIlT a PoRTfolIo of lICenseD PResTIGe bRanDs WHeRebY We PRoDUCe anD DIsTRIbUTe oUR PResTIGe fRaGRanCe PRoDUCTs UnDeR lICense aGReeMenTs WITH bRanD oWneRs. UnDeR lICense aGReeMenTs, We obTaIn THe RIGHT To Use THe bRanD naMe, CReaTe neW fRaGRanCes anD PaCKaGInG, DeTeRMIne PosITIonInG anD DIsTRIbUTIon, anD MaRKeT anD sell THe lICenseD PRoDUCTs, In eXCHanGe foR THe PaYMenT of RoYalTIes. oUR RIGHTs UnDeR lICense aGReeMenTs aRe also GeneRallY sUbJeCT To CeRTaIn MInIMUM sales ReQUIReMenTs anD aDVeRTIsInG eXPenDITURes as aRe CUsToMaRY In oUR InDUsTRY. Our exclusive worldwide licenses for these brands expire on the following dates: Brand Name Expiration Date Abercrombie & Fitch December 31, 2021 Agent Provocateur December 31, 2023 Anna Sui Balmain December 31, 2021, plus two 5-year optional terms if certain conditions are met December 31, 2023 Banana Republic December 31, 2016 bebe Stores Boucheron Coach Dunhill Hollister Jimmy Choo Karl Lagerfeld Montblanc June 30, 2017 December 31, 2025, plus a 5-year optional term if certain sales targets are met June 30, 2026 September 30, 2023, subject to earlier termination on September 30, 2019, if certain minimum sales are not met December 31, 2021 December 31, 2021 October 31, 2032 December 31, 2025 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 not to renew is provided S.T. Dupont December 31, 2016 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 $76 million) or one times the average of the annual sales for the years ending December 31, 2023 and 2024. the products 15 fragrance Portfolio INTER PARFUMS, INC. 2015 ANNUAL REPORT16 abeRCRoMbIe & fITCH In December 2014, we entered into a 7-year exclusive world- wide license to create, produce and distribute new fragrances and ancillaries under the Abercrombie & Fitch brand name. The Company will distribute these fragrances internationally in specialty stores, high-end department stores and duty free shops, and in the U.S., in duty free shops and in Abercrombie & Fitch retail and on-line stores. A new men’s scent is planned for Abercrombie & Fitch in 2016. A women’s Abercrombie & Fitch scent is in development for 2017. Abercrombie & Fitch stands for effortless American style. Since 1892, the brand has been known for its attention to detail with designs that embody simplicity and casual luxury. Rooted in a heritage of quality craftsmanship, Abercrombie & Fitch con- tinues to bring its customers iconic, modern classics with an aspirational look, feel, and attitude. the products 17 Abercrombie & Fitch Fierce INTER PARFUMS, INC. 2015 ANNUAL REPORT18 Agent Provocateur Fatale Intense the products 19 aGenT PRoVoCaTeUR In July 2013, we entered into a 10.5-year exclusive worldwide breaking new ground with every collection and rightfully earn- license to create, produce and distribute fragrances and fra- ing its place as a benchmark brand in the world of lingerie. grance related products under London-based luxury lingerie It is a brand that is confident, sensual and irreverent. Agent brand, Agent Provocateur. In 2013, we commenced distribution Provocateur celebrates and empowers women with a unique of selected fragrances within the brand’s legacy fragrance port- brand image renowned for being provocative and yet always folio and in 2014, we launched our first new Agent Provocateur leaving something to the imagination. scents, Fatale and Fatale Pink. In 2016, we plan to launch Agent In recent years, Agent Provocateur has been opening Provocateur Aphrodisiaque, our second fragrance family for the doors at a steady growth and plans to continue to grow its brand. Agent Provocateur fragrance sales are concentrated in door count, especially in Asia. Currently, its products which the United Kingdom and the Middle East. extend into swimwear, bridal and accessories, are sold glob- Founded in 1994 by Joseph Corré, and Serena Rees and ally, at 100 of its own boutiques and shop-in-shops within acquired by the private equity firm, 3i Group plc in 2007, the finest department stores, as well as specialty stores Agent Provocateur is an iconic, globally-recognized brand, and on-line. INTER PARFUMS, INC. 2015 ANNUAL REPORT20 anna sUI In June 2011, we entered into a 10-year exclusive worldwide bined with touch of nostalgia, hipness and rock-and-roll. fragrance license agreement to produce and distribute fragranc- Anna Sui’s devoted customer base, which spans the world, is es and fragrance related products under the Anna Sui brand. especially strong in Asia. Our rights under the agreement commenced on January 1, 2012 Anna Sui product sales have declined in the past two years when we took over production and distribution of the existing primarily owing to the slowdown in the Chinese economy Anna Sui fragrance collections. where the brand is especially popular. We have continued to We are working in partnership with American designer, build the brand after our 2013 successful launch of La Vie Anna Sui, and her creative team to build upon the brand’s de Bohème. In 2015, we released our second new Anna Sui growing customer appeal, and develop new fragrances that fragrance family, Romantica, and we have several flankers in capture the brand’s very sweet feminine girly aspect, com- development for 2016. the products 21 Anna Sui Romantica INTER PARFUMS, INC. 2015 ANNUAL REPORT22 Balmain Extatic the products 23 balMaIn In July 2011, we entered into a 12-year exclusive worldwide a significant transformation. With the redefinition of its license agreement to create, produce and distribute fragranc- image in ready-to-wear, the brand has become a reference es and fragrance related products under the Balmain brand. for style, while retaining its distinctive design codes from Our rights under the agreement commenced on January 1, the haute couture universe. In doing so, the brand has be- 2012 when we took over the production and distribution of come a major trendsetter. Our first new Balmain women’s existing Balmain fragrances for men and women. fragrance, Extatic, made its debut in 2014 in selective The Balmain couture house was founded in 1945 by distribution and in 2015, we launched a new men’s scent Pierre Balmain. In recent years, Balmain has undergone Balmain Homme. INTER PARFUMS, INC. 2015 ANNUAL REPORT24 banana RePUblIC Our relationship with the Gap and Banana Republic brands ada and our license agreement for international distribution dates back to 2005. Our rights to produce and sell Gap of Banana Republic product to specialty and department branded products to Gap retail stores in the United States stores outside the United States, including duty free and and Canada expired in December 2014, and international other travel related retailers through December 31, 2016. If rights expired December 31, 2015. the agreement is not renewed, then we would have until De- In 2015, we renewed our agreement with Banana Re- cember 31, 2017 to sell off all remaining inventory. Banana public to develop, produce, manufacture and distribute fra- Republic products currently available include: Classic, W, grances for Banana Republic branded products to be sold in Alabaster, Rosewood, Slate, Black Walnut, Cordovan, Wild- Banana Republic retail stores in the United States and Can- bloom and Modern. the products 25 Banana Republic Modern INTER PARFUMS, INC. 2015 ANNUAL REPORT26 bebe Glam the products 27 bebe sToRes In July 2008, we entered into an exclusive 6-year worldwide agreement with bebe Stores, Inc., that was renewed through June 30, 2017, under which we design, manufacture and sup- ply fragrances for company-owned bebe stores in the United States and Canada, as well as select specialty and department stores worldwide. We have incorporated bebe’s signature look into fragrances for the brand’s strong, hip, sexy, and sophis- ticated clientele. Scents currently available for domestic and international markets include: bebe, bebe Sheer, bebe Gold and bebe Glam. INTER PARFUMS, INC. 2015 ANNUAL REPORT28 boUCHeRon In December 2010, we entered into an exclusive world- through over 40 boutiques worldwide as well as an e-com- wide license agreement for the creation, development merce site. and distribution of fragrances under the Boucheron Our first new fragrance under the Boucheron brand, Jaïpur brand. Boucheron is the French jeweler “par excellence”. Bracelet, debuted in 2012, and Boucheron Place Vendôme, Founded by Frederic Boucheron in 1858, the House has which has a beautiful glasswork bottle with a cabochon, the produced some of the world’s most beautiful and pre- emblematic stone of House Boucheron, was released in 2013. cious creations. Today Boucheron creates jewelry and In 2015, we launched a new fragrance duo for the Boucheron timepieces and, under license from global brand leaders, brand around its iconic Quatre ring, Boucheron Quatre, which fragrances and sunglasses. Currently Boucheron operates received a favorable market response. the products 29 Boucheron Quatre INTER PARFUMS, INC. 2015 ANNUAL REPORT42 the products Montblanc Lady Emblem 43 MonTblanC In October 2015, we extended our license agreement with presence in more than 70 countries, network of more than Montblanc by five years. The original agreement, signed in 350 boutiques worldwide and high standards of product de- 2010, provided us with the exclusive worldwide license rights sign and quality, Montblanc has quickly grown to be our largest to create, produce and distribute fragrances and fragrance re- and fastest growing fragrance brand. lated products under the Montblanc brand through December In 2011, we launched our first new Montblanc fragrance, 31, 2020. The new 10-year agreement, which went into ef- Legend, which quickly became our best-selling men’s line. In fect on January 1, 2016, extends the partnership through 2012, we launched our first women’s fragrance under the Mont- December 31, 2025 without any material changes in operating blanc brand, and our second men’s line, Emblem, was launched conditions from the prior license. in 2014. Montblanc has quickly become our largest selling Montblanc has achieved a world-renowned position in the brand, and for 2015, the Montblanc Legend line was the 11th luxury segment and has become a purveyor of exclusive prod- best-selling fragrance line in the United States. The Emblem ucts, which reflect today’s exacting demands for timeless line was expanded in 2015 to include, Montblanc Emblem In- design, tradition and master craftsmanship. Through its lead- tense and the new women’s scent, Lady Emblem. For 2016, we ership positions in writing instruments, watches and leather are further extending our successful Montblanc Legend line with goods, promising growth outlook in women’s jewelry, active a new men’s scent, Montblanc Legend Spirit. INTER PARFUMS, INC. 2015 ANNUAL REPORT44 the products osCaR De la RenTa In October 2013, we entered into a 12-year exclusive world- Oscar de la Renta is one of the world’s leading luxury wide license to create, produce and distribute fragrances and goods firms. The New York-based company was established in fragrance related products under the Oscar de la Renta brand, 1965, and encompasses a full line of women’s accessories, which closed in December 2013. In 2014, we took over distribu- bridal, childrenswear, fragrance, beauty and home goods, in tion of fragrances within the brand’s legacy fragrance portfolio. addition to its internationally renowned signature women’s Our first new women’s fragrance under the Oscar de la Renta ready-to-wear collection. Oscar de la Renta products are sold brand, Extraordinary, was launched in 2015. For 2016, in ad- globally in fine department and specialty stores, www.oscar- dition to several flankers that are launching throughout the year delarenta.com and through wholesale channels. The Oscar in certain markets, we are planning to debut a new men’s fra- de la Renta brand has a loyal following in the United States, grance family, Oscar de la Renta Gentlemen. Canada and Latin America. 45 Oscar de la Renta Extraordinary Pétale INTER PARFUMS, INC. 2015 ANNUAL REPORT46 the products Paul Smith Essential 47 PaUl sMITH We signed an exclusive worldwide license agreement with Paul Smith in December 1998 for the creation, development and distri- bution of Paul Smith fragrances. 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, Paul Smith Extreme, Paul Smith Rose, Paul Smith Man 2 and Paul Smith Essential. INTER PARFUMS, INC. 2015 ANNUAL REPORT48 the products RePeTTo In December 2011, we entered into a 13-year exclusive world- recently handbags and high-end accessories. wide license agreement to create, produce and distribute fra- With Repetto boutiques in 37 countries, the brand is bran- grances under the Repetto brand. ching out into Asia, notably China, Hong Kong, Singapore, Created in 1947 by Rose Repetto at the request of her Thailand, South Korea and Japan where its mix of cross-gener- son, dancer and choreographer Roland Petit, Repetto is today ational appeal and French chic has been met with unprecedent- a legendary name in the world of dance. For a number ed enthusiasm. Our first Repetto fragrance line was launched of years, it has developed timeless and must-have collec- in 2013 and a floral scent was added in 2015. The brand has tions with a fully modernized signature style ranging from experienced gradual sales penetration in France, but slower ac- dance shoes, ballet slippers, flat shoes, and sandals to more ceptance internationally. 49 Repetto Eau Florale INTER PARFUMS, INC. 2015 ANNUAL REPORT50 the products Rochas Eau de Rochas 51 RoCHas In May 2015, we acquired the Rochas brand from The Procter This acquisition opens up a new page in the Company’s histo- & Gamble Company. Founded by Marcel Rochas in 1925, the ry by integrating for the first time both fragrances and fashion. brand began as a fashion house and expanded into perfumery This will allow us to apply a global approach to managing a fra- in the 1950s under Hélène Rochas’ direction. This transac- grance brand with complete freedom in terms of creativity and tion included all brand names and registered trademarks for aesthetic choices, as well as a very high degree of visibility to Rochas (Femme, Madame, Eau de Rochas, etc.), mainly for establish a position of even greater preeminence for Rochas in class 3 (cosmetics) and class 25 (fashion). Substantially the the luxury goods universe. Rochas brand sales currently include entire €106 million purchase price for the assets acquired approximately $2 million of royalties generated by the fashion (approximately $118 million) was allocated to trademarks with and accessory business via its portfolio of license agreements. indefinite lives, including approximately $5.4 million in acqui- Our first new fragrance for Rochas is under development, and is sition related expenses. expected to launch 2017. INTER PARFUMS, INC. 2015 ANNUAL REPORT 52 the products sHanGHaI TanG In July 2013, we created a wholly-owned Hong Kong subsid- As the global curator of modern Chinese chic, Shanghai Tang iary, Inter Parfums USA Hong Kong Limited, which entered champions the richness and beauty of the Chinese culture through into a 12-year exclusive worldwide license to create, produce its contemporary lifestyle offer of apparel and accessories for and distribute fragrances under China’s leading luxury men, women and children, as well as home collections. Shang- brand, Shanghai Tang. Our first Shanghai Tang fragrance hai Tang supports an international network of 45 boutiques, collection for men and women debuted in 2015. including the world’s largest lifestyle flagship–The Shanghai Founded in 1994, Shanghai Tang is the leading Chinese Tang Mansion in Hong Kong, and its largest flagship Boutique, luxury brand with international recognition and distribution. The Cathay Mansion in Shanghai, China and on-line. 53 Shanghai Tang Gold Lily INTER PARFUMS, INC. 2015 ANNUAL REPORT54 the products S.T. Dupont So Dupont 55 s.T. DUPonT In June 1997, we signed an exclusive worldwide license agree- ment with S.T. Dupont for the creation, manufacture and dis- tribution of S.T. Dupont fragrances. 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, S.T. Dupont Essence Pure, S.T. Dupont Noir, S.T. Dupont Blanc, S.T. Dupont Passenger, S.T. Dupont Intense, S.T. Dupont Pas- senger Cruise, 58 avenue Montaigne, So Dupont and Paris Saint-Germain. INTER PARFUMS, INC. 2015 ANNUAL REPORT56 the products Van Cleef & aRPels In September 2006, we entered into an exclusive worldwide license agreement for the creation, development and distribu- tion of fragrance products under the Van Cleef & Arpels brand and related trademarks. Van Cleef & Arpels fragrances in current distribution in- clude: First, Van Cleef pour Homme, Tsar, Van Cleef, First 1er Bouquet, Féerie, Collection Extraordinaire, Oriens, Midnight in Paris and Rêve. For 2016, we anticipate launching a new men’s line, In New York, and a new women’s line, So First. 