Inter Parfums
Annual Report 2016

Plain-text annual report

annual report two thousand sixteen 2016 Table of ConTenTs Financial Highlights 02 Letter to our Shareholders 04 The Company 08 The Products 14 The Organization 60 INTER PARFUMS, INC. 2016 ANNUAL REPORT2 financial Highlights $654.1 $131.1 $407.2 $381.5 $382.1 $370.4 $365.6 $563.6 $521.1 $499.3 $468.5 $39.2 $33.3 $29.4 $30.4 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 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 258,787 66,678 67,074 Net Income Attributable to the 9,917 Noncontrolling Interest Net Income Attributable to Inter Parfums, Inc. 33,331 Net Income Attributable to Inter Parfums, Inc. Common Shareholders’ per Share: Basic Diluted Weighted 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 1.07 1.07 31,072 31,176 15,341 161,828 94,202 337,977 682,409 –0– 74,562 370,391 0.62 2016 2015 2014 2013 2012 $521,072 194,601 $468,540 179,069 $499,261 $563,579 $654,117 212,224 234,800 246,931 228,268 61,203 60,496 8,532 30,437 0.98 0.98 30,996 31,100 9,078 176,967 82,847 337,674 687,659 –0– 98,606 365,587 0.52 233,634 250,025 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 –0– 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 –0– 325,799 278,414 274,765 45,754 131,136 4.29 4.26 30,575 30,716 15,554 307,335 – 0– 366,680 759,920 27,776 –0– 382,065 407,211 381,476 0.48 0.96 0.32 INTER PARFUMS, INC. 2016 ANNUAL REPORT 4 2016 letter to our Shareholders dear fellow shareholders, 2016 was another year of growth and accomplishment and • S, G & A expense as a percentage of sales was 49.7% com- one in which we continued to build a strong foundation to pared to 48.7%. support future growth. Among the highlights of the past • Net income attributable to Inter Parfums, Inc. was $33.3 year are: million or $1.07 per diluted share compared to $30.4 million • Strong top line growth across all but one geographic market; or $0.98 per diluted share in 2015. • Market share gain; • Improved profitability; and, • Our business generated cash flows from operating activ- ities of approximately $54.6 million, up from $50.1 million • Better than expected initial results from new portfolio brand in 2015. launches including Coach, Abercrombie & Fitch and Hollister. • We closed the year with working capital of $338 million in- financial oVerView cluding approximately $256 million in cash, cash equivalents and short-term investments, resulting in a working capital ra- • Net sales rose 11.2% to $521.1 million from $468.5 million tio of nearly 3.4 to 1. in 2015, at comparable foreign currency exchange rates, net • At year-end, long-term debt including current maturities ag- sales rose 12.1% year-over-year. gregated $74.6 million, which related to the remainder of the • Sales by European based operations were $404.0 million, debt incurred in connection with the May 2015 acquisition of up 11% from $362.7 million in 2015, in comparable foreign the Rochas brand. currency exchange rates, net sales for European based opera- tions were up 12.5%. With expectations for continued growth and consistent • U.S. based operations generated net sales of $117.1 mil- cash flows, coupled with an exceptionally strong balance lion, up 11% from $105.8 million in 2015. sheet, in October 2016, our Board of Directors deemed it • Gross margin was 62.7% compared to 61.8% in 2015. appropriate to increase our regular quarterly cash dividend, letter to shareholders 5 and Spain continues in 2017 as well as in important markets for the brand such as China and Japan. In the fall, we are unveiling a new men’s scent. Our timing couldn’t be better as the Coach brand has successfully undergone a major trans- formation, revitalization and repositioning, and as is now em- blematic of one of the most important industry trends known as “democratic luxury,” which translates into expensive, but not jet-setting over-the-top extravagant. Every indicator points to Coach becoming one of our largest brands and therefore an important addition to our brand portfolio. Another new brand, Rochas, achieved 2016 sales of $32.3 million selling only legacy scents. Mademoiselle Rochas, our first new fragrance under the Rochas brand, launches in 2017 where we plan to unlock the untapped potential of this sleeping beauty of a brand. Our ad campaign features Swiss born actress Noémie Schmidt, currently one of leading ladies on the BBC series, Ver- sailles. Distribution will be in two phases – 12 countries in the first half, including the brand’s largest markets of France and Spain, followed by round two starting in the second half. As the owner of the Rochas brand, our goal is to restore the brand’s de- sirability, reestablish Rochas as a Parisian luxury house, modern- ize the outdated classic image of the current lines and broaden the target customer. Philippe Benacin and Jean Madar Our largest brand, Montblanc, had an exceptional year with sales climbing 25% to approximately $122 million, resulting in a five-year compound annual growth rate for the brand of this time by 13% to $0.17 per share, or $0.68 per share 23.2%. To our own surprise, Legend Spirit, a new flanker in annually. This marks the fifth increase in our quarterly cash our consistently popular Montblanc Legend fragrance family, dividend since 2010. was a major contributor to the increase in brand sales. The Our two largest markets achieved exceptional growth brand’s Lady Emblem has begun to get traction as well, es- in 2016. In Western Europe, sales grew by 23.5%, and in pecially in the Middle East and South America. Capitalizing North America, sales increased 19% year-over-year. In Asia, upon the Legend loyalty, we will welcome still another exten- our third largest market, sales were 4% ahead of 2015, with sion, Legend Night, which is planned for the end of 2017 and Korea and Japan making up some of the shortfall in China, early 2018. where the market remains depressed. Aggregate sales in Cen- Sales of Jimmy Choo fragrances have achieved a five-year tral and South America and the Middle East ran ahead of compound annual growth rate of 17%, making it our second 2015, and the only market in which our sales declined was largest brand. With 2016 brand sales approximating $90 mil- Eastern Europe, owing to Russia’s economic problems result- lion, Jimmy Choo fragrances were off a modest 2% from 2015 ing from lower oil prices and a devalued currency. when year-over-year sales rose 18%, catalyzed by the launch looKinG BacK and ahead eUroPean Based oPerations of two women’s scents and the rollout of our first men’s fra- grance for the brand. In 2016, Jimmy Choo Illicit Flower de- buted as a flanker for Illicit, one of the 2015 new product One of 2016’s most promising and well-timed events for our launches. The Jimmy Choo franchise will welcome two new European operations was the introduction of our first Coach members in 2017, Jimmy Choo L’Eau in the first half and Jim- scent for women. Launched mid-year, the brand generated my Choo Man Ice in the second half. $23 million in sales in the second half, well ahead of expecta- Lanvin, our third largest brand, had a down year with sales tions. The Coach signature scent rollout in France, Germany, off 13% primarily due to the economic slowdowns in its two INTER PARFUMS, INC. 2016 ANNUAL REPORT6 flagship markets of Russia and China. At the end of 2016, indUstrY insiGhts and conclUsion we introduced Modern Princess in limited distribution, which We’d like to share some of our thoughts about our industry is being followed with broader rollout in 2017 in the hopes and our place within it. It is estimated that from 2011 of offsetting the negative geographic conditions where the to 2016, the global fragrance market contracted at a com- brand is most popular. Similarly, a new interpretation of the pound annual rate of 1.3%; during that timeframe, our com- best performing Lanvin fragrance, Éclat d’Arpège, will debut pound annual growth rate was 11%. That says something later in 2017. about our ability to buck trends, gain market share and grow As we do every year, in 2016, there were several limit- our Company. ed edition, brand extensions and holiday programs that we If you Google, “fragrance launches of 2016,” a whopping brought to market. In the brand extension category, we added 1,685 new entries appear. When it comes to fragrance, in a new fragrance for the Van Cleef & Arpels Collection Extraor- our opinion, new is good but longevity is better. The best dinaire and introduced In New York, a new men’s scent for the of breed fragrances remain on the market for years and brand. In addition to the 2017 programs mentioned above, some even decades fortified by extensions and flankers, we will grow the Collection Extraordinaire by still another new and/or with new packaging and promotion. But at the end fragrance and for Boucheron, we have Galerie Olfactive, a six- of the day, these fragrance gems achieve stellar returns scent luxury collection in exclusive distribution. on investment for their owners and our stable has many of these thoroughbreds. U.s. Based oPerations We have every reason for confidence in the future of In- The big news for U.S. operations was the launch of our two new- ter Parfums. With our rich and diverse portfolio of brands, est brands, Abercrombie & Fitch and Hollister, in international we are not dependent on one or two for our growth or suc- markets. While these well-known American brands are part of cess. We also recognize that all brands are not created our U.S. based operations, in the international markets, these equal. We have an effective distribution network reaching names are viewed as full-fledged prestige brands and are sold 100 countries, and in several of the most important mar- in department stores, specialty stores, and travel retail. These kets, we own or control the distribution organizations. We brands have played a key role in the transition of our U.S. based also have a very strong balance sheet, which, among other operations into a far larger, more geographically diverse and in- things, makes us an attractive partner to prospective brand creasingly profitable prestige fragrance business. In 2016, we owners. And of course, we have a great talent and resource launched Wave, a Hollister fragrance duo targeted for the young- reservoir. In fact, with 357 full-time employees worldwide, er set. That success was the impetus behind the 2017 launch Inter Parfums generated $521 million in sales in 2016 of another fragrance duo, Wave 2. For Abercrombie & Fitch, we equating to almost $1.5 million in sales per employee, introduced First Instinct for men in 2016 followed by a women’s which we feel is quite an achievement. version in 2017. For both brands, we couldn’t be happier with the results thus far. Sincerely yours, Dunhill, our largest fragrance franchise under the U.S. operations umbrella, with products solely for men, launched Icon Elite in 2016, building upon the highly successful Icon pillar. In 2017, we have Desire Extreme as well as Icon Rac- ing, another Icon flanker debuting for the brand. We are re- invigorating our Oscar de la Renta fragrance collection with a new women’s scent called Bella Blanca with a launch date set Jean madar Philippe Benacin for 2018, and for Anna Sui we have several brand extensions Chairman of the Board Vice Chairman of the Board and an entirely new pillar called Fantasia coming to market. Chief Executive Officer & President letter to shareholders 7 Jimmy Choo Illicit Flower INTER PARFUMS, INC. 2016 ANNUAL REPORT8 the Company Rochas Mademoiselle Rochas We are InTer Parfums, InC. We oPeraTe In The fragranCe busIness, and manufaCTure, markeT and dIsTrIbuTe a WIde array of fragranCe 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) owner of three (3) distribution subsidiaries: Inter Parfums srl wholly-owned United States subsidiaries, Jean Philippe for Italy, Inter España Parfums et Cosmetiques, SL, for Spain Fragrances, LLC and Inter Parfums USA, LLC, both New and Interparfums Luxury Brands, Inc., a Delaware corporation York limited liability companies, and IP Beauty, Inc. (former- for distribution of prestige brands in the United States. In- ly Nickel USA, Inc.), a Delaware corporation, are located at terparfums SA is also the majority owner of Parfums Rochas 551 Fifth Avenue, New York, New York 10176, and our tele- Spain, SL, a Spanish limited liability company, which special- phone number is 212.983.2640. We also own 100% of Inter izes in the distribution of Rochas fragrances, as well as the Parfums USA Hong Kong Limited indirectly through our 100% majority owner of Inter Parfums Gmbh, a distribution subsidi- owned subsidiary, Inter Parfums USA, LLC. ary for Germany. In addition, Interparfums SA is also the sole Our consolidated wholly-owned subsidiary, Inter Parfums owner of Interparfums (Suisse) SARL, a company formed to Holdings, S.A., and its majority-owned subsidiary, Interpar- hold and manage certain brand names, and Interparfums Sin- fums SA, maintain executive offices at 4 Rond Point des gapore Pte., Ltd., an Asian sales and marketing office. Champs Elysees, 75008 Paris, France. Our telephone num- Our common stock is listed on The Nasdaq Global Select ber in Paris is 331.5377.0000. Interparfums SA is the sole Market under the trading symbol “IPAR”. The common shares the company 9 Abercrombie & Fitch First Instinct of our subsidiary, Interparfums SA, are traded on the NYSE owned subsidiary in Paris, Interparfums SA, which is also Euronext Exchange. a publicly traded company, as 27% of Interparfums SA We maintain our internet website at www.interparfum- shares trade on the NYSE Euronext. sinc.com, which is linked to the Securities and Exchange Our business is not capital intensive, and it is important to Commission Edgar database. You can obtain through our note that we do not own manufacturing facilities. We act as website, free of charge, our annual reports on Form 10- a general contractor and source our needed components from K, quarterly reports on Form 10-Q, interactive data files, our suppliers. These components are received at one of our current reports on Form 8-K, beneficial ownership reports distribution centers and then, based upon production needs, (Forms 3, 4 and 5) and amendments to those reports filed the components are sent to one of several third party fillers or furnished pursuant to Section 13(a) of the Securities which manufacture the finished product for us and deliver Exchange Act of 1934 as soon as reasonably practicable them to one of our distribution centers. after they have been electronically filed with or furnished Our prestige products focus on niche brands, each with to the SEC. a devoted following. By concentrating in markets where We operate in the fragrance business and manufacture, the brands are best known, we have had many successful market and distribute a wide array of fragrance and fra- launches. We typically launch new fragrance families for our grance related products. We manage our business in two brands every year or two, and more frequently seasonal and segments, European based operations and United States limited edition fragrances are introduced as well. based operations. Prestige fragrance products are pro- The creation and marketing of each product family is in- duced and marketed by both our United States operations, timately linked with the brand’s name, its past and present and our European operations, the latter, through our 73% positioning, customer base and, more generally, the prevailing INTER PARFUMS, INC. 2016 ANNUAL REPORT10 market atmosphere. Accordingly, we generally study the mar- BUsiness strateGY ket for each proposed family of fragrance products for almost foCus on PresTIge beauTy brands a full year before we introduce any new product into the mar- Prestige beauty brands are expected to contribute significantly ket. This study is intended to define the general position of to our growth. We focus on developing and launching quality fra- the fragrance family and more particularly its scent, bottle, grances utilizing internationally renowned brand names. By iden- packaging and appeal to the buyer. In our opinion, the unity tifying and concentrating in the most receptive market segments of these four elements of the marketing mix makes for a suc- and territories where our brands are known, and executing highly cessful product. targeted launches that capture the essence of the brand, we have As with any business, many aspects of our operations had a history of successful launches. Certain fashion designers are subject to influences outside our control. We discuss and other licensors choose us as a partner, because our Company’s in greater detail risk factors relating to our business in size enables us to work more closely with them in the product Item 1A of our Annual Report on Form 10-K for the fiscal development process as well as our successful track record. year ended December 31, 2016, and the reports that we file from time to time with the Securities and Exchange groW PorTfolIo brands Through Commission. euroPean oPeraTIons neW ProduCT develoPmenT and markeTIng We grow through the creation of fragrance family extensions within the existing brands in our portfolio. Every year or two, We produce and distribute our fragrance products primarily we create a new family of fragrances for each brand in our under license agreements with brand owners, and fragrance portfolio. We frequently introduce seasonal and limited edition product sales through our European operations represented fragrances as well. With new introductions, we leverage our approximately 78% of net sales for 2016. We have built ability and experience to gauge trends in the market and fur- a portfolio of prestige brands, which include Boucheron, ther leverage the brand name into different product families in Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, Montblanc, order to maximize sales and profit potential. We have had suc- Paul Smith, S.T. Dupont, Repetto, Rochas and Van Cleef & cess in introducing new fragrance families (sub-brands, flanker Arpels, whose products are distributed in over 100 countries brands or flankers) within our brand franchises. Furthermore, around the world. we promote the smooth and consistent performance of our With respect to the Company’s largest brands, we own the prestige fragrance operations through knowledge of the mar- Lanvin brand name for its class of trade, and license the ket, detailed analysis of the image and potential of each brand Montblanc and Jimmy Choo brand names. As a percentage of name, a “good dose” of creativity and a highly professional net sales, product sales for the Company’s largest brands were approach to international distribution channels. as follows: Year ended December 31, 2016 23% Montblanc 17% 12% Jimmy Choo Lanvin ConTInue To add neW brands 2015 2014 To our PorTfolIo Through neW lICenses 21% 20% 15% 22% 16% 18% or aCQuIsITIons Prestige brands are the core of our business and we intend to add new prestige beauty brands to our portfolio. Over the past twenty years, we have built our portfolio of well-known unITed sTaTes oPeraTIons prestige brands through acquisitions and new license agree- Prestige brand fragrance products are also marketed through ments. We intend to further build on our success in prestige our United States operations, and represented 22% of sales fragrances and pursue new licenses and acquire new brands for the year ended December 31, 2016. These fragrance to strengthen our position in the prestige beauty market. products are sold under trademarks owned by us or pursu- To that end, during 2014, we signed fragrance licenses ant to license or other agreements with the owners of brands, for Abercrombie & Fitch and Hollister brands; in 2015, we which include Abercrombie & Fitch, Agent Provocateur, Anna signed fragrance licenses for Coach and French Connection, Sui, bebe, Dunhill, Hollister, French Connection, Oscar de la extended our Montblanc fragrance license and purchased the Renta, and Shanghai Tang brands. Rochas brand, and in 2016, we extended the terms of our the company 11 Coach Coach INTER PARFUMS, INC. 2016 ANNUAL REPORT INTER PARFUMS, INC. 2016 ANNUAL REPORT12 S.T. Dupont and bebe licenses. As of December 31, 2016, payment aggregating €5.4 million (approximately $5.7 mil- we had cash, cash equivalents and short-term investments of lion). As a result of the buyout, we recognized a gain of $4.7 approximately $256 million, which we believe should assist million and received the buyout payment in May 2017. As of us in entering new brand licenses or outright acquisitions. March 31, 2017, the three month inventory sell-off period However, we cannot assure you that we will be able to enter concluded and Balmain purchased all remaining inventory ag- into any future agreements, or acquire brands or assets on gregating $1.4 million. terms favorable to us, or if we do, that any such transaction will be successful. We identify prestige brands that can be ImPaIrmenT loss developed and marketed into a full and varied product fam- We review intangible assets with finite lives for impair- ilies and, with our technical knowledge and practical expe- ment whenever events or changes in circumstances in- rience gained over time, take licensed brand names through dicate that the carrying amount may not be recoverable. all phases of concept, development, manufacturing, market- Product sales of our Karl Lagerfeld brand have not met ing and distribution. exPand exIsTIng PorTfolIo InTo neW CaTegorIes with our original expectations. As a result of our review in 2016, we recorded an impairment loss of $5.7 million as of December 31, 2016. We intend to selectively broaden our product offering beyond s.T. duPonT the fragrance category and offer other fragrance related prod- In September 2016, we renewed our license agreement ucts and personal care products under some of our existing with S.T. Dupont for the creation, development and distri- brands. We believe such product offerings meet customer bution of fragrance products through December 31, 2019, needs and further strengthen customer loyalty. without any material changes in terms and conditions. Our ConTInue To buIld initial 11-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended global dIsTrIbuTIon fooTPrInT through December 31, 2016. Our business is a global business and we intend to con- tinue to build our global distribution footprint. In order to seTTlemenT WITh frenCh Tax auThorITIes adapt to changes in the environment and our business, we The French Tax Authorities examined the 2012 tax return have formed and are operating distribution subsidiaries in of Interparfums SA, and in August 2015 issued a $6.9 the major markets of the United States, Italy, Spain and million tax adjustment. It is our position that the French Germany for distribution of prestige fragrances. We may Tax Authorities are incorrect in their assessments and we look into future joint arrangements or acquire distribution believe that we have strong arguments to support our tax companies within other key markets to distribute certain positions. The main issues challenged by the French Tax of our prestige brands. While building a global distribution Authorities related to the commission rate and royalty rate footprint is part of our long-term strategy, we may need to paid to Interparfums Singapore Pte. and Interparfums make certain decisions based on the short-term needs of the (Suisse) SARL, respectively. Interparfums Singapore Pte. business. We believe that in certain markets, vertical inte- and Interparfums (Suisse) SARL are wholly-owned sub- gration of our distribution network may be one of the keys sidiaries of Interparfums SA. Due to the subjective nature to future growth of our Company, and ownership of such of the issues involved, in April 2016, Interparfums SA distribution should enable us to better serve our customers’ reached an agreement in principle to settle the entire mat- needs in local markets and adapt more quickly as situations ter with the French Tax Authorities. The settlement requires may determine. recent deVeloPments buyouT of lICense Interparfums SA to pay a tax assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as to In December 2016, we reached an agreement with the Bal- future acceptable commission and royalty rates, which is main brand calling for Balmain to buyout the Balmain license not expected to have a significant impact on cash flow. The agreement, effective December 31, 2016, in exchange for a settlement, which was recently finalized with the French the company 13 Tax Authorities, was accrued for in March 2016. In July from many different suppliers located around the world. 