PART
I
Item
1. Business
Introduction
We
are Inter Parfums, Inc. We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrance
and fragrance related products. Organized under the laws of the State of Delaware in May 1985 as Jean Philippe Fragrances, Inc.,
we changed our name to Inter Parfums, Inc. in July 1999. We have also retained our brand name, Jean Philippe Fragrances, for some
of our mass market products.
Our
worldwide headquarters and the office of our three (3) wholly-owned United States subsidiaries, Jean Philippe Fragrances, LLC
and Inter Parfums USA, LLC, both New York limited liability companies, and IP Beauty, Inc. (formerly 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, Interparfums 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 España 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, as well as the majority owner of Inter Parfums Gmbh, a distribution subsidiary for Germany.
As of December 31, 2017, our German distribution subsidiary has been replaced by the former minority-owner in such subsidiary,
which is now acting as the distributor of our products in Germany. 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.
We
maintain our internet website at
www.interparfumsinc.com,
which is linked to the Securities and Exchange Commission Edgar
database. 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 reports on Form 8-K, beneficial ownership reports (Forms 3, 4 and 5) and amendments to those reports
filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they
have been electronically filed with or furnished to the SEC.
Company
Overview
The
following information is qualified in its entirety by and should be read together with the more detailed information and audited
financial statements, including the related notes, contained or incorporated by reference in this report.
General
We
operate in the fragrance business and manufacture, market and distribute a wide array of fragrance and fragrance related products.
We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance
products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which
is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.
Our
business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general
contractor and source our needed components from our suppliers. These components are received at one of our distribution centers
and then, based upon production needs, the components are sent to one of several third party fillers which manufacture the finished
product for us and deliver them to one of our distribution centers.
Our
prestige products focus on niche brands, each with a devoted following. By concentrating in markets where the brands are best
known, we have had many successful launches. We typically launch new fragrance families for our brands every year or two, and
more frequently seasonal and limited edition fragrances are introduced as well.
The
creation and marketing of each product family is intimately linked with the brand’s name, its past and present positioning,
customer base and, more generally, the prevailing market atmosphere. Accordingly, we generally study the market for each proposed
family of fragrance products for almost a full year before we introduce any new product into the market. This study is intended
to define the general position of the fragrance family and more particularly its scent, bottle, packaging and appeal to the buyer.
In our opinion, the unity of these four elements of the marketing mix makes for a successful product.
As
with any business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand
portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing
markets and channels to grow market share. We discuss in greater detail risk factors relating to our business in Item 1A
of this Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and the reports that we file from time to
time with the Securities and Exchange Commission.
European
Operations
We
produce and distribute our fragrance products primarily under license agreements with brand owners, and fragrance product sales
through our European operations represented approximately 81% of net sales for 2017. We have built a portfolio 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 countries around the world.
With
respect to the Company’s largest brands, we own the Lanvin brand name for its class of trade, and license the Montblanc
and Jimmy Choo brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Montblanc
|
|
|
21
|
%
|
|
|
23
|
%
|
|
|
21
|
%
|
Jimmy Choo
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
20
|
%
|
Lanvin
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
15
|
%
|
United
States Operations
Prestige
brand fragrance products are also marketed through our United States operations, and represented 19% of sales for the year ended
December 31, 2017. These fragrance products are sold under trademarks owned by us or pursuant to license or other agreements
with the owners of brands, which include
Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, Hollister, French
Connection
and
Oscar de la Renta
brands.
Recent
Developments
GUESS
License
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 will take effect on April 1, 2018, and our rights under such license are subject to certain minimum
advertising expenditures and royalty payments as are customary in our industry.
Jimmy
Choo License Renewal
In
December 2017, the Company and J Choo Ltd amended their license agreement and extended their partnership through December 31,
2031. Our initial Jimmy Choo license was signed in 2009.
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 has filed a claim for refund of approximately $3.6 million (€3.2
million) for these taxes paid since 2015 including accrued interest of approximately $0.4 million. The Company recorded the refund
claim in the accompanying financial statements as of December 31, 2017.
Impairment
Loss
The
Company reviews intangible assets with indefinite lives for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. Product sales of some of our legacy mass market product lines have been declining
for many years and now represent a very small portion of our net sales. During the fourth quarter of 2017, the Company set in
motion a plan to discontinue several of these product lines over the next few years. As a result, the Company recorded an impairment
loss of $2.1 million as of December 31, 2017, which represented approximately 50% of total intangible assets relating to our mass
market product lines. The Company also increased its inventory obsolescence reserves by $0.5 million as of December 31, 2017,
to adjust to net realizable value the inventory of the product lines expected to be discontinued.
Paul
Smith License Renewal
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.
Settlement
with French Tax Authorities
As
previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA. The main issues challenged 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
in March 2016.