57 Van Cleef & Arpels Ambre Impérial INTER PARFUMS, INC. 2015 ANNUAL REPORT58 59 INTER PARFUMS, INC. 2015 ANNUAL REPORT60 Lanvin Éclat d’Arpège Pour Homme quarterly financial data 61 qUarterly data: (UnaUdited) for the year ended decemBer 31, 2015 (In Thousands, Except Per Share Data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year Net Sales $109,249 $102,021 $138,944 $118,326 $468,540 289,471 Gross Margin 38,969 67,610 13,305 60,325 5,520 85,826 18,634 75,710 1,510 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 10,007 4,351 14,220 1,859 30,437 $0.32 $0.32 30,979 31,072 $0.14 $0.14 30,988 31,107 $0.46 $0.46 31,005 31,098 $0.06 $0.06 31,012 31,125 $0.98 $0.98 30,996 31,100 qUarterly data: (UnaUdited) for the year ended decemBer 31, 2014 (In Thousands, Except Per Share Data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year $121,730 $118,192 $134,206 $125,133 $499,261 69,230 12,150 68,116 7,667 75,328 13,764 74,363 3,764 287,037 37,345 Net Sales Gross Margin Net Income Net Income Attributable to Inter Parfums, Inc. 8,894 6,109 11,113 3,320 29,436 Net Income Attributable to Inter Parfums, Inc. per Share: Basic Diluted Average Common Shares Outstanding: Basic Diluted $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 INTER PARFUMS, INC. 2015 ANNUAL REPORT noRTH aMeRICa 27% United States export sales were approximately $66.3 million, $61.0 million and $58.8 million in 2015, 2014 and 2013, respectively. Consolidated net sales to customers by region are as follows: Year Ended December 31, consolidated net sales to cUstomers By reGion (in thousands) 2015 $125,700 170,600 North America 2013 $145,900 $125,900 177,900 215,700 2014 Europe CenTRal & soUTH aMeRICa 9% Central and South America Middle East Asia Other 57,700 50,600 40,300 43,300 85,600 98,700 41,100 41,900 78,200 11,000 11,900 $468,500 $499,300 consolidated net sales to cUstomers in maJor coUntries are as follows: (in thousands) Year Ended December 31, 2015 United States United Kingdom France 2014 $122,000 $119,000 37,000 32,000 34,000 50,000 47,000 9,400 $563,600 2013 $142,000 46,000 eURoPe 36% asIa 17% MIDDle easT 9% INTER PARFUMS, INC. 2015 ANNUAL REPORT64 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 offic- • Product development; es of Interparfums SA in Paris. Each company is organized • Logistics and transportation; into two operational units that report directly to general • Purchasing and industrial relations; management, and European operations ultimately report to • Quality control and inventory cost supervision. Mr. Benacin and United States operations ultimately report to Mr. Madar. eXPoRT sales: Herve Bouillonnec in the United States and Frédéric Garcia- fInanCe, InVesToR RelaTIons Pelayo in France: anD aDMInIsTRaTIon: • International development strategy; Russell Greenberg in the United States and Philippe Santi • Establishment of distributor networks and negotiation of in France: contracts; • Financial policy and communication, investor relations; • Monitoring of profit margins and advertising expenditures. • Financial accounting, cost accounting, budgeting and cash flow management; DoMesTIC (HoMe CoUnTRY) sales: • Disclosure requirements of the Securities and Exchange Michel Bes in the United States and Jérôme Thermoz Commission and Commission des Operations de Bourse; in France: • Labor relations, tax and legal matters and management • Establish and apply domestic sales strategy and information systems. distribution policy; • Sales team management and development; • Monitoring of profit margins and advertising expenditures. the organization 65 simplified chart of the orGaniZation 45% 55% 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% 51% interparfums deutschland gmbh (germany) parfums rochas spain, sl pãna inter es pa rfums et cosmetiques, sl (spain) interparfums srl (italy) INTER PARFUMS, INC. 2015 ANNUAL REPORT66 ConTenTs Management’s Discussion and Analysis of Financial Condition and Results of Operations 67 Reports on Internal Control Over Financial Reporting 78 Report of Independent Registered Public Accounting Firm 80 Financial Statements 81 Directors and Executive Officers 99 Corporate and Market Information 100 management’s discussion and analysis of financial condition and results of operations 67 management’s discussion and analysis of financial condition and Results of Operations manaGement’s discUssion and analysis of financial condition and resUlts of operations oVeRVIeW We operate in the fragrance business, and manufacture, mar- brand names. As a percentage of net sales, product sales for ket and distribute a wide array of fragrances and fragrance the Company’s largest brands were as follows: related products. We manage our business in two segments, European based operations and United States based opera- Year Ended December 31, tions. Certain prestige fragrance products are produced and Montblanc marketed by our European operations through our 73% owned Lanvin subsidiary in Paris, Interparfums SA, which is also a publicly Jimmy Choo traded company as 27% of Interparfums SA shares trade on 2015 21% 15% 20% 2014 2013 22% 18% 16% 15% 15% 13% the NYSE Euronext. Through our United States operations we also market fragrance We produce and distribute our European based fragrance and fragrance related products. United States operations rep- products primarily under license agreements with brand owners, resented 23%, 21% and 18% of net sales in 2015, 2014 and and European based fragrance product sales represented ap- 2013, respectively. These fragrance products are sold or to be proximately 77%, 79% and 82% of net sales for 2015, 2014 and sold primarily pursuant to license or other agreements with the 2013, respectively. We have built a portfolio of prestige brands, owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, which include Balmain, Boucheron, Coach, Jimmy Choo, Karl Banana Republic, bebe, Dunhill, French Connection, Hollister, Os- Lagerfeld, Lanvin, Montblanc, Paul Smith, S.T. Dupont, Repetto, car de la Renta, and Shanghai Tang brands. Rochas and Van Cleef & Arpels, whose products are distributed Quarterly sales fluctuations are influenced by the timing of in over 100 countries around the world. new product launches as well as the third and fourth quarter Until early 2013, Burberry was our most significant license holiday season. In certain markets where we sell directly to re- as Burberry products represented 23% of net sales for the tailers, seasonality is more evident. We sell directly to retailers year ended December 31, 2013. (See Note 2 “Termination in France as well as through our own distribution subsidiaries of Burberry License” in notes to consolidated financial state- in Italy, Germany, Spain and the United States. ments on page 89 of this Annual Report). With respect to the We grow our business in two distinct ways. First, we grow by add- Company’s largest brands, we own the Lanvin brand name for ing new brands to our portfolio, either through new licenses or other its class of trade, and license the Montblanc and Jimmy Choo arrangements or outright acquisitions of brands. Second, we grow INTER PARFUMS, INC. 2015 ANNUAL REPORT 68 through the introduction of new products and supporting new and recent important eVents established products through advertising, merchandising and sam- MonTblanC pling as well as phasing out existing products that no longer meet In October 2015, we extended our license agreement with the needs of our consumers. The economics of developing, produc- Montblanc by five years. The original agreement, signed in 2010, ing, launching and supporting products influence our sales and op- provided us with the exclusive worldwide license rights to create, pro- erating performance each year. Our introduction of new products duce and distribute fragrances and fragrance related products under may have some cannibalizing effect on sales of existing products, the Montblanc brand through December 31, 2020. The new 10- which we take into account in our business planning. year agreement, which went into effect on January 1, 2016, extends Our business is not capital intensive, and it is important to the partnership through December 31, 2025 without any material note that we do not own manufacturing facilities. We act as a changes in operating conditions from the prior license. The license general contractor and source our needed components from our agreement is subject to certain minimum sales, advertising expendi- suppliers. These components are received at one of our dis- tures and royalty payments as are customary in our industry. tribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which fRenCH ConneCTIon manufacture the finished product for us and then deliver them In September 2015, we entered into a 12-year license agreement to one of our distribution centers. to create, produce and distribute fragrances and fragrance related As with any global business, many aspects of our operations products under the French Connection brand names. The agree- are subject to influences outside our control. We believe we have ment is subject to certain minimum advertising expenditures and a strong brand portfolio with global reach and potential. As part royalty payments as are customary in our industry. The license of our strategy, we plan to continue to make investments behind agreement was subject to certain conditions precedent, which fast-growing markets and channels to grow market share. have now been satisfied, and we took over distribution of selected During 2015, the economic and political uncertainty and fi- fragrances within the brand’s existing fragrance portfolio in 2016. nancial market volatility taking place in certain European coun- tries, the Middle East, China and Brazil had a small negative RoCHas impact on our business, and at this time we do not believe it In May 2015, we acquired the Rochas brand from The Procter will significantly affect our overall business for the foreseeable & Gamble Company. This transaction includes all brand names future. However, if the degree of uncertainty or volatility wors- and registered trademarks for Rochas (Femme, Madame, Eau de ens or is prolonged, then there will likely be a negative effect on Rochas, etc.), mainly for class 3 (cosmetics) and class 25 (fash- ongoing consumer confidence, demand and spending and as a ion). Substantially the entire €106 million purchase price for the result, our business. Currently, we believe general economic and assets acquired (approximately $118 million), including approx- other uncertainties still exist in select markets in which we do imately $5.4 million in acquisition related expenses, was allo- business, and we continue to monitor global economic uncer- cated to trademarks with indefinite lives including approximately tainties and other risks that may affect our business. $21 million of which was allocated to fashion trademarks. An Our reported net sales are impacted by changes in foreign additional $4.4 million was paid for related inventory. currency exchange rates. A strong U.S. dollar has a negative im- pact on our net sales. However, earnings are positively affected CoaCH by a strong dollar, because approximately 40% of net sales of In April 2015, we entered into an 11-year exclusive worldwide li- our European operations are denominated in U.S. dollars, while cense with Coach, Inc. to create, produce and distribute new men’s almost all costs of our European operations are incurred in euro. and women’s fragrances and fragrance related products under the Our Company addresses certain financial exposures through a Coach brand name. We will distribute these fragrances globally to controlled program of risk management that includes the use of department stores, specialty stores and duty free shops, as well as derivative financial instruments. We primarily enter into foreign in Coach retail stores beginning in 2016. The agreement is sub- currency forward exchange contracts to reduce the effects of ject to certain minimum sales, advertising expenditures and fluctuating foreign currency exchange rates. royalty payments as are customary in our industry. management’s discussion and analysis of financial condition and results of operations 69 discUssion of critical accoUntinG policies We make estimates and assumptions in the preparation of ucts, we allow returns if properly requested, authorized and our financial statements in conformity with accounting prin- approved. We regularly review and revise, as deemed neces- ciples generally accepted in the United States of America. sary, our estimate of reserves for future sales returns based Actual results could differ significantly from those estimates primarily upon historic trends and relevant current data, in- under different assumptions and conditions. We believe the cluding information provided by retailers regarding their inven- following discussion addresses our most critical accounting tory levels. In addition, as necessary, specific accruals may be policies, which are those that are most important to the por- established for significant future known or anticipated events. trayal of our financial condition and results of operations. The types of known or anticipated events that we have consid- These accounting policies generally require our manage- ered, and will continue to consider, include, but are not limited ment’s most difficult and subjective judgments, often as to, the financial condition of our customers, store closings by a result of the need to make estimates about the effect of retailers, changes in the retail environment and our decision matters that are inherently uncertain. Management of the to continue to support new and existing products. We record Company has discussed the selection of significant ac- estimated reserves for sales returns as a reduction of sales, counting policies and the effect of estimates with the Audit cost of sales and accounts receivable. Returned products are Committee of the Board of Directors. recorded as inventories and are valued based upon estimated ReVenUe ReCoGnITIon realizable value. The physical condition and marketability of returned products are the major factors we consider in esti- We sell our products to department stores, perfumeries, mating realizable value. Actual returns, as well as estimated specialty stores, mass market retailers, supermarkets and realizable values of returned products, may differ significantly, domestic and international wholesalers and distributors. either favorably or unfavorably, from our estimates, if factors Sales of such products by our domestic subsidiaries are de- such as economic conditions, inventory levels or competitive nominated in U.S. dollars and sales of such products by our conditions differ from our expectations. foreign subsidiaries are primarily denominated in either euro or U.S. dollars. We recognize revenues when merchandise InVenToRIes is shipped and the risk of loss passes to the customer. Net Inventories are stated at the lower of cost or market value. sales are comprised of gross revenues less returns, trade dis- Cost is principally determined by the first-in, first-out meth- counts and allowances. aCCoUnTs ReCeIVable od. We record adjustments to the cost of inventories based upon our sales forecast and the physical condition of the inventories. These adjustments are estimates, which could Accounts receivable represent payments due to the Company vary significantly, either favorably or unfavorably, from actu- for previously recognized net sales, reduced by allowances al requirements if future economic conditions or competitive for sales returns and doubtful accounts. Accounts receivable conditions differ from our expectations. balances are written-off against the allowance for doubtful accounts when they become uncollectible. Recoveries of ac- eQUIPMenT anD oTHeR lonG-lIVeD asseTs counts receivable previously recorded against the allowance Equipment, which includes tools and molds, is recorded at cost are recorded in the consolidated statement of income when and is depreciated on a straight-line basis over the estimated received. We generally grant credit based upon our analysis useful lives of such assets. Changes in circumstances such of the customer’s financial position as well as previously es- as technological advances, changes to our business model or tablished buying patterns. changes in our capital spending strategy can result in the ac- sales ReTURns tual useful lives differing from our estimates. In those cases where we determine that the useful life of equipment should be Generally, we do not permit customers to return their unsold shortened, we would depreciate the net book value in excess of products. However, for U.S. distribution of our prestige prod- the salvage value, over its revised remaining useful life, thereby INTER PARFUMS, INC. 2015 ANNUAL REPORT70 increasing depreciation expense. Factors such as changes in the service potential of the asset are compared to the carrying planned use of equipment, or market acceptance of products, value of the asset. If our projection of undiscounted future could result in shortened useful lives. cash flows is in excess of the carrying value of the intangible We evaluate indefinite-lived intangible assets for impair- asset, no impairment charge is recorded. If our projection ment at least annually during the fourth quarter, or more fre- of undiscounted future cash flows is less than the carrying quently when events occur or circumstances change, such as value of the intangible asset, an impairment charge would be an unexpected decline in sales, that would more likely than not recorded to reduce the intangible asset to its fair value. The indicate that the carrying value of an indefinite-lived