Inter Parfums
Annual Report 2018

Plain-text annual report

1 table of contents financial highlights 02 letter to our shareholders 04 the company 08 the products 14 the organization 58 2 Financial Highlights NET SALES (in millions ) 2018 2017 2016 2015 2014 NET INCOME ATTRIBUTABLE TO INTER PARFUMS, INC. (in millions ) 2018 2017 2016 2015 2014 $53.8 $41.6 $33.3 $30.4 $29.4 INTER PARFUMS, INC. SHAREHOLDERS’ EQUITY (in millions ) 2018 2017 2016 2015 2014 $675.6 $591.3 $521.1 $468.5 $499.3 $447.6 $433.3 $370.4 $365.6 $382.1 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 Net Income Attributable to the Noncontrolling Interest Net Income Attributable to Inter Parfums, Inc. 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 2018 2017 2016 2015 2014 $675,574 248,012 $591,251 214,965 $521,072 194,601 $468,540 179,069 $499,261 212,224 332,831 94,731 95,859 15,922 53,793 $1.72 $1.71 31,308 31,522 $11,031 295,540 78,623 78,065 13,659 41,594 $1.33 $1.33 31,172 31,305 $11,914 258,787 66,678 67,074 9,917 33,331 $1.07 $1.07 31,072 31,176 228,268 61,203 60,496 8,532 30,437 $0.98 $0.98 30,996 31,100 233,634 53,403 56,715 7,909 29,436 $0.95 $0.95 30,931 31,060 $15,341 $9,078 $10,166 $193,136 67,870 382,425 799,167 -0- 46,061 447,607 $0.905 $208,343 $161,828 $176,967 69,899 382,171 777,772 -0- 60,579 433,298 $0.72 94,202 337,977 682,409 -0- 74,562 370,391 $0.62 82,847 337,674 687,659 -0- 98,606 365,587 $0.52 $90,138 190,152 382,935 604,506 298 -0- 382,065 $0.48 4 2018 Letter to our Shareholders DEAR FELLOW SHAREHOLDERS, 2018 was one of the best years in the history of Inter Parfums. Jean Madar and Philippe Benacin letter to shareholders 5 Among the year’s highlights are: strong, coming in 9% and 24% ahead of 2017, respectively. Gains • Record net sales were also achieved in the Middle East and Eastern Europe with • Growth in all the regions where we operate sales up 17% and 7%, respectively. Even sales in Central and • Market share expansion South America were slightly ahead of 2017. • The addition of three new brands to our portfolio Based upon available data, Inter Parfums has been gaining • Our official entry into the direct-to-consumer e-commerce market share. According to market research, in 2018 the glob- arena via a partnership with a premier modeling management al fragrance industry grew 6.5% to $52.7 billion while our sales company rose 14.3%, or more than twice the rate of growth of our in- dustry. These analysts estimated that the five-year compound YEAR-OVER-YEAR FINANCIAL OVERVIEW annual growth rate for fragrance market was 5.2% while our • Net sales increased 14.3% to $675.6 million as compared rate was 7.4%. to $591.3 million. At comparable foreign currency exchange rates, net sales increased 12.8%. OUR EUROPEAN BASED OPERATIONS • Sales by European based operations rose 12.8% to $537.6 While Montblanc and Jimmy Choo brand sales held their place million from $476.5 million, at comparable foreign currency as our first and second largest brands, Coach overtook Lanvin exchange rates net sales for European based operations for third place. Year-over-year sales growth was achieved by were up 16%. all four brands. This growth was primarily due to continuing • U.S. based operations generated net sales of $138.0 million, sales of established scents supplemented by brand extensions up 20.2 % from $114.8 million in 2017. and flankers that expand and/or refresh existing pillars rather • Gross margin was 63.3% compared to 63.6%. than major new product launches. Compared to 2017, brand • S, G & A expense as a percentage of sales was 49.3% com- sales by Montblanc rose 1.4%, Jimmy Choo by 8.5%, Coach by pared to 49.9%. 73% and Lanvin by 7%. A short discussion of Coach is warrant- • Our effective tax rate was 27.3% compared to 29.2%. ed in light of the its extraordinary and rapid growth. We took • Net income attributable to Inter Parfums, Inc. increased 29.3% over the Coach license in 2015, discontinued its preexisting to $53.8 million from $41.6 million. fragrance portfolio, and then in 2016, launched our first wom- • On a per diluted share basis, net income attributable to Inter en’s scent, followed in the fall of 2017 with our first men’s sig- Parfums, Inc. rose 28.6% to $1.71 from $1.33. nature collection. Then in 2018, we filled the channels with a flanker for each, Coach Floral and Coach Platinum. Going from OTHER 2018 FINANCIAL HIGHLIGHTS zero to just under $100 million in brand sales in two years is a • Our business generated cash flow from operating activities very exciting first for us. of approximately $63 million. In 2019, we have several major initiatives for our largest • We closed the year with working capital of $382 million in- brands underway. For Montblanc, an entirely new pillar, called cluding approximately $261 million in cash, cash equivalents Montblanc Explorer, was launched early in the year and all and short-term investments, resulting in a working capital indicators point to this being a megahit and a catalyst for a ratio of over 3 to 1. meaningful increase in brand sales. For Jimmy Choo, a new • At year-end, long-term debt including current maturities men’s scent is scheduled to debut in the second half of the aggregated $46.1 million. year. For women, A Girl in Capri, is coming to market under • Our capital expenditures approximated $4 million. the Lanvin label later this year. Flankers continue to make up • Based upon a full-time staff of approximately 300 worlwide, an important part of our marketing strategy, and in 2019, we we generated nearly $2.25 million in net sales per employee. have one debuting for Coach, called Floral Blush, one for Ro- GROWING OUR MARKETS AND OUR MARKET SHARE chas, called Mademoiselle Rochas Couture and several for the Jimmy Choo fragrance family. We continue to enrich and re- fresh our smaller brands with brand extensions. For example, For the second consecutive year, North America was our larg- Boucheron’s Collection will add two new members, as will La est market. In 2018, our North American sales were 19% ahead Collection Extraordinaire by Van Cleef & Arpels. In addition, a of 2017 building upon the 18% growth over 2016. Our business in third fragrance duo for Les Parfums Matières by Karl Lager- Western Europe and Asia, our next two largest markets, were also feld will debut in 2019. 6 U.S. BASED OPERATIONS Aldridge’s social channels and large and passionate fan base. The three new brands added to our portfolio in 2018 all fall un- Not only is she a beautiful model, Ms. Aldridge is also an exem- der our U.S. based operations. In February 2018, we entered plary role model, as a wife, mother and business woman. She into a 15-year exclusive worldwide license with the legendary has been fully engaged in the creative and product development fashion company, GUESS, whose fashions are sold through decisions of her brand and her initial collection is scheduled to its more than 1,000 retail stores and another 650 more retail begin rolling out toward the close of 2019. Ms. Aldridge will also partnerships. Since its founding in 1980, this iconic American help fast track the launch and continued sale of her fragranc- brand has become a global marque, generating sales in 100 es through interaction with her growing social media following. countries. In fact, 69% of its fiscal 2018 sales came from be- Over time, we plan to expand our IMG collaboration, by partner- yond U.S. shores. GUESS leadership has ambitious plans to ing with other high profile IMG clients as they create their own expand its retail network further. Capitalizing upon GUESS’s direct-to-consumer fragrance and beauty lines, as well as ex- global reach is at the heart of our brand strategy as we dis- plore the myriad crossover opportunities. tribute GUESS fragrances throughout the world at GUESS In addition to incremental GUESS brand sales starting in the stores, as well as better department stores, specialty stores spring of 2018, the growth in sales by U.S. based brands was and travel retail. Shortly after signing the license agreement, led by Anna Sui and Abercrombie & Fitch fragrances. 2019 will we began producing and selling many of the brand’s legacy be an active year for our U.S. operations. Authentic for men and scents, and that effort alone placed GUESS fragrances among women is a fragrance duo unveiling for Abercrombie & Fitch, our best-selling U.S. based brands. For 2019, we have flankers and there is a new signature scent for men debuting for Dunhill unveiling for the 1981 and Seductive pillars, and then in 2020, as is a brand extension for the Dunhill Century fragrance fam- the global launch of a women’s blockbuster fragrance should ily. Following on the successful launch of Fantasia by Anna Sui knock it out of the park for this fragrance brand. in 2018, we are introducing Fantasia Mermaid, along several In April 2018, we partnered with London-based Graff by en- other brand extensions. Bella Rosa comes to market for Os- tering into an exclusive, worldwide license agreement under car de la Renta on the heels of 2018’s launch of Bella Blanca. which we are creating and developing, and will distribute fra- Brand extensions for the Wave and Festival pillars will debut in grances under the Graff brand. The House of Graff has earned 2019 under the Hollister label. its reputation as the premier source for many of the world’s most rarefied and superb gemstones. To meet our responsibil- IN CLOSING ity to this aspirational brand, we are creating exceptional and Coming off one of the best years in our history, we are geared up distinctive fragrances along with exquisite packaging. These for further growth and greater profitability in 2019 and beyond. products will be sold at a higher price point in select distribu- We’ve established and filled senior and mid-level positions with tion including Graff stores, exclusive department and specialty stellar individuals. We have made enhancements across rele- stores and upscale travel retail. We are far along in developing vant disciplines and functions. With three new brands we have a multi-scent collection, with the first entrant or two sched- three new growth trajectories that build upon our already rich uled to debut late in 2019 or early 2020. We also see this brand portfolio of brands that ignite both global and regional loyalty. as a natural for travel amenities for five star hotels and for air- Our brands embrace consumers of different ages and eco- lines’ first and business class passengers, and this is an area nomic brackets and are well suited to our distribution network we are pursuing. encompassing 100 countries. We also have a very strong bal- Finally, our third new business opportunity is quite different ance sheet, which, among other things, makes us an attractive from our traditional model, but definitely within our wheel- partner to prospective brand owners. Our financial strength and house. In September 2018, we established a strategic partner- great talent and resource reservoir have enabled us to build ship with IMG Worldwide Models to develop direct-to-consumer new brand associations into vibrant enterprises. e-commerce fragrance and beauty businesses for its diverse and dynamic client base. We believe this partnership is a first in our industry. The first such collaboration is with supermodel Lily Aldridge. Ms. Aldridge, best known for her work with Bulgari, Ralph Lauren, Levi’s and Victoria’s Secret, has been working closely with us to develop a unique, namesake fragrance line Chairman of the Board Vice Chairman of the Board and e-commerce site that will be connected directly to Ms. Chief Executive Officer President letter to shareholders 7 Guess Seductive Homme Noir 8 The Company We are Inter Parfums, Inc. We operate in the fragrance business, and manufacture, mar- ket 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 four (4) whol- ly-owned United States subsidiaries, Jean Philippe Fragrances, LLC, Inter Parfums USA, LLC and Interstellar Brands LLC, all New York limited liability companies, and IP Beauty, Inc. (for- merly Nickel USA, Inc.), a Delaware corporation, are located at 551 Fifth Avenue, New York, New York 10176, and our telephone number is 212.983.2640. We also own 100% of Inter Parfums USA Hong Kong Limited indirectly through our 100% owned subsidiary, Inter Parfums USA, LLC. Our consolidated wholly-owned subsidiary, Inter Parfums Holdings, S.A., and its majority-owned subsidiary, Interpar- fums SA, maintain executive offices at 4 Rond Point des Champs Elysees, 75008 Paris, France. Our telephone number in Paris is 331.5377.0000. Interparfums SA is the sole owner of three (3) distribution subsidiaries: Inter Parfums srl for Italy, Inter Es- paña Parfums et Cosmetiques, SL, for Spain and Interparfums Luxury Brands, Inc., a Delaware corporation, for distribution of prestige brands in the United States. Interparfums SA is also the majority owner of Parfums Rochas Spain, SL, a Spanish limited liability company, which specializes in the distribution of Rochas fragrances. In addition, Interparfums SA is also the sole owner of Interparfums (Suisse) SARL, a company formed to hold and manage certain brand names, and Interparfums Singapore Pte., Ltd., an Asian sales and marketing office. Our common stock is listed on The Nasdaq Global Select Market under the trading symbol “IPAR”. The common shares of our subsidiary, Interparfums SA, are traded on the NYSE Euronext Exchange. The Securities and Exchange Commission (“SEC”) maintains an internet site at http://www.sec.gov that contains financial reports, proxy and information statements, and other informa- tion regarding issuers that file electronically with the SEC. We Coach Coach Platinum maintain our internet website at www.interparfumsinc.com, which is linked to the SEC internet site. You can obtain through our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, interactive data files, current the company 9 reports on Form 8-K, beneficial ownership reports (Forms 3, brands are best known, we have had many successful product 4 and 5) and amendments to those reports filed or furnished launches. We typically launch new fragrance families for our pursuant to Section 13(a) of the Securities Exchange Act of 1934 brands every year or two, and more frequently seasonal and as soon as reasonably practicable after they have been elec- limited edition fragrances are introduced as well. tronically filed with or furnished to the SEC. The creation and marketing of each product family is inti- We operate in the fragrance business and manufacture, mar- mately linked with the brand’s name, its past and present po- ket and distribute a wide array of fragrance and fragrance related sitioning, customer base and, more generally, the prevailing products. We manage our business in two segments, European market atmosphere. Accordingly, we generally study the market based operations and United States based operations. Certain for each proposed family of fragrance products for almost a full prestige fragrance products are produced and marketed by our year before we introduce any new product into the market. This European operations through our 73% owned subsidiary in Paris, study is intended to define the general position of the fragrance Interparfums SA, which is also a publicly traded company as 27% family and more particularly its scent, bottle, packaging and ap- of Interparfums SA shares trade on the NYSE Euronext. peal to the buyer. In our opinion, the unity of these four elements Our business is not capital intensive, and it is important to of the marketing mix makes for a successful product. note that we do not own manufacturing facilities. We act as a As with any business, many aspects of our operations are general contractor and source our needed components from subject to influences outside our control. We believe we have a our suppliers. These components are received at one of our strong brand portfolio with global reach and potential. As part distribution centers and then, based upon production needs, of our strategy, we plan to continue to make investments behind the components are sent to one of several third party fillers fast-growing markets and channels to grow market share. We which manufacture the finished product for us and deliver discuss in greater detail risk factors relating to our business in them to one of our distribution centers. Item 1A of our Annual Report on Form 10-K for the fiscal year Our fragrance products focus on prestige brands, each with ended December 31, 2018, and the reports that we file from a devoted following. By concentrating in markets where the time to time with the SEC. Montblanc Explorer 10 European Operations We produce and distribute our fragrance products pri- marily under license agreements with brand owners, and Grow Portfolio Brands Through New Product Development And Marketing We grow through the creation of fragrance family extensions fragrance product sales through our European operations within the existing brands in our portfolio. Every year or two, we represented approximately 80% of net sales for 2018. We create a new family of fragrances for each brand in our portfolio. have built a portfolio of prestige brands, which include We frequently introduce seasonal and limited edition fragrances Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, as well. With new introductions, we leverage our ability and ex- Montblanc, Paul Smith, Repetto, Rochas, S.T. Dupont and perience to gauge trends in the market and further leverage the Van Cleef & Arpels, whose products are distributed in over brand name into different product families in order to maximize 100 countries around the world. sales and profit potential. We have had success in introducing With respect to the Company’s largest brands, we own new fragrance families (sub-brands, flanker brands or flankers) the Lanvin brand name for our class of trade, and license within our brand franchises. Furthermore, we promote the per- the Montblanc, Jimmy Choo and Coach brand names. As a formance of our prestige fragrance operations through knowl- percentage of net sales, product sales for the Company’s edge of the market, detailed analysis of the image and potential of largest brands were as follows: each brand name, and a highly professional approach to interna- tional distribution channels. Year ended December 31, Montblanc Jimmy Choo Coach Lanvin 2018 19% 17% 15% 10% 2017 21% 2016 23% 18% 10% 11% 17% 4% 12% United States Operations Prestige brand fragrance products are also marketed Continue To Add New Brands To Our Portfolio Through New Licenses 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 25 years, we have built our portfolio of well-known prestige brands through acquisitions and new license agreements. We intend to further build on our success in prestige fragrances and pursue through our United States operations, and represent- new licenses and acquire new brands to strengthen our position ed 20% of sales for the year ended December 31, 2018. in the prestige beauty market. To that end, in 2017, we extended These fragrance products are sold under trademarks our Jimmy Choo license through December 31, 2031 and our Paul owned by us or pursuant to license or other agreements Smith license until December 2021. In 2018, we signed new li- with the owners of brands, which include Abercrombie & cense agreements with GUESS?, Inc., Graff and Lily Aldridge and Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French extended our license with Van Cleef & Arpels. As of December 31, Connection, Graff, GUESS, Hollister, Lily Aldridge and 2018, we had cash, cash equivalents and short-term investments Oscar de la Renta brands. of approximately $261 million, which we believe should assist BUSINESS STRATEGY Focus On Prestige Beauty Brands Prestige beauty brands are expected to contribute signifi- us in entering new brand licenses or out-right acquisitions. We identify prestige brands that can be developed and marketed into a full and varied product families and, with our technical knowl- edge and practical experience gained over time, take licensed cantly to our growth. We focus on developing and launching brand names through all phases of concept, development, manu- quality fragrances utilizing internationally renowned brand facturing, marketing and distribution. names. By identifying and concentrating in the most recep- tive market segments and territories where our brands are known, and executing highly targeted launches that capture the essence of the brand, we have had a history of success- Expand Existing Portfolio Into New Categories We selectively broaden our product offering beyond the fra- ful launches. Certain fashion designers and other licensors grance category and offer other fragrance related products and choose us as a partner, because our Company’s size enables personal care products under some of our existing brands. We us to work more closely with them in the product develop- believe such product offerings meet customer needs and further ment process as well as our successful track record. strengthen customer loyalty. the company 11 Continue To Build Global Distribution Footprint Our business is a global business and we intend to continue the creation, development and distribution of fragrances under the Graff brand. Our rights under such license agree- ment are subject to certain advertising expenditures and to build our global distribution footprint. In order to adapt to royalty payments as are customar y in our industr y. Initial changes in the environment and our business, in addition to product development includes a multi-scent collection our arrangements with third party distributors globally, we are planned for a late 2019 launch. Additionally, we are explor- operating distribution subsidiaries or divisions in the major ing opportunities for luxur y travel amenities, including five markets of the United States, France, Italy and Spain for dis- star hotels. tribution of prestige fragrances. We may look into future joint arrangements or acquire distribution companies within other key markets to distribute certain of our prestige brands. While Guess License In February 2018, the Company entered into an exclusive, 15- building a global distribution footprint is part of our long-term year worldwide license agreement with GUESS?, Inc. for the strategy, we may need to make certain decisions based on the creation, development and distribution of fragrances under short-term needs of the business. We believe that in certain the GUESS brand. This license took effect on April 1, 2018, markets, vertical integration of our distribution network may and our rights under such license are subject to certain be one of the keys to future growth of our Company, and own- minimum advertising expenditures and royalty payments ership of such distribution should enable us to better serve our as are customary in our industry. In 2018, our sales efforts customers’ needs in local markets and adapt more quickly as were focused on existing fragrances; in 2019, we plan to add situations may determine. several flankers to existing product and in 2020, entirely new fragrances are scheduled for launch. RECENT DEVELOPMENTS Lily Aldridge In September 2018, Interstellar Brands LLC, a wholly-owned Income Tax Recovery The French government had introduced a 3% tax on dividends subsidiary of the Company, announced the development of or deemed dividends for entities subject to French corporate a new fragrance line in collaboration with supermodel Lily income tax in 2012. In 2017, the French Constitutional Court Aldridge. The license agreement with Lily Aldridge runs released a decision declaring that the 3% tax on dividends through December 31, 2023, and is subject to royalty pay- or deemed dividends is unconstitutional. As a result of that ments as are customary in our industry. This deal marks the decision, the Company filed a claim for refund of approximately beginning of a strategic partnership between Interstellar $3.9 million for these taxes paid since 2015 including accrued and IMG Models, which manages Lily Aldridge, to develop interest of approximately $0.4 million. The Company recorded direct-to-consumer e-commerce fragrance and beauty busi- the refund claim as of December 31, 2017 and has received the nesses for IMG Models’ diverse and dynamic client base. Our entire refund in 2018. initial fragrance product launch, a multi-scent collection, is planned for September 2019. Impairment Loss The Company reviews intangible assets with indefinite lives Van Cleef & Arpels License In May 2018, the Company renewed its license agreement for for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. an additional six years with Van Cleef & Arpels for the creation, Product sales of some of our mass market product lines had development, and distribution of fragrance products through been declining for many years and represent a very small December 2024, without any material changes in terms and portion of our net sales. In 2017, the Company set in motion conditions. Our initial 12-year license agreement with Van a plan to discontinue several of these product lines over the Cleef & Arpels was signed in 2006. next few years and as a result, recorded an impairment loss Graff License In April 2018, the Company entered into an exclusive, 8-year of $2.1 million as of December 31, 2017. The Company also increased its inventory obsolescence reserves by $0.5 million as of December 31, 2017, to adjust to net realizable value the worldwide license agreement with London-based Graff for inventory of the product lines to be discontinued. 