2016, Interparfums SA paid $1.1 million to the French Tax For United States operations, components for our pres- Authorities upon receipt of formal notification regarding tax tige fragrances are primarily sourced, produced and filled years 2013 and 2014. ProdUction and sUPPlY The sTages of The develoPmenT and ProduCTIon ProCess in the United States, and our mass market products are primarily manufactured, produced or filled in the United States or China. marKetinG and distriBUtion for all fragranCes are as folloWs: Our products are distributed in over 100 countries around • Simultaneous discussions with perfume designers and the world through a selective distribution network. For creators (includes analysis of aesthetic and olfactory trends, our international distribution, we either contract with target clientele and market communication approach) independent distribution companies specializing in luxury • Concept choice goods or distribute prestige products through our distribution • Produce mock-ups for final acceptance of bottles subsidiaries. In each country, we designate anywhere from and packaging one to three distributors on an exclusive basis for one or more • Receive bids from component suppliers (glass makers, of our name brands. We also distribute our products through plastic processors, printers, etc.) a 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 distribution subsidiaries in the major markets incoming components; and of the United States, Italy, Spain and Germany. Our third • Follow packaging and inventory control procedures. party distributors vary in size depending on the number of competing brands they represent. This extensive and diverse suPPlIers Who assIsT us WITh ProduCT network together with our own distribution subsidiaries pro- develoPmenT InClude: vides us with a significant presence in over 100 countries • Independent perfumery design companies around the world. (Aesthete, Carré Basset, PI Design, Cent Degres) Approximately 40% of our European based prestige fra- • Perfumers (IFF, Givaudan, Firmenich, Robertet, grance net sales are denominated in U.S. dollars. We address Takasago, Mane) which create a fragrance consistent certain financial exposures through a controlled program of with our expectations and, that of the fragrance designers risk management that includes the use of derivative financial and creators instruments. We primarily enter into foreign currency forward • Bottle manufacturers (Pochet du Courval, Verescence, exchange contracts to reduce the effects of fluctuating foreign Verreries Brosse, Bormioli Luigi, Stoelzle Masnières), currency exchange rates. caps (Qualipac, ALBEA , RPC, Codiplas, LF Beauty, The business of our European operations has become in- Texen Group) or boxes (Autajon, MMPP, Nortier, Draeger) creasingly seasonal due to the timing of shipments by our • Production specialists who carry out packaging (CCI, majority-owned distribution subsidiaries to their customers, Edipar, Jacomo, SDPP, MF Productions, Biopack) or which are weighted to the second half of the year. logistics (Balloré Logistics for storage, order preparation For our United States operations, we distribute product to and shipment). approved retailers and distributors in the United States as well as internationally, including duty free and other travel-related Suppliers’ accounts for our European operations are retailers. We utilize our in house sales team to reach our third primarily settled in euro and for our United States oper- party distributors and customers outside the United States. ations, suppliers’ accounts are primarily settled in U.S. In addition, the business of our United States operations has dollars. For our European operations, prestige fragrances, become increasingly seasonal as shipments are weighted to- components and contract filling needs are purchased ward the second half of the year. INTER PARFUMS, INC. 2016 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 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 bebe Stores Boucheron Coach Dunhill Hollister Jimmy Choo Karl Lagerfeld Montblanc December 31, 2021, plus two five-year optional terms if certain conditions are met June 30, 2020 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, 2019 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 $74 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. 2016 ANNUAL REPORT16 aberCrombIe & fITCh In December 2014, we entered into a 7-year exclusive world- Abercrombie & Fitch. A women’s version of First instinct is in wide license to create, produce and distribute new fragrances the works for 2017. and fragrance related products under the Abercrombie & Abercrombie & Fitch stands for effortless American Style. Fitch brand name. The Company distributes these fragranc- Since 1892, the brand has been known for its attention to es internationally in specialty stores, high-end department detail with designs that embody simplicity and casual luxu- stores and duty free shops, and in the U.S., in duty free ry. Rooted in a heritage of quality craftsmanship, Abercrom- shops and in select Abercrombie & Fitch retail stores. In bie and Fitch continues to bring its customers iconic, modern 2016 we launched a new men’s scent, First Instinct, for classics with an aspirational look, feel, and attitude. the products 17 Abercrombie & Fitch First Instinct INTER PARFUMS, INC. 2016 ANNUAL REPORT18 Agent Provocateur Aphrodisiaque the products 19 agenT ProvoCaTeur In July 2013, we entered into a 10.5-year exclusive worldwide Agent Provocateur fragrance sales are concentrated in the license to create, produce and distribute fragrances and fra- United Kingdom and the Middle East. grance related products under London-based luxury lingerie Founded in 1994, Agent Provocateur is an iconic, global- brand, Agent Provocateur. In 2013, we commenced distribution ly-recognized brand, breaking new ground with every collection of selected fragrances within the brand’s legacy fragrance port- and rightfully earning its place as a benchmark brand in the folio, and in 2014, we launched our first new Agent Provocateur world of lingerie. It is a brand that is confident, sensual and ir- scents, Fatale and Fatale Pink. In 2016, we introduced Agent reverent. Agent Provocateur celebrates and empowers women Provocateur Aphrodisiaque, our second fragrance family for the with a unique brand image renowned for being provocative and brand. Several new scents are scheduled to launch in 2017. yet always leaving something to the imagination. INTER PARFUMS, INC. 2016 ANNUAL REPORT20 anna suI In June 2011, we entered into a 10-year exclusive worldwide capture the brand’s very sweet feminine girly aspect, com- fragrance license agreement to produce and distribute fragranc- bined with touch of nostalgia, hipness and rock-and-roll. es and fragrance related products under the Anna Sui brand. Anna Sui’s devoted customer base, which spans the world, is Our rights under the agreement commenced on January 1, 2012 concentrated in Asia. when we took over production and distribution of the existing Anna Sui product sales have declined in the past three Anna Sui fragrance collections. years primarily owing to the slowdown in the Chinese economy We are working in partnership with American designer, where the brand is especially popular. We are currently distrib- Anna Sui, and her creative team to build upon the brand’s uting several lines of product, including top sellers, La Vie de growing customer appeal, and develop new fragrances that Bohème, Romantica and Secret Wish. the products 21 Anna Sui Fantasia INTER PARFUMS, INC. 2016 ANNUAL REPORT22 bebe Glam the products 23 bebe sTores In July 2008, we entered into an exclusive 6-year worldwide agreement with bebe Stores, Inc., that has been renewed through June 30, 2020, under which we design, manufacture and supply fragrances for company-owned bebe stores in the United States and Canada, as well as select specialty and de- partment stores worldwide. We have incorporated bebe’s sig- nature look into fragrances for the brand’s strong, hip, sexy, and sophisticated clientele. Scents currently available for do- mestic and international markets include: bebe, bebe Sheer, bebe Gold, bebe Glam and bebe Glam 24 Karat. INTER PARFUMS, INC. 2016 ANNUAL REPORT24 bouCheron In December 2010, we entered into an exclusive 15-year worldwide as well as an e-commerce site. worldwide license agreement for the creation, development Our first new fragrance under the Boucheron brand, Jaïpur and distribution of fragrances under the Boucheron brand. Bracelet, debuted in 2012, and Boucheron Place Vendôme, Boucheron is the French jeweler “par excellence”. Founded which has a beautiful glasswork bottle with a cabochon, by Frederic Boucheron in 1858, the House has produced the emblematic stone of House Boucheron, was released in some of the world’s most beautiful and precious creations. 2013. In 2015, we launched a new fragrance duo for the Today Boucheron creates jewelry and timepieces and, under Boucheron brand around its iconic Quatre ring, Boucheron license from global brand leaders, fragrances and sunglass- Quatre. A six scent collection is launching under the Bouche- es. Currently Boucheron operates through over 40 boutiques ron brand in 2017. the products 25 Boucheron Quatre pour Homme INTER PARFUMS, INC. 2016 ANNUAL REPORT26 Coach Coach the products 27 CoaCh In April 2015, we entered into an exclusive 11-year worldwide innovative design. Coach is sold worldwide through Coach stores, license with Coach, Inc. to create, produce and distribute new select department stores and specialty stores, and through Coach’s men’s and women’s fragrances and fragrance related products website at www.coach.com. Coach’s common stock is traded on under the Coach brand name. We distribute these fragrances the New York Stock Exchange under the symbol COH and Coach’s globally to department stores, specialty stores and duty free Hong Kong Depositary Receipts are traded on The Stock Exchange shops, as well as in Coach retail stores. of Hong Kong Limited under the symbol 6388. Coach, established in New York City in 1941, is a leading design In 2016, we launched our first Coach fragrance, a women’s house of modern luxury accessories and lifestyle collections with scent, which has quickly become a top selling new prestige a rich heritage of pairing exceptional leathers and materials with fragrance. A men’s scent is planned for 2017. INTER PARFUMS, INC. 2016 ANNUAL REPORT28 dunhIll In December 2012, we entered into an exclusive 10- of British men’s style, the brand continues to blend innovation year worldwide fragrance license to create, produce and and creativity with traditional craftsmanship. distribute fragrances and fragrance related products under We took over production and distribution of Dunhill legacy the Dunhill brand. fragrances beginning in 2013, and we introduced a legacy The house of Dunhill was established in 1893 and since scent flanker, Desire Black, in 2014. In 2015, we rolled out that time has been dedicated to providing high quality our new Dunhill scent, Icon, the success of which has made the men’s luxury products, with core collections offered in mens- Dunhill brand our largest and fastest growing brand within our wear, leather goods and accessories. The brand has global United States based operations. For 2016, we launched several reach through a premium mix of self-managed retail outlets, product extensions including Icon Luxury Spray Set and Icon high-level department stores and specialty stores. Known for Elite. In 2017, the brand’s Desire family is adding a new scent, its commitment to elegance and innovation and being a leader Desire Extreme, and Icon Racing will also launch in 2017. the products 29 Dunhill Icon Collection INTER PARFUMS, INC. 2016 ANNUAL REPORT30 Hollister Wave for Her the products 31 hollIsTer In December 2014, we entered into a 7-year exclusive world- women’s scent, Wave, for Hollister. Wave 2, a brand extension wide license to create, produce and distribute new fragrances for Hollister is in the works for 2017. and fragrance related products under the Hollister brand Hollister is the fantasy of Southern California. Inspired by name. The Company distributes these fragrances internation- beautiful beaches, open blue skies, and sunshine, Hollister lives ally in specialty stores, high-end department stores and duty the dream of an endless summer. Hollister’s laidback lifestyle free shops, and in the U.S., in duty free shops and in select makes every design effortlessly cool and totally accessible. Hol- Hollister retail stores. In 2016 we launched a new men’s and lister brings Southern California to the world. INTER PARFUMS, INC. 2016 ANNUAL REPORT 32 JImmy Choo In October 2009, we entered into an exclusive 12- Our first fragrance under the Jimmy Choo brand, a signature year worldwide license agreement for the creation, scent, rolled out globally in 2011. Jimmy Choo product sales ex- development and distribution of fragrances under the ceeded our expectations and sales topped $40 million in that first Jimmy Choo brand. year. In 2013, we launched our second Jimmy Choo line, Flash, With a heritage in luxury footwear, Jimmy Choo today en- and in 2014, we debuted Jimmy Choo Man our first men’s scent compasses a complete luxury lifestyle accessory brand with which ranked in 2015 as the 9th best-selling men’s fragrance in men’s and women’s shoes, handbags, small leather goods, the United States. In 2015, the launch of Jimmy Choo Illicit, our sunglasses and eyewear. Its products are available in the third women’s fragrance under that label, was the principal driver growing network of Jimmy Choo freestanding stores as well as for brand growth. For 2016, we debuted a new women’s flanker, in the most prestigious department, specialty and duty free Jimmy Choo Illicit Flower. In 2017, we have both a women’s and stores worldwide. men’s fragrance initiative planned for the brand. the products 33 Jimmy Choo Man Intense INTER PARFUMS, INC. 2016 ANNUAL REPORT34 Karl Lagerfeld Private Klub the products 35 karl lagerfeld In October 2012, we entered into a 20-year worldwide license reflects the designer’s own style and soul. Our first line, a agreement with Karl Lagerfeld B.V., the internationally re- premium namesake duo scent for both men and women, was nowned haute couture fashion house, to create, produce and launched in 2014. However, in 2015, with sales concentrated distribute fragrances under the Karl Lagerfeld brand. in Russia and northern Europe, re-orders were disappointing Under the creative direction of Karl Lagerfeld, one of the and sales of this brand declined despite the launch of Pri- world’s most influential and iconic designers, the Lagerfeld vate Klub, a line extension. We will attempt to reinvigorate this Portfolio represents a modern approach to distribution, an in- brand by changing its strategic positioning and instituting new novative digital strategy and a global 360 degree vision that pricing in 2017. INTER PARFUMS, INC. 2016 ANNUAL REPORT36 lanvIn In July 2007, we acquired the worldwide rights to the Lanvin Éclat d’Arpège line accounts for approximately 50% of this brand names and international trademarks listed in Class 3, brand’s sales. We have extended our Lanvin fragrance fam- our class of trade. A synonym of luxury and elegance, the ilies, and in order to capitalize on the success of our Éclat Lanvin fashion house, founded in 1889 by Jeanne Lanvin, ex- d’Arpège line, in 2015, we launched Éclat d’Arpège Pour panded into fragrances in the 1920s. Homme as well as Éclat de Fleurs. For 2016, we released a Lanvin is currently our third largest brand by sales vol- new women’s line, Lanvin Modern Princess in limited distri- ume. Lanvin fragrances occupy an important position in the bution to be followed by broader international distribution in selective distribution market in France, Europe and Asia. 2017. In addition, another interpretation of Éclat d’Arpège Current lines in distribution include: Arpège, Lanvin L’Hom- is also in the works for 2017. Lanvin brand product sales me, Éclat d’Arpège, Rumeur 2 Rose, Jeanne Lanvin, Marry continue to be affected by the economic slowdown in its two Me!, Jeanne Lanvin Couture, Lanvin Me and Me L’Eau. Our flagship markets, Russia and China. the products 37 Lanvin Modern Princess INTER PARFUMS, INC. 2016 ANNUAL REPORT38 Montblanc Legend Night the products 39 monTblanC In October 2015, we extended our license agreement with goods, promising growth outlook in women’s jewelry, active Montblanc by five years. The original agreement, signed in presence in more than 70 countries, network of more than 2010, provided us with the exclusive worldwide license rights 350 boutiques worldwide and high standards of product de- to create, produce and distribute fragrances and fragrance re- sign and quality, Montblanc has quickly grown to be our largest lated products under the Montblanc brand through December and fastest growing fragrance brand. 31, 2020. The new 10-year agreement, which went into ef- In 2011, we launched our first new Montblanc fragrance, fect on January 1, 2016, extends the partnership through Legend, which quickly became our best-selling men’s line. In December 31, 2025 without any material changes in operating 2012, we launched our first women’s fragrance under the Mont- conditions from the prior license. blanc brand, and our second men’s line, Emblem, was launched Montblanc has achieved a world-renowned position in the in 2014. Montblanc has quickly become our largest selling luxury segment and has become a purveyor of exclusive prod- brand. The Emblem line was expanded in 2015 to include Mont- ucts, which reflect today’s exacting demands for timeless blanc Emblem Intense and a new women’s scent, Lady Emblem. design, tradition and master craftsmanship. Through its lead- In 2016, we further extended our successful Montblanc Legend ership positions in writing instruments, watches and leather line with a new men’s scent, Montblanc Legend Spirit. INTER PARFUMS, INC. 2016 ANNUAL REPORT40 osCar de la renTa In October 2013, we entered into a 12-year exclusive worldwide Oscar de la Renta is one of the world’s leading luxury goods license to create, produce and distribute fragrances and fragrance firms. The New York-based company was established in 1965, related products under the Oscar de la Renta brand. In 2014, and encompasses a full line of women’s accessories, bridal, we took over distribution of fragrances within the brand’s legacy childrenswear, fragrance, beauty and home goods, in addition fragrance portfolio, and our first new women’s fragrance under to its internationally renowned signature women’s ready to the Oscar de la Renta brand, Extraordinary, was launched in wear collection. Oscar de la Renta products are sold globally 2015. For 2016, in addition to several flankers that we launched in fine department and specialty stores, www.oscardelarenta. throughout the year in select markets, we debuted a new men’s com and through wholesale channels. The Oscar de la Renta fragrance family, Oscar de la Renta Gentleman. Bella Blanca, a brand has a loyal following in the United States, Canada and new Oscar de la Renta scent, will be introduced in 2018. Latin America. the products 41 Oscar de la Renta Bella Blanca INTER PARFUMS, INC. 2016 ANNUAL REPORT42 Paul Smith Essential the products 43 Paul smITh We signed an exclusive worldwide license agreement with Paul Smith in December 1998 for the creation, development and distribution of Paul Smith fragrances. In 2008, we extended this license for an additional seven years through December 31, 2017, and although we cannot assure we will be successful, we are currently in discussions to extend this license through December 31, 2019. Paul Smith is an internationally renowned British designer who creates fashion with a clear identity. Paul Smith has a mod- ern 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 Extrême, Paul Smith Rose and Paul Smith Essential. INTER PARFUMS, INC. 2016 ANNUAL REPORT44 rePeTTo In December 2011, we entered into a 13-year exclusive world- With Repetto boutiques in several countries throughout wide license agreement to create, produce and distribute fra- the world, the brand has branched out into Asia, notably grances under the Repetto brand. China, Hong Kong, Singapore, Thailand, South Korea and Created in 1947 by Rose Repetto at the request of her son, Japan with a mix of cross-generational appeal and French dancer and choreographer Roland Petit, Repetto is today a legend- chic. Our first Repetto fragrance line was launched in 2013 ary name in the world of dance. For a number of years it has de- and a floral scent was added in 2015. Despite this brand’s veloped timeless and must-have collections with a fully modernized success with footwear, handbags and high end accessories, signature style ranging from dance shoes, ballet slippers, flat shoes, fragrance sales have been disappointing due to the lack of and sandals to more recently handbags and high-end accessories. brand recognition. the products 45 Repetto Le Ballet Blanc INTER PARFUMS, INC. 2016 ANNUAL REPORT46 Rochas Mademoiselle Rochas the products 47 roChas In May 2015, we acquired the Rochas brand from The Procter This acquisition opened up a new page in the Company’s & Gamble Company. Founded by Marcel Rochas in 1925, the history by integrating for the first time both fragrances and brand began as a fashion house and expanded into perfumery fashion. This is allowing us to apply a global approach to man- in the 1950s under Hélène Rochas’ direction. This transac- aging a fragrance brand with complete freedom in terms of tion included all brand names and registered trademarks for creativity and aesthetic choices, as well as a very high degree Rochas (Femme, Madame, Eau de Rochas, etc.), mainly for of visibility to establish a position of even greater preeminence class 3 (cosmetics) and class 25 (fashion). Substantially the for Rochas in the luxury goods universe. Rochas brand sales entire €106 million purchase price for the assets acquired currently include approximately $2 million of royalties gener- (approximately $118 million) was allocated to trademarks with ated by the fashion and accessory business via its portfolio of indefinite lives, including approximately $5.4 million in acqui- license agreements. Our first new fragrance for Rochas, Made- sition related expenses. moiselle Rochas, launched in the first quarter of 2017. INTER PARFUMS, INC. 2016 ANNUAL REPORT 48 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 into a 12-year exclusive worldwide license to create, produce through its contemporary lifestyle offer of apparel and ac- and distribute fragrances under China’s leading luxury brand, cessories for men, women and children, as well as home col- Shanghai Tang. Our first Shanghai Tang fragrance collection lections. Shanghai Tang supports an international network of for men and women debuted in 2015. 