intangible cash flow projections are based upon a number of assump- asset may not be recoverable. When testing indefinite-lived in- tions, including future sales levels and future cost of goods tangible assets for impairment, the evaluation requires a com- and operating expense levels, as well as economic conditions, parison of the estimated fair value of the asset to the carrying changes to our business model or changes in consumer ac- value of the asset. The fair values used in our evaluations are ceptance of our products which are more subjective in nature. estimated based upon discounted future cash flow projections We believe that the assumptions we have made in projecting using a weighted average cost of capital of 8.02%. The cash future cash flows for the evaluations described above are flow projections are based upon a number of assumptions, in- reasonable and currently no impairment indicators exist for cluding, future sales levels and future cost of goods and oper- our intangible assets subject to amortization. In those cases ating expense levels, as well as economic conditions, changes where we determine that the useful life of long-lived assets to our business model or changes in consumer acceptance of should be shortened, we would depreciate the net book value our products which are more subjective in nature. If the carry- in excess of the salvage value (after testing for impairment ing value of an indefinite-lived intangible asset exceeds its fair as described above), over the revised remaining useful life of value, an impairment charge is recorded. such asset thereby increasing amortization expense. We believe that the assumptions we have made in project- In determining the useful life of our Lanvin brand names ing future cash flows for the evaluations described above are and trademarks, we applied the provisions of ASC topic reasonable and currently no impairment indicators exist for 350-30-35-3. The only factor that prevented us from de- our indefinite-lived intangible assets. However, if future actu- termining that the Lanvin brand names and trademarks were al results do not meet our expectations, we may be required indefinite life intangible assets was Item c. “Any legal, reg- to record an impairment charge, the amount of which could ulatory, or contractual provisions that may limit the useful be material to our results of operations. life.” The existence of a repurchase option in 2025 may At December 31, 2015 indefinite-lived intangible assets limit the useful life of the Lanvin brand names and trade- aggregated $119.5 million. The following table presents the marks to the Company. However, this limitation would only impact a change in the following significant assumptions take effect if the repurchase option were to be exercised and would have had on the calculated fair value in 2015 assuming the repurchase price was paid. If the repurchase option is all other assumptions remained constant: not exercised, then the Lanvin brand names and trademarks increase are expected to continue to contribute directly to the future (decrease) cash flows of our Company and their useful life would be change to fair value considered to be indefinite. Weighted average cost of capital Weighted average cost of capital Future sales levels Future sales levels +10% -10% +10% -10% $(12.3) $ 15.1 $ 12.4 With respect to the application of ASC topic 350-30-35- 8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were $(12.4) exercised, and in applying ASC topic 350-30-35-8, we as- sumed that the repurchase option is exercised. When exer- Intangible assets subject to amortization are evaluated for cised, Lanvin has an obligation to pay the exercise price and impairment testing whenever events or changes in circum- the Company would be required to convey the Lanvin brand stances indicate that the carrying amount of an amortizable names and trademarks back to Lanvin. The exercise price to intangible asset may not be recoverable. If impairment in- be received (Residual Value) is well in excess of the carrying dicators exist for an amortizable intangible asset, the un- value of the Lanvin brand names and trademarks, therefore discounted future cash flows associated with the expected no amortization is required. management’s discussion and analysis of financial condition and results of operations 71 DeRIVaTIVes jurisdiction. If the Company determines that a deferred tax We account for derivative financial instruments in accor- asset will not be realizable, an adjustment to the deferred tax dance with ASC topic 815, which establishes accounting asset will result in a reduction of net income at that time. In and reporting standards for derivative instruments, includ- addition, the Company follows the provisions of uncertain tax ing certain derivative instruments embedded in other contracts, positions as addressed in ASC topic 740-10-65-1. and for hedging activities. This topic also requires the recogni- tion of all derivative instruments as either assets or liabilities QUanTITaTIV e analYsIs on the balance sheet and that they are measured at fair value. During the three-year period ended December 31, 2015, we have We currently use derivative financial instruments to hedge not made any material changes in our assumptions underlying these certain anticipated transactions and interest rates, as well as critical accounting policies or to the related significant estimates. receivables denominated in foreign currencies. We do not utilize The results of our business underlying these assumptions have not derivatives for trading or speculative purposes. Hedge effective- differed significantly from our expectations. ness is documented, assessed and monitored by employees who While we believe the estimates we have made are proper and are qualified to make such assessments and monitor the instru- the related results of operations for the period are presented ments. Variables that are external to us such as social, political fairly in all material respects, other assumptions could reason- and economic risks may have an impact on our hedging program ably be justified that would change the amount of reported net and the results thereof. InCoMe TaXes sales, cost of sales, and selling, general and administrative expenses as they relate to the provisions for anticipated sales returns, allowance for doubtful accounts and inventory obsoles- The Company accounts for income taxes using an asset and cence reserves. For 2015, had these estimates been changed liability approach that requires the recognition of deferred tax simultaneously by 5% in either direction, our reported gross assets and liabilities for the expected future tax consequences profit would have increased or decreased by approximately $0.5 of events that have been recognized in its financial statements million and selling, general and administrative expenses would or tax returns. The net deferred tax assets assume sufficient have changed by approximately $0.02 million. The collective future earnings for their realization, as well as the continued impact of these changes on 2015 operating income, net income application of currently anticipated tax rates. Included in net attributable to Inter Parfums, Inc., and net income attributable deferred tax assets is a valuation allowance for deferred tax to Inter Parfums, Inc. per diluted common share would be an assets, where management believes it is more-likely-than-not increase or decrease of approximately $0.5 million, $0.2 million that the deferred tax assets will not be realized in the relevant and $0.01, respectively. resUlts of operations neT sales (in millions) Years Ended December 31, European-based ongoing brand product sales United States-based product sales Total ongoing brand net sales Burberry brand net sales Total net sales 2015 $362.7 105.8 468.5 – $468.5 % Change 2014 % Change 2013 (8)% 1% (6)% n/a (6)% $394.0 105.3 $499.3 – 18% 6% 15% n/a $499.3 (11)% $334.0 99.3 $433.3 130.3 $563.6 Net sales decreased 6% in 2015 to $468.5 million, as compared to $499.3 million in 2014. At comparable foreign currency exchange rates, net sales increased 1.5%. 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), net sales in 2014 increased 15% to $499.3 million, as compared to $433.3 million in 2013. 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 1.11 in 2015 and 1.33 in both 2014 and 2013. INTER PARFUMS, INC. 2015 ANNUAL REPORT72 European based prestige product sales decreased 8% in strength of the U.S. dollar began early on in 2015 and its 2015 to $362.7 million, as compared to $394.0 million in effect on currency exchange rates continued throughout the 2014. At comparable foreign currency exchange rates, Eu- year. As mentioned above, the average U.S. dollar/euro ex- ropean based prestige product sales increased 1.8%. The change rate for all of 2015 was 1.11, as compared to 1.33 for strength of the U.S. dollar versus the euro has impacted both 2014 and 2013. Irrespective of the strong U.S. dollar our European based prestige product sales for the entire environment continuing thus far in 2016, we maintain confi- year. The currency impact was most apparent with our three dence in our future as we continue to strengthen advertising largest brands, led by Jimmy Choo, where brand sales for and promotional investments supporting all portfolio brands, 2015 increased 41% in local currency, but only 18% in accelerate brand development and build upon the strength of dollars, as compared to 2014. The excellent performance our worldwide distribution network. in Jimmy Choo fragrance sales reflects robust gains from For 2016, we expect most of the growth for our European the Jimmy Choo Man line, and the launch of Jimmy Choo operations to come from our newest brands Coach and Ro- Illicit, the brand’s third women’s fragrance initiative. With chas. Our first Coach women’s line is set to launch in Septem- only a new line extension launched for the Lanvin brand in ber 2016 and we have ramped up our distribution network for 2015, sales were off only 6% in local currency, but 21% in our Rochas current product lines while we prepare our new Ro- dollars, in 2015 as compared to 2014. Montblanc brand chas line for 2017. Of our other European based brands, only sales increased 6% in local currency but declined 12% in Lanvin and Van Cleef & Arpels will see launches of a new scent dollars in 2015, as compared to 2014. The brand bene- family. For our other brands, line extensions and/or flankers fitted from both established scents, such as Legend and are in the works. Lastly, we hope to benefit from our strong Emblem along with initial sales for the Lady Emblem line. financial position to potentially acquire one or more brands, While the Montblanc brands growth rate slowed somewhat either on a proprietary basis or as a licensee. in 2015, it followed the exceptional 2012 through 2014 United States based product sales increased 1% in 2015 year-over-year growth rates in local currency of 51%, 35% to $105.8 million, as compared to $105.3 million in 2014. and 33%, respectively. The excellent market response to Dunhill fragrances had an exceptionally strong performance Boucheron Quatre enhanced that brands performance in with brand sales aggregating $22.3 million, up 37% in 2015 2015 with sales up 6% to $19.7 million in 2015 as com- as compared to 2014. The success of the 2015 launch of pared to $18.5 million in 2014. The most disappointing Dunhill Icon has enabled Dunhill to quickly become our larg- performance was that of the Karl Lagerfeld brand, which est brand within our United States operations. Oscar de la saw brand sales decline 43% in local currency or 53% in Renta brand sales increased 18%, aggregating $18.6 million dollars, as its initial 2014 launch did not gain the traction in 2015, benefitting from the 2015 launch of Extraordinary originally anticipated. by Oscar de la Renta. With a very difficult comparison from Ongoing European based prestige product sales increased last year’s new product launch, Agent Provocateur performed 18% in 2014 to $394.0 million, as compared to 2013. New well with sales up 6% reaching $5.6 million in 2015. De- product launches were the primary catalyst for sales growth in clines in our specialty retail and mass market product lines 2014. Karl Lagerfeld’s signature scents for both men and wom- mitigated some of these gains. In addition, sales of Anna Sui en yielded $24.2 million in incremental sales in 2014. Steady fragrances, which were down nearly 23% in 2015, as com- gains from Legend fragrances along with the 2014 launch of pared to 2014, continue to be depressed by negative market Emblem, enabled Montblanc brand sales to continue to outper- conditions in China. form expectations with sales reaching $110.8 million in 2014, United States based product sales increased 6% in 2014 up 33% as compared to 2013. The successful 2014 launch to $105.3 million as compared to $99.3 million in 2013. of Jimmy Choo Man enabled Jimmy Choo brand sales in 2014 Dunhill legacy scents added $16.2 million to 2014 sales, to reach $78.5 million, up 8% as compared to 2013. With a up 25% from $13.0 million in 2013. Sales of Oscar de la strong performance by Éclat d’Arpège and the launch of Lanvin Renta legacy products began in 2014 and aggregated $15.8 Me L’Eau in 2014, Lanvin brand sales increased 5% to $90.3 million for the year. In addition, the spring launches, Fatale million in 2014 as compared to 2013. and Fatale Pink for Agent Provocateur, were well received in It was anticipated that 2015 was going to be a very chal- international markets, generating $5.3 million in 2014 sales. lenging year from a currency perspective. The significant Declines in our specialty retail and mass market product management’s discussion and analysis of financial condition and results of operations 73 lines mitigated some of these gains. In addition, a difficult As a percentage of net sales, gross profit margins were Asian market resulted in a 16% decline in Anna Sui brand sales 61.8%, 57.5%, and 58.3% in 2015, 2014 and 2013, aggregating $21.5 million in 2014. respectively. For European operations, gross profit mar- Future growth within our United States based operations gin was 65%, 60% and 61% in 2015, 2014 and 2013, is expected to come from our prestige fragrance licenses. respectively. The margin fluctuation for European opera- We plan to grow our brands by launching new products and tions is directly related to currency fluctuation. We care- pursuing expanded distribution. For 2016, a new women’s fully monitor movements in foreign currency exchange scent for Agent Provocateur and a new men’s scent for Oscar rates as almost 40% of our European based operations de la Renta are expected to fuel growth. In addition, we are net sales in 2015 were denominated in U.S. dollars, while well on our way in the development of a men’s and women’s most of our costs are incurred in euro. From a margin scent for the Hollister brand as well as a new men’s scent standpoint, a strong U.S. dollar has a positive effect on for Abercrombie & Fitch, which are all expected to launch our gross margin while a weak U.S. dollar has a negative this summer. onGoInG bRanD neT sales To CUsToMeRs bY ReGIon (In millions) Years Ended December 31, North America Western Europe Eastern Europe Central & South America 2014 $125.9 130.9 2013 47.0 57.7 46.4 41.4 $110.1 114.4 2015 $125.7 123.6 47.0 41.1 41.9 78.2 11.0 $468.5 Middle East Asia Other effect. The average dollar/euro exchange rate was 1.11 in 2015 and 1.33 in both 2014 and 2013. The small gross margin decline for European based operations in 2014 was directly related to the termination of the Burberry license. The discontinuance of Burberry product sales, which were sold at higher margins than ongoing brand sales, resulted in that small decline in 2014. For United States operations, gross profit margin was 50%, 48% and 46% in 2015, 2014 and 2013, respectively. 