12 Settlement with French Tax Authorities As previously reported, the French Tax Authorities examined the suppliers’ accounts are primarily settled in U.S. dollars. For our European operations components for our prestige fragrances 2012 tax return of Interparfums SA. The main issues challenged are purchased from many suppliers around the world and are by the French Tax Authorities related to the commission rate and primarily manufactured in France. For United States opera- royalty rate paid to Interparfums Singapore Pte. and Interparfums tions, components for our prestige fragrances are sourced from (Suisse) SARL, respectively. Due to the subjective nature of many suppliers around the world and are primarily manufac- the issues involved, in April 2016, Interparfums SA reached an tured in the United States. agreement in principle to settle the entire matter with the French Tax Authorities. The settlement required Interparfums SA to pay MARKETING AND DISTRIBUTION a tax assessment of $1.9 million covering the issues for not only Our products are distributed in over 100 countries around the 2012 tax year, but also covering the issues for the tax years the world through a selective distribution network. For our ended 2013 through 2015. The settlement, which was finalized international distribution, we either contract with independent by the French Tax Authorities in the first quarter of 2017, was distribution companies specializing in luxury goods or distribute accrued as of December 31, 2016. prestige products through our distribution subsidiaries. In each PRODUCTION AND SUPPLY country, we designate anywhere from one to three distributors on an exclusive basis for one or more of our name brands. We also The stages of the development and production process for all distribute our products through a variety of duty free operators, fragrances are as follows: such as airports and airlines and select vacation destinations. • Simultaneous discussions with perfume designers and cre- As our business is a global one, we intend to continue to ators (includes analysis of esthetic and olfactory trends, build our global distribution footprint. For distribution of target clientele and market communication approach) brands within our European based operations we operate • Concept choice through our distribution subsidiaries or divisions in the major • Produce mock-ups for final acceptance of bottles and packaging markets of the United States, France, Italy and Spain, in addi- • Receive bids from component suppliers (glass makers, tion to our arrangements with third party distributors globally. plastic processors, printers, etc.) and packaging companies Our third party distributors vary in size depending on the num- • Choose suppliers • Schedule production and packaging • Issue component purchase orders ber of competing brands they represent. This extensive and di- verse network together with our own distribution subsidiaries provides us with a significant presence in over 100 countries • Follow quality control procedures for incoming components; around the world. and Over 45% of our European based prestige fragrance net • Follow packaging and inventory control procedures. sales are denominated in U.S. dollars. We address certain financial exposures through a controlled program of risk Suppliers who assist us with product development include: management that includes the use of derivative financial in- • Independent perfumery design companies (Aesthete, Carré struments. We primarily enter into foreign currency forward Basset, PI Design, Cent Degres) exchange contracts to reduce the effects of fluctuating foreign • Perfumers (IFF, Givaudan, Firmenich, Robertet, Takasago, currency exchange rates. Mane) which create a fragrance consistent with our expec- The business of our European operations has become in- tations and, that of the fragrance designers and creators creasingly seasonal due to the timing of shipments by our dis- • Bottle manufacturers (Pochet du Courval, Verescence, tribution subsidiaries and divisions to their customers, which Verreries Brosse, Bormioli Luigi, Stoelzle Masnières ), are weighted to the second half of the year. caps (Qualipac, ALBEA, RPC, Codiplas, LF Beauty, Texen For our United States operations, we distribute product Group) or boxes (Autajon , MMPP, Nortier, Draeger) to retailers and distributors in the United States as well as • Production specialists who carry out packaging (CCI,Edipar, internationally, including duty free and other travel-related Jacomo, SDPP, MF Productions,Biopack) or logistics (Bolloré retailers. We utilize our in-house sales team to reach our third Logistics for storage, order preparation and shipment) party distributors and customers outside the United States. In addition, the business of our United States operations has Suppliers’ accounts for our European operations are pri- become increasingly seasonal as shipments are weighted marily settled in euro and for our United States operations, toward the second half of the year. the company 13 Dunhill Century 14 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 December 31, 2021, plus two 5-year optional terms if certain conditions are met bebe Stores Boucheron June 30, 2020 December 31, 2025, Coach Dunhill 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 French Connection December 31, 2027, plus a 10- Graff GUESS Hollister Jimmy Choo Karl Lagerfeld Lily Aldridge Montblanc year optional term if certain sales targets are met December 31, 2026, plus 3 optional 3-year terms if certain sales targets are met December 31, 2033 December 31, 2021 December 31, 2031 October 31, 2032 December 31, 2023 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 S.T. Dupont December 31, 2021 December 31, 2024 December 31, 2019 Van Cleef & Arpels December 31, 2024 In connection with the acquisition of the Lanvin brand names and trademarks for our class of trade, we granted the seller the right to repurchase the brand names and trademarks in 2025 for the greater of €70 million (approximately $80 million) or one times the average of the annual sales for the years ending December 31, 2023 and 2024. The Products We are the owner of the Rochas brand, and the Lanvin brand name and trademark for our class of trade. In addition, we have built a portfolio of licensed prestige brands where- by we produce and distribute our prestige fra- grance products under license agreements with brand owners. Under license agreements, we obtain the right to use the brand name, cre- ate 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 li- cense agreements are also generally subject to certain minimum sales requirements and advertising expenditures as are customary in our industry. the products 15 Fragrance Portfolio 16 In December 2014, we entered into a 7-year worldwide license to create, produce and distribute new fragrances and fra- grance related products under the Abercrombie & Fitch brand name. The Company distributes these fragrances internation- ally in specialty stores, high-end department stores and duty free shops, and in the U.S., in duty free shops and in select Abercrombie & Fitch retail stores. In 2016 we launched our initial men’s scent, First Instinct, and during 2017 we launched a women’s version of First Instinct. In 2018 and early 2019, we introduced several First Instinct brand extensions. In the spring of 2019 we will be unveiling a new fragrance family for Abercrombie & Fitch, Authentic, for men and women. Abercrombie & Fitch is a specialty retailer of high quality apparel and accessories for men and women. For more than 125 years, the iconic brand has outfitted innovators, explor- ers and entrepreneurs. Today, it reflects the updated attitude of the modern customer, while remaining true to its heri- tage of creating expertly crafted products with an effortless, American style. the products 17 Abercrombie & Fitch Authentic 18 In June 2011, we entered into a 10-year exclusive worldwide fra- grance license agreement to produce and distribute fragrances and fragrance related products under the Anna Sui brand. We work in partnership with American designer, Anna Sui, and her creative team to build upon the brand’s growing customer ap- peal, and develop new fragrances that capture the brand’s very sweet feminine girly aspect, combined with touch of nostalgia, hipness and rock-and-roll. Anna Sui’s devoted customer base, which spans the world, is concentrated in Asia. With the popularity of Anna Sui fragrances throughout Asia, we enjoyed dramatic increases in brand sales in that region in both 2017 and 2018. By maintaining a strong advertising and marketing commitment to Anna Sui over many years, we were rewarded as the Chinese economy improved. We also took ad- vantage of the improving economy with a major new product launch Fantasia by Anna Sui, with distribution concentrated across Asia. In addition, the brand’s growing popularity in oth- er Asian countries contributed to the upturn that began in 2017. In 2018, we introduced Fantasia Mermaid for Anna Sui and a completely new Anna Sui fragrance family called, Sky, is in the works for 2020. the products 19 Anna Sui Fantasia Mermaid 20 In December 2010, we entered into an exclusive 15-year worldwide license agreement for the creation, development and distribution of fragrances under the Boucheron brand. Boucheron is the French jeweler “par excellence”. Founded by Frederic Boucheron in 1858, the House has produced some of the world’s most beautiful and precious creations. Today Boucheron creates jewelry and timepieces and, under license from global brand leaders, fragrances and sunglass- es. Currently Boucheron operates through over 40 boutiques worldwide as well as an e-commerce site. One of our first new fragrances under the Boucheron brand, Boucheron Place Vendôme, was released in 2013. In 2015, we launched a new fragrance duo for the Boucheron brand around its iconic Quatre ring, Boucheron Quatre. A six scent collection was launched under the Boucheron brand in 2017, to which two scents were added in 2018, the same year Boucheron Quatre en Rose made its debut. For 2019, we are again launching two new fragrances as part of the Boucheron collection. the products 21 Boucheron Collection Boucheron 22 In April 2015, we entered into an exclusive 11-year worldwide license with Coach, Inc. to create, produce and distribute new men’s and women’s fragrances and fragrance related products under the Coach brand name. We distribute these fragrances globally to department stores, specialty stores and duty free shops, as well as in Coach retail stores. Coach, established in New York City in 1941, is a leading design house of modern luxury accessories and lifestyle col- lections with a rich heritage of pairing exceptional leathers and materials with innovative design. Coach is sold worldwide through Coach stores, select department stores and specialty stores, and through Coach’s website at www.coach.com. In 2016, we launched our first Coach fragrance, a women’s scent, and in 2017, a men’s scent, both of which have quickly be- come top selling prestige fragrances. In 2018, the Coach brand achieved remarkable sales growth and quickly become one of the largest brands in our portfolio. Coach sales were driven by the continued popularity of the Coach signature lines, as well as the success of flankers, Coach Floral and Coach Platinum, which rolled out in 2018. We have a new Coach women’s scent in the works for debut in 2020. the products 23 Coach Coach Platinum 24 In December 2012, we entered into an exclusive 10-year worldwide fragrance license to create, produce and distribute fragrances and fragrance related products under the Dunhill brand. The house of Dunhill was established in 1893 and since that time has been dedicated to providing high quality men’s luxury products, with core collections offered in menswear, leather goods and accessories. The brand has global reach through a premium mix of self-managed retail outlets, high-level de- partment stores and specialty stores. Known for its commit- ment to elegance and innovation and being a leader of British men’s style, the brand continues to blend innovation and cre- ativity with traditional craftsmanship. Beginning in 2015, we rolled out our new Dunhill scent, Icon, the success of which has made the Dunhill brand one of the stars within our United States based operations. Building upon the established success of the Icon fragrance family, we launched several product extensions including Icon Absolute, Icon Elite and Icon Racing. In 2018 we introduced a new Dunhill scent for men called Century and for 2019, we will debut the Dunhill Signature Collection, as well as Century Blue. the products 25 Dunhill Icon Collection 26 In April 2018, the Company entered into an exclusive, 8-year worldwide license agreement with London-based Graff for the creation, development and distribution of fragrances under the Graff brand. The 8-year agreement has three 3-year auto- matic renewal options, potentially extending the license until December 31, 2035. Since Laurence Graff OBE founded the company in 1960, Graff has been dedicated to sourcing and crafting diamonds and gemstones of untold beauty and rarity, and transforming them into spectacular pieces of jewelry that move the heart and stir the soul. Throughout its rich history, Graff has be- come the world leader for diamonds of rarity, magnitude and distinction. Most notably, it has dominated the list of historical and important rough diamonds discovered, cut and polished this century. Each jewelry creation is designed and manufac- tured in Graff’s London atelier, where master craftsmen em- ploy stone-led design techniques to emphasize the beauty of each individual stone. The company remains a family business, overseen by Francois Graff, Chief Executive Officer. Our plan calls for developing a multi-scent collection launching towards the end of 2019 with distribution earmarked for Graff stores, high-end department stores, and upscale travel retail. Additionally, we are exploring opportunities for luxury travel amenities, including five star hotels. the products 27 Graff 28 In February 2018, the Company entered into an exclusive, 15- year worldwide license agreement with GUESS?, Inc. for the creation, development and distribution of fragrances under the GUESS brand. This license took effect on April 1, 2018. We began selling GUESS legacy scents in 2018. For 2019, we have on tap two GUESS launches, 1981 Los Angeles for men and women and Seductive Noir for men and women. For 2020, we have a new line, Bella Vita, in development. Established in 1981, GUESS began as a jeans company and has since successfully grown into a global lifestyle brand. GUESS?, Inc. designs, markets, distributes and licenses a life- style collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. GUESS products are distributed through branded GUESS stores as well as better department and specialty stores around the world. As of November 3, 2018, GUESS directly operated over 1,100 retail stores in the Americas, Europe and Asia. GUESS’ licensees and distributors operated 584 additional retail stores worldwide. GUESS and its licensees and distributors operate in approximately 100 countries worldwide. the products 29 Guess Seductive Noir 30 In December 2014, we entered into a 7-year worldwide license to create, produce and distribute new fragrances and fragrance related products under the Hollister brand name. The Company distributes these fragrances internationally in specialty stores, high-end department stores and duty free shops, and in the U.S., in duty free shops as well as select Hollister retail stores. In 2016 we launched a new men’s and women’s scent, Wave, for Hollister. In 2017, we introduced a fragrance duo, Wave 2, to complement the Wave franchise by Hollister. During 2018 we debuted an entirely new fragrance family for Hollister, Festival Vibes, as well as Free Wave, both for men and women. For 2020, we have a duo in the works, Festival Party for men and women. The quintessential apparel brand of the global teen con- sumer, Hollister Co. celebrates the liberating spirit of the endless summer inside everyone. Inspired by California’s laidback attitude, Hollister’s clothes are designed to be lived in and made your own, for wherever life takes you. the products 31 Hollister Festival Nite 32 In October 2009, we entered into an exclusive 12-year worldwide license agreement for the creation, development and distribution of fragrances under the Jimmy Choo brand, and in 2017, we entered into an amended license agreement which now runs through December 31, 2031. Jimmy Choo encompasses a complete luxury accessories brand. Women’s shoes remain the core of the product offering, alongside handbags, small leather goods, scarves, eyewear, belts, fragrance and men’s shoes. Chief Executive Officer Pierre Denis and Creative Director Sandra Choi together share a vision to create one of the world’s most treasured luxury brands. Jim- my Choo has a global store network encompassing more than 150 stores and is present in the most prestigious department and specialty stores worldwide. Jimmy Choo is part of the Mi- chael Kors Holdings Limited luxury fashion group. Our first fragrance under the Jimmy Choo brand, a wom- en’s signature scent, rolled out globally in 2011. In 2013, we launched our second Jimmy Choo line, Flash, and in 2014, we debuted Jimmy Choo Man, our first men’s scent which ranked in 2015 as the 9th best-selling men’s fragrance in the Unit- ed States. In 2015, the launch of Jimmy Choo Illicit, our third women’s fragrance under that label hit the market. In 2017, building on the very strong fragrance family trees of the Jimmy Choo signature scent for women (2011) and Jimmy Choo Man (2014), we successfully launched Jimmy Choo L’Eau for women and Jimmy Choo Man Ice. In 2018 we released a flanker for the Jimmy Choo Man line, Jimmy Choo Man Blue, and the brand’s women’s signature scent added still another member to the family with Jimmy Choo Fever. For 2019, Jimmy Choo will add a new scent for men in the fall and for 2020, we are expanding our product line to include a fragrance collection with related lipstick and nail polish. the products 33 Jimmy Choo Fever 34 In October 2012, we entered into a 20-year worldwide license agreement with Karl Lagerfeld B.V., the internationally re- nowned haute couture fashion house, to create, produce and distribute fragrances under the Karl Lagerfeld brand. Under the creative direction of Karl Lagerfeld, one of the world’s most influential and iconic designers, the Lagerfeld Portfolio represents a modern approach to distribution, an innovative digital strategy and a global 360 degree vision that reflects the designer’s own style and soul. In 2017, we changed the strategic positioning and instituting new pricing with the launch of a new duo called Les Parfums Matières, which de- buted in the second half of 2017, achieving excellent sales re- sults. In the second half of 2018, we expanded the Les Parfums Matières line with another fragrance duo. the products 35 Karl Lagerfeld Les Parfums Matières 36 In July 2007, we acquired the worldwide rights to the Lanvin brand names and international trademarks listed in Class 3, our class of trade. A synonym of luxury and elegance, the Lanvin fashion house, founded in 1889 by Jeanne Lanvin, expanded into fragrances in the 1920s. Lanvin is currently our fourth largest brand by sales volume. Lanvin fragrances occupy an important position in the selec- tive distribution market in France, Eastern Europe and Asia, and we have several lines currently in distribution, including: Arpège, Lanvin L’Homme, Éclat d’Arpège, Rumeur 2 Rose, Jeanne Lanvin, Marry Me and Modern Princess. Our Éclat d’Arpège line accounts for approximately 50% of this brand’s sales. To capitalize on the success of our Éclat d’Arpège line, in 2015 we launched Éclat d’Arpège Homme as well as Éclat de Fleurs. In late 2016, we released a new Lanvin women’s line, Modern Princess in limited distribution which rolled out to broader international distribution in 2017. We added two flank- ers, Lanvin Modern Princess Eau Sensuelle and Éclat de Nuit in 2018 and we have a new Lanvin scent called A Girl in Capri debuting in 2019. the products 37 Lanvin A girl in Capri 38 In September 2018, Interstellar Brands LLC, a wholly-owned subsidiary of the Company announced the development of a new fragrance line in collaboration with supermodel Lily Aldridge. The license agreement with Lily Aldridge runs through December 31, 2023. This deal marks the beginning of a strategic partnership between Interstellar and IMG Models, which manages Lily Aldridge, to develop direct-to-consumer e-commerce fragrance and beauty businesses for IMG Models’ diverse and dynamic client base. Aldridge, best known for her work with Bulgari, Ralph Lau- ren, Levi’s and Victoria’s Secret, will work closely with In- terstellar to develop a unique, namesake fragrance line and e-commerce site that will be connected directly to Aldridge’s social channels and passionate fan base. Our initial fra- grance product launch, a multi-scent collection, is planned for September 2019. 