48 boutiques, including The Shanghai Tang Mansion in Hong Founded in 1994, Shanghai Tang is the leading Chinese Kong, and its largest flagship Boutique, The Cathay Mansion luxury brand with international recognition and distribution. in Shanghai, China and on-line. the products 49 Shanghai Tang Gold Lily INTER PARFUMS, INC. 2016 ANNUAL REPORT50 S.T. Dupont Collection the products 51 s.T. duPonT In June 1997, we signed an exclusive worldwide license agree- a French luxury goods house founded in 1872, which is known ment with S.T. Dupont for the creation, manufacture and dis- for its fine writing instruments, lighters and leather goods. tribution of S.T. Dupont fragrances. In 2011, the agreement S.T. Dupont fragrances include: S.T. Dupont, S.T. Dupont was renewed through December 31, 2016, and in September Essence Pure, S.T. Dupont Passenger, S.T. Dupont Passen- 2016 was renewed again through December 31, 2019, without ger Cruise, 58 avenue Montaigne, So Dupont and S.T. Du- any material changes in terms and conditions. S.T. Dupont is pont Collection. INTER PARFUMS, INC. 2016 ANNUAL REPORT52 van Cleef & arPels In September 2006, we entered into an exclusive 12-year worldwide license agreement for the creation, development and distribution 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, Féerie, Collection Extraordinaire, and Rêve. In 2016, we launched a new men’s line, In New York, and a new women’s line, So First. Sales of the Collection Extraordinaire line have experienced continued growth since its debut. the products 53 Van Cleef & Arpels In New York INTER PARFUMS, INC. 2016 ANNUAL REPORT54 the products 55 INTER PARFUMS, INC. 2016 ANNUAL REPORT56 Rochas Mademoiselle Rochas quarterly financial data 57 qUarterlY data: (UnaUdited) for the Year ended decemBer 31, 2016 (In Thousands, Except Per Share Data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year Net Sales $111,522 $117,157 74,428 Gross Margin 7,729 71,317 9,448 Net Income $157,622 94,832 21,479 $134,771 85,894 4,592 $521,072 326,471 43,248 Net Income Attributable to Inter Parfums, Inc. Net Income Attributable to Inter Parfums, Inc. per Share: Basic Diluted Average Common Shares Outstanding: Basic Diluted 7,334 5,831 16,239 3,927 33,331 $0.24 $0.24 31,039 31,115 $0.19 $0.19 31,055 31,160 $0.52 $0.52 31,080 31,197 $0.13 $0.13 31,072 31,231 $1.07 $1.07 31,072 31,176 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 $109,249 $102,021 $138,944 $118,326 $468,540 67,610 13,305 60,325 5,520 85,826 75,710 18,634 1,510 289,471 38,969 Net Sales Gross Margin Net Income Net Income Attributable to Inter Parfums, Inc. 10,007 4,351 14,220 1,859 30,437 Net Income Attributable to Inter Parfums, Inc. per Share: Basic Diluted Average Common Shares Outstanding: Basic Diluted $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 INTER PARFUMS, INC. 2016 ANNUAL REPORT norTh amerICa 29% United States export sales were approximately $77.5 mil- lion, $66.3 million and $61.0 million in 2016, 2015 and 2014, respectively. Consolidated net sales to customers by region are as follows: Year Ended December 31, consolidated net sales to cUstomers BY reGion (in thousands) 2016 $149,600 192,800 North America 2014 $125,900 $125,700 170,600 177,900 2015 Europe CenTral & souTh amerICa 8% Central and South America Middle East Asia Other 41,100 57,700 41,900 40,300 78,200 85,600 43,900 42,200 81,600 11,000 11,000 $521,100 $468,500 consolidated net sales to cUstomers in maJor coUntries are as follows: (in thousands) Year Ended December 31, 2016 United States United Kingdom France 2015 $144,000 $122,000 32,000 31,000 43,000 34,000 11,900 $499,300 2014 $119,000 37,000 50,000 euroPe 37% asIa 16% mIddle easT 8% INTER PARFUMS, INC. 2016 ANNUAL REPORT60 the Organization all CorPoraTe funCTIons, oPeraTIons: Including product analysis and development, production and Daniel Kline and Alex Canavan in the United States, and Axel sales, and finance are coordinated at the Company’s corpo- 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 61 simPlified chart of the orGaniZation philippe benacin jean madar inter parfums, inc. (nasdaq - “ipar”) public shareholders interparfums holdings, sa jean philippe fragrances, llc inter parfums usa, llc inter parfums usa hong kong ltd interparfums sa (euronext – paris) interparfums luxury brands, inc. interparfums (suisse) sarl interparfums singapore pte, ltd interparfums deutschland gmbh (germany) parfums rochas spain, sl pãna inter es pa rfums et cosmetiques, sl (spain) interparfums srl (italy) INTER PARFUMS, INC. 2016 ANNUAL REPORT62 ConTenTs Management’s Discussion and Analysis of Financial Condition and Results of Operations 63 Report on Internal Control Over Financial Reporting 75 Reports of Independent Registered Public Accounting Firm 76 Notes to Consolidated Financial Statements 83 Financial Statements 78 Directors and Executive Officers 98 Corporate and Market Information 99 management’s discussion and analysis of financial condition and results of operations 63 management’s discussion and analysis of financial condition and Results of Operations manaGement’s discUssion and analYsis of financial condition and resUlts of oPerations regulaTIon s-k ITem 10(e) Regulation S-K, Item 10(e), “Use of Non-GAAP Financial We produce and distribute our European based fragrance Measures in commission filings,” prescribes the conditions products primarily under license agreements with brand own- for use of non-GAAP financial information in filings with the ers, and European based fragrance product sales represented Securities and Exchange Commission. approximately 79%, 77% and 82% of net sales for 2016, 2015 Our reported results include a provision of $1.9 million and 2014, respectively. We have built a portfolio of prestige ($1.4 million net of noncontrolling interests) for income taxes brands, which include Balmain, Boucheron, Coach, Jimmy resulting from a pending nonrecurring tax settlement. Due to Choo, Karl Lagerfeld, Lanvin, Montblanc, Paul Smith, S.T. Du- the significance of this transaction, as well as its nonrecurring pont, Repetto, Rochas and Van Cleef & Arpels, whose products nature, exclusion of such amount in the non-GAAP financial are distributed in over 100 countries around the world. measures provides a more complete disclosure and facilitates With respect  to  the  Company’s  largest  brands, a more accurate comparison of current results to historic re- we  own  the  Lanvin  brand name for its class of trade, and sults. Based upon the foregoing, we believe that our presen- license the Montblanc and Jimmy Choo brand names. tation of the non-GAAP financial information is an important As  a  percentage of net  sales, product  sales  for  the Compa- supplemental measure of operating performance to investors. ny’s largest brands were as follows: overvIeW We operate in the fragrance business, and manufacture, mar- ket and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based opera- Year ended December 31, 2016 23% Montblanc 17% 12% Jimmy Choo Lanvin 2015 2014 21% 20% 15% 22% 16% 18% tions. Certain prestige fragrance products are produced and Through our United States operations we also market fra- marketed by our European operations through our 73% owned grance and fragrance related products. United States opera- subsidiary in Paris, Interparfums SA, which is also a publicly tions represented 22%, 23% and 21% of net sales in 2016, traded company as 27% of Interparfums SA shares trade on 2015 and 2014, respectively. These fragrance products are the NYSE Euronext. sold primarily pursuant to license or other agreements with INTER PARFUMS, INC. 2016 ANNUAL REPORT 64 the owners of the Abercrombie & Fitch, Agent Provocateur, Our reported net sales are impacted by changes in foreign Anna Sui, Banana Republic, bebe, Dunhill, French Connection, currency exchange rates. A strong U.S. dollar has a negative im- Hollister, Oscar de la Renta, and Shanghai Tang brands. pact on our net sales. However, earnings are positively affected Quarterly sales fluctuations are influenced by the timing of by a strong dollar, because approximately 40% of net sales new product launches as well as the third and fourth quarter of our European operations are denominated in U.S. dollars, holiday season. In certain markets where we sell directly to re- while almost all costs of our European operations are incurred tailers, seasonality is more evident. We sell directly to retailers in euro. Our Company addresses certain financial exposures in France as well as through our own distribution subsidiaries through a controlled program of risk management that includes in Italy, Germany, Spain and the United States. the use of derivative financial instruments. We primarily enter We grow our business in two distinct ways. First, we grow by into foreign currency forward exchange contracts to reduce the adding new brands to our portfolio, either through new licenses effects of fluctuating foreign currency exchange rates. We are or other arrangements or out-right acquisitions of brands. Sec- also carefully monitoring currency trends in the United King- ond,  we grow through the introduction of new products and dom as a result of the volatility created from the United King- by supporting new and established products through adver- dom’s decision to exit the European Union. We have evaluated tising, merchandising and sampling as well as by phasing out our current pricing models and currently we do not expect any existing products that no longer meet the needs of our con- significant pricing changes. However, if the devaluation of the sumers.  The economics of developing, producing, launching British Pound worsens, it may affect future gross profit margins and supporting products influence our sales and operating from sales in the territory. We do not expect any material losses performance each year. Our introduction of new products may on accounts receivables to be collected in British Pounds as we have some cannibalizing effect on sales of existing products, routinely hedge those amounts. which we take into account in our business planning. Our business is not capital intensive, and it is important to recent imPortant eVents note that we do not own manufacturing facilities. We act as a buyouT of lICense general contractor and source our needed components from our In December 2016, the Company reached an agreement suppliers. These components are received at one of our dis- with the Balmain brand calling for Balmain to buyout the tribution centers and then, based upon production needs, the Balmain license agreement, effective December 31, 2016, components are sent to one of several third party fillers, which in exchange for a payment aggregating €5.4 million (approxi- manufacture the finished product for us and then deliver them mately $5.7 million). As a result of the buyout, the Company to one of our distribution centers. recognized a gain of $4.7 million and expects to receive the As with any global business, many aspects of our opera- buyout payment by April 30, 2017. The Company has a three tions are subject to influences outside our control. We believe month inventory sell-off period ending March 31, 2017 and we have a strong brand portfolio with global reach and poten- Balmain has also agreed to purchase all remaining inventory tial. As part of our strategy, we plan to continue to make in- and tangible assets. vestments behind fast-growing markets and channels to grow market share. ImPaIrmenT loss During 2016, the economic and political uncertainty and The Company reviews intangible assets with finite lives for impair- financial market volatility taking place in Eastern Europe, the ment whenever events or changes in circumstances indicate that Middle East and China had a small negative impact on our the carrying amount may not be recoverable. Product sales of our business, and at this time we do not believe it will signifi- Karl Lagerfeld brand have not met with our original expectations. cantly affect our overall business for the foreseeable future. As a result of our review in 2016, the Company recorded an im- However, if the degree of uncertainty or volatility worsens or pairment loss of $5.7 million as of December 31, 2016. is prolonged, then there will likely be a negative effect on on- going consumer confidence, demand and spending and as a s.T. duPonT result, our business. Currently, we believe general economic In September 2016, we renewed our license agreement with and other uncertainties still exist in select markets in which S.T. Dupont for the creation, development and distribution we do business, and we continue to monitor global economic of fragrance products through December 31, 2019, without uncertainties and other risks that may affect our business. any material changes in terms and conditions. Our initial management’s discussion and analysis of financial condition and results of operations 65 11-year license agreement with S.T. Dupont was signed revenue reCognITIon in June 1997, and had previously been extended through We sell our products to department stores, perfumeries, spe- December 31, 2016. cialty stores, and domestic and international wholesalers and distributors. Sales of such products by our domestic subsidiar- seTTlemenT WITh frenCh Tax auThorITIes ies are denominated in U.S. dollars and sales of such products As previously reported, the French Tax Authorities examined by our foreign subsidiaries are primarily denominated in either the 2012 tax return of Interparfums SA, and in August 2015 euro or U.S. dollars. We recognize revenues when merchandise issued a $6.9 million tax adjustment. It is the Company’s is shipped and the risk of loss passes to the customer. Net position that the French Tax Authorities are incorrect in their sales are comprised of gross revenues less returns, trade dis- assessments and the Company believes that it has strong counts and allowances. arguments to support its tax positions. The main issues chal- lenged by the French Tax Authorities related to the commis- aCCounTs reCeIvable sion rate and royalty rate paid to Interparfums Singapore Pte. Accounts receivable represent payments due to the Company for and Interparfums (Suisse) SARL, respectively. Interparfums previously recognized net sales, reduced by allowances for sales Singapore Pte. and Interparfums (Suisse) SARL are whol- returns and doubtful accounts. Accounts receivable balances ly-owned subsidiaries of Interparfums SA. Due to the subjec- are written-off against the allowance for doubtful accounts when tive nature of the issues involved, in April 2016, Interparfums they become uncollectible. Recoveries of accounts receivable SA reached an agreement in principle to settle the entire previously recorded against the allowance are recorded in the matter with the French Tax Authorities. The settlement re- consolidated statement of income when received. We generally quires Interparfums SA to pay a tax assessment of $1.9 grant credit based upon our analysis of the customer’s financial million covering the issues for not only the 2012 tax year, position as well as previously established buying patterns. but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as sales reTurns to future acceptable commission and royalty rates, which is Generally, we do not permit customers to return their unsold not expected to have a significant impact on cash flow. The products. However, for U.S. distribution of our prestige prod- settlement, which is subject to formal documentation with ucts, we allow returns if properly requested, authorized and the French Tax Authorities, was accrued for in March 2016. approved. We regularly review and revise, as deemed necessary, In July 2016, Interparfums SA paid $1.1 million to the French our estimate of reserves for future sales returns based primarily Tax Authorities upon receipt of formal notification regarding upon historic trends and relevant current data, including infor- tax years 2013 and 2014. mation provided by retailers regarding their inventory levels. In addition, as necessary, specific accruals may be established discUssion of critical accoUntinG Policies for significant future known or anticipated events. The types We make estimates and assumptions in the preparation of of known or anticipated events that we have considered, and our financial statements in conformity with accounting prin- will continue to consider, include, but are not limited to, the ciples generally accepted in the United States of America. financial condition of our customers, store closings by retailers, Actual results could differ significantly from those estimates changes in the retail environment and our decision to contin- under different assumptions and conditions. We believe the ue to support new and existing products. We record estimated following discussion addresses our most critical accounting reserves for sales returns as a reduction of sales, cost of sales policies, which are those that are most important to the por- and accounts receivable. Returned products are recorded as in- trayal of our financial condition and results of operations. ventories and are valued based upon estimated realizable value. These accounting policies generally require our manage- The physical condition and marketability of returned products ment’s most difficult and subjective judgments, often as are the major factors we consider in estimating realizable value. a result of the need to make estimates about the effect of Actual returns, as well as estimated realizable values of returned matters that are inherently uncertain. Management of the products, may differ significantly, either favorably or unfavor- Company has discussed the selection of significant ac- ably, from our estimates, if factors such as economic condi- counting policies and the effect of estimates with the Audit tions, inventory levels or competitive conditions differ from Committee of the Board of Directors. our expectations. INTER PARFUMS, INC. 2016 ANNUAL REPORT66 InvenTorIes results do not meet our expectations, we may be required to Inventories are stated at the lower of cost and net realizable record an impairment charge, the amount of which could be value. Cost is principally determined by the first-in, first-out material to our results of operations. method. We record adjustments to the cost of inventories At December 31, 2016 indefinite-lived intangible assets based upon our sales forecast and the physical condition of aggregated $115.8 million. The following table presents the the inventories. These adjustments are estimates, which could impact a change in the following significant assumptions vary significantly, either favorably or unfavorably, from actual would have had on the calculated fair value in 2016 assuming results if future economic conditions or competitive condi- all other assumptions remained constant: tions differ from our expectations. eQuIPmenT and oTher long-lIved asseTs $ in millions Equipment, which includes tools and molds, is recorded at Weighted average cost of capital cost and is depreciated on a straight-line basis over the esti- Weighted average cost of capital mated useful lives of such assets. Changes in circumstances Future sales levels such as technological advances, changes to our business Future sales levels model or changes in our capital spending strategy can re- increase (decrease) change to fair value +10% -10% +10% -10% $(16.2) $ 20.0 $ 17.0 $(17.0) sult in the actual useful lives differing from our estimates. Intangible assets subject to amortization are evaluated In those cases where we determine that the useful life of for impairment testing whenever events or changes in cir- equipment should be shortened, we would depreciate the net cumstances indicate that the carrying amount of an amortiz- book value