40.3 85.6 11.9 34.1 78.4 Sales growth for our United States operations has primari- ly come from higher margin prestige product licenses while 8.5 sales of other lower margin fragrance products have been in $499.3 $433.3 a decline. Costs relating to purchase with purchase and gift with The chart above demonstrates the effect of negative market purchase promotions are reflected in cost of sales and conditions in China and South America in 2015. The decline in aggregated $25.4 million, $24.4 million and $25.7 million Western Europe in 2015 includes the effect of the 17% devalu- in 2015, 2014 and 2013, respectively, and represented 5.4%, ation of the euro against the dollar and the difficult comparison 4.9% and 4.6% of net sales, respectively. for Karl Lagerfeld brand sales in 2015 compared to the initial Generally, we do not bill customers for shipping and han- launch of that brand in the 2014 period. dling costs and such costs, which aggregated $4.7 million, In 2014, ongoing brand sales were ahead in all regions. Our $5.2 million and $6.1 million in 2015, 2014 and 2013, re- three largest markets Western Europe, North America and Asia spectively, are included in selling, general and administrative had sales growth of 14.4%, 14.4% and 9.2%, respectively. expenses in the consolidated statements of income. As such, Eastern Europe, which had been a difficult market that year as our Company’s gross margins may not be comparable to other a result of political and economic turmoil in the area, was up companies, which may include these expenses as a component 1.3% in 2014. of cost of goods sold. GRoss MaRGIns (In millions) Years Ended December 31, Net sales Cost of sales Gross margin Gross margin as a 2015 $468.5 179.0 $289.5 2014 $499.3 212.3 $287.0 2013 $563.6 234.8 $328.8 sellInG, GeneRal & aDMInIsTRaTIVe eXPenses (In millions) Years Ended December 31, Selling, general & 2015 2014 2013 administrative expenses Selling, general & administrative expenses $228.3 $233.6 $250.0 percent of net sales 61.8% 57.5% 58.3% as a percent of net sales 49% 47% 44% INTER PARFUMS, INC. 2015 ANNUAL REPORT 74 Selling, general and administrative expenses decreased 2% 2014 and 2013, respectively. Approximately two-thirds of in 2015 as compared to 2014 and decreased 7% in 2014 as the 2015 increase is the result of higher service fees paid in compared to 2013. As a percentage of sales, selling, gen- the U.S. resulting from increased sales. The balance is from eral and administrative expenses were 49%, 47% and 44% the addition of our newly formed distribution subsidiary in in 2015, 2014 and 2013, respectively. For European opera- Spain, Parfums Rochas. The decline in 2014, as compared tions, selling, general and administrative expenses decreased to 2013 is directly related to the termination of the Burberry 4% in 2015, as compared to 2014 and represented 52% of license and related discontinuation of our United Kingdom sales in 2015 as compared to 50% in 2014. With European distribution subsidiary. based constant currency sales up only 1.8%, it is very diffi- Income from operations increased 15% to $61.2 mil- cult to gain leverage over fixed costs while still trying to drive lion in 2015 as compared to 2014, rebounding from the the business. 32% decrease to $53.4 million in 2014 from $78.8 mil- For United States operations, selling, general and adminis- lion in 2013. Operating margins aggregated 13.1%, 10.7% trative expenses increased 9% in 2015 and represented 39% and 14.0% for the years ended December 31, 2015, 2014 of sales, as compared to 36% in 2014. This increase is related and 2013, respectively. As discussed above, the increase to the sales growth within our United States operations, which in gross margin partially mitigated by the increase in sell- comes primarily from our newest, prestige product licenses, ing, general and administrative expenses explains the effect such as Oscar de la Renta and Dunhill, which bear royalty and on operating margin in 2015 as compared to 2014. Results advertising expenses. for 2013 were influenced by an exceptional first quarter, Promotion and advertising included in selling, general and whereby operating pursuant to the transition agreement administrative expenses aggregated $83.8 million, $86.7 with Burberry, profits were extraordinarily strong due to a million and $94.0 million in 2015, 2014 and 2013, respec- substantial increase in sales, coupled with low promotional tively. Promotion and advertising as a percentage of sales expenses. In 2014, we experienced a slight decline in gross represented 17.9%, 17.4% and 16.7% of net sales in 2015, margin, as compared to 2013; however, sales levels were 2014 and 2013, respectively. As planned, we invest heavily not high enough to gain leverage of our selling, general and in promotional spending to support new product launches administrative expenses. and continued worldwide building of brand awareness for our With only limited reorganization measures employed, brand portfolio. the Company’s business model is expected to continue to Royalty expense included in selling, general and ad- demonstrate effectiveness. A significant portion of the ex- ministrative expenses aggregated $33.8 million, $35.6 penses associated with the Burberry brand were variable in million and $40.5 million in 2015, 2014 and 2013, re- nature. The Company plans to continue to absorb substan- spectively. Royalty expense as a percentage of sales tially all of its fixed costs through increased sales of other represented 7.2%, 7.1% and 7.2% of net sales in 2015, brands in our prestige fragrance portfolio as well as with 2014 and 2013, respectively. Royalty expense in 2014 the sale of products of recently licensed new brands. Our includes a $2.3 million increase to the estimated royalty goal is to reach an operating margin of at least 14% in the liability due to Burberry. Without this adjustment, royal- coming years. ty expense would have represented 6.7% of net sales in 2014. Slightly less than half of the 2015 increase is the oTHeR InCoMe anD eXPenses result of increased licensing activities within our U.S. op- Interest expense aggregated $2.8 million, $1.5 million and erations, while the balance represents a shift in sales mix $1.4 million in 2015, 2014 and 2013, respectively. The within our European operations. The decline in 2014, as increase in 2015 is primarily related to the financing of compared to 2013, is directly related to the termination the Rochas brand acquisition and includes an approximate of the Burberry license. $1.0 million loss relating to the interest rate swap. We use Service fees, which are fees paid to third parties relating the credit lines available to us, as needed, to finance our to the activities of our distribution subsidiaries, aggregat- working capital needs as well as our financing needs for ed $12.3 million, $11.1 million and $15.1 million in 2015, acquisitions. Loans payable – banks and long-term debt management’s discussion and analysis of financial condition and results of operations 75 including current maturities aggregated $98.6 million, French Government equal to 3% on any dividend paid by $0.3 million and $6.1 million as of December 31, 2015, a French company to its shareholders. This tax aggregated 2014 and 2013, respectively. approximately $0.7 million, $0.8 million and $1.6 million Foreign currency gains or (losses) aggregated ($0.9) million in 2015, 2014 and 2013, respectively. Excluding this tax, $0.9 million and ($1.2) million in 2015, 2014 and 2013, re- our effective tax rate of European operations was 34.5%, spectively. The volatility in currency exchange rates during the 31.7% and 34.0% in 2015, 2014 and 2013, respective- first quarter of 2015 had not been seen in many years. The ly. The increase in 2015 is primarily the result of higher 2015 loss includes approximately $2.4 million in losses from 2015 profits in high tax rate jurisdictions. In 2014, the intercompany balances of our majority owned subsidiary, In- exact opposite scenario played out where higher profits terparfums SA, and its other foreign subsidiaries, which were in lower tax rate jurisdictions contributed to the decline not hedged. We typically enter into foreign currency forward in the effective tax rate of our European operations. In exchange contracts to manage exposure related to receivables addition, changes in allocation percentages related to from unaffiliated third parties denominated in a foreign curren- state and local taxes of our U.S. operations continues to cy and occasionally to manage risks related to future sales ex- reduce our U.S. operations effective tax rate, which was pected to be denominated in a foreign currency. Almost 40% of 35.1%, 36.5% and 39.8% in 2015, 2014 and 2013, 2015 net sales of our European operations were denominated respectively. in U.S. dollars. The French Tax Authorities have examined the 2012 tax Interest income aggregated $3.0 million, $3.9 million return of Interparfums, SA and issued a $6.9 million tax ad- and $4.4 million in 2015, 2014 and 2013, respectively. justment. It is our position that the French Tax Authorities are Cash and cash equivalents and short-term investments incorrect in their assessments. We believe that we have strong are primarily invested in certificates of deposit with vary- arguments to support our tax positions and that more likely ing maturities. InCoMe TaXes than not, our tax positions will be sustained. The Company will vigorously contest the assessments. The Company is no longer subject to U.S. federal, state, Our effective income tax rate was 35.6%, 34.2% and 36.8% and local or non-U.S. income tax examinations by tax author- in 2015, 2014 and 2013, respectively. Our effective tax ities for years before 2012. rates differ from statutory rates due to the effect of state and Other than as discussed above, we did not experience any local taxes and tax rates in foreign jurisdictions. Beginning significant changes in tax rates, and none were expected in in 2013, the Company incurred a new tax levied by the jurisdictions where we operate. neT InCoMe anD eaRnInGs PeR sHaRe (In thousands, except share and per share data) Years 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 2015 $31,328 7,641 $38,969 8,532 $30,437 $0.98 0.98 2014 $29,276 8,069 $37,345 7,909 $29,436 2013 $44,147 6,819 $50,966 11,755 $39,211 $0.95 0.95 $1.27 1.27 30,996,137 31,100,215 30,931,308 30,763,955 31,060,326 30,953,882 INTER PARFUMS, INC. 2015 ANNUAL REPORT 76 Net income was $39.0 million, $37.3 million and $51.0 cash and cash equivalents and short-term investments million in 2015, 2014 and 2013, respectively. Net in- held by our European operations. Approximately 90% of come attributable to European operations was $31.3 the Company’s total assets are held by European opera- million, $29.3 million and $44.1 million in 2015, 2014 tions. In addition to the cash and cash equivalents and and 2013, respectively, while net income attributable to short-term investments referred to above, approximately United States operations was $7.6 million, $8.1 million $190 million of trademarks, licenses and other intangible and $6.8 million in 2015, 2014 and 2013, respectively. assets are held by European operations. The reasons for significant fluctuations in net income for The Company hopes to benefit from its strong finan- both European operations and United States operations cial position to potentially acquire one or more brands, are directly related to the previous discussions relating to either on a proprietary basis or as a licensee. Opportu- changes in sales, gross margin and selling, general and nities for external growth continue to be examined, with administrative expenses. As previously discussed, our the priority of maintaining the quality and homogeneous European operations reported net sales are affected by nature of our portfolio. However, we cannot assure you changes in foreign currency exchange rates, as a strong that any new license or acquisition agreements will be U.S. dollar has a negative impact on reported net sales. consummated. However, earnings are positively affected by a strong U.S. Cash provided by operating activities aggregated $50.1 dollar, because almost 40% of net sales of our European million, $36.6 million and $49.2 million in 2015, 2014 and operations are denominated in U.S. dollars, while almost 2013, respectively. In 2015, working capital items used $0.6 all costs of our European operations are incurred in euro. million in cash from operating activities, as compared to For United States operations in 2015, with sales relative- $10.9 million in 2014 and $18.4 million in 2013. Although ly flat, the 9% increase in selling, general and adminis- accounts receivable is up from that of the prior year, day’s trative expenses was only partially mitigated by the 4% sales outstanding remains relatively consistent at 75 days in increase in gross margin. 2015, as compared to 66 days and 73 days in 2014 and The noncontrolling interest arises from our 73% owned 2013, respectively. Inventory day’s on hand aggregated 213 subsidiary in Paris, Interparfums SA, which is also a public- in 2015, as compared to 198 in 2014 and 199 in 2013, re- ly traded company as 27% of Interparfums SA shares trade spectively. The increase reflects the inventory buildup needed on the NYSE Euronext. Net income attributable to the non- to support product development for the newest brands add- controlling interest is directly related to the profitability of ed to our fragrance portfolio. Although we saw some initial our European operations, and aggregated 27.2%, 27.0% and sales for existing Rochas products in 2015, new fragrances 26.6% of European operations net income in 2015, 2014 for Coach, Abercrombie & Fitch and Hollister will each make and 2013, respectively. Net income attributable to Inter their debut in 2016. Parfums, Inc. aggregated $30.4 million, $29.4 million and Cash flows used in investing activities reflect the pur- $39.2 million in 2015, 2014 and 2013, respectively. Net chase and sales of short-term investments by our European margins attributable to Inter Parfums, Inc. aggregated 6.5%, operations. These investments are primarily certificates 5.9% and 7.0% in 2015, 2014 and 2013, respectively. of deposit with maturities greater than three months. At December 31, 2015, approximately $82 million of such lIQUIDITY anD CaPITal ResoURCes certificates of deposit contain penalties where we would The Company’s financial position remains strong. At forfeit a portion of the interest earned in the event of early December 31, 2015, working capital aggregated $338 withdrawal. Our business is not capital intensive as we do million and we had a working capital ratio of 3.6 to 1. not own any manufacturing facilities. However, on a full Cash and cash equivalents and short-term investments year basis, we spend approximately $4 million on tools and aggregated $260 million most of which is held in euro molds, depending on our new product development calen- by our European operations and is readily convertible into dar. Capital expenditures also include amounts for office U.S. dollars. We have not had any liquidity issues to date, fixtures, computer equipment and industrial equipment and do not expect any liquidity issues relating to such needed at our distribution centers. management’s discussion and analysis of financial condition and results of operations 77 In May 2015, the Company, through its majority owned ber 31, 2015 and 2014, respectively. Proceeds from sale of Paris-based subsidiary, Interparfums SA, acquired the Ro- stock of subsidiary reflect the proceeds from shares issued by chas brand from The Procter & Gamble Company. This trans- our French subsidiary, Interparfums SA, pursuant to options action includes all brand names and registered trademarks exercised. for Rochas (Femme, Madame, Eau de Rochas, etc.), mainly In addition to our regular annual dividend, in Novem- for class 3 (cosmetics) and class 25 (fashion). Substantially ber 2013, our Board of Directors authorized a special the entire €106 million purchase price for the assets acquired cash dividend of $0.48 per share. In January 2014, our (approximately $118 million) was allocated to trademarks Board of Directors authorized the continuation of the with indefinite lives, including approximately $5.4 million in regular $0.48 per share annual dividend for 2014 and acquisition related expenses. An additional $4.4 million was in January 2015, our Board of Directors authorized an paid for related inventory. 