39 Lily Aldridge 40 In October 2015, we extended our license agreement with Montblanc by five years. The original agreement, signed in 2010, provided us with the exclusive worldwide license rights to create, produce and distribute fragrances and fragrance re- lated products under the Montblanc brand through December 31, 2020. The new agreement, which went into effect on January 1, 2016, extends the partnership through December 31, 2025 without any material changes in operating conditions from the prior license. Montblanc has achieved a world-renowned position in the luxury segment and has become a purveyor of exclusive prod- ucts, which reflect today’s exacting demands for timeless de- sign, tradition and master craftsmanship. Through its leadership positions in writing instruments, watches and leather goods, promising growth outlook in women’s jewelry, active presence in more than 70 countries, network of more than 350 boutiques worldwide and high standards of product design and quality, Montblanc has grown to be our largest fragrance brand. In 2011, we launched our first new Montblanc fragrance, Leg- end, which quickly became our best-selling men’s line. In 2012, we launched our first women’s fragrance under the Montblanc brand, and our second men’s line, Emblem was launched in 2014. The Emblem line was expanded in 2015 to include Mont- blanc Emblem Intense and a new women’s scent, Lady Emblem. In 2016, we further extended our successful Montblanc Leg- end line with a new men’s scent, Montblanc Legend Spirit. For 2017, we continued the rollout of the highly successful launch of Montblanc Legend Spirit and launched Montblanc Legend Night during the 2017 holiday season with the global rollout continu- ing into the following year. In early 2019, Montblanc will unveil Montblanc Explorer, a new men’s scent, with distribution in all geographic markets around the globe. the products 41 Montblanc Explorer 42 In October 2013, we entered into a 12-year exclusive worldwide license to create, produce and distribute fragrances and fragrance related products under the Oscar de la Renta brand. In 2014, we took over distribution of fragrances within the brand’s legacy fragrance portfolio, and our first new women’s fragrance under the Oscar de la Renta brand, Extraordinary, was launched in 2015. For 2016, in addition to several flankers that we launched throughout the year, we debuted a new men’s fragrance family, Oscar de la Renta Gentlemen. Bella Blanca, a new Oscar de la Renta scent, debuted in early 2018, and Bella Rosa is scheduled for a 2019 debut. Oscar de la Renta is one of the world’s leading luxury goods firms. The New York-based company was established in 1965, and encompasses a full line of women’s accessories, bridal, childrenswear, fragrance, beauty and home goods, in addition to its internationally renowned signature women’s ready to wear collection. Oscar de la Renta products are sold globally in fine department and specialty stores, www.oscardelarenta. com and through wholesale channels. The Oscar de la Renta brand has a loyal following in the United States, Canada and Latin America. the products 43 Oscar de la Renta Bella Rosa 44 In May 2017, the Company renewed its license agreement for an additional four years with Paul Smith for the creation, development, and distribution of fragrance products through December 2021, without any material changes in terms and conditions. Our initial 12-year license agreement with Paul Smith was signed in 1998, and had previously been extended through December 31, 2017. Paul Smith is an internationally renowned British design- er who creates fashion with a clear identity. Paul Smith has a modern style which combines elegance, inventiveness and a sense of humor and enjoys a loyal following, especially in the UK and Japan. Fragrances include: Paul Smith, Paul Smith Extrême, and Paul Smith Rose. In 2018, Paul Smith Hello You, made its debut. the products 45 Paul Smith Rose Limited Edition 46 In December 2011, we entered into a 13-year exclusive worldwide license agreement to create, produce and distribute fragrances under the Repetto brand. Created in 1947 by Rose Repetto at the request of her son, dancer and choreographer Roland Petit, Repetto is today a legendary name in the world of dance. For a number of years, it has developed timeless and must-have collections with a fully modernized signature style ranging from dance shoes, ballet slippers, flat shoes, and sandals to more recently handbags and high-end accessories. With Repetto boutiques in several countries throughout the world, the brand has branched out into Asia, notably China, Hong Kong, Singapore, Thailand, South Korea and Japan with a mix of cross-generational appeal and French chic. Our first Repetto fragrance line was launched in 2013 and a floral scent was added in 2015. Despite this brand’s success with footwear, handbags and high-end accessories, fragrance sales have been modest. A new scent, Dance with Repetto debuted in the first quarter of 2018. the products 47 Repetto Dance with Repetto 48 In May 2015, we acquired the Rochas brand from The Procter & Gamble Company. Founded by Marcel Rochas in 1925, the brand began as a fashion house and expanded into perfumery in the 1950s under Hélène Rochas’ direction. This transaction included all brand names and registered trademarks for Rochas (Femme, Madame, Eau de Rochas, etc.), mainly for fragrance, cosmetics and fashion. This acquisition opened a new page in the Company’s histo- ry by integrating for the first time both fragrances and fashion, allowing us to apply a global approach to managing a fra- grance brand with complete freedom in terms of creativity and aesthetic choices. At the same time, we enjoy a very high de- gree of visibility establishing a position of even greater preem- inence for Rochas in the luxury goods universe. Rochas brand sales currently include approximately $2.5 million of royalties generated by the fashion and accessory business via its portfo- lio of license agreements. Our first new fragrance for Rochas, Mademoiselle Rochas, had a successful launch that began in the first quarter of 2017 in its traditional markets of France and Spain. In 2018, we continued the international rollout of Made- moiselle Rochas in additional markets, debuted flankers for Eau de Rochas and Mademoiselle Rochas and in late 2018, we launched our first new men’s line, Rochas Moustache. We also have a new men’s line under development for 2020. the products 49 Rochas Mademoiselle Rochas 50 In June 1997, we signed an exclusive worldwide license agreement with S.T. Dupont for the creation, manufacture and distribution of S.T. Dupont fragrances. In 2011, the agreement was renewed through December 31, 2016, and in September 2016 was renewed again through December 31, 2019, without any material changes in terms and conditions. S.T. Dupont is a French luxury goods house founded in 1872, which is known for its fine writing instruments, lighters and leather goods. S.T. Dupont fragrances include: S.T. Dupont Classic, S.T. Dupont Essence Pure, S.T. Dupont Collection and Be Exceptional (launched in September 2018). the products 51 S.T. Dupont Collection 52 In May 2018, the Company renewed its license agreement for an additional six years with Van Cleef & Arpels for the cre- ation, development, and distribution of fragrance products through December 2024. Our initial 12-year license agreement with Van Cleef & Arpels was signed in 2006. Van Cleef & Arpels fragrances in current distribution include: First and Collection Extraordinaire. Sales of the Collection Extraordinaire line have experienced continued growth since its debut. We continue to annually introduce new additions to the Van Cleef & Arpels Collection Extraordi- naire assortment. the products 53 Van Cleef & Arpels Collection Extraordinaire 26 0 /2018 0 1 54 Rochas Mademoiselle Rochas Couture quaterly financial data 55 QUARTERLY DATA: (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 2018 (In thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Net Sales Gross Margin Net Income Net Income Attributable to $171,767 105,629 21,862 $149,367 95,654 14,259 $177,213 109,147 24,426 $177,227 117,132 9,168 Full Year $675,574 427,562 69,715 Inter Parfums, Inc. 15,909 10,899 18,938 8,047 53,793 Net Income Attributable to Inter Parfums, Inc. per Share: Basic Diluted Weighted Average Common Shares Outstanding: Basic Diluted $0.51 $0.51 31,267 31,429 $0.35 $0.35 31,299 31,490 $0.60 $0.60 31,326 31,587 $0.26 $0.26 31,340 31,584 QUARTERLY DATA: (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 2017 (In thousands, except per share data) 1st Quarter $143,058 Net Sales 2nd Quarter $129,136 3rd Quarter $169,531 4th Quarter $149,526 Gross Margin Net Income Net Income Attributable to 90,070 18,167 83,943 9,211 103,472 22,103 98,801 5,772 $1.72 $1.71 31,308 31,522 Full Year $591,251 376,286 55,253 Inter Parfums, Inc. 13,373 6,744 17,077 4,400 41,594 Net Income Attributable to Inter Parfums, Inc. per Share: Basic Diluted Weighted Average Common Shares Outstanding: Basic Diluted $0.43 $0.43 31,145 31,254 $0.22 $0.22 31,169 31,281 $0.55 $0.55 31,175 31,307 $0.14 $0.14 31,200 31,378 $1.33 $1.33 31,172 31,305 5656 United States export sales were approximately $93.1 million, $71.4 million and $77.5 million in 2018, 2017 and 2016, respectively. Consolidated net sales to customers by region are as follows: CONSOLIDATED NET SALES TO CUSTOMERS BY REGION (in thousands) Year Ended December 31, North America Europe Asia Middle East Central and South America Other 2018 $210,200 233,600 109,000 59,300 51,700 11,800 $675,600 2017 $176,900 2016 $149,000 214,800 194,700 88,000 50,500 51,200 9,900 81,300 41,600 44,000 10,500 $591,300 $521,100 CONSOLIDATED NET SALES TO CUSTOMERS IN MAJOR COUNTRIES ARE AS FOLLOWS: (in thousands) Year Ended December 31, United States France United Kingdom Russia 2018 $204,000 44,000 36,000 35,000 2017 $173,000 2016 $144,000 44,000 33,000 34,000 47,000 31,000 27,000 5757 58 The Organization All Corporate Functions: Including product analysis and development, production and sales, and finance are coordinated at the Company’s corpo- rate headquarters in New York and at the corporate offices of Interparfums SA in Paris. Each company is organized into two operational units that report directly to general man- agement, and European operations ultimately report to Mr. Benacin and United States operations ultimately report to Mr. Madar. Finance, Investor Relations And Administration: Russell Greenberg in the United States and Philippe Santi in France: • Financial policy and communication, investor relations; • Financial accounting, cost accounting, budgeting and cash flow management; • Disclosure requirements of the Securities and Ex- change Commission and Commission des Operations de Bourse; • Labor relations, tax and legal matters and management information systems. Operations: Brian Gibbons and Alex Canavan in the United States, and Axel Marot in France: • Product development; • Logistics and transportation; • Purchasing and industrial relations; • Quality control and inventory cost supervision. Export Sales: Herve Bouillonnec in the United States and Frédéric Garcia- Pelayo in France: • International development strategy; • Establishment of distributor networks and negotiation of contracts; • Monitoring of profit margins and advertising expenditures. Domestic (Home Country) Sales: Michel Bes in the United States and Jérôme Thermoz in France: • Establish and apply domestic sales strategy and distribution policy; • Sales team management and development; • Monitoring of profit margins and advertising expenditures. the organization 59 SIMPLIFIED CHART OF THE ORGANIZATION 45% PHILIPPE BENACIN JEAN MADAR 55% PUBLIC SHAREHOLDERS 100% 100% 100% 100% INTER PARFUMS HOLDINGS, SA JEAN PHILIPPE FRAGRANCES, LLC INTER PARFUMS USA, LLC INTERSTELLAR BRANDS, LLC 73% 100% INTERPARFUMS SA [ EURONEXT - PARIS ] INTER PARFUMS USA HONG KONG LTD 100% 100% 100% 100% 100% INTERPARFUMS LUXURY BRANDS, INC INTERPARFUMS [ SUISSE ] SARL INTERPARFUMS SINGAPORE PTE, LTD INTER ESPAÑA PARFUMS ET COSMÉTIQUES SL [ SPAIN ] INTERPARFUMS SRL [ ITALY ] 51% PARFUMS ROCHAS SPAIN, SL 60 contents management’s discussion and analysis of financial condition and results of operations report on internal control over financial reporting report of independent registered public accounting firm financial statements notes to consolidated financial statements directors and executive officers corporate and market information 61 73 74 76 81 98 99 management’s discussion and analysis of financial condition and results of operations 61 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- tions. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. We produce and distribute our European based fra- grance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 80%, 81% and 78% of net sales for 2018, 2017 and 2016, respectively. We have built a por tfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, Montblanc, Paul Smith, Repetto, Rochas, S.T. Dupont and Van Cleef & Arpels, whose products are distributed in over 100 coun- tries around the world. Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 20%, 19% and 22% of net sales in 2018, 2017 and 2016, respectively. These fragrance products Management’s Discussion And Analysis Of Financial Condition And Results Of Operations MANAGEMENT’S DISCUSSION AND ANALYSIS OF are sold or to be sold primarily pursuant to license or oth- FINANCIAL CONDITION AND RESULTS OF OPERATIONS Regulation S-K Item 10(e) Regulation S-K, Item 10(e), “Use of Non-GAAP Financial er agreements with the owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French Connec- tion, Graff, GUESS, Hollister, Lily Aldridge and Oscar de la Measures in commission filings,” prescribes the conditions Renta brands. for use of non-GAAP financial information in filings with the With respect to the Company’s largest brands, we own the Securities and Exchange Commission. Lanvin brand name for our class of trade, and license the Our reported results include an impairment loss net of tax Montblanc, Jimmy Choo and Coach brand names. As a per- expense, and inventory reserve adjustment net of tax expense, centage of net sales, product sales for the Company’s largest both relating to the discontinuance and wind-down of certain brands were as follows: of our mass market product lines, adjustment to deferred tax benefit due to the Tax Act, and tax recovery for dividends net Years ended December 31, of minority interest for 2017, and the nonrecurring tax set- Montblanc tlement payment net of minority interest for 2016. Due to the Jimmy Choo cumulative effect of these nonrecurring items for 2017 and Coach significance and nonrecurring nature of the tax settlement Lanvin payment for 2016, exclusion of such amounts in the non-GAAP 2018 2017 2016 23% 21% 19% 17% 15% 10% 18% 10% 11% 17% 4% 12% financial measures provides a more complete disclosure and Quarterly sales fluctuations are influenced by the timing of facilitates a more accurate comparison of current results to new product launches as well as the third and fourth quarter historic results.Based upon the foregoing, we believe that holiday season. In certain markets where we sell directly to our presentation of the non-GAAP financial information in- retailers, seasonality is more evident. We sell directly to re- cluded on pages 49-50 of our Form 10-K is an important sup- tailers in France as well as through our own distribution sub- plemental measure of operating performance to investors. sidiaries in Italy, Spain and the United States. 62 We grow our business in two distinct ways. First, we grow Our Company addresses certain financial exposures through by adding new brands to our portfolio, either through new a controlled program of risk management that includes the licenses or other arrangements or outright acquisitions of use of derivative financial instruments. We primarily enter into brands. Second, we grow through the introduction of new foreign currency forward exchange contracts to reduce the ef- products and by supporting new and established products fects of fluctuating foreign currency exchange rates. We are through advertising, merchandising and sampling as well also carefully monitoring currency trends in the United King- as by phasing out underperforming products so we can de- dom as a result of the volatility created from the United King- vote greater resources to those products with greater poten- dom’s decision to exit the European Union. We have evaluated tial. The economics of developing, producing, launching and our pricing models and we do not expect any significant pric- supporting products influence our sales and operating per- ing changes. However, if the devaluation of the British Pound formance each year. Our introduction of new products may worsens, it may affect future gross profit margins from sales have some cannibalizing effect on sales of existing products, in the territory. which we take into account in our business planning. Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from RECENT IMPORTANT EVENTS Lily Aldridge License In September 2018, Interstellar Brands LLC, a wholly-owned our suppliers. These components are received at one of our subsidiary of the Company, announced the development of distribution centers and then, based upon production needs, a new fragrance line in collaboration with supermodel Lily the components are sent to one of several third party fillers, Aldridge. The license agreement with Lily Aldridge runs which manufacture the finished product for us and then deliv- through December 31, 2023, and is subject to royalty pay- er them to one of our distribution centers. ments as are customary in our industry. This deal marks the As with any global business, many aspects of our opera- beginning of a strategic partnership between Interstellar tions are subject to influences outside our control. We believe and IMG Models, which manages Lily Aldridge, to develop we have a strong brand portfolio with global reach and po- direct-to-consumer e-commerce fragrance and beauty busi- tential. As part of our strategy, we plan to continue to make nesses for IMG Models’ diverse and dynamic client base. Our investments behind fast-growing markets and channels to initial fragrance product launch, a multi-scent collection, is grow market share. planned for September 2019. In years prior to 2017, the economic and political uncertain- ty and financial market volatility in Eastern Europe, the Middle East and China had a minor negative impact on our business, Van Cleef & Arpels License In May 2018, the Company renewed its license agreement for but our sales in these regions have been improving and we do an additional six years with Van Cleef & Arpels for the creation, not anticipate dramatic changes in business conditions for the development, and distribution of fragrance products through foreseeable future. However, if the degree of uncertainty or December 2024, without any material changes in terms and volatility worsens or is prolonged, then there will likely be a conditions. Our initial 12-year license agreement with Van negative effect on ongoing consumer confidence, demand and Cleef & Arpels was signed in 2006. spending and accordingly, our business. We believe general economic and other uncertainties still exist in select markets in which we do business, and we monitor these uncertainties and Graff License In April 2018, the Company entered into an exclusive, 8-year other risks that may affect our business. worldwide license agreement with London-based Graff for Our reported net sales are impacted by changes in foreign the creation, development and distribution of fragrances currency exchange rates. A strong U.S. dollar has a negative under the Graff brand. Our rights under such license agree- impact on our net sales. However, earnings are positively af- ment are subject to certain advertising expenditures and fected by a strong dollar, because over 45% of net sales of our royalty payments as are customar y in our industr y. Initial European operations are denominated in U.S. dollars, while product development includes a multi-scent collection almost all costs of our European operations are incurred in planned for a late 2019 launch. Additionally, we are explor- euro. Conversely, a weak U.S. dollar has a favorable impact ing opportunities for luxur y travel amenities, including five on our net sales while gross margins are negatively affected. star hotels. management’s discussion and analysis of financial condition and results of operations 63 Guess License In February 2018, the Company entered into an exclusive, assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years end- 15-year worldwide license agreement with GUESS?, Inc. for ed 2013 through 2015. The settlement, which was finalized by the the creation, development and distribution of fragrances French Tax Authorities in the first quarter of 2017, was accrued as under the GUESS brand. This license took effect on April 1, of December 31, 2016. 