in excess of the salvage value, over its revised re- able intangible asset may not be recoverable. If impairment maining useful life, thereby increasing depreciation expense. indicators exist for an amortizable intangible asset, the un- Factors such as changes in the planned use of equipment, discounted future cash flows associated with the expected or market acceptance of products, could result in shortened service potential of the asset are compared to the carrying useful lives. value of the asset. If our projection of undiscounted future We evaluate indefinite-lived intangible assets for impair- cash flows is in excess of the carrying value of the intangible ment at least annually during the fourth quarter, or more fre- asset, no impairment charge is recorded. If our projection quently when events occur or circumstances change, such as of undiscounted future cash flows is less than the carrying an unexpected decline in sales, that would more likely than value of the intangible asset, an impairment charge would not indicate that the carrying value of an indefinite-lived in- be recorded to reduce the intangible asset to its fair value. tangible asset may not be recoverable. When testing indef- The cash flow projections are based upon a number of as- inite-lived intangible assets for impairment, the evaluation sumptions, including future sales levels and future cost of requires a comparison of the estimated fair value of the asset goods and operating expense levels, as well as economic to the carrying value of the asset. The fair values used in our conditions, changes to our business model or changes in evaluations are estimated based upon discounted future cash consumer acceptance of our products which are more sub- flow projections using a weighted average cost of capital of jective in nature. In those cases where we determine that 6.2%. The cash flow projections are based upon a number the useful life of long-lived assets should be shortened, we of assumptions, including, future sales levels and future cost would amortize the net book value in excess of the salvage of goods and operating expense levels, as well as economic value (after testing for impairment as described above), over conditions, changes to our business model or changes in con- the revised remaining useful life of such asset thereby in- sumer acceptance of our products which are more subjective creasing amortization expense. We believe that the assump- in nature. If the carrying value of an indefinite-lived intangible tions we have made in projecting future cash flows for the asset exceeds its fair value, an impairment charge is recorded. evaluations described above are reasonable. Product sales We believe that the assumptions we have made in project- of our Karl Lagerfeld brand have not met with our original ing future cash flows for the evaluations described above are expectations. During the fourth quarter of 2016, the Com- reasonable and currently no impairment indicators exist for pany decided that it will most likely exercise its rights for our indefinite-lived intangible assets. However, if future actual an early termination of the Karl Lagerfeld license in 2024, management’s discussion and analysis of financial condition and results of operations 67 rather than continue the license through its original expira- monitor the instruments. Variables that are external to us such tion in 2032. As a result of the shortened expected life of as social, political and economic risks may have an impact on the license, the Company recorded an impairment loss of our hedging program and the results thereof. $5.7 million as of December 31, 2016. In determining the useful life of our Lanvin brand names InCome Taxes and trademarks, we applied the provisions of ASC topic The Company accounts for income taxes using an asset and 350-30-35-3. The only factor that prevented us from de- liability approach that requires the recognition of deferred tax termining that the Lanvin brand names and trademarks were assets and liabilities for the expected future tax consequences indefinite life intangible assets was Item c. “Any legal, reg- of events that have been recognized in its financial statements ulatory, or contractual provisions that may limit the useful or tax returns. The net deferred tax assets assume sufficient life.” The existence of a repurchase option in 2025 may limit future earnings for their realization, as well as the continued the useful life of the Lanvin brand names and trademarks to application of currently anticipated tax rates. Included in net the Company. However, this limitation would only take ef- deferred tax assets is a valuation allowance for deferred tax fect if the repurchase option were to be exercised and the assets, where management believes it is more-likely-than-not repurchase price was paid. If the repurchase option is not that the deferred tax assets will not be realized in the relevant exercised, then the Lanvin brand names and trademarks are jurisdiction. If the Company determines that a deferred tax expected to continue to contribute directly to the future cash asset will not be realizable, an adjustment to the deferred tax flows of our Company and their useful life would be consid- asset will result in a reduction of net income at that time. In ered to be indefinite. addition, the Company follows the provisions of uncertain tax With respect to the application of ASC topic 350-30-35-8, positions as addressed in ASC topic 740. the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exer- QuanTITaTIv e analysIs cised, and in applying ASC topic 350-30-35-8, we assumed During the three-year period ended December 31, 2016, we that the repurchase option is exercised. When exercised, Lan- have not made any material changes in our assumptions un- vin has an obligation to pay the exercise price and the Compa- derlying these critical accounting policies or to the related ny would be required to convey the Lanvin brand names and significant estimates. The results of our business underlying trademarks back to Lanvin. The exercise price to be received these assumptions have not differed significantly from our (Residual Value) is well in excess of the carrying value of the expectations. Lanvin brand names and trademarks, therefore no amortiza- While we believe the estimates we have made are prop- tion is required. derIvaTIves er and the related results of operations for the period are presented fairly in all material respects, other assumptions could reasonably be justified that would change the amount We account for derivative financial instruments in accor- of reported net sales, cost of sales, and selling, general and dance with ASC topic 815, which establishes accounting administrative expenses as they relate to the provisions for and reporting standards for derivative instruments, includ- anticipated sales returns, allowance for doubtful accounts ing certain derivative instruments embedded in other con- and inventory obsolescence reserves. For 2016, had these tracts, and for hedging activities. This topic also requires estimates been changed simultaneously by 5% in either di- the recognition of all derivative instruments as either assets rection, our reported gross profit would have increased or or liabilities on the balance sheet and that they are mea- decreased by approximately $0.5 million and selling, general sured at fair value. and administrative expenses would have changed by approx- We currently use derivative financial instruments to hedge imately $0.02 million. The collective impact of these chang- certain anticipated transactions and interest rates, as well es on 2016 operating income, net income attributable to as receivables denominated in foreign currencies. We do not Inter Parfums, Inc., and net income attributable to Inter Par- utilize derivatives for trading or speculative purposes. Hedge fums, Inc. per diluted common share would be an increase effectiveness is documented, assessed and monitored by or decrease of approximately $0.5 million, $0.2 million and employees who are qualified to make such assessments and $0.01, respectively. INTER PARFUMS, INC. 2016 ANNUAL REPORT68 resUlts of oPerations neT sales (in millions) Years Ended December 31, European-based ongoing brand product sales United States-based product sales Total net sales 2016 $404.0 117.1 $521.1 % Change 2015 % Change 2014 11% 11% 11% $362.7 105.8 $468.5 (8)% 1% (6)% $394.0 105.3 $499.3 Net sales increased 11% in 2016 to $521.1 million, as com- It was anticipated that 2015 was going to be very challeng- pared to $468.5 million in 2015. At comparable foreign ing from a currency perspective for our European based oper- currency exchange rates, net sales increased 12%. Net sales ations. The significant strength of the U.S. dollar began early decreased 6% in 2015 to $468.5 million, as compared to on in 2015, and continued throughout the year. As mentioned $499.3 million in 2014. At comparable foreign currency ex- above, the average U.S. dollar/euro exchange rate for all of 2015 change rates, net sales increased 1.5%. The average U.S. was 1.11, as compared to 1.33 for 2014. The currency impact dollar/euro exchange rates were 1.11 in 2016 and 2015 and was most apparent with our three largest brands, led by Jimmy 1.33 in 2014. Choo, where brand sales for 2015 increased 41% in local cur- European based prestige product sales increased 11% in rency, but only 18% in dollars, as compared to 2014. The excel- 2016 to $404.0 million, as compared to $362.7 million in lent performance in Jimmy Choo fragrance sales reflects robust 2015. At comparable foreign currency exchange rates, Euro- gains from the Jimmy Choo Man line, and the launch of Jimmy pean based prestige product sales increased 12.5%. Euro- Choo Illicit, the brand’s third women’s fragrance initiative. With pean based prestige product sales decreased 8% in 2015 to only a new line extension launched for the Lanvin brand in 2015, $362.7 million, as compared to $394.0 million in 2014. At sales were off only 6% in local currency, but 21% in dollars, in comparable foreign currency exchange rates, European based 2015 as compared to 2014. Montblanc brand sales increased prestige product sales increased 1.8% in 2015. 6% in local currency but declined 12% in dollars in 2015, as In 2016, Montblanc, our largest brand, continued to lead compared to 2014. The brand benefited from both established the way in sales growth reaching $121.7 million in brand sales, scents, such as Legend and Emblem along with initial sales for a 25% increase from the prior year. The successful launch of the Lady Emblem line. The most disappointing performance was Montblanc Legend Spirit and the continued popularity of the that of the Karl Lagerfeld brand, which saw brand sales decline original Legend line were important contributors to Montblanc 43% in local currency or 53% in dollars, as its initial 2014 brand sales. Our newer brands were also contributors to the launch did not gain the traction originally anticipated. increase in net sales. Coach brand sales, which commenced in Irrespective of the strong U.S. dollar environment, we main- the second half of 2016, were well ahead of expectations gen- tain confidence in our future as we continue to strengthen ad- erating $23.1 million in incremental sales. Strong demand for vertising and promotional investments supporting all portfolio the Eau de Rochas and Rochas Man lines in Spain and France brands, accelerate brand development and build upon the contributed to the successful integration of Rochas, and brand strength of our worldwide distribution network. For 2017, our sales aggregated $32.3 million in 2016. We began consolidat- first new product for Rochas, a women’s fragrance, will be in- ing brand sales when we acquired Rochas in June 2015. In the troduced early in the year, initially in about 12 countries. Also absence of a major new product launch, Jimmy Choo fragrance this winter, Lanvin Modern Princess, which recently debuted in sales declined 2% in 2016 as the bar was set unusually high France, will roll out in wider international distribution. A multi- in 2015 when brand sales were up 18% compared to the pre- scent collection for Boucheron is now in selective distribution, ceding year. Lanvin brand sales declined 13% in 2016 as that and come this spring, we have important new initiatives unveil- brand’s product sales continue to be affected by the economic ing for the Jimmy Choo signature scent for women and Jimmy slowdowns in its two flagship markets of Russia and China. Choo Man, with a brand extension for each. A fragrance duo is We hope to reverse that trend with the recent launch of a new in the pipeline for the Karl Lagerfeld brand next summer, and scent by Lanvin, Modern Princess. our first men’s scent for Coach will launch in the fall. management’s discussion and analysis of financial condition and results of operations 69 United States based product sales increased 11% in 2016 In 2016, we continued to feel the effect of negative market to $117.1 million, as compared to $105.8 million in 2015. conditions in Eastern Europe, the Middle East and China, while International distribution of our first new Abercrombie & Fitch Western Europe and North America continued to perform well. men’s scent, First Instinct, and the Hollister duo, Wave, were For 2015 compared to 2014, the results demonstrate the ef- major contributors to our top line growth in 2016 as they were fect of negative market conditions in China and South America. rolled out into several international markets throughout the The 2015 decline in Western Europe includes the effect of the year. Dunhill, which launched its Icon fragrance line in ear- 17% devaluation of the euro against the dollar and the difficult ly 2015, continues to be a consistent top performing brand. comparison for Karl Lagerfeld brand sales in 2015 compared to Sales increased 4% in 2016 despite a difficult comparison the initial launch of that brand in the 2014 period. to 2015, where Dunhill brand sales were up 37% compared to the prior year. The success of the 2015 launch of Dunhill Icon has enabled Dunhill to quickly become the largest brand within our United States operations. Although Oscar de la Renta brand sales had increased 18% in 2015, benefitting from the 2015 launch of Extraor- dinary by Oscar de la Renta, sales of this brand decreased 28% in 2016 due to large part to the absence of any major gross margIns (In millions) Years ended December 31, 2016 $521.1 Net sales 194.6 Cost of sales $326.5 Gross margin Gross margin as a 2015 $468.5 179.0 $289.5 2014 $499.3 212.3 $287.0 product launch. For the Spring of 2017, we have a new Os- percent of net sales 62.7% 61.8% 57.5% car de la Renta woman’s scent ready to launch. In addition, sales of Anna Sui fragrances continued to be depressed due As a percentage of net sales, gross profit margins were 62.7%, to negative market conditions in China throughout the 2014 61.8%, and 57.5% in 2016, 2015 and 2014, respectively. For to 2016 periods. We hope to reverse this trend and anticipate European operations, gross profit margin was 66%, 65% and either stable sales or modest growth for Anna Sui fragrances 60% in 2016, 2015 and 2014, respectively. The margin fluctu- for 2017. ation as a percentage of sales for European operations in 2016, For 2017, we expect our newest brands Abercrombie & Fitch as compared to 2015, is primarily the result of increased product and Hollister, to lead our growth story. Overall, growth within sales, much of which was through our distribution subsidiaries our United States based operations is expected to come from that sell product directly to retailers. In addition to increased sales our prestige fragrance licenses, by launching new products of Montblanc and Coach product sold through our United States and pursuing expanded distribution. distribution subsidiary, the Rochas brand was a major contributor Lastly, we hope to benefit our worldwide operations from as its sales are concentrated in France and Spain, both of which our strong financial position to potentially acquire one or more are countries where we distribute directly to retailers. brands, either on a proprietary basis or as a licensee. Howev- We carefully monitor movements in foreign currency ex- er, we cannot assure you that any new license or acquisition change rates as almost 40% of our European based opera- agreements will be consummated. tions net sales is denominated in U.S. dollars, while most of 2015 $125.7 123.6 neT sales To CusTomers by regIon (In millions) Years ended December 31, 2016 $149.6 North America 152.6 Western Europe 40.3 Eastern Europe 43.9 Central & South America 42.2 81.5 11.0 $521.1 Middle East Other Asia our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross margin while a weak U.S. dollar has a negative effect. The average 2014 dollar/euro exchange rate was 1.11 in 2016 and 2015 and $125.9 1.33 in 2014. Although currency fluctuation had only a minor 130.9 effect on gross margin as a percentage of sales in our Europe- 47.0 41.1 41.9 78.2 47.0 57.7 40.3 85.6 an operations for 2016, in 2015 it was the primary cause of the gross margin fluctuation. For United States operations, gross profit margin was 50% for both 2016 and 2015 and 48% in 2014. Sales 11.0 11.9 growth in recent years for our United States operations has $468.5 $499.3 primarily come from higher margin prestige product licenses INTER PARFUMS, INC. 2016 ANNUAL REPORT 70 while sales of other lower margin fragrance products have spending to support new product launches and continued world- been in a decline. wide building of brand awareness for our brand portfolio. Costs relating to purchase with purchase and gift with pur- Royalty expense included in selling, general and adminis- chase promotions are reflected in cost of sales and aggregat- trative expenses aggregated $37.8 million, $33.8 million and ed $30.0 million, $25.4 million and $24.4 million in 2016, $35.6 million in 2016, 2015 and 2014, respectively. Royalty 2015 and 2014, respectively, and represented 5.8%, 5.4% expense as a percentage of sales represented 7.3%, 7.2% and 4.9% of net sales, respectively. and 7.1% of net sales in 2016, 2015 and 2014, respectively. Generally, we do not bill customers for shipping and han- The small increases are the result of increased licensing ac- dling costs and such costs, which aggregated $5.1 million, tivities within our U.S. operations. $4.7 million and $5.2 million in 2016, 2015 and 2014, re- Service fees, which are fees paid to third parties relating spectively, are included in selling, general and administrative to the activities of our distribution subsidiaries, aggregated expenses in the consolidated statements of income. As such, $9.9 million, $12.3 million and $11.1 million in 2016, 2015 our Company’s gross margins may not be comparable to other and 2014, respectively. Service fees decreased in 2016 as a companies, which may include these expenses as a compo- result of our U.S. distribution subsidiary, Interparfums Luxury nent of cost of goods sold. Brands, Inc.’s 2016 conversion to an in-house sales team model. However, much of this savings was mitigated by an sellIng, general & admInIsTraTIve exPenses increase in compensation costs of the in-house sales team. (In millions) Years ended December 31, 2016 Selling, general & administrative expenses $258.8 $228.3 $233.6 Selling, general & 2015 2014 administrative expenses Approximately two-thirds of the 2015 increase in service fees was the result of higher fees paid in the U.S. resulting from increased sales. The balance of the increase is from the ad- dition of our newly formed distribution subsidiary in Spain, Parfums Rochas. as a percent of net sales 50% 49% 47% buyouT of lICense In December 2016, the Company reached an agreement with Selling, general and administrative expenses increased 13% the Balmain brand calling for Balmain to buyout the Balmain in 2016 as compared to 2015 and decreased 2% in 2015 as license agreement, effective December 31, 2016, in exchange compared to 2014. As a percentage of sales, selling, gener- for a payment aggregating €5.4 million (approximately $5.7 mil- al and administrative expenses were 50%, 49% and 47% in lion). As a result of the buyout, the Company recognized a gain 2016, 2015 and 2014, respectively. For European operations, of $4.7 million and expects to receive the buyout payment by selling, general and administrative expenses increased 14% April 30, 2017. The Company has a three month inventory sell- in 2016, as compared to 2015 and represented 53% of sales off period ending March 31, 2017 and Balmain has also agreed in 2016 as compared to 52% in 2015. As discussed in more to purchase all remaining inventory and tangible assets. detail below, the 2016 increase is primarily from increased promotion and advertising expenditures. ImPaIrmenT loss For United States operations, selling, general and adminis- The Company reviews intangible assets with finite lives for trative expenses increased 9% in 2016 and represented 38% impairment whenever events or changes in circumstances of sales, as compared to 39% in 2015. This increase is in line indicate that the carrying amount may not be recoverable. with sales growth from our newest prestige product licens- Product sales of our Karl Lagerfeld brand have not met with es, such as Abercrombie & Fitch, Hollister and Dunhill, all of our original expectations. As a result of our review in 2016, which bear royalty and advertising expenses. the Company recorded an impairment loss of $5.7 million as Promotion and advertising included in selling, general and of December 31, 2016. administrative expenses aggregated $99.0 million, $83.8 mil- lion and $86.7 million in 2016, 2015 and 2014, respectively. InCome from oPeraTIons Promotion and advertising as a percentage of sales represent- As a result of the above analysis regarding net sales, gross ed 19.0%, 17.9% and 17.4% of net sales in 2016, 2015 and profit margins, selling, general and administrative expenses, 2014, respectively. As planned, we invest heavily in promotional buyout of license and impairment loss, income from opera- management’s discussion and analysis of financial condition and results of operations 71 tions increased 9% to $66.7 million in 2016 as compared InCome Taxes to 2015, after increasing 15% to $61.2 million in 2015 from Our effective income tax rate was 35.5%, 35.6% and 34.2% in $53.4 million in 2014. Operating margins aggregated 