8% increase to $0.52 per share. In January 2016, the The cost of the acquisition was paid in cash on the clos- Board of Directors authorized a 15% increase in the ing date and was financed entirely through a 5-year term annual dividend to $0.60 per share. The next quarter- loan payable in equal quarterly installments plus interest. ly cash dividend of $0.15 per share is payable on April In order to reduce exposure to rising variable interest rates, 15, 2016 to shareholders of record on March 31, 2016. the Company entered into a swap transaction effectively Dividends paid, including dividends paid once per year exchanging the variable interest rate to a fixed rate of ap- to noncontrolling stockholders of Interparfums SA, aggre- proximately 1.2%. The swap is a derivative instrument and gated $19.6 million, $19.5 million and $36.7 million for is therefore recorded at fair value and changes in fair value the years ended December 31, 2015, 2014 and 2013, are reflected in the accompanying consolidated statements respectively. The cash dividends to be paid in 2016 are of income. not expected to have any significant impact on our finan- Our short-term financing requirements are expected to be cial position. met by available cash on hand at December 31, 2015, cash We believe that funds provided by or used in opera- generated by operations and short-term credit lines provided tions can be supplemented by our present cash position by domestic and foreign banks. The principal credit facili- and available credit facilities, so that they will provide us with ties for 2015 consist of a $20.0 million unsecured revolving sufficient resources to meet all present and reasonably fore- line of credit provided by a domestic commercial bank and seeable future operating needs. approximately $27.0 million in credit lines provided by a Inflation rates in the U.S. and foreign countries in which consortium of international financial institutions. Short-term we operate did not have a significant impact on operating borrowings aggregated zero and $0.3 million as of Decem- results for the year ended December 31, 2015. ConTRaCTUal oblIGaTIons The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations. ($ in thousands) contractual obligations Long-Term Debt Operating Leases (1) Purchase Obligations Total Less than 1-year Years 2-3 Payments Due by Period Years More than 4-5 5-years $22,163 $43,548 $32,895 – $5,512 $10,198 $8,235 $8,743 Total $98,606 $32,688 $905,459 $101,067 $224,131 $227,191 $353,070 $1,036,753 $128,742 $277,877 $268,321 $361,813 (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, 2015, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations. INTER PARFUMS, INC. 2015 ANNUAL REPORT 78 reports on internal control over financial reporting qUantitatiVe and qUalitatiVe disclosUres aBoUt market risk. GeneRal and JPY ¥50.0 million which all have maturities of less than one year. We believe that our risk of loss as the result of nonperfor- mance by any of such financial institutions is remote. We address certain financial exposures through a controlled InTeResT RaTe RIsK ManaGeMenT program of risk management that primarily consists of the use We mitigate interest rate risk by monitoring interest rates, of derivative financial instruments. We primarily enter into for- and then determining whether fixed interest rates should be eign currency forward exchange contracts in order to reduce swapped for floating rate debt, or if floating rate debt should the effects of fluctuating foreign currency exchange rates. We be swapped for fixed rate debt. We entered into an interest do not engage in the trading of foreign currency forward ex- rate swap in June 2015 on €100 million of debt, effectively change contracts or interest rate swaps. exchanging the variable interest rate to a fixed rate of approxi- mately 1.2%. This derivative instrument is recorded at fair val- foReIGn eXCHanGe RIsK ManaGeMenT ue and changes in fair value are reflected in the accompanying We periodically enter into foreign currency forward exchange consolidated statements of income. contracts to hedge exposure related to receivables denomi- nated in a foreign currency and to manage risks related to future sales expected to be denominated in a currency other manaGement’s annUal report than our functional currency. We enter into these exchange on internal control contracts for periods consistent with our identified exposures. oVer financial reportinG The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the receivables and The management of Inter Parfums, Inc. is responsible for estab- cash flows of Interparfums SA, our French subsidiary, whose lishing and maintaining adequate internal control over financial functional currency is the euro. All foreign currency contracts reporting as defined in Rule 13(a)-15(f) under the Securities are denominated in currencies of major industrial countries Exchange Act of 1934. With the participation of the Chief and are with large financial institutions, which are rated as Executive Officer and the Chief Financial Officer, our manage- strong investment grade. ment conducted an evaluation of the effectiveness of our inter- All derivative instruments are required to be reflected as nal control over financial reporting based on the framework and either assets or liabilities in the balance sheet measured at criteria established in Internal Control – Integrated Framework fair value. Generally, increases or decreases in fair value of (2013), issued by the Committee of Sponsoring Organizations of derivative instruments will be recognized as gains or losses the Treadway Commission. Based on this evaluation, our man- in earnings in the period of change. If the derivative is desig- agement has concluded that our internal control over financial nated and qualifies as a cash flow hedge, then the changes in reporting was effective as of December 31, 2015. fair value of the derivative instrument will be recorded in other Our independent auditor, WeiserMazars LLP, a registered comprehensive income. public accounting firm, has issued its report on its audit Before entering into a derivative transaction for hedging of our internal control over financial reporting. This report purposes, we determine that the change in the value of the appears below. derivative will effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement. Jean madar russell Greenberg At December 31, 2015, we had foreign currency con- Chief Executive Officer, Executive Vice President tracts in the form of forward exchange contracts with notional Chairman of the and Chief Financial Officer amounts of approximately U.S. $12.8 million, GB £1.6 million Board of Directors reports on internal control over financial reporting 79 report of independent reGistered of the assets of the company; (2) provide reasonable as- pUBlic accoUntinG firm on internal control surance that transactions are recorded as necessary to oVer financial reportinG permit preparation of financial statements in accordance boaRD of DIReCToRs anD sHaReHolDeRs with generally accepted accounting principles, and that InTeR PaRfUMs, InC. neW YoRK, neW YoRK receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable We have audited Inter Parfums, Inc.’s internal control assurance regarding prevention or timely detection of over financial reporting as of December 31, 2015, based unauthorized acquisition, use, or disposition of the com- on criteria established in Internal Control – Integrated pany’s assets that could have a material effect on the Framework (2013) issued by the Committee of Sponsoring financial statements. Organizations of the Treadway Commission (the COSO cri- Because of its inherent limitations, internal control over teria). Inter Parfums, Inc.’s management is responsible for financial reporting may not prevent or detect misstate- maintaining effective internal control over financial report- ments. Also, projections of any evaluation of effectiveness ing, and for its assessment of the effectiveness of internal to future periods are subject to the risk that controls may control over financial reporting, included in the accom- become inadequate because of the changes in conditions, panying Management’s Annual Report on Internal Control or that the degree of compliance with the policies or proce- over Financial Reporting. Our responsibility is to express an dures may deteriorate. opinion on the company’s internal control over financial re- In our opinion, Inter Parfums, Inc. maintained, in all mate- porting based on our audit. rial respects, effective internal control over financial reporting We conducted our audit in accordance with the stan- as of December 31, 2015, based on the COSO criteria. dards of the Public Company Accounting Oversight Board We have also audited, in accordance with the standards (United States). Those standards require that we plan and of the Public Company Accounting Oversight Board (United perform the audit to obtain reasonable assurance about States), the consolidated balance sheet of Inter Parfums, Inc. whether effective internal control over financial reporting as of December 31, 2015 and the related consolidated state- was maintained in all material respects. Our audit of in- ments of income, comprehensive loss, changes in sharehold- ternal control over financial reporting included obtaining ers’ equity, comprehensive income and cash flows for the year an understanding of internal control over financial report- ended December 31, 2015 and our report dated March 14, ing, assessing the risk that a material weakness exists, 2016 expressed an unqualified opinion thereon. and testing and evaluating the design and operating ef- fectiveness of internal control based on the assessed risk. WeisersMazars, LLP Our audit also included performing such other procedures as we considered necessary in the circumstances. We be- lieve that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance New York, New York regarding the reliability of financial reporting and the March 14, 2016 preparation of financial statements for external purposes in accordance with generally accepted accounting princi- ples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions INTER PARFUMS, INC. 2015 ANNUAL REPORT80 report of independent registered public accounting firm report of independent reGistered In our opinion, the consolidated financial statements pUBlic accoUntinG firm referred to above present fairly, in all material respects, boaRD of DIReCToRs anD sHaReHolDeRs the financial position of Inter Parfums, Inc. and subsid- InTeR PaRfUMs, InC. neW YoRK, neW YoRK iaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, We have audited the accompanying consolidated balance in conformity with U.S. generally accepted accounting sheets of Inter Parfums, Inc. and subsidiaries (the “Company”) principles. as of December 31, 2015 and 2014, and the related consol- We also have audited, in accordance with the stan- idated statements of income, comprehensive income (loss), dards of the Public Company Accounting Oversight Board changes in shareholders’ equity and cash flows for each of (United States), Inter Parfums, Inc.’s internal control the years in the three-year period ended December 31, 2015. over financial reporting as of December 31, 2015, based These consolidated financial statements are the responsibility on criteria established in Internal Control – Integrated of the Company’s management. Our responsibility is to express Framework (2013) issued by the Committee of Sponsoring an opinion on these consolidated financial statements based Organizations of the Treadway Commission (COSO), and on our audits. our report dated March 14, 2016 expressed an unquali- We conducted our audits in accordance with the standards fied opinion thereon. of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the WeiserMazars LLP audit to obtain reasonable assurance about whether the con- solidated financial statements are free of material misstate- ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the ac- counting principles used and significant estimates made by management, as well as evaluating the overall financial state- New York, New York ment presentation. We believe that our audits provide a rea- March 14, 2016 sonable basis for our opinion. financial statements 81 consolidated Balance sheets (In thousands, except share and per share data) December 31, 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 2015 2014 $176,967 82,847 95,082 98,346 2,422 5,811 100 7,182 468,757 9,333 201,335 8,234 $687,659 31 62,030 388,434 365,587 110,800 476,387 $687,659 $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 60,200 116,659 498,724 $604,506 Accrued expenses Accounts payable – trade Current portion of long-term debt current liabilities: Loans payable – banks – 22,163 50,636 46,890 7,359 4,035 131,083 76,443 3,746 long–term debt, less current portion total current liabilities Income taxes payable deferred tax liability Dividends payable 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, 31,037,915 and 30,977,293 shares, at December 31, 2015 and 2014, respectively Additional paid-in capital Retained earnings 374,121 Accumulated other comprehensive loss (48,091) (15,823) Treasury stock, at cost, 9,880,058 and 9,897,995 common shares at December 31, 2015 and 2014, respectively (36,817) (36,464) 382,065 total inter parfums, inc. shareholders’ equity noncontrolling interest total equity total liabilities and equity (See accompanying notes to consolidated financial statements.) INTER PARFUMS, INC. 2015 ANNUAL REPORT 82 consolidated statements of income (In thousands, except share and per share data) Years Ended December 31, net sales Cost of sales Gross margin Selling, general, and administrative expenses income from operations other expenses (income): Interest expense 2015 $468,540 179,069 289,471 228,268 61,203 2014 2013 $499,261 $563,579 212,224 287,037 233,634 53,403 234,800 328,779 250,025 78,754 (Gain) loss on foreign currency 1,168 Interest and dividend income (2,995) (3,888) (4,440) 707 (3,312) (1,892) (902) 2,826 876 1,478 1,380 income before income taxes Income taxes net income Less: Net income attributable to the noncontrolling interest 60,496 21,527 38,969 8,532 56,715 19,370 37,345 7,909 80,646 29,680 50,966 11,755 net income attributable to inter parfums, inc. $30,437 $29,436 $39,211 net income attributable to inter parfums, inc. common shareholders: Basic Diluted $0.98 0.98 $0.95 0.95 $1.27 1.27 weighted average number of shares outstanding: Basic Diluted 30,996,137 31,100,215 30,931,308 30,763,955 31,060,326 30,953,882 dividends declared per share $0.52 $0.48 $0.96 (See accompanying notes to consolidated financial statements ) financial statements 83 consolidated statements of comprehensiVe income (loss) (In thousands, except share and per share data Years Ended December 31, net income other comprehensive income (loss): 2015 , 2014 $38,969 $37,345 2013 $50,966 Transfer from OCI into earnings – (44,346) Translation adjustments, net of tax (57,806) (44,346) (57,806) (20,461) comprehensive income (loss) (5,377) – (327) 19,027 18,700 69,666 comprehensive income (loss) attributable to noncontrolling interests: Net income 11,755 Transfer from OCI into earning – – (87) Translation adjustments, net of tax (12,078) (16,123) 5,425 (8,214) 17,093 7,909 (3,546) 8,532 comprehensive income (loss) attributable to inter parfums, inc. $(1,831) $(12,247) $52,573 (See accompanying notes to consolidated financial statements.) INTER PARFUMS, INC. 2015 ANNUAL REPORT 84 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 year additional paid-in capital, beginning of year Shares issued upon exercise of stock options 1,981 Sale of subsidiary shares to noncontrolling interests (192) (335) 677 Stock-based compensation 60,200 359,459 additional paid-in capital, end of year retained earnings, beginning of year Net income Dividends Stock-based compensation retained earnings, end of year accumulated other comprehensive income (loss), beginning of year Foreign currency translation adjustment, net of tax Transfer from OCI into earnings accumulated other comprehensive income (loss), end of year (15,823) (32,268) – (48,091) 2015 $31 60,200 1,234 788 62,030 374,121 30,437 (16,124) – 388,434 (36,464) 140 (493) 2014 $31 57,877 29,436 (14,855) 81 25,860 (41,683) – (15,823) (36,016) 219 (667) 2013 $31 54,679 2,882 (173) 489 57,877 349,672 39,211 (29,582) 158 12,498 13,602 (240) 25,860 (35,404) 203 374,121 359,459 (815) (36,817) (36,464) (36,016) 116,659 8,532 (12,078) – 1,523 (3,836) – 110,800 128,145 7,909 (16,123) – 1,365 (4,667) 30 118,505 11,755 5,425 (87) 830 (8,341) 58 116,659 128,145 treasury stock, beginning of year Shares issued upon exercise of stock options Shares received as proceeds of option exercises treasury stock, end of year noncontrolling interest, beginning of year Net income Foreign currency translation adjustment, net of tax Transfer from OCI into earnings Sale of subsidiary shares to noncontrolling interest Dividends Stock-based compensation noncontrolling interest, end of year total equity $476,387 $498,724 $535,356 (See accompanying notes to consolidated financial statements ) financial statements 85 consolidated statements of cash flows (In thousands) Years Ended December 31, 2015 2014 2013 cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for doubtful accounts Non cash stock compensation Excess tax benefits from stock-based compensation arrangements Deferred tax expense (benefit) Change in fair value of derivatives Changes in: Accounts receivable $38,969 $37,345 $50,966 10,166 11,110 412 856 (670) (557) 355 574 838 (700) 4,844 (157) (19,607) 71,776 9,078 442 787 (260) 829 903 (12,573) (4,354) (1,622) Inventories Other assets 583 Accounts payable and accrued expenses 12,973 (4,996) (33,156) Income taxes, net 4,912 8,540 (86,724) Net cash provided by operating activities 49,194 36,613 29,240 4,344 425 50,084 cash flows from investing activities: Purchases of short-term investments (62,415) (245,810) (381,843) Proceeds from sale of short-term investments 207,082 Purchase of equipment and leasehold improvements Payment for intangible assets acquired Proceeds from sale of equipment Proceeds from sale of trademark 3,481 Net cash used in investing activities (34,590) (37,272) (181,263) 151,771 (4,158) (119,788) – – 212,762 (3,302) (7,769) (5,015) (922) 2,801 – – cash flows from financing activities: Proceeds from (repayments of) loans payable – banks Proceeds from issuance of long-term debt 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 – 110,970 (11,761) (32) 653 260 1,327 (15,806) (3,836) 81,775 (10,440) 86,829 90,138 (5,765) (21,835) – – (90) 953 670 1,030 (14,841) (4,667) (22,710) (12,143) (35,512) – – (98) 1,668 700 657 (28,331) (8,341) (55,580) 5,964 (181,685) Cash and cash equivalents – beginning of year 307,335 Cash and cash equivalents – end of year $176,967 $90,138 $125,650 Supplemental disclosures of cash flow information: 125,650 Cash paid for: Interest Income taxes (See accompanying notes to consolidated financial statements.) $2,400 19,668 $1,508 $1,524 10,430 104,992 INTER PARFUMS, INC. 2015 ANNUAL REPORT 86 notes to consolidated financial statements foReIGn CURRenCY TRanslaTIon (1) the company and its significant accounting policies For foreign subsidiaries with operations denominated in a foreign bUsIness of THe CoMPanY currency, assets and liabilities are translated to U.S. dollars at Inter Parfums, Inc. and its subsidiaries (the “Company”) are in