2018, and our rights under such license are subject to cer- tain minimum advertising expenditures and royalty payments DISCUSSION OF CRITICAL ACCOUNTING POLICIES as are customary in our industry. In 2018, our sales efforts We make estimates and assumptions in the preparation of our were focused on existing fragrances; in 2019, we plan to add financial statements in conformity with accounting principles several flankers to existing product and in 2020, entirely new generally accepted in the United States of America. Actual fragrances are scheduled for launch. results could differ significantly from those estimates under different assumptions and conditions. We believe the follow- Income Tax Recovery The French government had introduced a 3% tax on dividends ing discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our or deemed dividends for entities subject to French corporate financial condition and results of operations. These accounting income tax in 2012. In 2017, the French Constitutional Court policies generally require our management’s most difficult and released a decision declaring that the 3% tax on dividends or subjective judgments, often as a result of the need to make esti- deemed dividends is unconstitutional. As a result of that de- mates about the effect of matters that are inherently uncertain. cision, the Company filed a claim for refund of approximately Management of the Company has discussed the selection of sig- $3.9 million for these taxes paid since 2015 including accrued nificant accounting policies and the effect of estimates with the interest of approximately $0.4 million. The Company record- Audit Committee of the Board of Directors. ed the refund claim as of December 31, 2017 and has received the entire refund in 2018. Revenue Recognition We sell our products to department stores, perfumeries, spe- Impairment Loss The Company reviews intangible assets with indefinite lives cialty stores, and domestic and international wholesalers and distributors. Our revenue contracts represent single perfor- for impairment whenever events or changes in circumstanc- mance obligations to sell our products to customers. Sales of es indicate that the carrying amount may not be recoverable. such products by our domestic subsidiaries are denominated in Product sales of some of our mass market product lines had U.S. dollars and sales of such products by our foreign subsidiar- been declining for many years and represent a very small ies are primarily denominated in either euro or U.S. dollars. We portion of our net sales. In 2017, the Company set in motion recognize revenues when contract terms are met, the price is a plan to discontinue several of these product lines over the fixed and determinable, collectability is reasonably assured and next few years and as a result, recorded an impairment loss product is shipped or risk of ownership has been transferred to of $2.1 million as of December 31, 2017. The Company also in- and accepted by the customer. Net sales are comprised of gross creased its inventory obsolescence reserves by $0.5 million revenues less returns, trade discounts and allowances. as of December 31, 2017, to adjust to net realizable value the inventory of the product lines to be discontinued. Settlement with French Tax Authorities As previously reported, the French Tax Authorities examined the Accounts Receivable Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for sales returns and doubtful accounts. Accounts receivable 2012 tax return of Interparfums SA. The main issues challenged balances are written-off against the allowance for doubtful by the French Tax Authorities related to the commission rate and accounts when they become uncollectible. Recoveries of ac- royalty rate paid to Interparfums Singapore Pte. and Interparfums counts receivable previously recorded against the allowance (Suisse) SARL, respectively. Due to the subjective nature of the are recorded in the consolidated statement of income when issues involved, in April 2016, Interparfums SA reached an agree- received. We generally grant credit based upon our analysis of ment in principle to settle the entire matter with the French Tax the customer’s financial position as well as previously estab- Authorities. The settlement required Interparfums SA to pay a tax lished buying patterns. 64 Sales Returns Generally, we do not permit customers to return their unsold Factors such as changes in the planned use of equipment, or market acceptance of products, could result in shortened products. However, for U.S. distribution of our prestige prod- useful lives. ucts, we allow returns if properly requested, authorized and We evaluate indefinite-lived intangible assets for impair- approved as is customary in the industry. We regularly review ment at least annually during the fourth quarter, or more fre- and revise, as deemed necessary, our estimate of reserves for quently when events occur or circumstances change, such as future sales returns based primarily upon historic trends and an unexpected decline in sales, that would more likely than not relevant current data, including information provided by retail- indicate that the carrying value of an indefinite-lived intangible ers regarding their inventory levels. In addition, as necessary, asset may not be recoverable. When testing indefinite-lived in- specific accruals may be established for significant future tangible assets for impairment, the evaluation requires a com- known or anticipated events. The types of known or anticipated parison of the estimated fair value of the asset to the carrying events that we have considered, and will continue to consider, value of the asset. The fair values used in our evaluations are include, but are not limited to, the financial condition of our estimated based upon discounted future cash flow projections customers, store closings by retailers, changes in the retail en- using a weighted average cost of capital of 6.21%. The cash vironment and our decision to continue to support new and ex- flow projections are based upon a number of assumptions, in- isting products. We record estimated reserves for sales returns cluding, future sales levels and future cost of goods and oper- as a reduction of sales, cost of sales and accounts receivable. ating expense levels, as well as economic conditions, changes Returned products are recorded as inventories and are valued to our business model or changes in consumer acceptance of based upon estimated realizable value. The physical condition our products which are more subjective in nature. If the carry- and marketability of returned products are the major factors ing value of an indefinite-lived intangible asset exceeds its fair we consider in estimating realizable value. Actual returns, as value, an impairment charge is recorded. well as estimated realizable values of returned products, may We believe that the assumptions we have made in project- differ significantly, either favorably or unfavorably, from our es- ing future cash flows for the evaluations described above are timates, if factors such as economic conditions, inventory levels reasonable. However, if future actual results do not meet our or competitive conditions differ from our expectations. expectations, we may be required to record an impairment Inventories Inventories are stated at the lower of cost and net realizable charge, the amount of which could be material to our results of operations. At December 31, 2018 indefinite-lived intangible assets value. Cost is principally determined by the first-in, first-out aggregated $123.3 million. The following table presents the method. We record adjustments to the cost of inventories impact a change in the following significant assumptions based upon our sales forecast and the physical condition of would have had on the calculated fair value in 2018 assuming the inventories. These adjustments are estimates, which could all other assumptions remained constant: vary significantly, either favorably or unfavorably, from actual results if future economic conditions or competitive conditions differ from our expectations. Increase (decrease) $ in millions Change to fair value $(31.0) Weighted average cost of capital +10% Equipment And Other Long-Lived Assets Equipment, which includes tools and molds, is recorded at Weighted average cost of capital Future sales levels cost and is depreciated on a straight-line basis over the esti- Future sales levels -10% +10% -10% $36.7 $23.3 $(23.3) mated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business Intangible assets subject to amortization are evaluated for model or changes in our capital spending strategy can re- impairment testing whenever events or changes in circum- sult in the actual useful lives differing from our estimates. stances indicate that the carrying amount of an amortizable In those cases where we determine that the useful life of intangible asset may not be recoverable. If impairment indi- equipment should be shortened, we would depreciate the net cators exist for an amortizable intangible asset, the undis- book value in excess of the salvage value, over its revised re- counted future cash flows associated with the expected service maining useful life, thereby increasing depreciation expense. potential of the asset are compared to the carrying value of the management’s discussion and analysis of financial condition and results of operations 65 asset. If our projection of undiscounted future cash flows is in derivative instruments embedded in other contracts, and for excess of the carrying value of the intangible asset, no impair- hedging activities. This topic also requires the recognition of ment charge is recorded. If our projection of undiscounted fu- all derivative instruments as either assets or liabilities on the ture cash flows is less than the carrying value of the intangible balance sheet and that they are measured at fair value. asset, an impairment charge would be recorded to reduce the We currently use derivative financial instruments to hedge intangible asset to its fair value. The cash flow projections are certain anticipated transactions and interest rates, as well based upon a number of assumptions, including future sales as receivables denominated in foreign currencies. We do not levels and future cost of goods and operating expense lev- utilize derivatives for trading or speculative purposes. Hedge els, as well as economic conditions, changes to our business effectiveness is documented, assessed and monitored by em- model or changes in consumer acceptance of our products ployees who are qualified to make such assessments and mon- which are more subjective in nature. In those cases where we itor the instruments. Variables that are external to us such as determine that the useful life of long-lived assets should be social, political and economic risks may have an impact on our shortened, we would amortize the net book value in excess of hedging program and the results thereof. the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby increasing amortization expense. We believe that the Income Taxes The Company accounts for income taxes using an asset and assumptions we have made in projecting future cash flows for liability approach that requires the recognition of deferred tax the evaluations described above are reasonable. assets and liabilities for the expected future tax consequences In determining the useful life of our Lanvin brand names and of events that have been recognized in its financial statements trademarks, we applied the provisions of ASC topic 350-30-35- or tax returns. The net deferred tax assets assume sufficient 3. The only factor that prevented us from determining that the future earnings for their realization, as well as the continued Lanvin brand names and trademarks were indefinite life intan- application of currently anticipated tax rates. Included in net gible assets was Item c. “Any legal, regulatory, or contractual deferred tax assets is a valuation allowance for deferred tax provisions that may limit the useful life.” The existence of a re- assets, where management believes it is more-likely-than-not purchase option in 2025 may limit the useful life of the Lanvin that the deferred tax assets will not be realized in the rele- brand names and trademarks to the Company. However, this vant jurisdiction. If the Company determines that a deferred limitation would only take effect if the repurchase option were tax asset will not be realizable, an adjustment to the deferred to be exercised and the repurchase price was paid. If the repur- tax asset will result in a reduction of net income at that time. chase option is not exercised, then the Lanvin brand names and Accrued interest and penalties are included within the related trademarks are expected to continue to contribute directly to tax asset or liability in the accompanying financial statements. the future cash flows of our Company and their useful life would In addition, the Company follows the provisions of uncertain be considered to be indefinite. tax positions as addressed in ASC topic 740. With respect to the application of ASC topic 350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exercised, and in Quantitative Analysis During the three-year period ended December 31, 2018, we have applying ASC topic 350-30-35-8, we assumed that the repur- not made any material changes in our assumptions underlying chase option is exercised. When exercised, Lanvin has an obliga- these critical accounting policies or to the related significant esti- tion to pay the exercise price and the Company would be required mates. The results of our business underlying these assumptions to convey the Lanvin brand names and trademarks back to Lan- have not differed significantly from our expectations. vin. The exercise price to be received (Residual Value) is well While we believe the estimates we have made are proper and in excess of the carrying value of the Lanvin brand names and the related results of operations for the period are presented trademarks, therefore no amortization is required. fairly in all material respects, other assumptions could rea- Derivatives We account for derivative financial instruments in accordance net sales, cost of sales, and selling, general and administra- tive expenses as they relate to the provisions for anticipated with ASC topic 815, which establishes accounting and reporting sales returns, allowance for doubtful accounts and inventory standards for derivative instruments, including certain obsolescence reserves. For 2018, had these estimates been sonably be justified that would change the amount of reported 66 changed simultaneously by 5% in either direction, our reported gross profit would have increased or decreased by approxi- mately $0.3 million and selling, general and administrative expenses would have changed by approximately $0.07 million. The collective impact of these changes on 2018 operating income, net income attributable to Inter Parfums, Inc., and net income attributable to Inter Parfums, Inc. per diluted share would be an increase or decrease of approximately $0.4 million, $0.2 million and $0.01, respectively. RESULTS OF OPERATIONS Net Sales (in millions) Years Ended December 31, European-based product sales United States-based product sales Total net sales 2018 $537.6 138.0 $675.6 % Change 13% 20% 14% 2017 % Change 18% $476.5 114.8 (2%) 2016 $404.0 117.1 $591.3 13% $521.1 Net sales increased 14% in 2018 to $675.6 million, as compared to $591.3 million in 2017. At comparable foreign currency exchange rates, net sales increased 13%. Net sales increased 13% in 2017 to $591.3 million, as compared to $521.1 million in 2016. At com- parable foreign currency exchange rates, net sales increased 12%. The average U.S. dollar/euro exchange rates were 1.18 in 2018 and 1.13 in 2017 and 1.11 in 2016. European based product sales increased 13% in 2018 to $537.6 million, as compared to $476.5 million in 2017. At comparable foreign currency exchange rates, European based product sales increased 11% in 2018. European based product sales increased 18% in 2017 to $476.5 million, as compared to $404.0 million in 2016. At comparable foreign currency exchange rates, European based prestige product sales increased 16% in 2017. European based product sales in 2018 were stronger than our original expectations even though no new fragrance families were launched in 2018. Top line growth was primarily attributed to established scents and brand extensions for our largest brands. Coach brand sales accounted for much of the 2018 upside surprise with brand sales increasing 73% in 2018 to $99.7 mil- lion, as compared to $57.5 million in 2017, making it our portfolio’s third largest brand. The other largest brands in our European operations portfolio performed as expected with Montblanc, Jimmy Choo and Lanvin, achieving year-over-year sales growth of 1%, 8%, and 7%, respectively. Net sales in 2017, for European based operations were also stronger than original expectations, with Coach brand sales con- tributing much of that gain. Coach brand sales, which had commenced in the second half of 2016, increased 149% in 2017 reaching $57.5 million, as compared to $23.1 million in 2016. Rochas, another of our newer brands, also performed quite well with the 2017 launch of our first new fragrance, Mademoiselle Rochas. Rochas brand sales aggregated $46.2 million, up 34% in 2017, as com- pared to $34.6 in 2016. United States based product sales increased 20% in 2018 to $138.0 million, as compared to $114.8 million in 2017. The inclusion of legacy GUESS fragrances, which began in the second quarter of 2018, was a major contributor to the increase in net sales. Also fac- toring into the 2018 increase was the successful launch of brand extensions for Abercrombie & Fitch & Co. and with the popularity of Anna Sui fragrances throughout Asia, we continue to enjoy dramatic increases in Anna Sui brand sales in that region. In 2017, there was a slight decline in United States based product sales as compared to 2016. In 2016, sales were boosted by the international distribution of our first Abercrombie & Fitch men’s scent, First Instinct, and the Hollister duo, Wave, which made sales comparisons for 2017 difficult. Nonetheless, sales of Oscar de la Renta’s signature scent, and initial shipments of Icon Racing by Dunhill and Fantasia by Anna Sui, energized U.S. based product sales in 2017. We maintain confidence in our future as we continue to strengthen advertising and promotional investments supporting all portfolio brands, accelerate brand development and build upon the strength of our worldwide distribution network. Our product development teams have been ver y busy and we have new fragrance families being launched throughout 2019. Some of the highlights include: Abercrombie & Fitch Authentic, Dunhill Signature, Graff Multi-scent collection, a new scent for Jim- my Choo, Lanvin A Girl in Capri, Montblanc Explorer and Rochas Moustache. With new product development combined with management’s discussion and analysis of financial condition and results of operations 67 continued sales of our legacy scents, we look for continued while a weak U.S. dollar has a negative effect. The average dol- sales growth in 2019. lar/euro exchange rate was 1.18 in 2018, as compared to 1.13 in Lastly, we hope to benefit from our strong financial posi- 2017, accounting for the small fluctuation in gross margin as a tion to potentially acquire one or more brands, either on a percentage of sales for our European operations. proprietary basis or as a licensee. However, we cannot as- The minor margin fluctuation for European operations in sure you that any new license or acquisition agreements will 2017 is primarily the result of increased product sales, much be consummated. Net Sales to Customers by Region (in millions) Years ended December 31, North America Western Europe Asia Middle East Eastern Europe Central & South America Other 2018 $210.1 180.9 109.0 59.3 52.8 51.7 11.8 $675.6 2017 $176.9 165.4 2016 $149.0 153.6 88.0 50.5 49.4 51.2 9.9 81.3 41.6 41.1 44.0 10.5 of which was through our distribution subsidiaries that sell product directly to retailers. In addition to increased sales of Montblanc, Jimmy Choo and Coach product sold through our United States distribution subsidiary, our Rochas brand was also a major contributor as its sales are concentrated in France and Spain, both of which are countries where we dis- tribute directly to retailers. The average dollar/euro exchange rate was 1.13 in 2017 and 1.11 in 2016. Currency fluctuation had only a minor effect on gross margin as a percentage of sales in our European operations for 2017. For United States operations, gross profit margin was 51.4%, 49.3% and 49.7% in 2018, 2017 and 2016, respectively. $591.3 $521.1 Sales growth for our United States operations has primarily come from increased sales of higher margin prestige products Virtually all regions registered strong growth for the year under licenses. ended December 31, 2018, as compared to 2017. The strongest Costs relating to purchase with purchase and gift with pur- gains were achieved by Asia, North America and the Middle chase promotions are reflected in cost of sales, and aggregat- East, which increased sales by 24%, 19% and 17%, respectively. ed $36.4 million, $33.8 million and $30.0 million in 2018, 2017 For the year ended December 31, 2017, as compared to 2016, and 2016, respectively, and represented 5.4%, 5.7% and 5.8% the biggest improvement were in lagging regions of years be- of net sales, respectively. fore, namely Eastern Europe, the Middle East and Asia, where Generally, we do not bill customers for shipping and han- sales increased 20%, 21% and 8%, respectively. dling costs and such costs, which aggregated $7.1 million, $5.9 Gross Margins (in millions) Years ended December 31, Net sales Cost of sales Gross margin Gross margin as 2018 $675.6 248.0 $427.6 2017 $591.3 215.0 2016 $521.1 194.6 $376.3 $326.5 a percent of net sales 63.3% 63.6% 62.7% million and $5.1 million in 2018, 2017 and 2016, respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Com- pany’s gross margins may not be comparable to other com- panies, which may include these expenses as a component of cost of goods sold. Selling, General & Administrative Expenses (in millions) Years ended December 31, 2018 2017 2016 As a percentage of net sales, gross profit margin was 63.3%, Selling, general 63.6%, and 62.7% in 2018, 2017 and 2016, respectively. For & administrative expenses $332.8 $295.5 $258.8 European based operations, gross profit margin as a per- Selling, general centage of net sales was 66%, 67% and 66% in 2018, 2017 and & administrative expenses 2016, respectively. We carefully monitor movements in foreign as a percent of net sales 49% 50% 50% currency exchange rates as over 45% of our European based operations net sales is denominated in U.S. dollars, while most Selling, general and administrative expenses increased 13% in of our costs are incurred in euro. From a margin standpoint, 2018 as compared to 2017 and increased 14% in 2017 as com- a strong U.S. dollar has a positive effect on our gross margin pared to 2016. As a percentage of sales, selling, general and 68 administrative expenses were 49% in 2018 and 50% in both distribution subsidiary in Germany. Beginning in 2018, we 2017 and 2016. For European operations, selling, general and switched back to a third party distribution model in that terri- administrative expenses increased 10% in 2018, as compared tory. The 2017 increase is in line with increased sales by Euro- to 2017 and represented 52% of sales in 2018 and 53% of sales pean operations. in both 2017 and 2016. As discussed in more detail below, the fluctuations which are in line with the increase in sales for European operations, are primarily from variations in promo- Buyout of License In December 2016, the Company reached an agreement with tion and advertising expenditures. the Balmain brand calling for Balmain to buyout the Balmain For United States operations, selling, general and admin- license agreement, effective December 31, 2016, in exchange istrative expenses increased 25% in 2018 and represented for a payment aggregating $5.7 million. As a result of the 40% of sales in 2018, as compared to 38% of sales in 2017. buyout, the Company recognized a gain of $4.7 million as of The increase in sales of higher margin prestige products un- December 31, 2016. der license requires increased royalties and promotional and advertising expenses. Selling, general and administrative ex- penses decreased 2% in 2017 and represented 38% of sales Impairment Loss The Company reviews intangible assets with finite lives for im- in both 2017 and 2016. This decrease is in line with the slight pairment whenever events or changes in circumstances indi- decline in 2017 sales for our U.S. operations. cate that the carrying amount may not be recoverable. Product Promotion and advertising included in selling, general and sales of some of our mass market product lines have been administrative expenses aggregated $139.7 million, $123.7 declining for many years. In 2017, the Company set in motion a million and $99.0 million in 2018, 2017 and 2016, respective- plan to discontinue several of these product lines over the next ly. Promotion and advertising as a percentage of sales repre- few years. As a result, the Company recorded an impairment sented 20.7%, 20.9% and 19.0% of net sales in 2018, 2017 and loss of $2.1 million in 2017. 