12.8%, 2016, 2015 and 2014, respectively, and differs from statutory 13.1% and 10.7% for the years ended December 31, 2016, rates due to the effect of state and local taxes and tax rates in 2015 and 2014, respectively. Excluding the gain on buyout of foreign jurisdictions. The effective tax rate for our European op- license and impairment loss, income from operations in 2016 erations was 35.9%, 36% and 33.5% in 2016, 2015 and 2014, would have aggregated $67.7 million, an increase of 10.6%, respectively. The French Tax Authorities examined the 2012 tax compared to 2015 and represented an operating margin of return of Interparfums SA, and in August 2015 issued a $6.9 13.0%. In summary, for the past two years, the increase in million tax adjustment. The main issues challenged by the gross margin was mitigated by an increase in selling, general French Tax Authorities related to the commission rate and roy- and administrative expenses, primarily promotion and adver- alty rate paid to Interparfums Singapore Pte. and Interparfums tising expenditures, explaining the effect on operating margin. (Suisse) SARL, respectively. Interparfums Singapore Pte. and The Company plans to continue to increase sales without a Interparfums (Suisse) SARL are wholly-owned subsidiaries of substantial increase in fixed costs. Our goal is to reach an op- Interparfums SA. Due to the subjective nature of the issues in- erating margin of at least 14% in the coming years. volved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax oTher InCome and exPenses Authorities. The settlement requires Interparfums SA to pay a Interest expense aggregated $2.3 million, $2.8 million and tax assessment of $1.9 million covering the issues for not only $1.5 million in 2016, 2015 and 2014, respectively. The the 2012 tax year, but also covering the issues for the tax years significant increase in 2015 is related to the financing of ended 2013 through 2015. The settlement also includes an the Rochas brand acquisition and includes an approximate agreement as to future acceptable commission and royalty rates, $1.0 million loss in 2015 relating to the interest rate swap. which is not expected to have a significant impact on cash flow. There was a small gain on the swap in 2016. We use the The settlement, which is subject to formal documentation with credit lines available to us, as needed, to finance our work- the French Tax Authorities, was accrued as of March 31, 2016. ing capital needs as well as our financing needs for acquisi- In addition, the 2016 effective tax rate for European operations tions. Loans payable – banks and long-term debt including was favorably impacted by approximately 1.5%, due to lower tax current maturities aggregated $74.6 million, $98.6 million rates in France, Spain, and the United States. The increase in and $0.3 million as of December 31, 2016, 2015 and 2014, 2015 is primarily the result of higher 2015 profits in high tax respectively. rate jurisdictions as compared to 2014. Foreign currency gains or (losses) aggregated ($0.6) mil- The effective tax rate for our U.S. operations was 34.0%, lion ($0.9) million and $0.9 million in 2016, 2015 and 2014, 35.1% and 36.5% in 2016, 2015 and 2014, respectively. The respectively. Currency exchange rates were extremely volatile early adoption in 2016 of Accounting Standards Update 2016- during the first quarter of 2015. The 2015 loss includes ap- 09 (“ASU 2016-09”) resulted in the recognition of excess tax proximately $2.4 million in losses from intercompany balanc- benefits of $0.4 million in our provision for income taxes rath- es of our majority owned subsidiary, Interparfums SA, and its er than in additional paid-in capital. Under previous guidance, other foreign subsidiaries, which were not hedged. We typical- excess tax benefits and certain tax deficiencies from share- ly enter into foreign currency forward exchange contracts to based compensation arrangements were recorded in additional manage exposure related to receivables from unaffiliated third paid-in capital when the awards vested or were settled. ASU parties denominated in a foreign currency and occasionally to 2016-09 requires that all excess tax benefits and all tax de- manage risks related to future sales expected to be denominat- ficiencies be recognized as income tax expense or benefit in ed in a foreign currency. Almost 40% of 2016 net sales of our the income statement and adoption is on a prospective basis. European operations were denominated in U.S. dollars. In 2015, changes in allocation percentages related to state Interest and dividend income aggregated $3.3 million, and local taxes of our U.S. operations resulted in a reduced $3.0 million and $3.9 million in 2016, 2015 and 2014, re- effective tax rate. spectively. Cash and cash equivalents and short-term invest- Other than as discussed above, we did not experience any ments are primarily invested in certificates of deposit with significant changes in tax rates, and none were expected in varying maturities. jurisdictions where we operate. INTER PARFUMS, INC. 2016 ANNUAL REPORT72 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 2016 $35,037 8,211 $43,248 9,917 $33,331 2015 $31,328 7,641 $38,969 8,532 $30,437 2014 $29,276 8,069 $37,345 7,909 $29,436 $1.07 1.07 $0.98 0.98 $0.95 0.95 31,072,328 31,175,598 30,996,137 31,100,215 30,931,308 31,060,326 Net income has continued to increase over the past three trade on the NYSE Euronext. Net income attributable to the years and aggregated $43.2 million, $39.0 million and noncontrolling interest is related to the profitability of our $37.3 million in 2016, 2015 and 2014, respectively. Net European operations, and aggregated 28.3%, 27.2% and income attributable to European operations was $35.0 mil- 27.0% of European operations net income in 2016, 2015 and lion, $31.3 million and $29.3 million in 2016, 2015 and 2014, respectively. Net income attributable to Inter Parfums, 2014, respectively, while net income attributable to United Inc. aggregated $33.3 million, $30.4 million and $29.4 mil- States operations was $8.2 million, $7.6 million and $8.1 lion in 2016, 2015 and 2014, respectively. Net margins at- million in 2016, 2015 and 2014, respectively. The signif- tributable to Inter Parfums, Inc. aggregated 6.4%, 6.5% and icant fluctuations in net income for European operations 5.9% in 2016, 2015 and 2014, respectively. in are directly related to the previous discussions relating to changes in sales, gross profit margins, selling, general adJusTed neT InCome aTTrIbuTable and administrative expenses, buyout of license, impair- To InTer Parfums, InC. ment loss, and the pending settlement with the French Tax See information regarding Regulation S-K Item 10(e), “Use Authorities. In summary, improved gross profit margins in of Non-GAAP Financial Measures in commission filings,” on 2016 were offset by increased advertising and promotional page 63 of this Annual Report. expenditures. In addition, for our European operations, net Adjusted Net Income Attributable to Inter Parfums, income includes the effects of the $4.7 million gain on buy- Inc., is deemed a “non-GAAP financial measure” under out of license, $5.7 million impairment loss and the $1.9 the rules of the Securities and Exchange Commission. This million pending income tax settlement with the French Tax non-GAAP measure is calculated using GAAP amounts de- Authorities. rived from our consolidated financial statements. Adjusted For United States operations, in summary, in 2016 sales net income attributable to Inter Parfums, Inc. has limita- increased 11% while gross margins as a percentage of sales tions and should not be considered in isolation or as a sub- were unchanged and selling, general and administrative ex- stitute for net income, operating income, cash flow from penses increased 9%, as compared to the corresponding pe- operations or other consolidated income or cash flow data riod of the prior year. prepared in accordance with GAAP. Because not all com- The noncontrolling interest arises primarily from our 73% panies use identical calculations, this presentation of ad- owned subsidiary in Paris, Interparfums SA, which is also a justed income may not be comparable to a similarly titled publicly traded company as 27% of Interparfums SA shares measure of other companies. management’s discussion and analysis of financial condition and results of operations 73 adJusTed neT InCome aTTrIbuTable To InTer Parfums, InC. reConCIlIaTIon Adjusted net income attributable to Inter Parfums, Inc. is defined as net income attributable to Inter Parfums, Inc., plus the previously discussed pending nonrecurring tax settlement, net of the portion of the settlement attributable to the noncontrolling interest. We believe that certain investors would consider adjusted net income attributable to Inter Parfums, Inc. a useful means of evaluating our financial performance. The following table provides a reconciliation of net income attributable to Inter Parfums, Inc. to adjusted net income attributable to Inter Parfums, Inc. for the periods indicated. (In thousands, except share and per share data) Years Ended December 31, Net income attributable to Inter Parfums, Inc. Pending nonrecurring tax settlement (net of portion attributable to the noncontrolling interest of $500) Net income attributable to Inter Parfums, Inc. Adjusted net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted Weighted average number of shares outstanding: Basic Diluted 2016 $33,331 1,400 $34,731 1.12 1.11 2015 $30,437 2014 $29,436 — — $30,437 $29,436 0.98 0.98 0.95 0.95 31,072,328 31,175,598 30,996,137 31,100,215 30,931,308 31,060,326 lIQuIdITy and CaPITal resourCes Cash provided by operating activities aggregated $54.6 The Company’s financial position remains strong. At million, $50.1 million and $36.6 million in 2016, 2015 and December 31, 2016, working capital aggregated $338 mil- 2014, respectively. In 2016, working capital items used $0.2 lion and we had a working capital ratio of almost 3.4 to million in cash from operating activities, as compared to 1. Cash and cash equivalents and short-term investments $0.6 million in 2015 and $10.9 million in 2014. Although aggregated $256 million most of which is held in euro by accounts receivable is up from that of the prior year, days our European operations and is readily convertible into U.S. sales outstanding remained relatively consistent at 71 days dollars. We have not had any liquidity issues to date, and in 2016, as compared to 75 days and 66 days in 2015 and do not expect any liquidity issues relating to such cash and 2014, respectively. Inventory days on hand aggregated 185 cash equivalents and short-term investments held by our days in 2016, as compared to 213 days in 2015 and 198 European operations. Approximately 88% of the Company’s days in 2014, respectively. Fluctuations are primarily a func- total assets are held by European operations. In addition to tion of new product launch dates. The high level of days the cash and cash equivalents and short-term investments on hand in 2015 reflects the inventory buildup needed to referred to above, approximately $174 million of trademarks, support product development for the newest brands, as new licenses and other intangible assets are held by European scents for Coach, Abercrombie & Fitch and Hollister each operations. made their debut in 2016. The Company hopes to benefit from its strong financial Cash flows used in investing activities reflect the purchase position to potentially acquire one or more brands, either and sales of short-term investments by our European opera- on a proprietary basis or as a licensee. Opportunities for tions. These investments are primarily certificates of deposit external growth continue to be examined, with the priority with maturities greater than three months. At December 31, of maintaining the quality and homogeneous nature of our 2016, approximately $76 million of such certificates of de- portfolio. However, we cannot assure you that any new posit contain penalties where we would forfeit a portion of the license or acquisition agreements will be consummated. interest earned in the event of early withdrawal. INTER PARFUMS, INC. 2016 ANNUAL REPORT 74 Our business is not capital intensive as we do not own any Proceeds from sale of stock of subsidiary reflect the manufacturing facilities. However, on a full year basis, we spend proceeds from shares issued by our French subsidiary, In- approximately $4.0 million on tools and molds, depending on our terparfums SA, pursuant to options exercised. Purchase of new product development calendar. Capital expenditures also subsidiary shares from noncontrolling interest represents the include amounts for office fixtures, computer equipment and in- purchase of treasury shares of Interparfums SA, which are dustrial equipment needed at our distribution centers. expected to be issued to Interparfums SA employees in 2019 In connection with the 2015 acquisition of the Rochas brand, pursuant to its Free Share Plan. we entered into a 5-year term loan payable in equal quarterly In January 2014, our Board of Directors authorized the con- installments of €5.0 million (approximately $5.3 million) plus tinuation of the regular $0.48 per share annual dividend for interest. This term loan requires the maintenance of certain fi- 2014, and in January 2015, our Board of Directors authorized nancial covenants, tested semi-annually, including a maximum an 8% increase to $0.52 per share. In January 2016, the Board leverage ratio and a minimum interest coverage ratio. The fa- of Directors authorized a 15% increase in the annual dividend to cility also contains new debt restrictions among other standard $0.60 per share, and in October 2016, our Board of Directors provisions. The Company is in compliance with all of the cove- authorized an additional 13% increase in the annual dividend to nants and other restrictions of the debt agreements. In order to $0.68 per share. The next quarterly cash dividend of $0.17 per reduce exposure to rising variable interest rates, the Company share is payable on April 14, 2017 to shareholders of record on entered into a swap transaction effectively exchanging the vari- March 31, 2017. Dividends paid, including dividends paid once able interest rate to a fixed rate of approximately 1.2%. The per year to noncontrolling stockholders of Interparfums SA, ag- swap is a derivative instrument and is therefore recorded at fair gregated $22.9 million, $19.6 million and $19.5 million for the value and changes in fair value are reflected in the accompany- years ended December 31, 2016, 2015 and 2014, respectively. ing consolidated statements of income. The cash dividends to be paid in 2017 are not expected to have Our short-term financing requirements are expected to be met any significant impact on our financial position. by available cash on hand at December 31, 2016, cash generated We believe that funds provided by or used in operations can by operations and short-term credit lines provided by domestic be supplemented by our present cash position and available and foreign banks. The principal credit facilities for 2017 consist credit facilities, so that they will provide us with sufficient re- of a $20.0 million unsecured revolving line of credit provided by sources to meet all present and reasonably foreseeable future a domestic commercial bank and approximately $26.0 million in operating needs. credit lines provided by a consortium of international financial Inflation rates in the U.S. and foreign countries in which we institutions. There were no balances due from short-term borrow- operate did not have a significant impact on operating results ings as of December 31, 2016 and 2015. for the year ended December 31, 2016. ConTraCTual oblIgaTIons The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations ($ in thousands): contractual obligations Long-Term Debt Operating Leases Purchase Obligations (1) Total Less than 1-year Years 2-3 Payments Due by Period Years More than 4-5 5-years $21,494 $42,523 $10,541 -0- $5,390 $9,596 $6,697 $5,952 Total $74,558 $27,635 $907,206 $113,633 $226,386 $234,357 $332,830 $1,009,399 $140,517 $278,505 $251,595 $338,782 (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, 2016, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations. report on internal control over financial reporting 75 qUantitatiVe and qUalitatiVe disclosUres aBoUt marKet risK. ¥50.0 million which all have maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote. general InTeresT raTe rIsk managemenT We address certain financial exposures through a controlled We mitigate interest rate risk by monitoring interest rates, program of risk management that primarily consists of the use and then determining whether fixed interest rates should be of derivative financial instruments. We primarily enter into for- swapped for floating rate debt, or if floating rate debt should eign currency forward exchange contracts in order to reduce be swapped for fixed rate debt. We entered into an interest the effects of fluctuating foreign currency exchange rates. We rate swap in June 2015 on €100 million of debt, effectively do not engage in the trading of foreign currency forward ex- exchanging the variable interest rate to a fixed rate of approx- change contracts or interest rate swaps. imately 1.2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompa- foreIgn exChange rIsk managemenT nying consolidated statements of income. We periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denomi- manaGement’s annUal rePort nated in a foreign currency and to manage risks related to on internal control future sales expected to be denominated in a currency other oVer financial rePortinG than our functional currency. We enter into these exchange The management of Inter Parfums, Inc. is responsible for contracts for periods consistent with our identified exposures. establishing and maintaining adequate internal control over The purpose of the hedging activities is to minimize the effect financial reporting as defined in Rule 13(a)-15(f) under the of foreign exchange rate movements on the receivables and Securities Exchange Act of 1934. With the participation of cash flows of Interparfums SA, our French subsidiary, whose the Chief Executive Officer and the Chief Financial Officer, functional currency is the euro. All foreign currency contracts our management conducted an evaluation of the effective- are denominated in currencies of major industrial countries ness of our internal control over financial reporting based on and are with large financial institutions, which are rated as the framework and criteria established in Internal Control – strong investment grade. Integrated Framework (2013), issued by the Committee of All derivative instruments are required to be reflected as Sponsoring Organizations of the Treadway Commission. Based either assets or liabilities in the balance sheet measured at on this evaluation, our management has concluded that our fair value. Generally, increases or decreases in fair value of internal control over financial reporting was effective as of derivative instruments will be recognized as gains or losses December 31, 2016. in earnings in the period of change. If the derivative is desig- Our independent auditor, Mazars USA LLP, a registered nated and qualifies as a cash flow hedge, then the changes in public accounting firm, has issued its report on its audit of our fair value of the derivative instrument will be recorded in other internal control over financial reporting. This report appears comprehensive income. on the following page. Before entering into a derivative transaction for hedging purposes, we determine that the change in the value of the derivative will effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement. Jean madar russell Greenberg At December 31, 2016, we had foreign currency contracts in Chief Executive Officer, Executive Vice President the form of forward exchange contracts with notional amounts Chairman of the and Chief Financial Officer of approximately U.S. $69.8 million, GB £1.8 million and JPY Board of Directors INTER PARFUMS, INC. 2016 ANNUAL REPORT 76 reports of independent registered public accounting firm rePort of indePendent reGistered that (1) pertain to the maintenance of records that, in reason- PUBlic accoUntinG firm on internal control able detail, accurately and fairly reflect the transactions and dis- oVer financial rePortinG positions of the assets of the company; (2) provide reasonable board of dIreCTors and shareholders assurance that transactions are recorded as necessary to permit InTer Parfums, InC. neW york, neW york preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendi- tures of the company are being made only in accordance with We have audited Inter Parfums, Inc.’s internal control over fi- authorizations of management and directors of the company; nancial reporting as of December 31, 2016, based on criteria and (3) provide reasonable assurance regarding prevention or established in Internal Control – Integrated Framework (2013) timely detection of unauthorized acquisition, use, or disposition issued by the Committee of Sponsoring Organizations of the of the company’s assets that could have a material effect on the Treadway Commission (the COSO criteria). Inter Parfums, Inc.’s financial statements. management is responsible for maintaining effective internal Because of its inherent limitations, internal control over control over financial reporting, and for its assessment of the ef- financial reporting may not prevent or detect misstatements. fectiveness of internal control over financial reporting, included Also, projections of any evaluation of effectiveness to future in the accompanying Management’s Annual Report on Internal periods are subject to the risk that controls may become in- Control over Financial Reporting. Our responsibility is to express adequate because of the changes in conditions, or that the an opinion on the company’s internal control over financial re- degree of compliance with the policies or procedures may porting based on our audit. deteriorate. We conducted our audit in accordance with the standards In our opinion, Inter Parfums, Inc. maintained, in all material of the Public Company Accounting Oversight Board (United respects, effective internal control over financial reporting as of States). Those standards require that we plan and perform the December 