year end exchange rates. Income and expense items are trans- the fragrance business, and manufacture and distribute a wide lated at average rates of exchange prevailing during the year. array of fragrances and fragrance related products. Gains and losses from translation adjustments are accumulated Substantially all of our prestige fragrance brands are licensed in a separate component of shareholders’ equity. from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. Until ear- CasH anD CasH eQUIValenTs ly 2013, Burberry was our most significant license as Burberry anD sHoRT-TeRM InVesTMenTs products represented 23% of net sales in 2013 (see Note (2) All highly liquid investments purchased with a maturity of “Termination of Burberry License”). With respect to the Compa- three months or less are considered to be cash equivalents. ny’s largest brands, we own the Lanvin brand name for our class From time to time, the Company has short-term investments of trade, and license the Montblanc and Jimmy Choo brand which consist of certificates of deposit with maturities great- names. As a percentage of net sales, product sales for the Com- er than three months. The Company monitors concentrations pany’s largest brands were as follows: of credit risk associated with financial institutions with which 2015 Year Ended December 31, Montblanc 21% Lanvin 15% Jimmy Choo 20% the Company conducts significant business. The Company 2014 2013 believes its credit risk is minimal, as the Company primarily 22% 18% 16% 15% 15% 13% conducts business with large, well-established financial insti- tutions. Substantially all cash and cash equivalents are held at financial institutions outside the United States and are readily No other brand represented 10% or more of consolidated net sales. aCCoUnTs ReCeIVable convertible into U.S. dollars. basIs of PRePaRaTIon Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for The consolidated financial statements include the accounts of sales returns and doubtful accounts or balances which are the Company, including 73% owned Interparfums SA (“IPSA”), estimated to be uncollectible, which aggregated $5.9 million a subsidiary whose stock is publicly traded in France. In 2015, and $6.9 million as of December 31, 2015 and 2014, respec- Interparfums SA formed a new subsidiary in Spain, Parfums tively. Accounts receivable balances are written-off against Rochas. The subsidiary is 51% owned by Interparfums SA with the allowance for doubtful accounts when they become un- the remaining 49% owned by its Rochas distributor for Spain. collectible. Recoveries of accounts receivable previously re- Parfums Rochas is responsible for Rochas brand distribution in corded against the allowance are recorded in the consolidated the territory. All material intercompany balances and transac- statement of income when received. We generally grant credit tions have been eliminated. based upon our analysis of the customer’s financial position, as well as previously established buying patterns. ManaGeMenT esTIMaTes Management makes assumptions and estimates to prepare finan- InVenToRIes cial statements in conformity with accounting principles general- Inventories, including promotional merchandise, only include ly accepted in the United States of America. Those assumptions inventory considered saleable or usable in future periods, and and estimates directly affect the amounts reported and disclo- is stated at the lower of cost or market, with cost being de- sures included in the consolidated financial statements. Actual termined on the first-in, first-out method. Cost components results could differ from those assumptions and estimates. include raw materials, direct labor and overhead (e.g., indirect Significant estimates for which changes in the near term are con- labor, utilities, depreciation, purchasing, receiving, inspection sidered reasonably possible and that may have a material impact and warehousing) as well as inbound freight. Promotional mer- on the financial statements are disclosed in these notes to the chandise is charged to cost of sales at the time the merchan- consolidated financial statements. dise is shipped to the Company’s customers. notes to consolidated financial statements (in thousands except share and per share data) 87 DeRIVaTIVes assumptions, including future sales levels, future cost of goods All derivative instruments are recorded as either assets or liabil- and operating expense levels, as well as economic conditions, ities and measured at fair value. The Company uses derivative changes to our business model or changes in consumer accep- instruments to principally manage a variety of market risks. For tance of our products which are more subjective in nature. If the derivatives designated as hedges of the exposure to changes carrying value of an indefinite-lived intangible asset exceeds its in fair value of the recognized asset or liability or a firm com- fair value, an impairment charge is recorded. mitment (referred to as fair value hedges), the gain or loss is Intangible assets subject to amortization are evaluated for im- recognized in earnings in the period of change together with the pairment testing whenever events or changes in circumstances offsetting loss or gain on the hedged item attributable to the indicate that the carrying amount of an amortizable intangible as- risk being hedged. The effect of that accounting is to include set may not be recoverable. If impairment indicators exist for an in earnings the extent to which the hedge is not effective in amortizable intangible asset, the undiscounted future cash flows achieving offsetting changes in fair value. For cash flow hedges, associated with the expected service potential of the asset are the effective portion of the derivative’s gain or loss is initial- compared to the carrying value of the asset. If our projection of ly reported in equity (as a component of accumulated other undiscounted future cash flows is in excess of the carrying value comprehensive income) and is subsequently reclassified into of the intangible asset, no impairment charge is recorded. If our earnings in the same period or periods during which the hedged projection of undiscounted future cash flows is less than the car- forecasted transaction affects earnings. The ineffective portion rying value of the intangible asset, an impairment charge would of the gain or loss of a cash flow hedge is reported in earnings be recorded to reduce the intangible asset to its fair value. immediately. The Company also holds certain instruments for economic purposes that are not designated for hedge account- ReVenUe ReCoGnITIon ing treatment. For these derivative instruments, changes in The Company sells its products to department stores, perfum- their fair value are recorded in earnings immediately. eries, specialty stores, mass-market retailers, supermarkets and domestic and international wholesalers and distributors. Sales eQUIPMenT anD leaseHolD IMPRoVeMenTs of such products by our domestic subsidiaries are denominat- Equipment and leasehold improvements are stated at cost less ed in U.S. dollars, and sales of such products by our foreign accumulated depreciation and amortization. Depreciation and subsidiaries are primarily denominated in either euro or U.S. amortization are provided using the straight line method over dollars. The Company recognizes revenues when merchandise the estimated useful lives for equipment, which range between is shipped and the risk of loss passes to the customer. Net sales three and ten years and the shorter of the lease term or estimat- are comprised of gross revenues less returns, trade discounts ed useful asset lives for leasehold improvements. Depreciation and allowances. The Company does not bill its customers’ provided on equipment used to produce inventory, such as tools freight and handling charges. All shipping and handling costs, and molds, is included in cost of sales. which aggregated $4.7 million, $5.2 million and $6.1 million lonG-lIVeD asseTs in 2015, 2014 and 2013, respectively, are included in selling, general and administrative expenses in the consolidated state- Indefinite-lived intangible assets principally consist of trademarks ments of income. The Company grants credit to all qualified which are not amortized. The Company evaluates indefinite-lived customers and does not believe it is exposed significantly to any intangible assets for impairment at least annually during the undue concentration of credit risk. No one customer represent- fourth quarter, or more frequently when events occur or circum- ed 10% or more of net sales in 2015, 2014 or 2013. stances change, such as an unexpected decline in sales, that would more likely than not indicate that the carrying value of an sales ReTURns indefinite-lived intangible asset may not be recoverable. When Generally, the Company does not permit customers to return testing indefinite-lived intangible assets for impairment, the their unsold products. However, for U.S. based customers, we evaluation requires a comparison of the estimated fair value of allow returns if properly requested, authorized and approved. The the asset to the carrying value of the asset. The fair values used Company regularly reviews and revises, as deemed necessary, its in our evaluations are estimated based upon discounted future estimate of reserves for future sales returns based primarily upon cash flow projections using a weighted average cost of capital of historic trends and relevant current data including information 8.02%. The cash flow projections are based upon a number of provided by retailers regarding their inventory levels. In addition, INTER PARFUMS, INC. 2015 ANNUAL REPORT88 as necessary, specific accruals may be established for significant considers lease renewals in the useful life of its leasehold improve- future known or anticipated events. The types of known or antici- ments when such renewals are reasonably assured. In the event the pated events that we consider include, but are not limited to, the Company receives capital improvement funding from its landlord, financial condition of our customers, store closings by retailers, these amounts are recorded as deferred liabilities and amortized changes in the retail environment and our decision to continue over the remaining lease term as a reduction of rent expense. to support new and existing products. The Company records es- timated reserves for sales returns as a reduction of sales, cost of lICense aGReeMenTs sales and accounts receivable. Returned products are recorded as The Company’s license agreements generally provide the Company inventories and are valued based upon estimated realizable value. with worldwide rights to manufacture, market and sell fragrance The physical condition and marketability of returned products and fragrance related products using the licensors’ trademarks. are the major factors we consider in estimating realizable value. The licenses typically have an initial term of approximately 5 to Actual returns, as well as estimated realizable values of returned 15 years, and are potentially renewable subject to the Company’s products, may differ significantly, either favorably or unfavorably, compliance with the license agreement provisions. The remaining from our estimates, if factors such as economic conditions, inven- terms, including the potential renewal periods, range from ap- tory levels or competitive conditions differ from our expectations. proximately 1 to 16 years. Under each license, the Company is required to pay royalties in the range of 5% to 10% to the licensor, PaYMenTs To CUsToMeRs at least annually, based on net sales to third parties. The Company records revenues generated from purchase with In certain cases, the Company may pay an entry fee to ac- purchase and gift with purchase promotions as sales and the quire, or enter into, a license where the licensor or another costs of its purchase with purchase and gift with purchase pro- licensee was operating a pre-existing fragrance business. In motions as cost of sales. Certain other incentive arrangements those cases, the entry fee is capitalized as an intangible asset require the payment of a fee to customers based on their at- and amortized over its useful life. tainment of pre-established sales levels. These fees have been Most license agreements require minimum royalty payments, recorded as a reduction of net sales. incremental royalties based on net sales levels and minimum spending on advertising and promotional activities. Royalty ex- aDVeRTIsInG anD PRoMoTIon penses are accrued in the period in which net sales are recog- Advertising and promotional costs are expensed as incurred and nized while advertising and promotional expenses are accrued at recorded as a component of cost of goods sold (in the case of the time these costs are incurred. free goods given to customers) or selling, general and adminis- In addition, the Company is exposed to certain concentration trative expenses. Advertising and promotional costs included in risk. Substantially all of our prestige fragrance brands are licensed selling, general and administrative expenses were $83.8 million, from unaffiliated third parties, and our business is dependent $86.7 million and $94.0 million for 2015, 2014 and 2013, upon the continuation and renewal of such licenses. respectively. Costs relating to purchase with purchase and gift with purchase promotions that are reflected in cost of sales InCoMe TaXes aggregated $25.4 million, $24.4 million and $25.7 million in The Company accounts for income taxes using an asset and 2015, 2014 and 2013, respectively. Accrued expenses include liability approach that requires the recognition of deferred tax approximately $15.2 million and $16.5 million in advertising lia- assets and liabilities for the expected future tax consequences bilities as of December 31, 2015 and 2014, respectively. of events that have been recognized in its financial statements or tax returns. The net deferred tax assets assume sufficient PaCKaGe DeVeloPMenT CosTs future earnings for their realization, as well as the continued Package development costs associated with new products and re- application of currently enacted tax rates. Included in net de- designs of existing product packaging are expensed as incurred. ferred tax assets is a valuation allowance for deferred tax as- oPeRaTInG leases sets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant ju- The Company recognizes rent expense from operating leases with risdiction. If the Company determines that a deferred tax asset various step rent provisions, rent concessions and escalation clauses will not be realizable, an adjustment to the deferred tax asset on a straight-line basis over the applicable lease term. The Company will result in a reduction of net earnings at that time. notes to consolidated financial statements (in thousands except share and per share data) 89 IssUanCe of CoMMon sToCK bY ConsolIDaTeD sUbsIDIaRY periods after December 15, 2016, with early adoption permitted. We are currently evaluating the standard to determine the impact of The difference between the Company’s share of the proceeds its adoption on our consolidated financial statements. received by the subsidiary and the carrying amount of the por- In May 2014, the FASB issued an ASU which supersedes the tion of the Company’s investment deemed sold, is reflected as most current revenue recognition requirements. The new reve- an equity adjustment in the consolidated balance sheets. nue recognition standard requires entities to recognize revenue TReasURY sToCK in a way that depicts the transfer of goods or services to custom- ers in an amount that reflects the consideration which the entity The Board of Directors may authorize share repurchases of the expects to be entitled to in exchange for those goods or services. Company’s common stock (Share Repurchase Authorizations). This guidance is effective for annual and interim reporting pe- Share repurchases under Share Repurchase Authorizations riods beginning after December 15, 2017, with early adoption may be made through open market transactions, negotiated permitted for annual periods after December 31, 2016. We are purchase or otherwise, at times and in such amounts within currently evaluating the standard to determine the impact of its the parameters authorized by the Board. Shares repurchased adoption on our consolidated financial statements. under Share Repurchase Authorizations are held in treasury for There are no other recent accounting pronouncements issued general corporate purposes, including issuances under various but not yet adopted that would have a material effect on our employee stock option plans. Treasury shares are accounted consolidated financial statements. for under the cost method and reported as a reduction of equi- ty. Share Repurchase Authorizations may be suspended, limit- (2) termination of Burberry license ed or terminated at any time without notice. Burberry exercised its option to buy-out the license rights effec- ReCenT aCCoUnTInG PRonoUnCeMenTs Burberry entered into a transition agreement that provided for In February 2016, the Financial Accounting Standards Board certain license rights and obligations to continue through March (“FASB”) issued an Accounting