2016, respectively. We continue to invest heavily in promotional Product sales of our Karl Lagerfeld brand had not met with spending to support new product launches and to build brand our original expectations. As a result, the Company recorded awareness. We anticipated that on a full year basis, promotion an impairment loss of $5.7 million in 2016. and advertising expenditure would aggregate approximately 21% of 2018 net sales, which was in line with 2017 annual pro- motion and advertising expenditures as a percentage of sales. Income from Operations As a result of the above analysis regarding net sales, gross The slight decline in promotion and advertising expense as a profit margins, selling, general and administrative expenses, percentage of sales in 2018 is the result of better than expect- buyout of license and impairment loss, income from opera- ed sales in the final months of 2018. tions increased 20% to $94.7 million in 2018 as compared to Royalty expense included in selling, general and adminis- 2017, after increasing 18% to $78.6 million in 2017 from $66.7 trative expenses aggregated $48.9 million, $39.6 million and million in 2016. Operating margins aggregated 14.0%, 13.3% $37.8 million in 2018, 2017 and 2016, respectively. Royalty ex- and 12.8% for the years ended December 31, 2018, 2017 and pense as a percentage of sales represented 7.2%, 6.7% and 2016, respectively. Excluding the gain on buyout of license in 7.3% of net sales in 2018, 2017 and 2016, respectively. The 2016 and impairment losses in both 2017 and 2016, as well increase in 2018, as a percentage of sales, is directly related as the $0.5 million inventory reserve in 2017, income from to new licenses and increased royalty based product sales. operations would have aggregated $80.2 million in 2017 and The decline in 2017, as a percentage of sales, relates primar- $67.7 million in 2016. Operating margins would have aggre- ily to a lower minimum guaranteed royalty in connection with gated 14.0%, 13.6% and 13.0% for the years ended December the renewals of two licenses as well as the 2016 exit from the 31, 2018, 2017 and 2016, respectively. In summary, excluding Balmain license. nonrecurring items during the past three years, small fluctu- Service fees, which are fees paid within our European op- ations in gross margin were mitigated by small fluctuations in erations to third parties relating to the activities of our dis- selling, general and administrative expenses, primarily pro- tribution subsidiaries, aggregated $9.7 million, $11.7 million motion and advertising expenditures. Overall the Company and $9.9 million in 2018, 2017 and 2016, respectively. The 2018 has been able to increase sales with a steady increase in its decrease is primarily the result of the discontinuation of our operating margin. management’s discussion and analysis of financial condition and results of operations 69 Other Income and Expenses Interest expense aggregated $2.6 million, $2.0 million and for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for a certain income tax $2.3 million in 2018, 2017 and 2016, respectively. Interest effect of the Tax Act is incomplete, but it is able to determine expense is primarily related to the financing of brand and li- a reasonable estimate, it must record a provisional estimate censing acquisitions. We use the credit lines available to us, in the financial statements. as needed, to finance our working capital needs as well as our In connection with its initial analysis of the impact of the Tax financing needs for acquisitions. Long-term debt including Act, the Company recorded a tax expense of $1.1 million for the current maturities aggregated $46.1 million, $60.6 million year ended December 31, 2017. This estimate consists of no ex- and $74.6 million as of December 31, 2018, 2017 and 2016, pense for the one-time transition tax, and an expense of $1.1 respectively. million related to revaluation of deferred tax assets and liabili- Foreign currency losses aggregated $0.3 million, $1.5 ties caused by the lower corporate tax rate. There were no ma- million and $0.6 million in 2018, 2017 and 2016, respectively. terial differences between the Company’s 2017 estimates and We typically enter into foreign currency forward exchange the final calculated amounts. contracts to manage exposure related to receivables from The Company has estimated of the effect of GILTI and has unaffiliated third parties denominated in a foreign currency determined that it has no tax liability as of December 31, 2018 and occasionally to manage risks related to future sales ex- related to GILTI. pected to be denominated in a foreign currency. Over 45% of The Tax Act also contains a provision that allows a domestic 2018 net sales of our European operations were denominated corporation an immediate deduction for a portion of its foreign in U.S. dollars. derived intangible income (“FDII”). The Company estimated the Interest and dividend income aggregated $4.0 million, effect of FDII as of December 31, 2018, and recorded a tax ben- $3.0 million and $3.3 million in 2018, 2017 and 2016, respec- efit of $0.6 million. tively. Cash and cash equivalents and short-term invest- Our effective income tax rate was 27.3%, 29.2% and 35.5% ments are primarily invested in certificates of deposit with in 2018, 2017 and 2016, respectively. The French government var ying maturities. had introduced a 3% tax on dividends or deemed dividends for entities subject to French corporate income tax in 2012. Income Taxes In December 2017, the U.S. government passed the Tax Cuts and In 2017, the French Constitutional Court released a decision declaring that the 3% tax on dividends or deemed dividends Jobs Act (“the Tax Act”). The Tax Act makes broad and complex is unconstitutional. As a result of that decision, the Compa- changes to the U.S. tax code, including, but not limited to re- ny filed a claim for refund of approximately $3.9 million for ducing the future U.S. federal corporate tax rate from 35% to these taxes paid since 2015 including accrued interest of ap- 21% and requiring companies to pay a one-time transition tax on proximately $0.4 million. The Company recorded the refund certain unremitted earnings of foreign subsidiaries. claim as of December 31, 2017 and has received the entire The Tax Act also established new tax laws that affect 2018, refund in 2018. including, but not limited to: (i) the reduction of the U.S. federal As previously reported, the French Tax Authorities exam- corporate tax rate discussed above; (ii) a general elimination of ined the 2012 tax return of Interparfums SA. The main issues U.S. federal income taxes on dividends from foreign subsidiar- challenged by the French Tax Authorities related to the com- ies; (iii) a new provision designed to tax global intangible low- mission rate and royalty rate paid to Interparfums Singapore taxed income (“GILTI”); and (iv) a new provision that allows a Pte. and Interparfums (Suisse) SARL, respectively. Due to the domestic corporation an immediate deduction for a portion of subjective nature of the issues involved, in April 2016, Inter- its foreign derived intangible income (“FDII”). parfums SA reached an agreement in principle to settle the The Securities and Exchange Commission staff issued entire matter with the French Tax Authorities. The settlement Staff Accounting Bulletin (“SAB”) 118, which provides a required Interparfums SA to pay a tax assessment of $1.9 measurement period that should not extend beyond one year million covering the issues for not only the 2012 tax year, but from the Tax Act enactment date for companies to complete also covering the issues for the tax years ended 2013 through the related accounting under ASC 740, Accounting for In- 2015. The settlement, which was finalized by the French Tax come Taxes. In accordance with SAB 118, a company must Authorities in the first quarter of 2017, was accrued as of De- reflect the income tax effects of those aspects of the Tax Act cember 31, 2016. 70 Excluding the 2017 adjustment to deferred tax benefit as a result of the Tax Act, the 2017 claim for refund and the 2016 settle- ment, our effective tax rate was 27.3%, 32.4% and 32.7% in 2018, 2017 and 2016, respectively. Lastly, pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is expected to be cut from approximately 33% to 25% over a five-year period beginning in 2018. Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate. Net Income and Earnings per Share (In thousands, except 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 2018 $56,469 13,246 69,715 15,922 $53,793 2017 $48,236 7,017 55,253 13,659 2016 $35,037 8,211 43,248 9,917 $41,594 $33,331 $1.72 1.71 $1.33 1.33 $1.07 1.07 31,307,991 31,522,371 31,172,285 31,072,328 31,305,101 31,175,598 Net income has continued to increase over the past three years, and aggregated $69.7 million, $55.3 million and $43.2 million in 2018, 2017 and 2016, respectively. Net income attributable to European operations was $56.5 million, $48.2 million and $35.0 mil- lion in 2018, 2017 and 2016, respectively, while net income attributable to United States operations was $13.2 million, $7.0 million and $8.2 million in 2018, 2017 and 2016, respectively. The significant fluctuations in net income for European operations are directly related to the previous discussions relating to changes in sales, gross profit margins, selling, general and administrative expens- es, buyout of license, impairment loss, the French tax refund as well as the French tax settlement. For United States operations in 2017, net income, excluding the effect of the $2.1 million impairment loss and $0.5 million inventory reserve, was in line with that of 2016. The noncontrolling interest arises primarily from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling in- terest is related to the profitability of our European operations, and aggregated 28.2% of European operations net income in 2018 and 28.3% in both 2017 and 2016. Net income attributable to Inter Parfums, Inc. aggregated $53.8 million, $41.6 million and $33.3 million in 2018, 2017 and 2016, respectively. Net margins attributable to Inter Parfums, Inc. aggregated 8.0%, 7.0% and 6.4% in 2018, 2017 and 2016, respectively. Adjusted Net Income Attributable to Inter Parfums, Inc. Adjusted Net Income Attributable to Inter Parfums, Inc., is deemed a “non-GAAP financial measure” under the rules of the Securities and Exchange Commission. This non-GAAP measure is calculated using GAAP amounts derived from our consolidated financial statements. Adjusted net income attributable to Inter Parfums, Inc. has limitations and should not be considered in isola- tion or as a substitute for net income, operating income, cash flow from operations or other consolidated income or cash flow data prepared in accordance with GAAP. Because not all companies use identical calculations, this presentation of adjusted income may not be comparable to a similarly titled measure of other companies. management’s discussion and analysis of financial condition and results of operations 71 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 previ- ously discussed 2017 impairment loss net of tax expense, and inventory reserve adjustment net of tax expense, both relating to the discontinuance of certain of our mass market product lines, the 2017 adjustment to deferred tax benefit due to the Tax Act, the tax recovery for dividends net of minority interest for 2017, and the nonrecurring tax settlement net of minority interest for 2016. 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. Impairment loss (net of tax expense of $828) Inventory reserve adjustment (net of tax expense of $195) Adjustment to deferred tax benefit due to Tax Act Tax recovery for dividends (net of minority interest of $973) Nonrecurring tax settlement payment (net of minority interest of $500) Adjusted 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 2018 $53,793 - - - - - $53,793 2017 $41,594 2016 $33,331 1,295 305 1,087 (2,590) - $41,691 - - - - 1,400 $34,731 $1.72 1.71 $1.34 1.33 $1.12 1.11 31,307,991 31,522,371 31,172,285 31,072,328 31,305,101 31,175,598 Liquidity and Capital Resources The Company’s financial position remains strong. At December 31, 2018, working capital aggregated $382 million, and we had a working capital ratio of over 3 to 1. Cash and cash equivalents and short-term investments aggregated $261 million most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments held by our European operations. Approximately 86% of the Company’s total assets are held by European operations including approximately $180 mil- lion of trademarks, licenses and other intangible assets. The Company hopes to benefit from its strong financial position to potentially acquire one or more brands, either on a pro- prietary basis or as a licensee. Opportunities for external growth continue to be examined, with the priority of maintaining the quality and homogeneous nature of our portfolio. However, we cannot assure you that any new license or acquisition agreements will be consummated. Cash provided by operating activities aggregated $63.0 million, $35.9 million and $54.6 million in 2018, 2017 and 2016, respectively. In 2018, working capital items used $20.9 million in cash from operating activities, as compared to $32.5 million in 2017 and $0.2 million in 2016. Although accounts receivable is up from that of the prior year, day’s sales outstanding remained consistent at 71 days in 2018, as compared to 67 days and 71 days in 2017 and 2016, respectively. Inventory days on hand aggregated 223 days in 2018, as compared to 189 days in 2017 and 185 days in 2016, respectively. The increase in 2018 is primarily the result of the required buildup of inventory for new licenses entered into in 2018 where we do not have a full year of sales. Overall inventory levels are up approximately 21% from 72 the prior year, which is reasonable and reflect levels needed to generated by operations and short-term credit lines provided support sales expectations and our new product launches. by domestic and foreign banks. The principal credit facilities for Cash flows used in investing activities reflect the purchase and 2019 consist of a $20.0 million unsecured revolving line of cred- sales of short-term investments. These investments are primarily it provided by a domestic commercial bank and approximately certificates of deposit with maturities greater than three months. $28.6 million in credit lines provided by a consortium of inter- At December 31, 2018, approximately $75 million of certificates of national financial institutions. There were no balances due from deposit contain penalties where we would forfeit a portion of the short-term borrowings as of December 31, 2018 and 2017. interest earned in the event of early withdrawal. Purchase of subsidiary shares from noncontrolling interest Our business is not capital intensive as we do not own any represents the purchase of treasury shares of Interparfums manufacturing facilities. On a full year basis, we spent approxi- SA, which are expected to be issued to Interparfums SA em- mately $4.0 million on capital expenditures including tools and ployees in 2019 pursuant to its Free Share Plan. molds needed to support our new product development calen- In October 2016, our Board of Directors authorized a 13% dar. Capital expenditures also include amounts for office fix- increase in the annual dividend to $0.68 per share. In October tures, computer equipment and industrial equipment needed 2017, our Board authorized a 24% increase in the annual divi- at our distribution centers. Payments for licenses, trademarks dend to $0.84 per share and in October 2018 our Board autho- and other intangible assets primarily represent upfront entry rized a further 31% increase in the annual dividend to $1.10 per fees incurred in connection with new license agreements. In share. The next quarterly cash dividend of $0.275 per share is December 2016, the Company agreed to a buyout of its Balmain payable on April 15, 2019 to shareholders of record on March license, effective December 31, 2016, for a payment aggregat- 29, 2019. Dividends paid, including dividends paid once per year ing approximately $5.9 million. The Company received the buy- to noncontrolling stockholders of Interparfums SA, aggregat- out payment in May 2017. ed $35.0 million, $27.2 million and $22.9 million for the years In 2018, in connection with a new license agreement, we ended December 31, 2018, 2017 and 2016, respectively. The agreed to pay $15.0 million in equal annual installments of cash dividends to be paid in 2019 are not expected to have any $1.1 million including interest imputed at 4.1%. In 2015, in significant impact on our financial position. connection with a brand acquisition, we entered into a 5-year We believe that funds provided by or used in operations can term loan payable in equal quarterly installments of €5.0 be supplemented by our present cash position and available million (approximately $5.7 million) plus interest. In order to credit facilities, so that they will provide us with sufficient re- reduce exposure to rising variable interest rates, we entered sources to meet all present and reasonably foreseeable future into a swap transaction effectively exchanging the variable operating needs. interest rate to a fixed rate of approximately 1.2%. Inflation rates in the U.S. and foreign countries in which we Our short-term financing requirements are expected to be operate did not have a significant impact on operating results met by available cash on hand at December 31, 2018, cash for the year ended December 31, 2018. Contractual Obligations The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations ($ in thousands): Contractual Obligations Long-Term Debt Operating Leases Purchase Obligations(1) Total Less than Years Total $46,061 $44,011 $2,013,948 $2,104,020 1-year $23,155 $6,448 $166,779 $196,382 2-3 $12,686 $10,862 $366,247 $389,795 Payments Due by Period Year More than 5-years $8,078 4-5 $2,142 $8,704 $17,997 $352,890 $1,128,032 $363,736 $1,154,107 (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, 2018, 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 73 QUANTITATIVE AND QUALITATIVE DISCLOSURES We believe that our risk of loss as the result of nonperfor- ABOUT MARKET RISK General We address certain financial exposures through a controlled program of risk management that primarily consists of the mance by any of such financial institutions is remote. Interest Rate Risk Management We mitigate interest rate risk by monitoring interest rates, use of derivative financial instruments. We primarily enter and then determining whether fixed interest rates should be into foreign currency for ward exchange contracts in order to swapped for floating rate debt, or if floating rate debt should reduce the effects of fluctuating foreign currency exchange be swapped for fixed rate debt. We entered into an interest rates. We do not engage in the trading of foreign currency rate swap in June 2015 on €100 million of debt, effectively for ward exchange contracts or interest rate swaps. exchanging the variable interest rate to a fixed rate of ap- Foreign Exchange Risk Management We periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denominated proximately 1.2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the ac- companying consolidated statements of income. in a foreign currency and to manage risks related to future sales MANAGEMENT’S ANNUAL REPORT expected to be denominated in a currency other than our func- ON INTERNAL CONTROL tional currency. We enter into these exchange contracts for peri- OVER FINANCIAL REPORTING ods consistent with our identified exposures. The purpose of the The management of Inter Parfums, Inc. is responsible for hedging activities is to minimize the effect of foreign exchange rate establishing and maintaining adequate internal control over movements on the receivables and cash flows of Interparfums SA, financial reporting as defined in Rule 13(a)-15(f) under the our French subsidiary, whose functional currency is the euro. All Securities Exchange Act of 1934. With the participation of foreign currency contracts are denominated in currencies of major the Chief Executive Officer and the Chief Financial Officer, industrial countries and are with large financial institutions, which our management conducted an evaluation of the effective- are rated as strong investment grade. ness of our internal control over financial reporting based on All derivative instruments are required to be reflected as the framework and criteria established in Internal Control either assets or liabilities in the balance sheet measured at – Integrated Framework (2013), issued by the Committee of fair value. Generally, increases or decreases in fair value of Sponsoring Organizations of the Treadway Commission. Based derivative instruments will be recognized as gains or losses on this evaluation, our management has concluded that our in earnings in the period of change. If the derivative is desig- internal control over financial reporting was effective as of nated and qualifies as a cash flow hedge, then the changes in December 31, 2018. fair value of the derivative instrument will be recorded in other Our independent auditor, Mazars USA LLP, a registered comprehensive income. public accounting firm, has issued its report on its audit of Before entering into a derivative transaction for hedging our internal control over financial reporting. This report ap- purposes, we determine that the change in the value of the pears on the following page. 