31, 2016, based on the COSO criteria. audit to obtain reasonable assurance about whether effective We have also audited, in accordance with the standards internal control over financial reporting was maintained in all of the Public Company Accounting Oversight Board (United material respects. Our audit of internal control over financial re- States), the consolidated balance sheet of Inter Parfums, porting included obtaining an understanding of internal control Inc. as of December 31, 2016 and the related consolidated over financial reporting, assessing the risk that a material weak- statements of income, comprehensive income (loss), chang- ness exists, and testing and evaluating the design and operat- es in shareholders’ equity and cash flows for the year ended ing effectiveness of internal control based on the assessed risk. December 31, 2016 and our report dated March 13, 2017 Our audit also included performing such other procedures as we expressed an unqualified opinion thereon. considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Mazars USA LLP A company’s internal control over financial reporting is a pro- cess designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control New York, New York over financial reporting includes those policies and procedures March 13, 2017 reports of independent registered public accounting firm 77 rePort of indePendent reGistered PUBlic nancial statement presentation. We believe that our audits accoUntinG firm provide a reasonable basis for our opinion. board of dIreCTors and shareholders In our opinion, the consolidated financial statements re- InTer Parfums, InC. neW york, neW york ferred to above present fairly, in all material respects, the financial position of Inter Parfums, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their We have audited the accompanying consolidated balance sheets operations and their cash flows for each of the years in the of Inter Parfums, Inc. and subsidiaries (the “Company”) as of three-year period ended December 31, 2016, in conformity December 31, 2016 and 2015, and the related consolidated with U.S. generally accepted accounting principles. statements of income, comprehensive income (loss), changes in We also have audited, in accordance with the standards shareholders’ equity and cash flows for each of the years in the of the Public Company Accounting Oversight Board (United three-year period ended December 31, 2016. These consolidat- States), Inter Parfums, Inc.’s internal control over financial ed financial statements are the responsibility of the Company’s reporting as of December 31, 2016, based on criteria es- management. Our responsibility is to express an opinion on these tablished in Internal Control – Integrated Framework (2013) consolidated financial statements based on our audits. issued by the Committee of Sponsoring Organizations of the We conducted our audits in accordance with the standards Treadway Commission (COSO), and our report dated March of the Public Company Accounting Oversight Board (United 13, 2017 expressed an unqualified opinion thereon. States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Mazars USA LLP consolidated financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the con- solidated financial statements. An audit also includes assess- ing the accounting principles used and significant estimates New York, New York made by management, as well as evaluating the overall fi- March 13, 2017 INTER PARFUMS, INC. 2016 ANNUAL REPORT 78 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 current liabilities: Current portion of long-term debt Accounts payable – trade Accrued expenses Income taxes payable Dividends payable total current liabilities long–term debt, less current portion deferred tax liability commitments and contingencies equity: Inter Parfums, Inc. shareholders’ equity: 2016 2015 $161,828 94,202 104,819 96,977 7,433 6,240 626 8,090 480,215 10,076 183,868 8,250 $682,409 21,498 49,507 62,609 3,331 5,293 142,238 53,064 3,449 31 63,103 402,714 370,391 113,267 483,658 $682,409 $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 22,163 50,636 46,890 7,359 4,035 131,083 76,443 3,746 – 31 62,030 110,800 476,387 $687,659 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, 31,138,318 and 31,037,915 shares, at December 31, 2016 and 2015, respectively Additional paid-in capital Retained earnings 388,434 Accumulated other comprehensive loss (57,982) (48,091) Treasury stock, at cost, 9,864,805 and 9,880,058 common shares at December 31, 2016 and 2015, respectively (37,475) (36,817) 365,587 total inter Parfums, inc. shareholders’ equity noncontrolling interest total equity total liabilities and equity (See accompanying notes to consolidated financial statements ) financial statements 79 Gross margin 2014 $499,261 2015 $468,540 2016 $521,072 194,601 179,069 326,471 289,471 287, 037 258,787 233,634 228,268 (4,652) 5,658 66,678 61,203 — — — — 53,403 212,224 consolidated statements of income (In thousands, except share and per share data) Years Ended December 31, net sales Cost of sales Selling, general, and administrative expenses Gain on buyout of license Impairment loss income from operations other expenses (income): Interest expense (Gain) loss on foreign currency (902) Interest and dividend income (3,331) (2,995) (3,888) (396) 707 (3,312 ) 876 2,340 595 2,826 1,478 income before income taxes Income taxes net income Less: Net income attributable to the noncontrolling interest 67,074 23,826 43,248 9,917 60,496 21,527 38,969 8,532 56,715 19,370 37,345 7,909 net income attributable to inter Parfums, inc. $33,331 $30,437 $29,436 net income attributable to inter Parfums, inc. common shareholders: Basic Diluted $1.07 1.07 $0.98 0.98 $0.95 0.95 weighted average number of shares outstanding: Basic Diluted 31,072,328 31,175,598 30,996,137 30,931,308 31,100,215 31,060,326 dividends declared per share $0.62 $0.52 $0.48 (See accompanying notes to consolidated financial statements.) INTER PARFUMS, INC. 2016 ANNUAL REPORT 80 consolidated statements of comPrehensiVe income (loss) (In thousands, except share and per share data) Years Ended December 31, 2016 2015 2014 net income $43,248 $37,345 other comprehensive income (loss): Net derivative instrument loss, net of tax (22) – – Translation adjustments, net of tax (13,153) (44,346) (57,806) (13,175) (44,346) (57,806) comprehensive income (loss) 30,073 (5,377) (20,461) $38,969 , comprehensive income (loss) attributable to noncontrolling interests: Net income 7,909 Net derivative instrument loss, net of tax (5) – – Translation adjustments, net of tax (3,279) (12,078) (16,123) 6,633 (3,546) (8,214) 8,532 9,917 comprehensive income (loss) attributable to inter Parfums, inc. $23,440 $(1,831) $(12,247) (See accompanying notes to consolidated financial statements.) financial statements 81 2016 $31 62,030 2,160 (173 (1,753 839 63,103 388,434 33,331 (19,273 (222 402,714 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 2015 $31 60,200 1,234 2014 $31 57,877 1,981 677 60,200 359,459 29,436 (14,855) 81 25,860 (41,683) – (15,823) (36,016) 219 Shares issued upon exercise of stock options Sale of subsidiary shares to noncontrolling interests Purchase of subsidiary shares from noncontrolling interests Stock-based compensation ) (192) (335) ) – – 788 additional paid-in capital, end of year retained earnings, beginning of year Net income Dividends Stock-based compensation retained earnings, end of year 62,030 374,121 30,437 (16,124) – ) ) 388,434 374,121 accumulated other comprehensive income (loss), beginning of year Foreign currency translation adjustment, net of tax Net derivative instrument gain, net of tax accumulated other comprehensive loss, end of year (48,091 (9,874 (17 (57,982 ) ) ) ) (15,823) (32,268) – (48,091) treasury stock, beginning of year Shares issued upon exercise of stock options Shares received as proceeds of option exercises treasury stock, end of year (36,817 142 (800 (37,475 ) (36,464) 140 (493) ) ) (36,817) (36,464) (667) noncontrolling interest, beginning of year Net income Foreign currency translation adjustment, net of tax Net derivative instrument gain, net of tax Sale of subsidiary shares to noncontrolling interest Purchase of subsidiary shares from noncontrolling interest Dividends Stock-based compensation noncontrolling interest, end of year 110,800 9,917 (3,279 (5 1,738 (1,188 (4,863 147 113,267 ) ) ) ) 116,659 8,532 (12,078) – 1,523 – (3,836) – 128,145 7,909 (16,123) – 1,365 – (4,667) 30 110,800 116,659 total equity $483,658 $476,387 $498,724 (See accompanying notes to consolidated financial statements.) INTER PARFUMS, INC. 2016 ANNUAL REPORT 82 consolidated statements of cash flows (In thousands) Years Ended December 31, cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization including impairment loss Provision for doubtful accounts Non cash stock compensation Gain on sale of license Excess tax benefits from stock-based compensation arrangements Deferred tax expense (benefit) Change in fair value of derivatives Changes in: Accounts receivable 2016 $43,248 2015 2014 $38,969 $37,345 15,341 349 1,198 (4,652 – (1,374 682 (13,156 (909 (297 18,690 (4,556 54,564 ) ) ) ) ) ) – – (21,884 (77 1,579 – 1,565 (18,015 (4,863 (2,941 (44,636 (4,640 (15,139 176,967 $161,828 ) ) ) ) ) ) ) ) 9,078 10,166 442 787 – (260 ) 829 903 412 856 – (670 ) (557 ) 355 (12,573 ) (19,607 ) (4,354 ) (1,622 ) 12,973 4,912 50,084 4,344 425 ) (4,996 8,540 36,613 (62,415 ) (245,810 ) 151,771 212,762 (4,158 ) (119,788 ) (34,590 ) (3,302 ) (922 ) (37,272 ) – (5,765 ) 110,970 (11,761 ) (32 ) 653 260 1,327 (15,806 ) (3,836 ) – 81,775 (10,440 ) 86,829 90,138 $176,967 – – (90 ) 953 670 1,030 (14,841 ) (4,667 ) – (22,710 (12,143 ) (35,512 ) 125,650 $90,138 $2,239 28,124 $2,400 19,668 $1,508 104,430 Inventories Other assets Accounts payable and accrued expenses Income taxes, net Net cash provided by operating activities cash flows from investing activities: Purchases of short-term investments Proceeds from sale of short-term investments Purchase of equipment and leasehold improvements Payment for intangible assets acquired Net cash used in investing activities (57,289 42,604 (4,777 (965 (20,427 ) ) ) ) cash flows from financing activities: Repayment 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 Purchase of subsidiary shares from noncontrolling interests Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents – beginning of year Cash and cash equivalents – end of year Supplemental disclosures of cash flow information: Cash paid for: Interest Income taxes (See accompanying notes to consolidated financial statements.) notes to consolidated financial statements (in thousands except share and per share data) 83 notes to consolidated financial statements year. Gains and losses from translation adjustments are accumu- (1) the company and its significant accounting Policies lated in a separate component of shareholders’ equity. busIness of The ComPany Inter Parfums, Inc. and its subsidiaries (the “Company”) are in Cash and Cash eQuIvalenTs the fragrance business and manufacture and distribute a wide and shorT-Term InvesTmenTs array of fragrances and fragrance related products. All highly liquid investments purchased with a maturity of three Substantially all of our prestige fragrance brands are licensed months or less are considered to be cash equivalents. From time from unaffiliated third parties, and our business is dependent to time, the Company has short-term investments which con- upon the continuation and renewal of such licenses. With re- sist of certificates of deposit with maturities greater than three spect to the Company’s largest brands, we own the Lanvin brand months. The Company monitors concentrations of credit risk as- name for our class of trade, and license the Montblanc and Jim- sociated with financial institutions with which the Company con- my Choo brand names. As a percentage of net sales, product ducts significant business. The Company believes its credit risk is sales for the Company’s largest brands were as follows: minimal, as the Company primarily conducts business with large, Year Ended December 31, 2016 2015 2014 Montblanc 23% 22% Jimmy Choo 17% Lanvin 12% 20% 21% 15% 18% 16% well-established financial institutions. Substantially all cash and cash equivalents are held at financial institutions outside the United States and are readily convertible into U.S. dollars. aCCounTs reCeIvable Accounts receivable represent payments due to the Company for No other brand represented 10% or more of consolidated net sales. previously recognized net sales, reduced by allowances for sales basIs of PreParaTIon returns and doubtful accounts or balances which are estimated to be uncollectible, which aggregated $5.3 million and $5.9 million The consolidated financial statements include the accounts of the as of December 31, 2016 and 2015, respectively. Accounts re- Company, including 73% owned Interparfums SA, a subsidiary ceivable balances are written-off against the allowance for doubtful whose stock is publicly traded in France. In 2015, Interparfums accounts when they become uncollectible. Recoveries of accounts SA formed a subsidiary in Spain, Parfums Rochas. The subsidiary receivable previously recorded against the allowance are recorded is 51% owned by Interparfums SA with the remaining 49% owned in the consolidated statement of income when received. We gener- by its Rochas distributor for Spain. Parfums Rochas is responsible ally grant credit based upon our analysis of the customer’s financial for Rochas brand distribution in the territory. All material inter- position, as well as previously established buying patterns. company balances and transactions have been eliminated. InvenTorIes managemenT esTImaTes Inventories, including promotional merchandise, only include Management makes assumptions and estimates to prepare inventory considered saleable or usable in future periods, and financial statements in conformity with accounting principles is stated at the lower of cost and net realizable value, with generally accepted in the United States of America. Those as- cost being determined on the first-in, first-out method. Cost sumptions and estimates directly affect the amounts reported components include raw materials, direct labor and overhead and disclosures included in the consolidated financial state- (e.g., indirect labor, utilities, depreciation, purchasing, receiv- ments. Actual results could differ from those assumptions and ing, inspection and warehousing) as well as inbound freight. estimates. Significant estimates for which changes in the near Promotional merchandise is charged to cost of sales at the time term are considered reasonably possible and that may have a the merchandise is shipped to the Company’s customers. material impact on the financial statements are disclosed in these notes to the consolidated financial statements. derIvaTIves foreIgn CurrenCy TranslaTIon and measured at fair value. The Company uses derivative instru- For foreign subsidiaries with operations denominated in a ments to principally manage a variety of market risks. For deriva- foreign currency, assets and liabilities are translated to U.S. tives designated as hedges of the exposure to changes in fair value dollars at year end exchange rates. Income and expense items of the recognized asset or liability or a firm commitment (referred are trans lated at average rates of exchange prevailing during the to as fair value hedges), the gain or loss is recognized in earnings All derivative instruments are recorded as either assets or liabilities INTER PARFUMS, INC. 2016 ANNUAL REPORT 84 in the period of change together with the offsetting loss or gain on set may not be recoverable. If impairment indicators exist for an the hedged item attributable to the risk being hedged. The effect amortizable intangible asset, the undiscounted future cash flows of that accounting is to include in earnings the extent to which the associated with the expected service potential of the asset are hedge is not effective in achieving offsetting changes in fair value. compared to the carrying value of the asset. If our projection of For cash flow hedges, the effective portion of the derivative’s gain undiscounted future cash flows is in excess of the carrying value or loss is initially reported in equity (as a component of accumu- of the intangible asset, no impairment charge is recorded. If our lated other comprehensive income) and is subsequently reclassi- projection of undiscounted future cash flows is less than the car- fied into earnings in the same period or periods during which the rying value of the intangible asset, an impairment charge would hedged forecasted transaction affects earnings. The ineffective be recorded to reduce the intangible asset to its fair value. portion of the gain or loss of a cash flow hedge is reported in earn- ings immediately. The Company also holds certain instruments for revenue reCognITIon economic purposes that are not designated for hedge accounting The Company sells its products to department stores, perfum- treatment. For these derivative instruments, changes in their fair eries, specialty stores and domestic and international whole- value are recorded in earnings immediately. salers and distributors. Sales of such products by our domestic subsidiaries are denominated in U.S. dollars, and sales of such eQuIPmenT and leasehold ImProvemenTs products by our foreign subsidiaries are primarily denominated Equipment and leasehold improvements are stated at cost less accu- in either euro or U.S. dollars. The Company recognizes revenues mulated depreciation and amortization. Depreciation and amortization when merchandise is shipped and the risk of loss passes to the are provided using the straight line method over the estimated useful customer. Net sales are comprised of gross revenues less re- lives for equipment, which range between three and ten years and the turns, trade discounts and allowances. The Company does not shorter of the lease term or estimated useful asset lives for leasehold bill its customers’ freight and handling charges. All shipping and improvements. Depreciation provided on equipment used to produce handling costs, which aggregated $5.1 million, $4.7 million and inventory, such as tools and molds, is included in cost of sales. $5.2 million in 2016, 2015 and 2014, respectively, are included long-lIved asseTs in selling, general and administrative expenses in the consolidat- ed statements of income. The Company grants credit to all quali- Indefinite-lived intangible assets principally consist of trademarks fied customers and does not believe it is exposed significantly to which are not amortized. The Company evaluates indefinite-lived any undue concentration of credit risk. No one customer repre- intangible assets for impairment at least annually during the sented 10% or more of net sales in 2016, 2015 or 2014. fourth quarter, or more frequently when events occur or circum- stances change, such as an unexpected decline in sales, that sales reTurns would more likely than not indicate that the carrying value of an Generally, the Company does not permit customers to return their indefinite-lived intangible asset may not be recoverable. When unsold products. However, for U.S. based customers, we allow re- testing indefinite-lived intangible assets for impairment, the eval- turns if properly requested, authorized and approved. The Company uation requires a comparison of the estimated fair value of the regularly reviews and revises, as deemed necessary, its estimate asset to the carrying value of the asset. The fair values used of reserves for future sales returns based primarily upon historic in our evaluations are estimated based upon discounted future trends and relevant current data including information provided by cash flow projections using a weighted average cost of capital retailers regarding their inventory levels. In addition, as necessary, of 6.2%. The cash flow projections are based upon a number of specific accruals may be established for significant future known assumptions, including future sales levels, future cost of goods or anticipated events. The types of known or anticipated events and operating expense levels, as well as economic conditions, that we consider include, but are not limited to, the financial con- changes to our business model or changes in consumer accep- dition of our customers, store closings by retailers, changes in the tance of our products which are more subjective in nature. If the retail environment and our decision to continue to support new carrying value of an indefinite-lived intangible asset exceeds its and existing products. The Company records estimated reserves fair value, an impairment charge is recorded. for sales returns as a reduction of sales, cost of sales and accounts Intangible assets subject to amortization are evaluated for im- receivable. Returned products are recorded as inventories and are pairment testing whenever events or changes in circumstances valued based upon estimated realizable value. The physical condi- indicate that the carrying amount of an amortizable intangible as- tion and marketability of returned products are the major factors notes to consolidated financial statements (in thousands except share and per share data) 85 we consider in estimating realizable value. Actual returns, as well The licenses typically have an initial term of approximately 5 to as estimated realizable values of returned products, may differ 15 years, and are potentially renewable subject to the Company’s significantly, either favorably or unfavorably, from our estimates, if compliance with the license agreement provisions. The remaining factors such as economic conditions, inventory levels or competi- terms, including the potential renewal periods, range from ap- tive conditions differ from our expectations. proximately 1 to 15 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 pur- In certain cases, the Company may pay an entry fee to ac- chase and gift with purchase promotions as sales and the costs of its quire, or enter into, a license where the licensor or another purchase with purchase and gift with purchase promotions as cost of licensee was operating a pre-existing fragrance business. In sales. Certain other incentive arrangements require the payment of a those cases, the entry fee is capitalized as an intangible asset fee to customers based on their attainment of pre-established sales and