Standards Update (‘ASU”) 31, 2013. The Company continued to operate certain aspects which requires lessees to recognize lease assets and lease li- of the business for the brand including product development, abilities arising from operating leases on the balance sheet. testing, and distribution during the transition period. tive December 31, 2012. In October 2012, the Company and This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retro- (3) recent agreements spective approach, with early adoption permitted. We are cur- MonTblanC rently evaluating the standard to determine the impact of its In October 2015, the Company, through its majority owned Paris- adoption on our consolidated financial statements. based subsidiary, Interparfums SA, extended its license agreement In November 2015, the FASB issued an ASU that requires all with Montblanc by five years. The original agreement, signed in deferred tax liabilities and assets to be classified as non-current 2010, provided Interparfums SA with the exclusive worldwide on the balance sheet. This ASU is effective for annual and interim license rights to create, produce and distribute fragrances and reporting periods beginning after December 15, 2016, with early fragrance related products under the Montblanc brand through adoption permitted. In addition, this guidance can be applied ei- December 31, 2020. The new 10-year agreement, which went ther prospectively or retrospectively to all periods presented. We into effect on January 1, 2016, extends the partnership through are currently evaluating the standard to determine the impact of December 31, 2025 without any material changes in operating its adoption on our consolidated financial statements. conditions from the prior license. The license agreement is In July 2015, the FASB issued an ASU modifying the accounting subject to certain minimum sales, advertising expenditures and for inventory. Under this ASU, the measurement principle for inven- royalty payments as are customary in our industry. tory will change from lower of cost or market value to lower of cost and net realizable value. The ASU defines net realizable value as fRenCH ConneCTIon the estimated selling price in the ordinary course of business, less In September 2015, the Company entered into a 12-year license reasonably predictable costs of completion, disposal, and trans- agreement to create, produce and distribute fragrances and fragrance portation. The ASU is applicable to inventory that is accounted for related products under the French Connection brand names. The under the first-in, first-out method and is effective for reporting agreement is subject to certain minimum advertising expenditures INTER PARFUMS, INC. 2015 ANNUAL REPORT90 and royalty payments as are customary in our industry. The li- brand. The agreement closed on December 2, 2013 and is sub- cense agreement was subject to certain conditions precedent, ject to certain minimum advertising expenditures as is custom- which have now been satisfied, and the Company took over ary in our industry. The Company purchased certain inventories distribution of selected fragrances within the brand’s existing and paid an up-front entry fee of $5.0 million. Upon closing, the fragrance portfolio in 2016. Company took over distribution of fragrances within the brand’s RoCHas In May 2015, the Company, through its majority owned Paris- existing perfume portfolio and launched its first new fragrance under the Oscar de la Renta brand in 2015. based subsidiary, Interparfums SA, acquired the Rochas brand aGenT PRoVoCaTeUR from The Procter & Gamble Company. This transaction includes In July 2013, the Company entered into a 10.5-year exclusive all brand names and registered trademarks for Rochas (Femme, worldwide license to create, produce and distribute fragrances Madame, Eau de Rochas, etc.), mainly for class 3 (cosmetics) and and fragrance related products under London-based luxury lin- class 25 (fashion). Substantially the entire €106 million purchase gerie brand, Agent Provocateur. The agreement commenced on price for the assets acquired (approximately $118 million), includ- August 1, 2013 and is subject to certain minimum advertising ing approximately $5.4 million in acquisition related expenses, expenditures as is customary in our industry. The Company was allocated to trademarks with indefinite lives including approx- took over distribution of selected fragrances within the brand’s imately $21 million of which was allocated to fashion trademarks. existing perfume portfolio and launched its first fragrances un- An additional $4.4 million was paid for related inventory. der the Agent Provocateur brand in 2014. CoaCH sHanGHaI TanG In April 2015, the Company, through its majority owned Paris-based In July 2013, the Company created a wholly-owned Hong subsidiary, Interparfums SA, entered into an 11-year exclusive Kong subsidiary, Inter Parfums USA Hong Kong Limited, worldwide license with Coach, Inc. to create, produce and distribute which entered into a 12-year exclusive worldwide license to new men’s and women’s fragrances and fragrance related products create, produce and distribute fragrances and fragrance re- under the Coach brand name. Interparfums SA will distribute these lated products under China’s leading luxury brand, Shanghai fragrances globally to department stores, specialty stores and duty Tang. The agreement commenced on July 1, 2013 and is free shops, as well as in Coach retail stores beginning in 2016. The subject to certain minimum sales, advertising expenditures agreement is subject to certain minimum sales, advertising expen- and royalty payments as are customary in our industry. In ditures and royalty payments as are customary in our industry. 2015, the Company launched its initial men’s and women’s fragrance collection under the Shanghai Tang brand. abeRCRoMbIe & fITCH anD HollIsTeR In December 2014, the Company entered into a 7-year exclusive (4) inventories worldwide license to create, produce and distribute new fragranc- December 31, es and fragrance related products under the Abercrombie & Fitch and Hollister brand names. The Company will distribute these fragrances internationally in specialty stores, department stores Raw materials and component parts Finished goods and duty free shops, and in the U.S., in duty free shops and po- tentially in Abercrombie & Fitch and Hollister retail stores. The 2015 $30,569 67,777 $98,346 2014 $36,383 65,943 $102,326 agreement is subject to certain minimum sales, advertising ex- Overhead included in inventory aggregated $3.7 million and penditures and royalty payments as are customary in our industry. $3.3 million as of December 31, 2015 and 2014, respec- New men’s and women’s scents are planned for Hollister in 2016 tively. Included in inventories is an inventory reserve, which along with a new men’s scent for Abercrombie & Fitch. A women’s represents the difference between the cost of the inventory Abercrombie & Fitch scent is in the works for 2017. and its estimated realizable value, based upon sales forecasts osCaR De la RenTa and the physical condition of the inventories. In addition, and as necessary, specific reserves for future known or anticipat- In October 2013, the Company entered into a 12-year exclusive ed events may be established. Inventory reserves aggregated worldwide license to create, produce and distribute fragrances $6.6 million and $6.0 million as of December 31, 2015 and and fragrance related products under the Oscar de la Renta 2014, respectively. notes to consolidated financial statements (in thousands except share and per share data) 91 (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, 2015 Quoted Prices In Active Markets Significant Other Significant for Identical Assets Observable Inputs Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Assets Short-term investments $82,847 Foreign currency forward exchange contracts not accounted for using hedge accounting 123 $82,970 Liabilities – – – $82,847 123 $82,970 – – – Interest rate swaps 1,026 – 1,026 – fair ValUe measUrements at decemBer 31, 2014 Quoted Prices In Active Markets Significant Other Significant for Identical Assets Observable Inputs Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Assets: Short-term investments $190,152 Liabilities Foreign currency forward exchange contracts not accounted for using hedge accounting 355 – – $190,152 355 – – 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 variable interest rates on the Company’s indebtedness approximate current market rates. Foreign currency forward exchange contracts are valued based on quotations from financial institutions and the value of interest rate swaps are the discounted net present value of the swaps using third party quotes from financial institutions. (6) derivative financial instruments The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denom- inated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. In connection with the Rochas acquisition, $108 million of the purchase price was paid in cash on the closing date and was financed entirely through a 5-year term loan. As the payment at closing was due in dollars and we had planned to finance it with debt in euro, the Company entered into foreign currency forward contracts to secure the exchange rate for the $108 million purchase price at $1.067 per 1 euro. This derivative was designated and qualified as a cash flow hedge. The Company did not have any other derivatives under hedge accounting during the three-year period ended December 31, 2015. Gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying in- come statements and were immaterial in each of the years in the three-year period ended December 31, 2015. For the year ended December 31, 2015, interest expense includes a loss of $1.0 million relating to an interest rate swap. All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheet as of December 31, 2015. The valuation of foreign currency forward exchange contracts not accounted for using hedge accounting in 2015 resulted in an asset and is included in other current assets, and at December 31, 2014, such valuation resulted in a liability and is included in accrued INTER PARFUMS, INC. 2015 ANNUAL REPORT 92 expenses on the accompanying balance sheet. Generally, increas- Amortization expense was $5.8 million, $6.6 million and $6.2 es or decreases in the fair value of derivative instruments will be million in 2015, 2014 and 2013, respectively. Amortization ex- recognized as gains or losses in earnings in the period of change. If pense is expected to approximate $6.0 million in 2016 and 2017, the derivative instrument is designated and qualifies as a cash flow and $4.9 million in 2018, 2019 and 2020. The weighted average hedge, the changes in fair value of the derivative instrument will be amortization period for trademarks, licenses and other intangible recorded as a separate component of shareholders’ equity. assets with finite lives are 18 years, 14 years and 2 years, respec- At December 31, 2015, the Company had foreign currency tively, and 14 years in the aggregate. contracts in the form of forward exchange contracts with notional There were no impairment charges for trademarks with indefinite use- amounts of approximately U.S. $12.8 million, GB £1.6 million and ful lives in 2015, 2014 and 2013. The fair values used in our evaluations JPY ¥50.0 million, which all have maturities of less than one year. are estimated based upon discounted future cash flow projections using (7) equipment and leasehold improvements are based upon a number of assumptions, including, future sales levels a weighted average cost of capital of 8.02%. The cash flow projections December 31, Equipment Leasehold Improvements Less accumulated depreciation and amortization 2015 2014 $27,757 $26,006 1,631 29,388 1,581 27,587 and future cost of goods and operating expense levels, as well as eco- nomic conditions, changes to our business model or changes in consum- er acceptance of our products which are more subjective in nature. The Company believes that the assumptions the Company has made in pro- jecting future cash flows for the evaluations described above are reason- 20,055 $9,333 18,400 $9,187 able and currently no impairment indicators exist for our indefinite-lived assets. However, if future actual results do not meet our expectations, the Depreciation and amortization expense was $3.3 million in both Company may be required to record an impairment charge, the amount 2015 and 2014, $4.9 million in 2013. of which could be material to our results of operations. The cost of trademarks, licenses and other intangible assets with (8) trademarks, licenses and other intangible assets finite lives is being amortized by the straight line method over the 2015 Trademarks Gross Accumulated Net Book term of the respective license or the intangible assets estimated use- Amount Amortization Value ful life which range from three to twenty years. If the residual value of a finite life intangible asset exceeds its carrying value, then the asset (indefinite lives) $119,459 $– $119,459 is not amortized. The Company reviews intangible assets with finite Trademarks lives for impairment whenever events or changes in circumstances (finite lives) 42,046 61 41,985 indicate that the carrying amount may not be recoverable. Licenses Trademarks (finite lives) primarily represent Lanvin brand names and (finite lives) 66,082 28,994 37,088 trademarks and in connection with their purchase, Lanvin was granted Other intangible assets (finite lives) Subtotal Total 12,366 120,494 $239,953 9,563 38,618 $38,618 2,803 81,876 $201,335 the right to repurchase the brand names and trademarks in 2025 for the greater of €70 million (approximately $76 million) or one times the average of the annual sales for the years ending December 31, 2023 and 2024 (residual value). Because the residual value of the intang ble asset exceeds its carrying value, the asset is not amortized. 2014 Trademarks Gross Accumulated Net Book Amount Amortization Value (9) loans payable – Banks Loans payable – banks consist of the following: (indefinite lives) $4,252 $– $4,252 The Company and its domestic subsidiaries have available a Trademarks $20 million unsecured revolving line of credit due on demand, (finite lives) 46,889 53 46,836 which bears interest at the prime rate minus 0.5% (the prime rate Licenses (finite lives) Other intangible assets 72,171 26,976 45,195 a maturity date of December 18, 2016 is expected to be renewed was 3.5% as of December 31, 2015). The line of credit which has on an annual basis. Borrowings outstanding pursuant to lines of (finite lives) Subtotal Total 11,572 130,632 9,324 2,248 credit were zero as of December 31, 2015 and 2014. 36,353 94,279 The Company’s foreign subsidiaries have available credit lines, $134,884 $36,353 $98,531 including several bank overdraft facilities totaling approximately notes to consolidated financial statements (in thousands except share and per share data) 93 $27 million. These credit lines bear interest at EURIBOR plus be- 2032. In connection with certain of these license agreements, the tween 0.5% and 0.8% (EURIBOR was minus 0.1% at December Company is subject to minimum annual advertising commitments, 31, 2015). Outstanding amounts were zero as of December 31, minimum annual royalties and other commitments as follows: 2015, and $0.3 million as of December 31, 2014. The weighted average interest rate on short-term borrowings was zero as of December 31, 2015 and 0.8% as of December 31, 2014. (10) long-term debt In June 2015, the Company financed its Rochas brand acquisition 2016 2017 2018 2019 2020 with a $111 million, 5-year term loan payable in equal quarterly Thereafter installments plus interest. This term loan requires the maintenance of certain financial covenants, tested semi-annually, including a $101,067 $114,136 $109,995 $113,091 $114,100 $353,070 $905,459 maximum leverage ratio and a minimum interest coverage ratio. The Future advertising commitments are estimated based on planned facility also contains new debt restrictions among other standard future sales for the license terms that were in effect at December 31, provisions. The Company is in compliance with all of the covenants 2015, without consideration for potential renewal periods. The above fig- and other restrictions of the debt agreements. In order to reduce ures do not reflect the fact that our distributors share our advertising exposure to rising variable interest rates, the Company entered into obligations. Royalty expense included in selling, general, and adminis- a swap transaction effectively exchanging the variable interest rate trative expenses, aggregated $33.8 million, $35.6 million and $40.5 to a fixed rate of approximately 1.2%. The swap is a derivative in- million, in 2015, 2014 and 2013, respectively, and represented 7.2%, strument and is therefore recorded at fair value and changes in fair 7.1% and 7.2% of net sales for the years ended December 31, 2015, value are reflected in the accompanying consolidated statements of 2014 and 2013. income. Maturities of long-term debt subsequent to December 31, 2015 are approximately $22 million per year through 2019 and, (12) equity $11 million in 2020. (11) commitments leases sHaRe-baseD PaYMenTs: The Company maintains a stock option program for key employ- ees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the granting of both non- The Company leases its office and warehouse facilities under oper- qualified and incentive options. Options granted under the plans ating leases which are subject to various step rent provisions, rent typically have a six-year term and vest over a four to five-year peri- concessions and escalation clauses expiring at various dates through od. The fair value of shares vested in 2015 and 2014 aggregated 2023. Escalation clauses are not material and have been excluded $0.8 million and $0.7 million, respectively. Compensation cost, net from minimum future annual rental payments. Rental expense, which of estimated forfeitures, is recognized on a straight-line basis over is calculated on a straight-line basis, amounted to $9.9 million, $10.1 the requisite service period for the entire award. Forfeitures are million and $10.8 million in 2015, 2014 and 2013, respectively. estimated based on historic trends. It is generally the Company’s Minimum future annual rental payments are as follows: policy to issue new shares upon exercise of stock options. 