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 through- out the hedged period. Any hedge ineffectiveness is recog- nized in the income statement. At December 31, 2018, we had foreign currency contracts in Jean Madar Russell Greenberg the form of forward exchange contracts with notional amounts Chief Executive Officer, Executive Vice President of approximately U.S. $33.0 million, GB £2.65 million and JPY Chairman of the and Chief Financial Officer ¥75.0 million which all have maturities of less than one year. Board of Directors 74 report of independent registered public accounting firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Shareholders and the Board of Directors of Inter Parfums, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the ap- plicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We have audited the accompanying consolidated balance We conducted our audits in accordance with the standards sheets of Inter Parfums, Inc. (the “Company”) as of December of the PCAOB. Those standards require that we plan and per- 31, 2018 and 2017, and the related consolidated statements form the audits to obtain reasonable assurance about whether of income, comprehensive income, shareholders’ equity, the consolidated financial statements are free of material mis- and cash flows for each of the years in the three-year peri- statement, whether due to error or fraud, and whether effec- od ended December 31, 2018, and the related notes and tive internal control over financial reporting was maintained in the schedule listed in the Index in Item 15(a)(2) (collectively all material respects. referred to as the “financial statements”). We also have au- Our audits of the consolidated financial statements in- dited the Company’s internal control over financial reporting cluded performing procedures to assess the risks of mate- as of December 31, 2018, based on criteria established in rial misstatement of the consolidated financial statements, Internal Control - Integrated Framework: (2013) issued by whether due to error or fraud, and performing procedures the Committee of Sponsoring Organizations of the Treadway that respond to those risks. Such procedures included exam- Commission (COSO). ining, on a test basis, evidence regarding the amounts and In our opinion, the consolidated financial statements re- disclosures in the consolidated financial statements. Our au- ferred to above present fairly, in all material respects, the fi- dits also included evaluating the accounting principles used nancial position of the Company as of December 31, 2018 and and significant estimates made by management, as well as 2017, and the results of its operations and its cash flows for evaluating the overall presentation of the consolidated finan- each of the years in the three-year period ended December 31, cial statements. Our audit of internal control over financial 2018, in conformity with accounting principles generally ac- reporting included obtaining an understanding of internal cepted in the United States of America. Also in our opinion, the control over financial reporting, assessing the risk that a Company maintained, in all material respects, effective inter- material weakness exists, and testing and evaluating the de- nal control over financial reporting as of December 31, 2018, sign and operating effectiveness of internal control based on based on criteria established in Internal Control - Integrated the assessed risk. Our audits also included performing such Framework: (2013) issued by COSO. other procedures as we considered necessary in the circum- stances. We believe that our audits provide a reasonable ba- Basis for Opinion sis for our opinions. The Company’s management is responsible for these consol- idated financial statements, for maintaining effective internal Definition and Limitations of Internal Control control over financial reporting, and for its assessment of the over Financial Reporting effectiveness of internal control over financial reporting, in- A company’s internal control over financial reporting is a pro- cluded in the accompanying Management’s Annual Report on cess designed to provide reasonable assurance regarding the Internal Control over Financial Reporting. Our responsibility reliability of financial reporting and the preparation of consoli- is to express an opinion on the Company’s consolidated finan- dated financial statements for external purposes in accordance cial statements and an opinion on the Company’s internal- with generally accepted accounting principles. report of independent registered public accounting firm 75 A company’s internal control over financial reporting in- Because of its inherent limitations, internal control over cludes those policies and procedures that (1) pertain to the financial reporting may not prevent or detect misstatements. maintenance of records that, in reasonable detail, accurately Also, projections of any evaluation of effectiveness to future and fairly reflect the transactions and dispositions of the as- periods are subject to the risk that controls may become sets of the company; (2) provide reasonable assurance that inadequate because of changes in conditions, or that the transactions are recorded as necessary to permit preparation degree of compliance with the policies or procedures may of consolidated financial statements in accordance with gener- deteriorate. ally accepted accounting principles, and that receipts and ex- penditures of the company are being made only in accordance with authorizations of management and directors of the com- pany; and (3) provide reasonable assurance regarding preven- tion or timely detection of unauthorized acquisition, use, or We have served as the Company’s auditor since 2004. disposition of the company’s assets that could have a material New York, New York effect on the consolidated financial statements. March 1, 2019 76 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) Years Ended December 31, ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Receivables, other Other current assets Income taxes receivable Total current assets Equipment and leasehold improvements, net Trademarks, licenses and other intangible assets, net Deferred tax assets 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 Equity: Inter Parfums, Inc. shareholders’ equity: 2018 2017 $193,136 67,870 136,420 160,978 2,112 8,076 810 569,402 9,839 204,325 9,299 6,302 $799,167 23,155 58,328 92,468 4,396 8,630 186,877 22,906 3,538 $208,343 69,899 120,749 137,058 2,405 7,356 3,468 549,278 10,330 200,495 9,658 8,011 $777,772 24,372 52,609 81,843 1,722 6,561 167,107 36,207 3,821 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, 31,382,127 and 31,241,548 shares at December 31, 2018 and 2017, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost, 9,864,805 common shares at December 31, 2018 and 2017 Total Inter Parfums, Inc. shareholders’ equity Noncontrolling interest Total equity Total liabilities and equity (See accompanying notes to consolidated financial statements.) 31 69,970 448,731 (33,650) (37,475) 447,607 138,139 585,746 $799,167 31 66,004 422,570 (17,832) (37,475) 433,298 137,339 570,637 $777,772 financial statements 77 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share data) Years Ended December 31, Net sales Cost of sales Gross margin Selling, general, and administrative expenses Gain on buyout of license Impairment loss Income from operations Other expenses (income): Interest expense Loss on foreign currency Interest and dividend income Income before income taxes Income taxes 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 2018 $675,574 248,012 427,562 332,831 - - 94,731 2,578 251 (3,957) (1,128) 95,859 26,144 69,715 15,922 $53,793 $1.72 1.71 2017 $591,251 214,965 376,286 295,540 - 2,123 78,623 1,992 1,549 (2,983) 558 78,065 22,812 55,253 13,659 2016 $521,072 194,601 326,471 258,787 (4,652) 5,658 66,678 2,340 595 (3,331) (396) 67,074 23,826 43,248 9,917 $41,594 $33,331 $1.33 1.33 $1.07 1.07 31,307,991 31,522,371 31,172,285 31,305,101 31,072,328 31,175,598 Dividends declared per share $0.91 $0.72 $0.62 (See accompanying notes to consolidated financial statements.) 78 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except share and per share data) Years Ended December 31, Net income Other comprehensive income: Net derivative instrument loss, net of tax Transfer of OCI into earnings Translation adjustments, net of tax Comprehensive income Comprehensive income attributable to noncontrolling interests: Net income Net derivative instrument loss, net of tax Transfer of OCI into earnings Translation adjustments, net of tax Comprehensive income attributable to Inter Parfums, Inc. (See accompanying notes to consolidated financial statements.) 2018 $69,715 175 (37) (22,555) (22,417) 47,298 15,922 39 - (6,638) 9,323 $37,975 2017 $55,253 2016 $43,248 54 (22) 22 - 55,995 56,071 111,324 (13,153) (13,175) 30,073 13,659 9,917 17 5 15,899 29,580 (5) - (3,279) 6,633 $81,744 $23,440 financial statements 79 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands, except share and per share data) Years Ended December 31, Common stock, beginning and end of year Additional paid-in capital, beginning of year Shares issued upon exercise of stock options Sale of subsidiary shares to noncontrolling interests Purchase of subsidiary shares from noncontrolling interests Stock-based compensation Additional paid-in capital, end of year Retained earnings, beginning of year Net income Dividends Stock-based compensation Retained earnings, end of year Accumulated other comprehensive loss, beginning of year Foreign currency translation adjustment, net of tax Transfer from other comprehensive income into earnings Net derivative instrument gain, net of tax Accumulated other comprehensive loss, end of year Treasury stock, beginning of year Shares issued upon exercise of stock options Shares received as proceeds of option exercises Treasury stock, end of year Noncontrolling interest, beginning of year Net income Foreign currency translation adjustment, net of tax Transfer from other comprehensive income into earnings 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 2018 $31 66,004 3,406 - (572) 1,132 $69,970 422,570 53,793 (28,356) 724 448,731 (17,832) (15,917) (37) 136 (33,650) (37,475) - - (37,475) 137,339 15,922 (6,638) - 39 - (236) (8,706) 419 138,139 2017 $31 63,103 1,963 - - 938 2016 $31 62,030 2,160 (173) (1,753) 839 $66,004 $63,103 402,714 41,594 (22,460) 722 422,570 388,434 33,331 (19,273) 222 402,714 (57,982) (48,091) 40,096 17 37 (9,874) - (17) (17,832) (57,982) (37,475) (36,817) - - 142 (800) (37,475) (37,475) 113,267 13,659 15,899 5 17 - - (6,039) 531 137,339 110,800 9,917 (3,279) - (5) 1,738 (1,188) (4,863) 147 113,267 Total equity $585,746 $570,637 $483,658 (See accompanying notes to consolidated financial statements.) 80 INTER PARFUMS, INC. AND SUBSIDIARIES 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 Noncash stock compensation Gain on sale of license Deferred tax benefit Change in fair value of derivatives Changes in: Accounts receivable Inventories Other assets Accounts payable and accrued expenses Income taxes, net Net cash provided by operating activities Cash flows from investing activities: Purchases of short-term investments Proceeds from sale of short-term investments Purchase of equipment and leasehold improvements Payment for intangible assets acquired Proceeds from sale of trademark Net cash provided by (used in) investing activities Cash flows from financing activities: Repayment of long-term debt Purchase of treasury stock Proceeds from exercise of options Proceeds from sale of stock of subsidiary Dividends paid Dividends paid to noncontrolling interests Purchase of subsidiary shares from noncontrolling interests Net cash 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.) 2018 2017 2016 $69,715 $55,253 $43,248 11,031 1,442 2,205 - (158) (302) (23,032) (29,341) 484 25,592 5,405 63,041 (10,030) 8,859 (3,956) (8,509) - (13,636) 11,914 939 2,093 - (591) (1,254) (6,016) (28,518) 727 5,696 (4,352) 35,891 (31,874) 66,981 (3,023) (1,046) 5,886 36,924 15,341 349 1,198 (4,652) (1,374) 682 (13,156) (909) (297) 18,690 (4,556) 54,564 (57,289) 42,604 (4,777) (965) - (20,427) (23,487) (22,362) (21,884) - 3,406 - (26,287) (8,706) (808) (55,882) (8,730) (15,207) 208,343  $193,136 - 1,963 - (21,192) (6,039) - (47,630) 21,330 46,515 161,828 $208,343 (77) 1,579 1,565 (18,015) (4,863) (2,941) (44,636) (4,640) (15,139) 176,967 $161,828 $1,745 24,995 $1,813 24,337 $2,239 28,124 notes to consolidated financial statements (in thousands, except share and per share data) 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The Company and its Significant Foreign Currency Translation For foreign subsidiaries with operations denominated in a Accounting Policies Business Of The Company Inter Parfums, Inc. and its subsidiaries (the “Company”) are in foreign currency, assets and liabilities are translated to U.S. dollars at year end exchange rates. Income and expense items are translated at average rates of exchange prevailing the fragrance business and manufacture and distribute a wide during the year. Gains and losses from translation adjust- array of fragrances and fragrance related products. ments are accumulated in a separate component of share- Substantially all of our prestige fragrance brands are licensed holders’ equity. from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we own the Lanvin brand name for our class of trade, and license the Montblanc, Jimmy Choo, Cash And Cash Equivalents And Short-Term Investments All highly liquid investments purchased with a maturity of and Coach brand names. As a percentage of net sales, product three months or less are considered to be cash equivalents. sales for the Company’s largest brands were as follows: From time to time, the Company has short-term investments Year Ended December 31, Montblanc Jimmy Choo Coach Lanvin 2018 19% 17% 15% 10% 2017 2016 23% 21% 18% 10% 11% 17% 4% 12% which consist of certificates of deposit with maturities greater than three months. The Company monitors concentrations of credit risk associated with financial institutions with which the Company conducts significant business. The Company believes its credit risk is minimal, as the Company primarily conducts business with large, well-established financial institutions. Substantially all cash and cash equivalents are primarily held No other brand represented 10% or more of consolidated at financial institutions outside the United States and are read- net sales. ily convertible into U.S. dollars. Basis Of Preparation The consolidated financial statements include the accounts of the Accounts Receivable Accounts receivable represent payments due to the Company Company, including 73% owned Interparfums SA, a subsidiary for previously recognized net sales, reduced by allowances whose stock is publicly traded in France. In 2018, the Company for sales returns and doubtful accounts or balances which are formed Interstellar Brands, LLC, (“Interstellar”), a wholly owned estimated to be uncollectible, which aggregated $4.0 million subsidiary in the United States. Interstellar’s partnership with and $5.1 million as of December 31, 2018 and 2017, respec- IMG Models allows for the two groups to collaborate on exploring tively. Accounts receivable balances are written-off against and developing compelling e-commerce businesses for clients the allowance for doubtful accounts when they become un- of IMG Models. All material intercompany balances and transac- collectible. Recoveries of accounts receivable previously re- tions have been eliminated. corded against the allowance are recorded in the consolidated Management Estimates Management makes assumptions and estimates to prepare financial statements in conformity with accounting principles statement of income when received. We generally grant credit based upon our analysis of the customer’s financial position, as well as previously established buying patterns. generally accepted in the United States of America. Those as- sumptions and estimates directly affect the amounts reported Inventories Inventories, including promotional merchandise, only in- and disclosures included in the consolidated financial state- clude inventory considered saleable or usable in future pe- ments. Actual results could differ from those assumptions and riods, and is stated at the lower of cost and net realizable estimates. Significant estimates for which changes in the near value, with cost being determined on the first-in, first-out term are considered reasonably possible and that may have a method. Cost components include raw materials, direct la- material impact on the financial statements are disclosed in bor and overhead (e.g., indirect labor, utilities, depreciation, these notes to the consolidated financial statements. purchasing, receiving, inspection and warehousing) as well 82 as inbound freight. Promotional merchandise is charged to recoverable. When testing indefinite-lived intangible assets cost of sales at the time the merchandise is shipped to the for impairment, the evaluation requires a comparison of the Company’s customers. estimated fair value of the asset to the carrying value of the Derivatives All derivative instruments are recorded as either assets or asset. The fair values used in our evaluations are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 6.21% and 6.22% in 2018 liabilities and measured at fair value. The Company uses de- and 2017, respectively. The cash flow projections are based rivative instruments to principally manage a variety of market upon a number of assumptions, including future sales levels, risks. For derivatives designated as hedges of the exposure future cost of goods and operating expense levels, as well as to changes in fair value of the recognized asset or liability economic conditions, changes to our business model or chang- or a firm commitment (referred to as fair value hedges), the es in consumer acceptance of our products which are more gain or loss is recognized in earnings in the period of change subjective in nature. If the carrying value of an indefinite-lived together with the offsetting loss or gain on the hedged item intangible asset exceeds its fair value, an impairment charge attributable to the risk being hedged. The effect of that ac- is recorded. counting is to include in earnings the extent to which the Intangible assets subject to amortization are evaluated for hedge is not effective in achieving offsetting changes in fair impairment testing whenever events or changes in circum- value. For cash flow hedges, the effective portion of the de- stances indicate that the carrying amount of an amortizable rivative’s gain or loss is initially reported in equity (as a com- intangible asset may not be recoverable. If impairment indica- ponent of accumulated other comprehensive income) and is tors exist for an amortizable intangible asset, the undiscount- subsequently reclassified into earnings in the same period or ed future cash flows associated with the expected service periods during which the hedged forecasted transaction af- potential of the asset are compared to the carrying value of the fects earnings. The ineffective portion of the gain or loss of asset. If our projection of undiscounted future cash flows is in a cash flow hedge is reported in earnings immediately. The excess of the carrying value of the intangible asset, no impair- Company also holds certain instruments for economic pur- ment charge is recorded. If our projection of undiscounted fu- poses that are not designated for hedge accounting treatment. ture cash flows is less than the carrying value of the intangible For these derivative instruments, changes in their fair value asset, an impairment charge would be recorded to reduce the are recorded in earnings immediately. intangible asset to its fair value. Equipment And Leasehold Improvements Equipment and leasehold improvements are stated at cost Revenue Recognition The Company sells its products to department stores, perfum- less accumulated depreciation and amortization. Depreciation eries, specialty stores and domestic and international whole- and amortization are provided using the straight line method salers and distributors. Our revenue contracts represent over the estimated useful lives for equipment, which range single performance obligations to sell our products to cus- between three and ten years and the shorter of the lease term tomers. Sales of such products by our domestic subsidiaries or estimated useful asset lives for leasehold improvements. are denominated in U.S. dollars, and sales of such products by Depreciation provided on equipment used to produce invento- our foreign subsidiaries are primarily denominated in either ry, such as tools and molds, is included in cost of sales. euro or U.S. dollars. The Company recognizes revenues when contract terms are met, the price is fixed and determinable, Long-Lived Assets Indefinite-lived intangible assets principally consist of trade- collectability is reasonably assured and product is shipped or risk of ownership has been transferred to and accepted by marks which are not amortized. The Company evaluates indef- the customer. Net sales are comprised of gross revenues less inite-lived intangible assets for impairment at least annually returns, trade discounts and allowances. The Company does during the fourth quarter, or more frequently when events oc- not bill its customers’ freight and handling charges. All ship- cur or circumstances change, such as an unexpected decline ping and handling costs, which aggregated $7.1 million, $5.9 in sales, that would more likely than not indicate that the car- million and $5.1 million in 2018, 2017 and 2016, respectively, rying value of an indefinite-lived intangible asset may not be are included in selling, general and administrative expenses in notes to consolidated financial statements (in thousands, except share and per share data) 83 the consolidated statements of income. The Company grants cluded in selling, general and administrative expenses were credit to all qualified customers and does not believe it is ex- $139.7 million, $123.7 million and $99.0 million for 2018, 2017 posed significantly to any undue concentration of credit risk. and 2016, respectively. Costs relating to purchase with pur- No one customer represented 10% or more of net sales in chase and gift with purchase promotions that are reflected in 2018, 2017 or 2016. cost of sales aggregated $36.4 million, $33.8 million and $30.0 Sales Returns Generally, the Company does not permit customers to return their unsold products. However, for U.S. based customers, we Package Development Costs Package development costs associated with new products allow returns if properly requested, authorized and approved. and redesigns of existing product packaging are expensed million in 2018, 2017 and 2016, respectively. The Company regularly reviews and revises, as deemed nec- as incurred. essary, its