amortized over its useful life. levels. These fees have been recorded as a reduction of net sales. Most license agreements require minimum royalty pay- ments, incremental royalties based on net sales levels and adverTIsIng and PromoTIon minimum spending on advertising and promotional activities. Advertising and promotional costs are expensed as incurred and Royalty expenses are accrued in the period in which net sales recorded as a component of cost of goods sold (in the case of free are recognized while advertising and promotional expenses goods given to customers) or selling, general and administrative are accrued at the time these costs are incurred. expenses. Advertising and promotional costs included in selling, In addition, the Company is exposed to certain concentra- general and administrative expenses were $99.0 million, $83.8 tion risk. Substantially all of our prestige fragrance brands are million and $86.7 million for 2016, 2015 and 2014, respective- licensed from unaffiliated third parties, and our business is de- ly. Costs relating to purchase with purchase and gift with pur- pendent upon the continuation and renewal of such licenses. chase promotions that are reflected in cost of sales aggregated $30.0 million, $25.4 million and $24.4 million in 2016, 2015 InCome Taxes and 2014, respectively. Accrued expenses include approximate- The Company accounts for income taxes using an asset and lia- ly $27.2 million and $15.2 million in advertising liabilities as of bility approach that requires the recognition of deferred tax assets December 31, 2016 and 2015, respectively. and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. PaCk age develoPmenT CosTs The net deferred tax assets assume sufficient future earnings for Package development costs associated with new products and their realization, as well as the continued application of currently redesigns of existing product packaging are expensed as incurred. enacted tax rates. Included in net deferred tax assets is a valuation oPeraTIng leases allowance for deferred tax assets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized The Company recognizes rent expense from operating leases in the relevant jurisdiction. If the Company determines that a de- with various step rent provisions, rent concessions and escala- ferred tax asset will not be realizable, an adjustment to the deferred tion clauses on a straight-line basis over the applicable lease tax asset will result in a reduction of net earnings at that time. term. The Company considers lease renewals in the useful life of its leasehold improvements when such renewals are rea- IssuanCe of Common sToCk sonably assured. In the event the Company receives capital by ConsolIdaTed subsIdIary improvement funding from its landlord, these amounts are re- The difference between the Company’s share of the proceeds corded as deferred liabilities and amortized over the remaining received by the subsidiary and the carrying amount of the por- lease term as a reduction of rent expense. tion of the Company’s investment deemed sold, is reflected as an equity adjustment in the consolidated balance sheets. lICense agreemenTs The Company’s license agreements generally provide the Company Treasury sToCk with worldwide rights to manufacture, market and sell fragrance The Board of Directors may authorize share repurchases of the and fragrance related products using the licensors’ trademarks. Company’s common stock (Share Repurchase Authorizations). INTER PARFUMS, INC. 2016 ANNUAL REPORT 86 Share repurchases under Share Repurchase Authorizations the Company’s diluted weighted average number of common may be made through open market transactions, negotiated shares outstanding increased from 31,161,083 to 31,175,598. purchase or otherwise, at times and in such amounts within The adoption resulted in an increase in basic and diluted earn- the parameters authorized by the Board. Shares repurchased ings per share attributable to Inter Parfums Inc. (“EPS”) as follows: under Share Repurchase Authorizations are held in treasury for general corporate purposes, including issuances under various employee stock option plans. Treasury shares are accounted for under the cost method and reported as a reduction of equi- ty. Share Repurchase Authorizations may be suspended, limit- ed or terminated at any time without notice. 2016 Year Ended December 31, $1.06 Basic EPS prior to adoption of ASU 2016-09 $1.07 Basic EPS upon adoption of ASU 2016-09 Diluted EPS prior to adoption of ASU 2016-09 $1.06 $1.07 Diluted EPS upon adoption of ASU 2016-09 reCenT aCCounTIng PronounCemenTs In addition, under ASU 2016-09, excess tax benefits from In August 2016, the Financial Accounting Standards Board stock-based compensation arrangements are classified in cash (“FASB”) issued an Accounting Standards Update (“ASU”) to flows from operations, rather than inflow within financing activ- eliminate the diversity in practice related to the classification of ities and outflow within operating activities. The Company has certain cash receipts and payments in the statement of cash flows, applied the cash flow classification guidance prospectively. by adding or clarifying guidance on eight specific cash flow issues. In February 2016, the FASB issued an ASU which requires This ASU is effective for annual and interim periods beginning after lessees to recognize lease assets and lease liabilities arising from December 15, 2017 and early adoption is permitted. We have eval- operating leases on the balance sheet. This ASU is effective for uated the standard and determined that there will be no material annual and interim reporting periods beginning after December 15, impact on our consolidated financial statements. 2018 using a modified retrospective approach, with early adoption In March 2016, the FASB issued ASU 2016-09 which permitted. We are currently evaluating the standard to determine simplifies several aspects of the accounting for share-based the impact of its adoption on our consolidated financial statements. payments, including the income tax consequences and classifi- In November 2015, the FASB issued an ASU that requires all cation on the statement of cash flows. This ASU is effective for deferred tax liabilities and assets to be classified as noncurrent annual and interim periods beginning after December 15, 2016 on the balance sheet. This ASU is effective for annual and interim and early adoption is permitted. The Company elected to early reporting periods beginning after December 15, 2016, with early adopt ASU 2016-09 in the fourth quarter of 2016 which re- adoption permitted. In addition, this guidance can be applied ei- quired us to reflect any adjustments as of January 1, 2016, the ther prospectively or retrospectively to all periods presented. We beginning of the annual period that includes the interim period are currently evaluating the standard to determine the impact of of adoption. Prior periods were not adjusted. its adoption on our consolidated financial statements. Under previous guidance, excess tax benefits and certain In July 2015, the FASB issued an ASU modifying the ac- tax deficiencies from share-based compensation arrangements counting for inventory. Under this ASU, the measurement princi- were recorded in additional paid-in capital when the awards ple for inventory will change from lower of cost or market value vested or were settled. ASU 2016-09 requires that all excess to lower of cost and net realizable value. The ASU defines net tax benefits and all tax deficiencies be recognized as income tax realizable value as the estimated selling price in the ordinary expense or benefit in the income statement and adoption is on course of business, less reasonably predictable costs of comple- a prospective basis. The adoption resulted in the recognition of tion, disposal, and transportation. The ASU is applicable to in- excess tax benefits of $0.4 million in our provision for income ventory that is accounted for under the first-in, first-out method taxes rather than in additional paid-in capital for the year ending and is effective for reporting periods beginning after December December 31, 2016. As permitted by ASU 2016-09, the Com- 15, 2016, with early adoption permitted. We have evaluated the pany has elected to continue to estimate the number of stock- standard and determined that there is no material impact on our based awards expected to vest, rather than electing to account consolidated financial statements. for forfeitures as they occur. In May 2014, the FASB issued an ASU which superseded the Excess tax benefits are required to be prospectively excluded then most current revenue recognition requirements. This new from assumed future proceeds in the calculation of diluted shares revenue recognition standard requires entities to recognize rev- under the adoption of ASU 2016-09. As a result of the adoption, enue in a way that depicts the transfer of goods or services to notes to consolidated financial statements (in thousands except share and per share data) 87 customers in an amount that reflects the consideration which the into effect on January 1, 2016, extends the partnership through entity expects to be entitled to in exchange for those goods or ser- December 31, 2025 without any material changes in operat- vices. This guidance is effective for annual and interim reporting ing conditions from the prior license. The license agreement is periods beginning after December 15, 2017, with early adoption subject to certain minimum sales, advertising expenditures and permitted for annual periods after December 31, 2016. We have royalty payments as are customary in our industry. evaluated the standard and determined that there will be no ma- terial impact on our consolidated financial statements. frenCh ConneCTIon There are no other recent accounting pronouncements is- In September 2015, the Company entered into a 12-year license sued but not yet adopted that would have a material effect on agreement to create, produce and distribute fragrances and our consolidated financial statements. fragrance related products under the French Connection brand (2) Buyout of license names. The agreement is subject to certain minimum advertising expenditures and royalty payments as are customary in our in- In December 2016, the Company, through its majority owned dustry. The Company took over distribution of selected fragranc- Paris-based subsidiary, Interparfums SA, reached an agreement es within the brand’s existing fragrance portfolio in 2016. with the Balmain brand calling for Balmain to buyout the Balmain license agreement, effective December 31, 2016, in exchange roChas for a payment aggregating €5.4 million (approximately $5.7 mil- In May 2015, the Company, through its majority owned Paris- lion). As a result of the buyout, the Company recognized a gain based subsidiary, Interparfums SA, acquired the Rochas brand of $4.7 million and expects to receive the buyout payment by from The Procter & Gamble Company. This transaction includes April 30, 2017. The Company has a three month inventory sell- all brand names and registered trademarks for Rochas (Femme, off period ending March 31, 2017 and Balmain has also agreed Madame, Eau de Rochas, etc.), mainly for class 3 (cosmetics) and to purchase all remaining inventory and tangible assets. class 25 (fashion). Substantially the entire €106 million purchase (3) recent agreements s.T. duPonT price for the assets acquired (approximately $118 million), includ- ing approximately $5.4 million in acquisition related expenses, was allocated to trademarks with indefinite lives including approx- In September 2016, the Company, through its majority owned imately $21 million of which was allocated to fashion trademarks. Paris-based subsidiary, Interparfums SA, extended its license An additional $4.4 million was paid for related inventory. agreement with S.T. Dupont by three years. The original agree- ment, signed in July 1997, together with previous extensions, CoaCh provided Interparfums SA with the exclusive worldwide license In April 2015, the Company, through its majority owned Paris- rights to create, produce and distribute fragrances and related based subsidiary, Interparfums SA, entered into an 11-year ex- products under the S.T. Dupont brand through December 31, clusive worldwide license with Coach, Inc. to create, produce and 2016. The recent extension is effective on January 1, 2017 and distribute fragrances and fragrance related products under the extends the partnership through December 31, 2019 without Coach brand name. In 2016, Interparfums SA began distributing any material changes in operating conditions from the prior li- these fragrances to department stores, specialty stores and duty cense. The license agreement is subject to certain minimum free shops, as well as in Coach retail stores. The agreement is sales, advertising expenditures and royalty payments, as are subject to certain minimum sales, advertising expenditures and customary in our industry. royalty payments as are customary in our industry. monTblanC aberCrombIe & fITCh and hollIsTer In October 2015, the Company, through its majority owned Paris- In December 2014, the Company entered into a 7-year exclusive based subsidiary, Interparfums SA, extended its license agree- worldwide license to create, produce and distribute new fragrances ment with Montblanc by five years. The original agreement, signed and fragrance related products under the Abercrombie & Fitch and in 2010, provided Interparfums SA with the exclusive worldwide Hollister brand names. In 2016, the Company began to distribute license rights to create, produce and distribute fragrances and these fragrances internationally in specialty stores, department fragrance related products under the Montblanc brand through stores and duty free shops, and in the U.S., in duty free shops and December 31, 2020. The new 10-year agreement, which went in Abercrombie & Fitch and Hollister retail stores. The agreement is INTER PARFUMS, INC. 2016 ANNUAL REPORT 88 subject to certain minimum sales, advertising expenditures and Overhead included in inventory aggregated $3.1 million and royalty payments as are customary in our industry. $3.7 million as of December 31, 2016 and 2015, respec (4) inventories Year Ended December 31, Raw materials and component parts Finished goods tively. Included in inventories is an inventory reserve, which represents the difference between the cost of the inventory and its estimated realizable value, based upon sales fore- 2016 $36,821 60,156 $96,977 2015 casts and the physical condition of the inventories. In ad- dition, and as necessary, specific reserves for future known $30,569 or anticipated events may be established. Inventory reserves 67,777 aggregated $5.4 million and $6.6 million as of December $98,346 31, 2016 and 2015, respectively. (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, 2016 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 Liabilities: $94,202 Foreign currency forward exchange contracts accounted for using hedge accounting 181 – – $94,202 181 – – Foreign currency forward exchange contracts not accounted for using hedge accounting – – Interest rate swaps – 418 908 1,507 418 908 1,507 – – – 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: Interest rate swaps 1,026 – – – – $82,847 123 – – $82,970 – 1,026 – 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. notes to consolidated financial statements (in thousands except share and per share data) 89 (6) derivative financial instruments 2015, such valuation resulted in an asset and is included in other The Company enters into foreign currency forward exchange contracts current assets on the accompanying balance sheet. to hedge exposure related to receivables denominated in a foreign At December 31, 2016, the Company had foreign currency currency and occasionally to manage risks related to future sales ex- contracts in the form of forward exchange contracts with notional pected to be denominated in a foreign currency. Before entering into amounts of approximately U.S. $69.8 million, GB £1.8 million and a derivative transaction for hedging purposes, it is determined that a JPY ¥50.0 million, which all have maturities of less than one year. high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative in- (7) equipment and leasehold improvements strument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes Year Ended December 31, Equipment Leasehold Improvements the portion of the fair value of the foreign currency forward exchange Less accumulated contract attributable to the change in spot-forward difference which is depreciation and amortization reported in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income state- 2016 2015 $27,757 $31,325 1,635 32,960 22,884 $10,076 1,631 29,388 20,055 9,333 ment. For hedge contracts that are no longer deemed highly effective, Depreciation and amortization expense was $3.7 million in hedge accounting is discontinued and gains and losses accumulated 2016 and $3.3 million in both 2015 and 2014. in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no longer occur, then any (8) trademarks, licenses and other intangible assets gains or losses accumulated in other comprehensive income are re- classified to current-period earnings. In connection with the Rochas acquisition, $108 million of the purchase price was paid in cash on the closing date and was 2016 Trademarks Gross Accumulated Net Book Amount Amortization Value financed entirely through a 5-year term loan. As the payment at (indefinite lives) $115,793 $– $115,793 closing was due in dollars and we had planned to finance it with Trademarks debt in euro, the Company entered into foreign currency forward (finite lives) 40,794 63 40,731 contracts to secure the exchange rate for the $108 million pur- Licenses chase price at $1.067 per 1 euro. This derivative was designated (finite lives) 62,102 37,206 24,896 and qualified as a cash flow hedge. Gains and losses in derivatives designated as hedges are ac- cumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying income Other intangible assets (finite lives) Subtotal Total 12,861 115,757 $231,550 10,413 47,682 $47,682 2,448 68,075 $183,868 statements. Such gains and losses were immaterial in each of the Gross Accumulated Net Book years in the three-year period ended December 31, 2016. For 2015 Amount Amortization Value the years ended December 31, 2016 and 2015, interest expense Trademarks includes a gain (loss) of $0.1 million and ($1.0) million, respec- (indefinite lives) $119,459 $– $119,459 tively, relating to an interest rate swap. Trademarks All derivative instruments are reported as either assets or lia- (finite lives) 42,046 61 41,985 bilities on the balance sheet measured at fair value. The valuation Licenses of interest rate swaps resulted in a liability which is included in (finite lives) 66,082 28,994 37,088 long-term debt on the accompanying balance sheets. The valua- Other intangible assets tion of foreign currency forward exchange contracts at December 31, 2016, resulted in a liability and is included in accrued ex- penses on the accompanying balance sheet and at December 31, (finite lives) Subtotal Total 12,366 120,494 9,563 2,803 38,618 81,876 $239,953 $38,618 $201,335 INTER PARFUMS, INC. 2016 ANNUAL REPORT 90 Amortization expense was $5.9 million, $5.8 million Lanvin was granted the right to repurchase the brand names and and $6.6 million in 2016, 2015 and 2014, respectively. trademarks in 2025 for the greater of €70 million (approximately Amortization expense is expected to approximate $5.7 mil- $74 million) or one times the average of the annual sales for lion in 2017 and 2018, and $4.6 million in 2019, 2020 the years ending December 31, 2023 and 2024 (residual value). and 2021. The weighted average amortization period for Because the residual value of the intangible asset exceeds its trademarks, licenses and other intangible assets with finite carrying value, the asset is not amortized. lives are 18 years, 14 years and 2 years, respectively, and 14 years in the aggregate. (9) loans Payable – Banks There were no impairment charges for trademarks with indefi- Loans payable – banks consist of the following: nite useful lives in 2016, 2015 and 2014. The fair values used The Company and its domestic subsidiaries have available a in our evaluations are estimated based upon discounted future $20 million unsecured revolving line of credit due on demand, cash flow projections using a weighted average cost of capital which bears interest at the prime rate minus 0.5% (the prime of 6.2%. The cash flow projections are based upon a number rate was 3.75% as of December 31, 2016). The line of credit of assumptions, including, future sales levels and future cost of which has a maturity date of December 18, 2017 is expect- goods and operating expense levels, as well as economic condi- ed to be renewed on an annual basis. Borrowings outstanding tions, changes to our business model or changes in consumer pursuant to lines of credit were zero as of December 31, 2016 acceptance of our products which are more subjective in nature. and 2015. The Company believes that the assumptions the Company has The Company’s foreign subsidiaries have available credit lines, made in projecting future cash flows for the evaluations de- including several bank overdraft facilities totaling approximately scribed above are reasonable and currently no impairment in- $26 million. These credit lines bear interest at EURIBOR plus be- dicators exist for our indefinite-lived assets. However, if future tween 0.5% and 0.8% (EURIBOR was minus 0.08% at December actual results do not meet our expectations, the Company may 31, 2016). Outstanding amounts were zero as of December 31, be required to record an impairment charge, the amount of which 2016 and 2015. could be material to our results of operations. The weighted average interest rate on short-term borrowings The cost of trademarks, licenses and other intangible as- was zero as of December 31, 2016 and 2015. sets with finite lives is being amortized by the straight line method over the term of the respective license or the intan- (10) long-term debt gible assets estimated useful life which range from three to In June 2015, the Company financed its Rochas brand acqui- twenty years. If the residual value of a finite life intangible sition with a $111 million, 5-year term loan payable in equal asset exceeds its carrying