2016 2017 2018 2019 2020 Thereafter lICense aGReeMenTs $5,512 $5,285 $4,913 $4,470 $3,765 $8,743 $32,688 The Company is party to a number of license and other agreements vested or forfeited for the use of trademarks and rights in connection with the manu- Nonvested options – facture and sale of its products expiring at various dates through end of year The following table sets forth information with respect to nonvested options for 2015: Weighted Average Grant Date Fair Value Number of Shares Nonvested options – beginning of year Nonvested options granted Nonvested options 385,505 158,300 (128,955) 414,850 $7.14 $5.99 6.65 $6.86 INTER PARFUMS, INC. 2015 ANNUAL REPORT 94 The effect of share-based payment expenses decreased At December 31, 2015, options for 178,045 shares were income statement line items as follows: available for future grant under the plans. The aggregate Year Ended December 31, 2015 2014 2013 Income before – intrinsic value of options outstanding is $1.7 million as of December 31, 2015 and unrecognized compensation cost re- lated to stock options outstanding aggregated $2.7 million, income taxes $800 $900 $800 which will be recognized over the next five years. Net Income attributable The weighted average fair values of options granted by Inter Par- to Inter Parfums, Inc. 500 500 500 fums, Inc. during 2015, 2014 and 2013 were $5.99, $7.42 and Diluted earnings per share attributable to $9.20 per share, respectively, on the date of grant using the Black- Scholes option pricing model to calculate the fair value. Inter Parfums, Inc. 0.01 0.01 0.01 The assumptions used in the Black-Scholes pricing model are set forth in the following table: The following tables summarize stock option activity and Year Ended December 31, Weighted average expected stock-price volatility Weighted average expected option life Weighted average risk-free interest rate Weighted average dividend yield 2015 2014 2013 33% 34% 37% 5.0 yrs 5.0 yrs 5.0 yrs 1.7% 1.7% 1.7% 2.1% 1.8% 2.7% related information for the years ended December 31,2015, 2014 and 2013: Year Ended December 31, 2015 Options Shares under option- Weighted Average Exercise Price 639,495 158,300 (80,685) (7,810) $23.19 23.79 13.82 27.77 beginning of year Options granted Options exercised Options cancelled Shares under option- end of year Year Ended December 31, 2014 Options Shares under option- beginning of year 643,595 139,250 Options granted (136,640) (6,710) Options cancelled Options exercised Shares under option- end of year 639,495 709,300 $24.34 Company’s common stock. The expected term of the option is esti- Expected volatility is estimated based on historic volatility of the Weighted Average Exercise Price mated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects the assumption that the dividend payout as authorized by the Board of Directors would maintain its $19.58 current payout ratio as a percentage of earnings. 27.93 11.19 19.37 $23.19 Proceeds, tax benefits and intrinsic value related to stock options exercised were as follows: 2015 2014 2013 Year Ended December 31, Proceeds from stock options exercised excluding cashless Year Ended December 31, Weighted Average exercise of $0.5 million, 2013 Options Exercise Price $0.6 million and Shares under option- beginning of year Options granted Options exercised Options cancelled Shares under option- 716,235 136,350 (204,240) (4,750) $0.7 million in 2015, $14.41 2014 and 2013, 34.84 11.68 17.47 respectively $653 $953 $1,668 Tax benefits 260 670 700 Intrinsic value of stock options exercised $1,137 $2,733 $4,088 end of year 643,595 $19.58 notes to consolidated financial statements (in thousands except share and per share data) 95 The following table summarizes additional stock option infor- maining contractual life of options exercisable is 2.54 years. The mation as of December 31, 2015: aggregate intrinsic value of options exercisable at December 31, Options Outstanding Weighted Average Remaining 2015 is $1.3 million. The Chief Executive Officer and the President each exercised 19,000, 32,875 and 28,500 outstanding stock options of the Com- pany’s common stock in 2015, 2014 and 2013, respectively. The aggregate exercise prices of $0.5 million in 2015, $0.6 million in Exercise Number Contractual Options 2014 and $0.7 million in 2013 were paid by them tendering to Prices Outstanding 92,880 $15.59 2,000 $17.07 189,370 $19.03 - $19.33 3,000 $21.76 $22.20 4,000 144,300 $23.61 14,000 $25.82 130,100 $27.80 2,000 $29.36 3,500 $32.12 124,150 $35.75 709,300 Totals Life Exercisable 71,380 1,125 142,290 1,000 1,600 – – 26,020 500 875 49,660 294,450 2.00 years 1.08 years 2.14 years 2.09 years 3.09 years 6.00 years 4.80 years 5.00 years 3.69 years 3.09 years 4.00 years 3.82 years the Company in 2015, 2014 and 2013, an aggregate of 18,764, 19,656 and 18,880 shares, respectively, of the Company’s common stock, previously owned by them, valued at fair market value on the dates of exercise. All shares issued pursuant to these option exercis- es were issued from treasury stock of the Company. In addition, the Chief Executive Officer tendered in 2015, 2014 and 2013 an addi- tional 1,299, 3,112 and 2,573 shares, respectively, for payment of certain withholding taxes resulting from his option exercises. DIVIDenDs The quarterly dividend of $4.0 million ($0.13 per share) declared in December 2015 was paid in January 2016. Furthermore, in January 2016, the Board of Directors of the Company authorized a 15% increase in the annual dividend to $0.60 per share. The As of December 31, 2015, the weighted average exercise price next quarterly dividend of $0.15 per share will be paid on April of options exercisable was $21.93 and the weighted average re- 15, 2016 to shareholders of record on March 31, 2016. (13) 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: Year Ended December 31, Numerator for diluted earnings per share 2015 2014 2013 29,436 39,211 30,437 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: 30,996,137 104,078 31,100,215 30,931,308 30,763,955 129,018 31,060,326 189,927 30,953,882 Basic $1.27 Diluted 0.98 1.27 $0.95 0.95 $0.98 Not included in the above computations is the effect of anti-dilutive potential common shares, which consist of outstanding options to purchase 272,000, 130,000, and 32,000 shares of common stock for 2015, 2014, and 2013, respectively. INTER PARFUMS, INC. 2015 ANNUAL REPORT 96 (14) segments and Geographical 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. Both European and United States operations primarily represent the sale of prestige brand name fragrances. Information on the Company’s operations by segments is as follows: Year Ended December 31, net sales: 2015 2014 2013 (141) $468,540 $499,261 $563,579 United States Europe Eliminations of intercompany sales net income attributable to inter parfums, inc.: United States Europe $105,851 362,911 (222) $105,270 394,164 (173) $99,158 464,562 $7,640 $22,797 – $8,069 $21,367 $6,806 32,392 Eliminations – 13 $30,437 $29,436 $39,211 depreciation and amortization expense: United States $1,583 $1,554 $1,216 Europe 7,495 8,612 9,894 $9,078 $10,166 $11,110 interest and dividend income: United States Europe interest expense: United States Europe income tax expense: United States Europe Eliminations total assets: United States additions to long-lived assets: United States total long-lived assets: United States deferred tax assets: United States Europe $18 2,977 $2,995 $2 2,824 $2,826 $3,923 17,604 – $21,527 $3 3,885 $3,888 $73 1,405 $1,478 $4,643 14,727 – $19,370 $80,761 616,199 $78,740 535,049 $16 4,424 $4,440 $13 1,367 $1,380 $4,512 25,159 9 $29,680 $76,980 $1,283 122,663 $13,133 197,535 $365 6,817 – $1,165 $7,629 $13,433 $13,823 $396 6,452 $341 6,916 Europe 596,153 Eliminations of investment in subsidiary (9,301) (9,283) (9,075) $687,659 $604,506 $664,058 Europe 5,155 $123,946 $4,224 $12,784 3,059 Europe 112,864 $210,668 $107,718 $126,687 94,285 Eliminations – $7,182 $6,848 $7,257 – notes to consolidated financial statements (in thousands except share and per share data) 97 segments and Geographical areas continued United States export sales were approximately $66.3 million, $61.0 million and $58.8 million in 2015, 2014 and 2013, 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 2015 2014 2013 $125,700 $125,900 $145,900 170,600 177,900 41,100 57,700 41,900 78,200 11,000 $468,500 $499,300 $563,600 215,700 11,900 85,600 40,300 50,600 98,700 43,300 9,400 Consolidated net sales to customers in major countries are as follows: Year Ended December 31, 2015 2014 2013 $122,000 $119,000 $142,000 United States $32,000 United Kingdom $37,000 $46,000 $34,000 France $50,000 $47,000 (15) income taxes The Company or its subsidiaries file income tax returns in the U.S. federal, and various states and foreign jurisdictions. The Company assessed its uncertain tax positions and determined that it has no uncertain tax position at December 31, 2015. The components of income before income taxes consist of the following: Year Ended December 31, U.S. operations Foreign operations 2015 2014 2013 $12,712 $11,340 $11,564 44,003 69,306 48,932 $56,715 $80,646 $60,496 The provision for current and deferred income tax expense (benefit) consists of the following: Year Ended December 31, Current: Federal State and local Foreign Deferred: Federal State and local Foreign Total income tax expense 2015 2014 2013 $3,660 220 16,806 20,686 30 1 810 841 $21,527 $4,374 $3,638 323 454 15,229 20,744 19,926 24,836 (84) 370 30 59 4,415 (502) (556) 4,844 $19,370 $29,680 INTER PARFUMS, INC. 2015 ANNUAL REPORT 98 The tax effects of temporary differences that give rise to Differences between the United States Federal statutory income significant portions of the deferred tax assets and deferred tax rate and the effective income tax rate were as follows: 2015 2014 2015 2013 Year Ended December 31, Statutory rates 34.0% 34.0% 34.0% State and local taxes, 2014 tax liabilities are as follows: December 31, net 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, net Valuation allowance Net deferred tax assets 296 2,321 2,442 717 2,170 (468) 7,478 (296) 7,182 deferred tax liabilities (long-term): Trademarks and licenses (3,746) – Other (3,746) $3,436 Total deferred tax liabilities Net deferred tax assets net of Federal benefit Effect of foreign taxes greater than 0.2 0.1 0.4 1.6 U.S. statutory rates (0.2) Other Effective rates 35.6% 0.4 2.0 (0.3) 0.4 34.2% 36.8% 419 2,655 2,570 545 1,757 (16) accumulated other comprehensive income (loss) (679) The components of accumulated other comprehensive income 7,267 (loss) consists of the following: (419) 6,848 (2,154) – (2,154) $4,694 2013 2014 Year Ended December 31, 2015 Net derivative instruments, beginning of year $– $– $240 Transfer from OCI into earnings – – (240) Net derivative instruments, end of year – – – Cumulative translation Valuation allowances are provided for foreign net op - erating loss carr y-for wards, as future profitable oper- adjustments, ations from certain foreign subsidiaries might not be sufficient to realize the full amount of net operating loss carr y-forwards. (15,823) beginning of year 12,258 Translation adjustments (32,268) (41,683) 13,602 Cumulative translation 25,860 No other valuation allowances have been provided as management believes that it is more likely than not that the asset will be realized in the reduction of future taxable adjustments, end of year (48,091) (15,823) Accumulated other 25,860 income. comprehensive income The French Tax Authorities have examined the 2012 tax return (loss) ($48,091) $(15,823) $25,860 of Interparfums, SA and issued a $6.9 million tax adjustment. It is the Company’s position that the French Tax Authorities are (17) net income attributable to inter parfums, inc. incorrect in their assessments. The Company believes that it and transfers from the noncontrolling interest has strong arguments to support its tax positions and that more likely than not, its tax positions will be sustained. The Company will vigorously contest the assessments. Year Ended December 31, 2015 2014 2013 Net income attributable The Company is no longer subject to U.S. federal, state, and to Inter Parfums, Inc. $30,437 $29,436 $39,211 local or non-U.S. income tax examinations by tax authorities Decrease in for years before 2012. The Company has not provided for U.S. deferred income taxes on $352 million of undistributed earnings of its non-U.S. subsidiaries as of December 31, 2015 since the Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions (192) Company intends to reinvest most of these earnings in its Change from net income foreign operations indefinitely and the Company believes attributable to it has sufficient foreign tax credits available to offset any Inter Parfums, Inc. (335) (173) potential tax on amounts that have been and are planned to be repatriated. and transfers from noncontrolling interest $30,245 $29,101 $39,038 directors and executive officers 99 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. philippe santi Executive Vice President Director General Delegue Interparfums SA henry B. clarke President, Inter Parfums USA, LLC transfer agent WeiserMazars, LLP 135 West 50th Street New York, NY 10020 American Stock Transfer and Trust Company 6201 15th Avenue Brooklyn, NY 11219 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) robert Bensoussan-torres 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. INTER PARFUMS, INC. 2015 ANNUAL REPORT100 corporate and market information THe MaRKeT foR oUR CoMMon sToCK Our Company’s common stock, $.001 par value per share, is traded basis and in January 2015, our Board of Directors authorized an on The Nasdaq Global Select Market under the symbol “IPAR”. The 8% increase in the annual dividend to $0.52 per share. following table sets forth in dollars, the range of high and low closing In January 2016, our Board of Directors authorized a 15% in- prices for the past two fiscal years for our common stock. crease in the cash dividend to $0.60 per share on an annual basis. High Closing Low Closing April 15, 2016 to shareholders of record on March 31, 2016. The next quarterly cash dividend of $0.15 per share is payable on fiscal 2015 Fourth Quarter Third Quarter Second Quarter First Quarter Price Price 22.33 33.45 29.97 35.22 23.40 34.83 22.73 29.37 foRM 10K a copy of the company’s 2015 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) to: inter parfums, inc. 551 fifth avenue new york, ny 10176 Fiscal 2014 Price Price High Closing Low Closing attention: corporate secretary. Fourth Quarter Third Quarter Second Quarter First Quarter 29.98 31.39 36.78 37.74 24.81 25.62 27.59 30.38 CoRPoRaTe PeRfoRManCe GRaPH The following graph compares the performance for the periods in- dicated in the graph of our common stock with the performance of the Nasdaq Market Index and the average performance of a group of the Company’s peer corporations consisting of: Avon Products As of February 23, 2016, the number of record holders, Inc., CCA Industries, Inc., Colgate-Palmolive Co., Elizabeth Arden, which include brokers and broker’s nominees, etc., of our Inc., Estee Lauder Companies, Inc., Inter Parfums, Inc., Kimberly common stock was 45. We believe there are approximately Clark Corp., Natural Health Trends Corp., Revlon, Inc., Spectrum 8,200 beneficial owners of our common stock. Brands, Inc., Stephan Company, Summer Infant, Inc., The Procter DIVIDenDs & Gamble Company and United Guardian, Inc. The graph assumes that the value of the investment in our common stock and each In January 2014, our Board of Directors determined to maintain index was $100 at the beginning of the period indicated in the the quarterly dividend of $0.12 per share, or $0.48 on an annual graph, and that all dividends were reinvested. comparison 0f 5 year cUmUlatiVe total retUrn* among inter parfums, inc., the nasdaq composite index, and a peer Group *$100 invested on 12/31/10 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 12/10 100.00 100.00 100.00 12/11 84.09 100.53 109.19 12/12 107.11 116.92 118.26 12/13 203.00 166.19 148.15 12/14 158.14 188.78 167.04 12/15 139.80 199.95 158.65 

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