estimate of reserves for future sales returns based primarily upon historic trends and relevant current data including information provided by retailers regarding their Operating Leases The Company recognizes rent expense from operating leases inventory levels. In addition, as necessary, specific accruals with various step rent provisions, rent concessions and es- may be established for significant future known or anticipat- calation clauses on a straight-line basis over the applicable ed events. The types of known or anticipated events that we lease term. The Company considers lease renewals in the use- consider include, but are not limited to, the financial condition ful life of its leasehold improvements when such renewals are of our customers, store closings by retailers, changes in the reasonably assured. In the event the Company receives capital retail environment and our decision to continue to support improvement funding from its landlord, these amounts are re- new and existing products. The Company records estimated corded as deferred liabilities and amortized over the remain- reserves for sales returns as a reduction of sales, cost of sales ing lease term as a reduction of rent expense. and accounts receivable. Returned products are recorded as inventories and are valued based upon estimated realizable value. The physical condition and marketability of returned License Agreements The Company’s license agreements generally provide the products are the major factors we consider in estimating re- Company with worldwide rights to manufacture, market and alizable value. Actual returns, as well as estimated realizable sell fragrance and fragrance related products using the licen- values of returned products, may differ significantly, either sors’ trademarks. The licenses typically have an initial term favorably or unfavorably, from our estimates, if factors such of approximately 5 to 15 years, and are potentially renewable as economic conditions, inventory levels or competitive condi- subject to the Company’s compliance with the license agree- tions differ from our expectations. ment provisions. The remaining terms, including the poten- Payments to Customers The Company records revenues generated from purchase with tial renewal periods, range from approximately 1 to 15 years. Under each license, the Company is required to pay royalties in the range of 5% to 10% to the licensor, at least annually, based purchase and gift with purchase promotions as sales and the on net sales to third parties. costs of its purchase with purchase and gift with purchase In certain cases, the Company may pay an entry fee to ac- promotions as cost of sales. Certain other incentive arrange- quire, or enter into, a license where the licensor or another ments require the payment of a fee to customers based on licensee was operating a pre-existing fragrance business. In their attainment of pre-established sales levels. These fees those cases, the entry fee is capitalized as an intangible asset have been recorded as a reduction of net sales. and amortized over its useful life. Advertising and Promotion Advertising and promotional costs are expensed as incurred ments, incremental royalties based on net sales levels and minimum spending on advertising and promotional and recorded as a component of cost of goods sold (in the case activities. Royalty expenses are accrued in the period in which of free goods given to customers) or selling, general and ad- net sales are recognized while advertising and promotional ex- ministrative expenses. Advertising and promotional costs in- penses are accrued at the time these costs are incurred. Most license agreements require minimum royalty pay- 84 In addition, the Company is exposed to certain concentration Treasury shares are accounted for under the cost method risk. Most of our prestige fragrance brands are licensed from and reported as a reduction of equity. Share Repurchase unaffiliated third parties, and our business is dependent upon Authorizations may be suspended, limited or terminated at the continuation and renewal of such licenses. any time without notice. Income Taxes The Company accounts for income taxes using an asset and Recent Accounting Pronouncements In August 2017, the Financial Accounting Standards Board liability approach that requires the recognition of deferred (“FASB”) issued an Accounting Standards Update (“ASU”) to tax assets and liabilities for the expected future tax conse- improve accounting for hedging activities. The objective of quences of events that have been recognized in its financial the ASU is to improve the financial reporting of hedging rela- statements or tax returns. The net deferred tax assets as- tionships in order to better portray the economic results of an sume sufficient future earnings for their realization, as well entity’s risk management activities in its financial statements as the continued application of currently enacted tax rates. and to make certain targeted improvements to simplify the ap- Included in net deferred tax assets is a valuation allowance plication of hedge accounting guidance. This ASU is effective for deferred tax assets, where management believes it is for annual and interim periods beginning after December 15, more-likely-than-not that the deferred tax assets will not 2018 and early adoption is permitted. We are currently evalu- be realized in the relevant jurisdiction. If the Company de- ating the standard to determine the impact of its adoption on termines that a deferred tax asset will not be realizable, an our consolidated financial statements. adjustment to the deferred tax asset will result in a reduction In February 2016, the FASB issued an ASU which requires of net earnings at that time. Accrued interest and penalties lessees to recognize lease assets and lease liabilities arising are included within the related tax asset or liability in the ac- from operating leases on the balance sheet. This ASU is effec- companying financial statements. tive for annual and interim reporting periods beginning after December 15, 2018. The standard requires entities to recog- Issuance of Common Stock by Consolidated Subsidiary The difference between the Company’s share of the proceeds nize a lease liability to cover lease payments and a lease asset representing its right to use the underlying asset for the lease term. The Company has adopted the standard on January 1, received by the subsidiary and the carrying amount of the por- 2019 using the modified retrospective method in the year of tion of the Company’s investment deemed sold, is reflected as adoption with certain transition practical expedients with no an equity adjustment in the consolidated balance sheets. restatement of prior period amounts. The Company is in the process of evaluating the impact of the adoption of the stan- Treasury Stock The Board of Directors may authorize share repurchas- dard, which will relate primarily to our operating leases for office and warehouse spaces. While the Company continues es of the Company’s common stock (Share Repurchase to assess the impact of the adoption, it currently expects to Authorizations). Share repurchases under Share Repurchase record lease-related assets and liabilities on our consolidated Authorizations may be made through open market transac- balance sheets of approximately $40 million. Adoption of the tions, negotiated purchase or otherwise, at times and in such new standard will not have a material impact on the Company’s amounts within the parameters authorized by the Board. consolidated statements of income or Cash Flows. Shares repurchased under Share Repurchase Authorizations There are no other recent accounting pronouncements is- are held in treasury for general corporate purposes, includ- sued but not yet adopted that would have a material effect on ing issuances under various employee stock option plans. our consolidated financial statements. notes to consolidated financial statements (in thousands, except share and per share data) 85 (2) Recent Agreements Lily Aldridge In September 2018, Interstellar Brands LLC, a wholly-owned subsidiary of the Company, announced the development of December 31, 2031, without any material changes in operat- ing conditions from the prior license. Our initial Jimmy Choo license was signed in 2009. a new fragrance line in collaboration with supermodel Lily Aldridge. The license agreement with Lily Aldridge runs Paul Smith License Renewal In May 2017, the Company renewed its license agreement with through December 31, 2023, and is subject to royalty pay- Paul Smith by an additional four years. The original agreement, ments as are customary in our industry. This deal marks the signed in December 1998, together with previous extensions, beginning of a strategic partnership between Interstellar provided the Company with the exclusive worldwide license and IMG Models, which manages Lily Aldridge, to develop rights to create, produce and distribute fragrances and fra- direct-to-consumer e-commerce fragrance and beauty busi- grance related products under the Paul Smith brand through nesses for IMG Models’ diverse and dynamic client base. December 31, 2017. The recent extension extends the partner- Van Cleef & Arpels In May 2018, the Company renewed its license agreement for ship through December 31, 2021 without any material changes in operating conditions from the prior license. an additional six years with Van Cleef & Arpels for the creation, (3) Buyout of License development, and distribution of fragrance products through In December 2016, the Company reached an agreement with December 2024, without any material changes in terms and the Balmain brand calling for Balmain to buyout the Balmain li- conditions. Our initial 12-year license agreement with Van cense agreement, effective December 31, 2016, in exchange for Cleef & Arpels was signed in 2006. a payment aggregating $5.7 million. As a result of the buyout, Graff In April 2018, the Company entered into an exclusive, 8-year the Company recognized a gain of $4.7 million as of December 31, 2016, and received the buyout payment in May 2017. worldwide license agreement with London-based Graff for the (4) Inventories creation, development and distribution of fragrances under the Graff brand. Our rights under such license agreement are Year Ended December 31, 2018 2017 subject to certain advertising expenditures and royalty pay- Raw materials and ments as are customary in our industry. GUESS In February 2018, the Company entered into an exclusive, 15-year component parts Finished goods $67,508 93,470 $160,978 $46,884 90,174 $137,058 worldwide license agreement with GUESS?, Inc. for the creation, Overhead included in inventory aggregated $4.2 million and $5.0 development and distribution of fragrances under the GUESS brand. million as of December 31, 2018 and 2017, respectively. Included This license took effect on April 1, 2018, and our rights under such li- in inventories is an inventory reserve, which represents the cense are subject to certain minimum advertising expenditures and difference between the cost of the inventory and its estimated royalty payments as are customary in our industry. realizable value, based upon sales forecasts and the physical Jimmy Choo License Renewal In December 2017, the Company and J Choo Ltd amended their condition of the inventories. In addition, and as necessary, spe- cific reserves for future known or anticipated events may be es- tablished. Inventory reserves aggregated $4.9 million and $5.4 license agreement and extended their partnership through million as of December 31, 2018 and 2017, respectively. 86 (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, 2018 Quoted Prices in Significant Significant Active Markets for Other Observable Unobservable Total Identical Assets Inputs Inputs (Level 3) (Level 2) (Level 1) Assets: Short-term investments Foreign currency forward exchange contracts accounted for using hedge accounting Liabilities: Foreign currency forward exchange contracts not accounted for using hedge accounting Interest rate swap FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2017 $67,870 179 $68,049 45 $207 $252 $- - - - $- $- $67,870 179 $68,049 45 $207 $252 $- - - - $- $- Quoted Prices in Significant Significant Active Markets for Other Observable Unobservable Assets: Total Identical Assets Inputs Inputs (Level 3) (Level 2) (Level 1) Short-term investments $69,899 $- $69,899 Foreign currency forward exchange contracts accounted for using hedge accounting Foreign currency forward exchange contracts not accounted for using hedge accounting Liabilities: Interest rate swap 26 119 $70,044 $529 - - - $- 26 119 $70,044 $529 $- - - - $- 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 in- debtedness approximate current market rates. Foreign currency forward exchange contracts are valued based on quotations from financial institutions and the value of inter- est rate swaps are the discounted net present value of the swaps using third party quotes from financial institutions. (6) Derivative Financial Instruments The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a for- eign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Before entering notes to consolidated financial statements (in thousands, except share and per share data) 87 into a derivative transaction for hedging purposes, it is deter- million and JPY ¥75.0 million, which all have maturities of less mined that a high degree of initial effectiveness exists between than one year. the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. (7) Equipment and Leasehold Improvements High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the Year Ended December 31, cash flows of the hedged item. The effectiveness of each hedged Equipment item is measured throughout the hedged period and is based on Leasehold Improvements the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attrib- Less accumulated utable to the change in spot-forward difference which is report- depreciation and amortization ed in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income 2018 $36,465 1,639 38,104 28,265 $9,839 2017 $37,074 1,639 38,713 28,383 10,330 statement. For hedge contracts that are no longer deemed highly Depreciation and amortization expense was $4.1 million, $3.8 effective, hedge accounting is discontinued and gains and losses million and $3.7 million in 2018, 2017, and 2016, respectively. accumulated in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no (8) Trademarks, Licenses and Other Intangible Assets longer occur, then any gains or losses accumulated in other com- prehensive income are reclassified to current-period earnings. In connection with a 2015 brand acquisition, $108 million of the purchase price was paid in cash on the closing date and was 2018 Trademarks Gross Accumulated Net Book Amount Amortization Value financed entirely through a 5-year term loan. As the payment at (indefinite lives) $123,287 $- $123,287 closing was due in dollars and we had planned to finance it with Trademarks debt in euro, the Company entered into foreign currency for- (finite lives) 44,300 69 44,231 ward contracts to secure the exchange rate for the $108 million Licenses purchase price at $1.067 per 1 euro. This derivative was desig- (finite lives) 85,100 50,539 34,561 nated and qualified as a cash flow hedge. Other intangible assets Gains and losses in derivatives designated as hedges are (finite lives) accumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as hedges are includ- ed in (gain) loss on foreign currency on the accompanying in- Subtotal Total 13,619 143,019 $266,306 11,373 61,981 $61,981 2,246 81,038 $204,325 come statements. Such gains and losses were immaterial in Gross Accumulated Net Book each of the years in the three-year period ended December 31, 2017 Amount Amortization Value 2018. For the years ended December 31, 2018 and 2017, inter- Trademarks est expense includes a gain of $0.3 million and $0.5 million, (indefinite lives) $129,033 $- $129,033 respectively, relating to an interest rate swap. Trademarks All derivative instruments are reported as either assets or (finite lives) 46,461 72 46,389 liabilities on the balance sheet measured at fair value. The val- Licenses uation of interest rate swaps resulted in a liability which is in- (finite lives) 69,439 46,857 22,582 cluded in long-term debt on the accompanying balance sheets. Other intangible assets The valuation of foreign currency forward exchange contracts (finite lives) at December 31, 2018 and December 31, 2017, resulted in an asset and is included in other current assets on the accompa- Subtotal Total 14,949 130,849 12,458 59,387 2,491 71,462 $259,882 $59,387 $200,495 nying balance sheets. At December 31, 2018, the Company had foreign currency Amortization expense was $7.0 million, $6.0 million and $5.9 contracts in the form of forward exchange contracts with no- million in 2018, 2017 and 2016, respectively. Amortization tional amounts of approximately U.S. $33.0 million, GB £2.65 expense is expected to approximate $5.0 million, $4.6 million, 88 and $4.0 million in 2019, 2020, 2021, respectively, and $3.7 Trademarks (finite lives) primarily represent Lanvin million 2022 and 2023. The weighted average amortization brand names and trademarks and in connection with their period for trademarks, licenses and other intangible assets purchase, Lanvin was granted the right to repurchase the with finite lives are 18 years, 14 years and 2 years, respectively, brand names and trademarks in 2025 for the greater of €70 and 14 years on average. million (approximately $80 million) or one times the average The Company reviews intangible assets with indefinite of the annual sales for the years ending December 31, 2023 lives for impairment whenever events or changes in cir- and 2024 (residual value). Because the residual value of the cumstances indicate that the carrying amount may not be intangible asset exceeds its carr ying value, the asset is not recoverable. In 2017, the Company set in motion a plan to dis- amortized. continue some of its mass market product lines over the next few years. As a result, the Company recorded an impairment (9) Accrued Expenses loss of $2.1 million as of December 31, 2017. There were no Accrued expenses consist of the following: impairment charges for trademarks with indefinite use- ful lives in 2018 and 2016. The fair values used in our eval- Year Ended December 31, uations are estimated based upon discounted future cash Advertising liabilities flow projections using a weighted average cost of capital of Salary (including bonus 6.21% as of December 31, 2018 and 6.22% as of December and related taxes) 31, 2017 and 2016. The cash flow projections are based upon Royalties a number of assumptions, including, future sales levels and Due vendors (not yet invoiced) future cost of goods and operating expense levels, as well Retirement reserves as economic conditions, changes to our business model or Other changes in consumer acceptance of our products which are more subjective in nature. The Company believes that the as- 2018 2017 $27,418 $14,868 19,939 14,533 29,790 9,616 3,722 $92,468 18,488 11,409 11,228 9,113 4,187 81,843 sumptions it has made in projecting future cash flows for the (10) Loans Payable – Banks evaluations described above are reasonable and currently Loans payable – banks consist of the following: no other impairment indicators exist for our indefinite-lived The Company and its domestic subsidiaries have available a assets. However, if future actual results do not meet our ex- $20 million unsecured revolving line of credit due on demand, pectations, the Company may be required to record an im- which bears interest at the daily one-month LIBOR plus 2% (the pairment charge, the amount of which could be material to one-month LIBOR was 2.51% as of December 31, 2018). The our results of operations. line of credit which has a maturity date of December 18, 2019 The cost of trademarks, licenses and other intangible as- is expected to be renewed on an annual basis. Borrowings out- sets with finite lives is being amortized by the straight line standing pursuant to lines of credit were zero as of December method over the term of the respective license or the intan- 31, 2018 and 2017. gible assets estimated useful life which range from three to The Company’s foreign subsidiaries have available credit twenty years. If the residual value of a finite life intangible as- lines, including several bank overdraft facilities totaling ap- set exceeds its carrying value, then the asset is not amortized. proximately $30 million. These credit lines bear interest at The Company reviews intangible assets with finite lives for im- EURIBOR plus between 0.5% and 0.8% (EURIBOR was minus pairment whenever events or changes in circumstances indi- 0.36% at December 31, 2018). Outstanding amounts were zero cate that the carrying amount may not be recoverable. Product as of December 31, 2018 and 2017. sales of our Karl Lagerfeld brand did not met with our original As there were no borrowings outstanding as of December expectations. Accordingly, in 2016, the Company recorded an 31, 2018 and 2017, there is no weighted average interest rate on impairment loss of $5.7 million. short-term borrowings as of December 31, 2018 and 2017. notes to consolidated financial statements (in thousands, except share and per share data) 89 (11) Long-term Debt Long-term debt consists of the following: Year Ended December 31 $15.0 million payable in 14 equal annual installments of $1.1 million 2018 beginning in January 2020 including interest imputed at 4.1% per annum $11,291 $111.0 million 5-year term loan payable in 20 equal quarterly installments plus interest at 1.2% per annum Other Less current maturities Total 34,350 420 46,061 23,155 $22,906 2017 $- 59,965 614 60,579 24,372 $36,207 The $111.0 million 5-year term loan requires the maintenance of certain financial covenants, tested semi-annually, including a maximum leverage ratio and a minimum interest coverage ratio. The facility also contains new debt restrictions among other standard provisions. The Company is in compliance with all of the covenants and other restrictions of the debt agreements. In order to reduce exposure to ris- ing variable interest rates, the Company entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. The swap is a derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income. Maturities of long-term debt subsequent to December 31, 2018 are approximately $23.2 million and $11.6 million in 2019 and 2020, respectively and $1.1 million per year thereafter through 2033. (12) Commitments Leases The Company leases its office and warehouse facilities under facture and sale of its products expiring at variousdates through 2033. In connection with certain of these license agreements, the Company is subject to minimum annual advertising commitments, operating leases which are subject to various step rent provi- minimum annual royalties and other commitments as follows: sions, rent concessions and escalation clauses expiring at var- ious dates through 2029. Escalation clauses are not material and have been excluded from minimum future annual rental payments. Rental expense, which is calculated on a straight- line basis, amounted to $12.0 million, $11.2 million and $10.7 million in 2018, 2017 and 2016, respectively. Minimum future 2019 2020 2021 2022 2023 annual rental payments are as follows: Thereafter $166,779 178,408 187,839 173,366 179,524 1,128,032 $2,013,948 2019 2020 2021 2022 2023 Thereafter $6,448 5,786 5,076 4,563 4,141 17,997 $44,011 License Agreements The Company is party to a number of license and other agreements Future advertising commitments are estimated based on planned future sales for the license terms that were in ef- fect at December 31, 2018, without consideration for potential renewal periods. The above figures do not reflect the fact that our distributors share our advertising obligations. Royalty ex- pense included in selling, general, and administrative expens- es, aggregated $48.9 million, $39.6 million and $37.8 million, in 2018, 2017 and 2016, respectively, and represented 7.2%, 6.7% and 7.3% of net sales for the years ended December 31, for the use of trademarks and rights in connection with the manu- 2018, 2017 and 2016, respectively. 