value, then the asset is not amor- quarterly installments plus interest. This term loan requires the tized. The Company reviews intangible assets with finite lives maintenance of certain financial covenants, tested semi-annually, for impairment whenever events or changes in circumstances including a maximum leverage ratio and a minimum interest cov- indicate that the carrying amount may not be recoverable. erage ratio. The facility also contains new debt restrictions among Product sales of our Karl Lagerfeld brand have not met with other standard provisions. The Company is in compliance with all our original expectations. During the fourth quarter of 2016, of the covenants and other restrictions of the debt agreements. the Company decided that it will most likely exercise its In order to reduce exposure to rising variable interest rates, the rights for an early termination of the Karl Lagerfeld license Company entered into a swap transaction effectively exchanging in 2024, rather than continue the license through its original the variable interest rate to a fixed rate of approximately 1.2%. expiration in 2032. As a result of the shortened expected life The swap is a derivative instrument and is therefore recorded at of the license, the Company recorded an impairment loss of fair value and changes in fair value are reflected in the accompa- $5.7 million as of December 31, 2016. nying consolidated statements of income. Maturities of long-term Trademarks (finite lives) primarily represent Lanvin brand debt subsequent to December 31, 2016 are approximately $21 names and trademarks and in connection with their purchase, million per year through 2019 and, $11 million in 2020. notes to consolidated financial statements (in thousands except share and per share data) 91 (11) commitments leases million, in 2016, 2015 and 2014, respectively, and repre- sented 7.3%, 7.2% and 7.1% of net sales for the years ended The Company leases its office and warehouse facilities under oper- December 31, 2016, 2015 and 2014, respectively. ating leases which are subject to various step rent provisions, rent concessions and escalation clauses expiring at various dates through (12) equity 2023. Escalation clauses are not material and have been excluded share-based PaymenTs: from minimum future annual rental payments. Rental expense, which The Company maintains a stock option program for key em- is calculated on a straight-line basis, amounted to $10.7 million, ployees, executives and directors. The plans, all of which have $9.9 million and $10.1 million in 2016, 2015 and 2014, respec- been approved by shareholder vote, provide for the granting tively. Minimum future annual rental payments are as follows: of both nonqualified and incentive options. Options granted 2017 2018 2019 2020 2021 Thereafter $5,390 $5,028 $4,568 $3,689 $3,008 $5,952 $27,635 under the plans typically have a six-year term and vest over a four to five-year period. The fair value of shares vested in 2016 and 2015 aggregated $0.9 million and $0.8 million, respectively. Compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated based on historic trends. It is generally the Company’s policy to issue new shares upon exercise of stock options. The following table sets forth information with respect to lICense agreemenTs nonvested options for 2016: The Company is party to a number of license and other agree- ments for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various Weighted Average Number of Shares Grant Date Fair Value dates through 2032. In connection with certain of these li- Nonvested options – cense agreements, the Company is subject to minimum an- beginning of year nual advertising commitments, minimum annual royalties and Nonvested options other commitments as follows: 2017 2018 2019 2020 2021 Thereafter $113,633 $111,489 $114,897 $116,188 $118,169 $332,830 $907,206 granted Nonvested options vested or forfeited Nonvested options – end of year 414,850 149,850 (162,360) 402,340 $6.86 $7.43 $6.69 $7.14 The effect of share-based payment expenses decreased in- come statement line items as follows: Year Ended December 31, 2016 2015 2014 Future advertising commitments are estimated based on Income before planned future sales for the license terms that were in ef- income taxes $1,200 $800 $900 fect at December 31, 2016, without consideration for poten- Net Income attributable tial renewal periods. The above figures do not reflect the fact to Inter Parfums, Inc. 700 500 500 that our distributors share our advertising obligations. Royalty Diluted earnings per share expense included in selling, general, and administrative ex- attributable to penses, aggregated $37.8 million, $33.8 million and $35.6 Inter Parfums, Inc. 0.02 0.01 0.01 INTER PARFUMS, INC. 2016 ANNUAL REPORT 92 The following table summarizes stock option activity and relat- The weighted average fair values of options granted by Inter ed information for the years ended December 31, 2016, 2015 Parfums, Inc. during 2016, 2015 and 2014 were $7.43, $5.99 and 2014: Year Ended December 31, Weighted Average 2016 Options Exercise Price Shares under option- beginning of year 709,300 $24.34 Options granted 149,850 32.61 Options exercised (123,150) 18.69 Options forfeited (50,560) 27.18 Shares under option- end of year 685,440 26.95 and $7.42 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value. The assumptions used in the Black-Scholes pricing model are set forth in the following table: Year Ended December 31, Weighted average expected stock-price volatility Weighted average expected option life Weighted average risk-free 2016 2015 2014 29% 33% 34% 5.0 yrs 5.0 yrs 5.0 yrs interest rate 2.0% 1.7% 1.7% Year Ended December 31, Weighted Average 2015 Options Exercise Price Weighted average dividend yield 2.1% 2.1% 1.8% Shares under option- beginning of year Options granted Options exercised Options forfeited Shares under option- end of year 639,495 158,300 (80,685) (7,810) $23.19 23.79 13.82 27.77 Expected volatility is estimated based on historic volatil- ity of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects 709,300 $24.34 the assumption that the dividend payout as authorized by the Board of Directors would maintain its current payout ratio as a Year Ended December 31, Weighted Average percentage of earnings. 2014 Options Exercise Price Proceeds, tax benefits and intrinsic value related to stock Shares under option- beginning of year Options granted Options exercised Options forfeited Shares under option- end of year options exercised were as follows: 643,595 139,250 (136,640) (6,710) $19.58 27.93 11.19 19.37 Year Ended December 31, Proceeds from stock options exercised excluding cashless 639,495 $23.19 exercise of $0.7 million, $0.5 million and 2016 2015 2014 At December 31, 2016, options for 1,078,755 shares $0.6 million in 2016, were available for future grant under the plans. The ag- 2015 and 2014, gregate intrinsic value of options outstanding is $4.3 million as of December 31, 2016 and unrecognized com- pensation cost related to stock options outstanding ag- gregated $2.8 million, which will be recognized over the next five years. respectively $1,579 $653 $953 Tax benefits 400 260 670 Intrinsic value of stock options exercised $1,860 $1,137 $2,733 notes to consolidated financial statements (in thousands except share and per share data) 93 The following table summarizes additional stock option in- and 2014 an additional 2,179, 1,299 and 3,112 shares, re- formation as of December 31, 2016: spectively, for payment of certain withholding taxes resulting Options Outstanding Weighted Average Remaining from his option exercises. In September 2016, Interparfums SA, approved a plan to grant an aggregate of 15,100 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The shares will be distributed Exercise Number Contractual Options in September 2019 so long as the individual is employed by Prices Outstanding 70,050 $15.59 250 $17.07 87,310 $19.33 2,750 $21.76 2,800 $22.20 127,850 $23.61 $25.29 - $28.82 14,000 $26.40 5,000 $27.80 114,880 2,000 $29.36 $32.12 - $32.83 148,350 110,200 685,440 $35.75 Totals Life Exercisable 70,050 250 66,530 1,750 1,200 25,570 3,000 – 45,880 1,000 1,750 66,120 283,100 0.99 years 0.08 years 2.00 years 1.08 years 2.08 years 5.00 years 3.79 years 4.08 years 4.00 years 2.68 years 5.91 years 3.00 years 3.85 years Interparfums SA at the time, and in the case of officers and man- agers, only to the extent that the performance conditions have been met. Once distributed, the shares will be unrestricted and the employees will be permitted to trade their shares. The fair value of the grant of €22.46 per share (approximately $25.00 per share) has been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant taking into account the dividend yield as no dividends on this grant will be earned until the shares are distributed. The estimated number of shares to be distributed of 137,381 has been determined taking into account employee turnover. The aggregate cost of the grant of €3.1 million (approx- imately $3.4 million) will be recognized as compensation cost by Interparfums SA on a straight-line basis over the requisite three year service period. In 2016, $0.4 million of compensation cost As of December 31, 2016, the weighted average exercise has been recognized. price of options exercisable was $24.20 and the weighted av- To avoid dilution of the Company’s ownership of Interparfums erage remaining contractual life of options exercisable is 2.59 SA, all shares to be distributed pursuant to this plan will be pre-ex- years. The aggregate intrinsic value of options exercisable at De- isting shares of Interparfums SA, purchased in the open market by cember 31, 2016 is $2.6 million. Interparfums SA. As of December 31, 2016, a total of 108,348 The Chief Executive Officer and the President each exer- shares have been acquired in the open market at an aggregate cost cised 19,000, 19,000 and 32,875 outstanding stock options of $2.9 million, and such amount has been classified as an equity of the Company’s common stock in 2016, 2015 and 2014, transaction on the accompanying balance sheet. respectively. The aggregate exercise prices of $0.7 million in 2016, $0.5 million in 2015 and $0.6 million in 2014 dIvIdends were paid by them tendering to the Company in 2016, 2015 In October 2016, the Board of Directors of the Company au- and 2014, an aggregate of 20,658, 18,764 and 19,656 thorized a 13% increase in the annual dividend to $0.68 per shares, respectively, of the Company’s common stock, pre- share. The quarterly dividend aggregating approximately $5.3 viously owned by them, valued at fair market value on the million ($0.17 per share) declared in December 2016 was paid dates of exercise. All shares issued pursuant to these option in January 2017. The next quarterly dividend of $0.17 per exercises were issued from treasury stock of the Company. In share will be paid on April 14, 2017 to shareholders of record addition, the Chief Executive Officer tendered in 2016, 2015 on March 31, 2017. INTER PARFUMS, INC. 2016 ANNUAL REPORT 94 (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 using the treasury stock method. The reconciliation between the numerators and denom- inators of the basic and diluted EPS computations is as follows: Year Ended December 31, Numerator for diluted earnings per share Denominator: Weighted average shares Effect of dilutive securities: stock options Denominator for diluted earnings per share Earnings per share: 2016 2015 2014 29,436 30,437 33,331 31,072,328 103,270 31,175,598 30,996,137 30,931,308 104,078 129,018 31,100,215 31,060,326 Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted 1.07 1.07 0.98 0.98 0.95 0.95 Not included in the above computations is the effect of anti dilutive potential common shares, which consist of out- standing options to purchase 267,000, 272,000, and 130,000 shares of common stock for 2016, 2015, and 2014, respectively. (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: United States Europe Eliminations of intercompany sales net income attributable to inter Parfums, inc.: United States Europe Eliminations depreciation and amortization expense including impairment loss: 2016 $117,256 404,198 ) (382 $521,072 $8,285 25,120 (74 $33,331 ) United States Europe $1,816 13,525 $15,341 interest and dividend income: United States Europe $22 3,309 $3,331 2015 2014 $105,851 362,911 (222 ) $105,270 394,164 ) (173 $468,540 $499,261 $7,640 22,797 – $8,069 21,367 – $30,437 $29,436 $1,583 7,495 $9,078 $18 2,977 $2,995 $1,554 8,612 $10,166 $3 3,885 $3,888 notes to consolidated financial statements (in thousands except share and per share data) segments and Geographical areas continued Year Ended December 31, interest expense: United States Europe income tax expense: United States Europe Eliminations total assets: United States 95 2016 – 2,340 $2,340 $4,278 19,596 ) (48 $23,826 2015 2014 $2 2,824 $2,826 $3,923 17,604 – $73 1,405 $1,478 $4,643 14,727 – $21,527 $19,370 Europe Eliminations of investment in subsidiary ) $89,930 602,077 (9,598 $682,409 $80,761 616,199 ) (9,301 $78,740 535,049 ) (9,283 $687,659 $604,506 additions to long-lived assets: United States Europe total long-lived assets: United States Europe deferred tax assets: United States Europe Eliminations $930 4,812 $5,742 $12,247 181,697 $193,944 $194 7,848 48 $8,090 $1,283 122,663 $123,946 $13,133 197,535 $210,668 $365 6,817 – $7,182 $1,165 3,059 $4,224 $13,433 94,285 $107,718 $396 6,452 – $6,848 United States export sales were approximately $77.5 million, $66.3 million and $61.0 million in 2016, 2015 and 2014, respec- tively. Consolidated net sales to customers by region are as follows: Year Ended December 31, 2014 North America $125,900 Europe Central and South America Middle East Asia Other $125,700 170,600 177,900 78,200 11,000 41,100 41,900 85,600 11,900 57,700 40,300 2015 2016 149,600 192,800 43,900 42,200 81,600 11,000 $521,100 $468,500 $499,300 Consolidated net sales to customers in major countries are as follows: Year Ended December 31, 2014 United States $119,000 United Kingdom France 2016 $144,000 $31,000 $43,000 $122,000 $32,000 $34,000 $50,000 $37,000 2015 INTER PARFUMS, INC. 2016 ANNUAL REPORT 96 (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, 2016. The components of income before income taxes consist of the following: Year Ended December 31, 2014 U.S. operations $12,712 44,003 $56,715 2016 $12,441 54,633 $67,074 Foreign operations $60,496 $11,564 48,932 2015 The provision for current and deferred income tax expense (benefit) consists of the following: Year Ended December 31, Current: 2016 2015 2014 Federal State and local Foreign Deferred: Federal State and local Foreign Total income tax expense $3,792 309 21,099 25,200 113 9 (1,496 (1,374 $23,826 ) ) $3,660 220 16,806 20,686 30 1 810 841 $4,374 323 15,229 19,926 ) (84 30 ) (502 ) (556 $21,527 $19,370 The tax effects of temporary differences that give rise to Valuation allowances are provided for foreign net operating significant portions of the deferred tax assets and deferred tax loss carry-forwards, as future profitable operations from cer- liabilities are as follows: tain foreign subsidiaries might not be sufficient to realize the 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 deferred tax liabilities (long-term): Trademarks and licenses Other Total deferred tax liabilities Net deferred tax assets 2016 2015 No other valuation allowances have been provided as full amount of net operating loss carry-forwards. management believes that it is more likely than not that the asset will be realized in the reduction of future taxable 296 income. 2,321 2,442 As previously reported, the French Tax Authorities exam- ined the 2012 tax return of Interparfums SA, the Compa- 717 ny’s majority owned Paris-based subsidiary, and in August 2015 issued a $6.9 million tax adjustment. It is the Com- 2,170 pany’s position that the French Tax Authorities are incor- (468 ) rect in their assessments and the Company believes that it 7,478 has strong arguments to support its tax positions. The main (296 ) issues challenged by the French Tax Authorities related to 7,182 the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respec- (3,746 ) tively. Interparfums Singapore Pte. and Interparfums (Su- – isse) SARL are wholly-owned subsidiaries of Interparfums (3,746 ) SA. Due to the subjective nature of the issues involved, $3,436 in April 2016, Interparfums SA reached an agreement in ) ) ) ) 821 1,875 3,187 864 2,888 (724 8,911 (821 8,090 (3,449 – (3,449 $4,641 notes to consolidated financial statements (in thousands except share and per share data) 97 principle to settle the entire matter with the French Tax (16) accumulated other comprehensive income (loss) Authorities. The settlement requires Interparfums SA to pay The components of accumulated other comprehensive loss a tax assessment of $1.9 million covering the issues for not consist of the following: only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also in- Year Ended December 31, cludes an agreement as to future acceptable commission and Net derivative instruments, 2016 2015 2014 royalty rates, which is not expected to have a significant im- beginning of year $– pact on cash flow. The settlement, which for 2012, is subject Net derivative instruments, to formal documentation with the French Tax Authorities, was (17 loss, net of tax ) $– – $– – accrued as of March 31, 2016. In July 2016, Interparfums SA paid $1.1 million to the French Tax Authorities relating to tax years 2013 and 2014. Net derivative instruments end of year – Cumulative translation (17 – ) The Company is no longer subject to U.S. federal, state, adjustments, and local or non-U.S. income tax examinations by tax authori- ties for years before 2013. The Company has not provided for U.S. deferred income beginning of year Translation adjustments Cumulative translation (48,091 (9,874 ) ) (15,823 ) 25,860 (32,268 ) (41,683 ) taxes on $365 million of undistributed earnings of its non- U.S. subsidiaries as of December 31, 2016 since the Com pany intends to reinvest most of these earnings in its for- adjustments, end of year Accumulated other (57,965 ) (48,091 ) (15,823 ) eign operations indefinitely and the Company believes it comprehensive has sufficient foreign tax credits available to offset any potential tax on amounts that have been and are planned income (loss) (57,982 (15,823) (48,091 ) ) to be repatriated. (17) net income attributable to inter Parfums, inc. Differences between the United States Federal statutory and transfers from the noncontrolling interest income tax rate and the effective income tax rate were as follows: Year Ended December 31, 2016 2015 2014 34.0 Statutory rates % 34.0 State and local taxes, 34.0 % % net of Federal benefit 0.3 0.2 0.1 Effect of foreign taxes greater than U.S. statutory rates Other ) (0.3 Effective rates % 34.2 1.5 (0.3 35.5 ) % 35.6 (0.2 1.6 0.4 % ) Year Ended December 31, Net income attributable 2016 2015 2014 to Inter Parfums, Inc. $33,331 $30,437 $29,436 Decrease in Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions (1,926 ) (335 (192 ) ) Change from net income attributable to Inter Parfums, Inc. and transfers from noncontrolling interest $31,405 $30,245 $29,101 INTER PARFUMS, INC. 2016 ANNUAL REPORT 98 directors and executive officers directors and execUtiVe officers dIreCTors Jean madar exeCuTIve offICers CorPoraTe InformaTIon Chief Executive Officer, Chief Executive Officer, Jean madar 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 Philippe santi Executive Vice President Director General Delegue Interparfums SA francois heilbronn frédéric Garcia-Pelayo Managing Partner M.M. Friedrich, Director of Export Sales Heilbronn & Fiszer Interparfums SA Mazars USA, LLP 135 West 50th Street New York, NY 10020 transfer agent American Stock Transfer and Trust Company 6201 15th Avenue Brooklyn, NY 11219 Jean levy Business Consultant - Former President and Chief Executive Officer, Cosmair 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. corporate and market information 99 The markeT for our Common sToCk Our Company’s common stock, $.001 par value per share, is traded 2016, our Board of Directors authorized a 15% increase in the on The Nasdaq Global Select Market under the symbol “IPAR”. The cash dividend to $0.60 per share on an annual basis. In October following table sets forth in dollars, the range of high and low closing 2016, our Board of Directors authorized an additional 13% prices for the past two fiscal years for our common stock. increase in the annual dividend to $0.68 per share. The next High Closing Low Closing 2017 to shareholders of record on March 31, 2017. quarterly cash dividend of $0.17 per share is payable on April 14, fiscal 2016 Fourth Quarter Price Price 29.40 36.40 27.05 35.07 Third Quarter 27.19 Second Quarter 31.71 20.37 32.47 First Quarter form 10k a copy of the company’s 2016 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, Fiscal 2015 Price Price High Closing Low Closing nY 10176 attention: corporate secretary. Fourth Quarter Third Quarter Second Quarter First Quarter 33.45 35.22 34.83 29.37 22.33 29.97 23.40 22.73 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, 2017, the number of record holders, Inc., CCA Industries, Inc., Colgate-Palmolive Co., Estee Lauder which include brokers and broker’s nominees, etc., of our com- Companies, Inc., Inter Parfums, Inc., Kimberly Clark Corp., mon stock was 42. We believe there are approximately 9,500 Natural Health Trends Corp., Proctor & Gamble Co., Revlon, Inc., beneficial owners of our common stock. Spectrum Brands Holdings, Inc., Stephan Co., Summer Infant, dIvIdends Inc. and United Guardian, Inc. The graph assumes that the value of the investment in our common stock and each index was $100 In January 2015, our Board of Directors authorized an 8% at the beginning of the period indicated in the graph, and that all increase in the annual dividend to $0.52 per share and in January 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 12/31/11 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 12/11 100.00 100.00 100.00 12/12 127.37 116.41 108.26 12/13 241.41 165.47 135.85 12/14 188.05 188.69 153.37 12/15 166.25 200.32 145.85 12/16 233.18 216.54 152.71 INTER PARFUMS, INC. 2016 ANNUAL REPORT Montblanc Emblem Intense 551 F I F T H AV E N U E N Y, N Y 10176 T E L : 21 2 9 83 2 6 4 0 FA X : 212 9 83 419 7 W W W. I N T E R PA R F U M S I NC .C OM 

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