90 (13) Equity Share-Based Payments: The Company maintains a stock option program for key employees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the granting of both nonqualified and incentive options. Options granted under the plans typically have a six-year term and vest over a four to five-year period. The fair value of shares vested aggregated $1.1 million and $0.9 million in 2018 and 2017, 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 nonvested options for 2018: Nonvested options – beginning of year Nonvested options granted Nonvested options vested or forfeited Nonvested options-end of year Number of Shares Weighted Average Grant Date Fair Value 431,235 196,350 (142,225) 485,360 $8.22 $14.31 $8.11 $10.72 The effect of share-based payment expenses decreased income statement line items as follows: Year Ended December 31, 2018 $2,200 Income before income taxes Net Income attributable to Inter Parfums, Inc. Diluted earnings per share attributable to Inter Parfums, Inc 1,390 0.04 2017 $2,100 2016 $1,200 1,150 700 0.04 0.02 The following table summarizes stock option activity and related information for the years ended December 31, 2018, 2017 and 2016: Year Ended December 31, 2018 2017 2016 Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price Shares under option- beginning of year Options granted Options exercised Options forfeited Shares under option- 730,980 196,350 (140,579) (10,580) $31.92 63 .91 24.21 37.64 684,540 174,600 (103,230) (24,930) $26.94 43.48 19.03 29.49 709,300 148,950 (123,150) (50,560) $24.34 32.61 18.69 27.18 end of year 776,171 41.33 730,980 31.92 684,540 26.94 At December 31, 2018, options for 744,215 shares were available for future grant under the plans. The aggregate intrinsic value of options outstanding is $18.8 million as of December 31, 2018 and unrecognized compensation cost related to stock options out- standing aggregated $4.9 million, which will be recognized over the next five years. The weighted average fair values of options granted by Inter Parfums, Inc. during 2018, 2017 and 2016 were $14.31, $9.82 and $7.43 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value. notes to consolidated financial statements (in thousands, except share and per share data) 91 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 interest rate Weighted average dividend yield 2018 27% 5.0 yrs 2.5% 2.0% 2017 28% 5.0 yrs 2.2% 2.0% 2016 29% 5.0 yrs 2.0% 2.1% Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects the assumption that the dividend payout as authorized by the Board of Directors would maintain its current payout ratio as a percentage of earnings. Proceeds, tax benefits and intrinsic value related to stock options exercised were as follows: Year Ended December 31, Proceeds from stock options exercised, excluding cashless exercise of $0.7 million in 2016 Tax benefits Intrinsic value of stock options exercised 2018 $3,406 $807 $4,310 2017 2016 $1,963 $600 $2,258 $1,579 $400 $1,860 The following table summarizes additional stock option information as of December 31, 2018: Options Outstanding Weighted Average Remaining Exercise Price Number Outstanding Contractual Life Options Exercisable $23.61 - $29.36 $32.83 - $35.75 $40.15 - $46.90 $65.25 Totals 209,920 206,101 177,800 182,350 776,171 2.48 years 2.85 years 4.96 years 6.00 years 3.98 years 134,170 123,781 32,860 - 290,811 As of December 31, 2018, the weighted average exercise price of options exercisable was $31.65 and the weighted average re- maining contractual life of options exercisable is 2.57 years. The aggregate intrinsic value of options exercisable at December 31, 2018 is $9.9 million. The Chief Executive Officer and the President each exercised 19,000 outstanding stock options of the Company’s common stock in 2016. The aggregate exercise prices of $0.7 million in 2016 was paid by them tendering to the Company an aggregate of 20,658 shares, of the Company’s common stock, previously owned by them, valued at fair market value on the dates of exercise. All shares issued pursuant to these option exercises were issued from treasury stock of the Company. In addition, the Chief Ex- ecutive Officer tendered in an additional 2,179 shares in 2016 for payment of certain withholding taxes resulting 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 per- formance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate perfor- mance conditions. The shares, subject to adjustment for stock splits, will be distributed in September 2019 so long as the individual is employed by Interparfums SA at the time, and in the case of officers and managers, 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. 92 The fair value of the grant of €18.56 per share (approximately employees with no performance condition requirement, and an $22.00 per share) has been determined based on the quoted aggregate of 133,000 shares to officers and managers, subject to share price of Interparfums SA shares as reported by the NYSE certain corporate performance conditions. The shares, subject to Euronext on the date of grant. The estimated number of shares adjustment for stock splits, will be distributed in June 2022 and to be distributed of 157,840 has been determined taking into will follow the same guidelines as the September 2016 plan. account employee turnover and has been adjusted for stock The fair value of the grant of €29.84 per share (approximate- splits. The aggregate cost of the grant of approximately $3.4 ly $34.00 per share) has been determined based on the quoted million is being recognized as compensation cost by Interpar- stock price of Interparfums SA shares as reported by the NYSE fums SA on a straight-line basis over the requisite three year Euronext on the date of grant. The estimated number of shares service period. For the year ended December 31, 2018, $1.1 to be distributed of 142,842 has been determined taking into million of compensation cost has been recognized in connec- account employee turnover. The aggregate cost of the grant of tion with this plan. approximately $4.9 million will be recognized as compensation To avoid dilution of the Company’s ownership of Interpar- cost by Interparfums SA on a straight-line basis over the req- fums SA, all shares to be distributed pursuant to this plan will uisite three and a half year service period. be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. In 2016, 131,101 shares had been acquired in the open market at an aggregate cost of $2.9 Dividends In October 2018, the Board of Directors of the Company au- million. In 2018 an additional 18,899 shares were acquired in thorized a 31% increase in the annual dividend to $1.10 per the open market at an aggregate cost of $0.8 million. All share share. The quarterly dividend aggregating approximately $8.6 purchases have been classified as equity transactions on the million ($0.275 per share) declared in December 2018 was accompanying balance sheet. paid in January 2019. The next quarterly dividend of $0.275 per In December 2018, Interparfums SA approved an additional share will be paid on April 15, 2019 to shareholders of record plan to grant an aggregate of 26,600 shares of its stock to on March 29, 2019. (14) 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 denominators 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: Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted 2018 $53,793 31,307,991 214,380 31,522,371 2017 $41,594 2016 $33,331 31,172,285 31,072,328 132,816 103,270 31,305,101 31,175,598 $1.72 $1.71 $1.33 $1.33 $1.07 $1.07 Not included in the above computations is the effect of anti dilutive potential common shares, which consist of outstanding op- tions to purchase 89,000, 165,000, and 267,000 shares of common stock for 2018, 2017, and 2016, respectively. notes to consolidated financial statements (in thousands, except share and per share data) 93 (15) 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. 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: United States Europe Interest and dividend income: United States Europe Interest expense: United States Europe Income tax expense: United States Europe Eliminations Total assets: United States Europe Eliminations of investment in subsidiary Additions to long-lived assets: United States Europe 2018 2017 2016 $140,768 537,805 (2,999) $675,574 $13,071 40,877 (155) 53,793 $2,711 8,320 $11,031 $137 3,820 $3,957 419 2,159 $2,578 $2,264 23,898 (18) 26,144 $133,406 686,123 (20,362) $799,167 $19,181 4,188 $23,369 $116,244 476,660 (1,653) $117,256 404,198 (382) $591,251 $521,072 $7,051 34,577 (34) 41,594 $3,943 7,971 $11,914 $58 2,925 $2,983 - 1,991 $1,991 $3,764 19,069 (21) 22,812 $92,909 694,385 (9,522) $777,772 $980 3,089 $4,069 $8,285 25,120 (74) 33,331 $1,816 13,525 $15,341 $22 3,309 3,331 - 2,340 2,340 $4,278 19,596 (48) 23,826 $89,930 602,077 (9,598) $682,409 $930 4,812 $5,742 94 Segments and Geographical Areas continued Year Ended December 31, Total long-lived assets: United States Europe Deferred tax assets: United States Europe Eliminations 2018 2017 2016 $25,753 188,411 $214,164 $650 8,561 88 $9,299 $9,284 201,541 $210,825 $781 8,808 69 $9,658 $12,247 181,697 $193,944 $194 7,848 48 $8,090 United States export sales were approximately $93.1 million, $71.4 million and $77.5 million in 2018, 2017 and 2016, respectively. Consolidated net sales to customers by region are as follows: Year Ended December 31, North America Europe Asia Middle East Central and South America Other Consolidated net sales to customers in major countries are as follows: Year Ended December 31, United States France United Kingdom Russia (16) Income Taxes 2018 $210,200 233,600 109,000 59,300 51,700 11,800 $675,600 2018 $204,000 $44,000 $36,000 $35,000 2017 $176,900 214,800 88,000 50,500 51,200 9,900 2016 $149,000 194,700 81,300 41,600 44,000 10,500 $591,300 $521,100 2017 $173,000 $44,000 $33,000 $34,000 2016 $144,000 $47,000 $31,000 $27,000 The Company and 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, 2018. The components of income before income taxes consist of the following: Year Ended December 31, U.S. operations Foreign operations 2018 $15,162 80,697 $95,859 2017 $10,761 67,304 $78,065 2016 $12,441 54,633 $67,074 notes to consolidated financial statements (in thousands, except share and per share data) 95 The provision for current and deferred income tax expense amount of net operating loss carry-forwards. (benefit) consists of the following: No other valuation allowances have been provided as manage- Year Ended December 31, 2018 2017 2016 realized in the reduction of future taxable income. ment believes that it is more likely than not that the asset will be Current: Federal State and local Foreign Deferred: Federal State and local Foreign Total income tax expense $1,629 497 24,175 26,301 $4,050 $3,792 302 19,051 23,403 309 21,099 25,200 113 - (270) (157) (554) (55) 18 (591) 113 9 (1,496) (1,374) Tax Cuts and Jobs Act In December 2017, the U.S. government passed the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to re- ducing the future U.S. federal corporate tax rate from 35% to 21% and requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries. The Tax Act also established new tax laws that affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of $26,144 $22,812 $23,826 U.S. federal income taxes on dividends from foreign subsidiar- ies; (iii) a new provision designed to tax global intangible low- The tax effects of temporary differences that give rise to taxed income (“GILTI”); and (iv) a new provision that allows a significant portions of the deferred tax assets and deferred tax domestic corporation an immediate deduction for a portion of liabilities are as follows: its foreign derived intangible income (“FDII”). 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 Net deferred tax assets 2018 2017 Accounting Bulletin (“SAB”) 118, which provides a measure- The Securities and Exchange Commission staff issued Staff $468 658 4,561 626 $520 1,557 4,212 502 3,267 3,166 (23) 222 ment period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In ac- cordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s ac- counting for a certain income tax effect of the Tax Act is incom- plete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. In connection with its initial analysis of the impact of the Tax 10,179 9,557 (258) (520) 9,659 9,299 Act, the Company recorded a tax expense of $1.1 million for the year ended December 31, 2017. This estimate consists of no expense for the one-time transition tax, and an expense of $1.1 million related to revaluation of deferred tax assets and li- (3,538) $5,761 (3,821) $5,838 abilities caused by the lower corporate tax rate. There were no material differences between the Company’s 2017 estimates and the final calculated amounts. Valuation allowances are provided for foreign net operating The Company has estimated of the effect of GILTI and has loss carry-forwards, as future profitable operations from certain determined that it has no tax liability as of December 31, 2018 foreign subsidiaries might not be sufficient to realize the full related to GILTI. 96 The Tax Act also contains a provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”). The Company estimated the effect of FDII as of December 31, 2018, and recorded a tax benefit of $0.6 million. Income Tax Recovery The French government had introduced a 3% tax on dividends or deemed dividends for entities subject to French corporate income tax in 2012. In 2017, the French Constitutional Court released a decision declaring that the 3% tax on dividends or deemed dividends is unconstitutional. As a result of that decision, the Company filed a claim for refund of approximately $3.9 million for these taxes paid since 2015 including accrued interest of approximately $0.4 million. The Company recorded the refund claim as of December 31, 2017 and has received the entire refund in 2018. Settlement with French Tax Authorities As previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA. The main issues chal- lenged by the French Tax Authorities related to the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respectively. Due to the subjective nature of the issues involved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax Authorities. The settlement required 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, which was finalized by the French Tax Authorities in the first quarter of 2017, was accrued as of December 31, 2016. Other Tax Matters The French authorities are considering that the existence of IP Suisse, a wholly-owned subsidiary of Interparfums SA, does not, in and of itself, constitute a permanent establishment and therefore Interparfums, SA should pay French taxes on all or part of the profits of that entity. No claim or assessment for any taxes or penalties has been made at this time. The Company disagrees and is prepared to vigorously defend its position. Consequently, no provision has been made in the accompanying financial statements as we believe it is more likely than not that our position will be sustained based on its technical merits. Although we believe that we have sufficient arguments to support our position, there exists a risk that the French authorities may prevail. The Company’s exposure in connection with this matter is approximately $1.4 million, net of recovery taxes already paid to the Swiss authorities, and excluding interest and penalties. The Company is no longer subject to U.S. federal, state, and local or non-U.S. income tax examinations by tax authorities for years before 2015. Differences between the United States Federal statutory income tax rate and the effective income tax rate were as follows: Year Ended December 31, Statutory rates State and local taxes, net of Federal benefit Benefit of Foreign Derived Intangible Income Deferred tax effect of statutory tax rate changes Foreign income tax recovery Effect of foreign taxes greater than (less than) U.S. statutory rates Other Effective rates 2018 21.0% 0.4 (0.6) - - 7.3 (0.8) 27.3% 2017 34.0% 0.2 - 1.4 (4.6) (1.0) (0.8) 29.2% 2016 34.0% 0.3 - - - 1.5 (0.3) 35.5% notes to consolidated financial statements (in thousands, except share and per share data) 97 (17) Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive loss consist of the following: Year Ended December 31, Net derivative instruments,beginning of year Net derivative instrument gain (loss), net of tax Net derivative instruments end of year Cumulative translation adjustments,beginning of year Translation adjustments Cumulative translation adjustments, end of year Accumulated other comprehensive loss (18) Net Income Attributable to Inter Parfums, Inc. and Transfers from the Noncontrolling Interest Year Ended December 31, Net income attributable to Inter Parfums, Inc. Decrease in Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions Change from net income attributable to Inter Parfums, Inc. 2018 37 99 136 (17,869) (15,917) (33,786) $(33,650) 2017 (17) 54 37 (57,965) 40,096 (17,869) 2016 $- (17) (17) (48,091) (9,874) (57,965) $(17,832) $(57,982) 2018 $53,793 2017 $41,594 2016 $33,331 - - (1,926) and transfers from noncontrolling interest $53,793 $41,594 $31,405 98 directors and executive officers DIRECTORS AND EXECUTIVE OFFICERS Directors Jean Madar Michel Dyens Chairman, and Chief Executive Officer, Corporate Information Inter Parfums, Inc. Chief Executive Officer, Michel Dyens & Co. and Chairman of the Board of Directors Inter Parfums, Inc. Philippe Benacin Véronique Gabai-Pinsky President, Vera Wang Group 551 Fifth Avenue New York, NY 10176 Tel. (212) 983-2640 Fax: (212) 983-4197 www.interparfumsinc.com President, and Vice Chairman of the Gilbert Harrison Board of Directors, Inter Parfums, Inc. Chairman, Harrison Group, Inc. Interparfums SA Chief Executive Officer, Founder and Chairman Emeritus 4 Rond Point des Champs Elysées Interparfums SA Financo LLC Russell Greenberg Executive Vice President, and Chief Financial Officer Inter Parfums, Inc. Philippe Santi Executive Vice President Director General Delegue Interparfums SA Executive Officers Jean Madar Chief Executive Officer, 75008 Paris, France Tel. (1) 53-77-00-00 Fax: (1) 40-76-08-65 Auditors and Chairman of the Board of Directors Mazars USA, LLP Inter Parfums, Inc. Philippe Benacin 135 West 50th Street New York, NY 10020 President, and Vice Chairman of the Transfer Agent Board of Directors, Inter Parfums, Inc. American Stock Transfer and Trust Company 6201 15th Avenue Brooklyn, NY 11219 Francois Heilbronn Managing Partner M.M. Friedrich, Heilbronn & Fiszer Robert Bensoussan-Torres Chief Executive Officer, Interparfums SA Russell Greenberg Executive Vice President, and Chief Financial Officer Co-founder of Sirius Equity, Inter Parfums, Inc. a retailand branded luxury goods investment company Philippe Santi Patrick Choël Executive Vice President Director General Delegue Business Consultant and Former Interparfums SA President and Chief Executive Officer Parfums Christian Dior and the LVMH Perfume and Cosmetics Division Frédéric Garcia-Pelayo Director of Export Sales Interparfums SA corporate and market information 99 the market for our common stock Our Company’s common stock, $.001 par value per share, is traded basis. In October 2018, our board of directors authorized a 31% increase in the annual dividend to $1.10 per share on an on The Nasdaq Global Select Market under the symbol “IPAR”. The annual basis. The next quaterly cash dividend of $0.275 per following table sets forth in dollars, the range of high and low clos- share is payable on April 15, 2019 to shareholders of record ing prices for the past two fiscal years for our common stock. on March 29, 2019. Third Quarter High Closing Low Closing Fiscal 2018 Price Price 55.88 Fourth Quarter 53.75 46.25 42.00 High Closing Low Closing Fiscal 2017 Price Price 41.05 66.48 66.25 54.75 49.15 Second Quarter Fourth Quarter First Quarter 46.30 Third Quarter Second Quarter First Quarter 42.10 38.50 37.65 35.55 34.25 31.55 Form 10-K A copy of the company’s 2018 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge to shareholders upon request (except for exhib- its) To: Inter Parfums, Inc. 551 Fifth Avenue New York, NY 10176 Attention: Corporate Secretary. Corporate Performance Graph The following graph compares the performance for the pe- riods indicated 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 corpora- tions consisting of: Avon Products Inc., CCA Industries, Inc., As of February 20, 2019, the number of record holders, Colgate-Palmolive Co., Estée Lauder Companies, Inc., Inter which include brokers and brokers’ nominees, etc., of our Parfums, Inc., Kimberly Clark Corp., Natural Health Trends common stock was 37. We believe there are approximately Corp., Procter & Gamble Co., Revlon, Inc., Spectrum Brands 14,330 beneficial owners of our common stock. Holdings, Inc., Stephan Co., Summer Infant, Inc. and United Dividends In October 2017, our board of directors authorized a 24% in- vestment in our common stock and each index was $100 at the beginning of the period indicated in the graph, and that all crease in the annual dividend to $0.84 per share on an annual dividends were reinvested. Guardian, Inc. The graph assumes that the value of the in- COMPARISON 0F 5 YEAR CUMULATIVE TOTAL RETURN* Among Inter Parfums, Inc., The NASDAQ Composite Index, and a Peer Group Inter Parfums, Inc. NASDAQ Composite Peer Group *$100 invested on 12/31/13 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 12/13 100.00 100.00 100.00 12/14 77.90 114.62 112.63 12/15 68.87 122.81 106.91 12/16 96.59 133.19 111.63 12/17 130.47 172.11 127.70 12/18 200.04 168.84 127.49 100 

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