Fragrance
Products
General
We
are the owner of the Rochas brand, and Lanvin brand name and trademark for our class of trade. In addition, we have built a portfolio
of licensed prestige brands whereby we produce and distribute our prestige fragrance products under license agreements with brand
owners. Under license agreements, we obtain the right to use the brand name, create new fragrances and packaging, determine positioning
and distribution, and market and sell the licensed products, in exchange for the payment of royalties. Our rights under license
agreements are also generally subject to certain minimum sales requirements and advertising expenditures as are customary in our
industry.
Our
licenses for these brands expire on the following dates:
Brand Name
|
Expiration Date
|
|
|
Abercrombie & Fitch
|
December 31, 2021
|
Agent Provocateur
|
December 31, 2023
|
Anna Sui
|
December 31, 2021, plus two 5-year optional
terms if certain conditions are met
|
bebe Stores
|
June 30, 2020
|
Boucheron
|
December 31, 2025, plus a 5-year optional term
if certain sales targets are met
|
Coach
|
June 30, 2026
|
Dunhill
|
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-year optional term
if certain sales targets are met
|
Guess
|
December
31, 2033
|
Hollister
|
December
31, 2021
|
Jimmy Choo
|
December 31, 2031
|
Karl Lagerfeld
|
October 31, 2032
|
Montblanc
|
December 31, 2025
|
Oscar de la Renta
|
December 31, 2025, plus a 5-year optional term
if certain sales targets are met
|
Paul Smith
|
December 31, 2021
|
Repetto
|
December 31, 2024
|
S.T. Dupont
|
December 31, 2019
|
Van Cleef & Arpels
|
December 31, 2018, plus a 5-year optional term
if certain sales targets are met
|
In
connection with the acquisition of the Lanvin brand names and trademarks 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 $84 million) or one times
the average of the annual sales for the years ending December 31, 2023 and 2024.
Fragrance
Portfolio
Abercrombie & Fitch—
In
December 2014, we entered into a 7-year worldwide license to create, produce and distribute new fragrances and fragrance related
products under the Abercrombie & Fitch 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 and in select Abercrombie & Fitch retail
stores. In 2016 we launched a new men’s scent,
First Instinct
, and during 2017 we launched a women’s version
of
First Instinct
. For the first quarter of 2018, we have scheduled two brand extensions for Abercrombie & Fitch’s
First Instinct
for men, and in the second half of 2018, we have planned an Abercrombie & Fitch
First Instinct
extension
for women.
Abercrombie & Fitch stands for effortless
American style. Since 1892, the brand has been known for high quality apparel and its attention to detail with designs that embody
simplicity.
For 125 years, the iconic brand has outfitted innovators,
explorers and entrepreneurs and today
, Abercrombie & Fitch continues to bring its customers iconic, modern classics
with an aspirational look, feel, and attitude.
Agent
Provocateur—
In July 2013, we entered into a 10.5-year exclusive worldwide license to create, produce and distribute
fragrances and fragrance related products under London-based luxury lingerie brand, Agent Provocateur. In 2013, we commenced distribution
of selected fragrances within the brand’s legacy fragrance portfolio, and in 2014, we launched our first new Agent Provocateur
scents,
Fatale
and
Fatale Pink.
In 2016, we introduced Agent Provocateur
Aphrodisiaque
, our second fragrance
family for the brand. An addition to the brand’s signature fragrance collection took place in 2017 with another planned
in 2018. Agent Provocateur fragrance sales are concentrated in the United Kingdom and the Middle East.
Agent
Provocateur is a brand that is confident, sensual and irreverent. It celebrates and empowers women with a unique brand image renowned
for being provocative and yet always leaving something to the imagination.
Anna
Sui—
In June 2011, we entered into a 10-year exclusive worldwide fragrance license agreement to produce and distribute
fragrances and fragrance related products under the Anna Sui brand. Our rights under the agreement commenced on January 1, 2012
when we took over production and distribution of the existing Anna Sui fragrance collections.
We
are working in partnership with American designer, Anna Sui, and her creative team to build upon the brand’s growing customer
appeal, 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.
During
2017 Anna Sui brand sales experienced an upturn in sales as economic conditions in China, a strong market for the brand, had been
improving. During the economic downturn in China, we maintained our strong advertising and marketing commitment to Anna Sui, which
was rewarded as the Chinese economy improved. In addition, the brand’s growing popularity in other Asian countries contributed
to the upturn in Anna Sui fragrance sales, which we exploited with a major new product launch
Fantasia
by Anna Sui, with
distribution concentrated across Asia. In the second half of 2018, we will introduce
Fantasia Mermaid
for Anna Sui. We
are currently distributing several lines of product, including top sellers,
La Vie de Bohème, Romantica
and
Secret
Wish.
bebe
Stores—
In July 2008, we entered into an exclusive 6-year worldwide agreement with bebe Stores, Inc., that has been
renewed through June 30, 2020, under which we design, manufacture and supply fragrances for company-owned bebe stores in the United
States and Canada, as well as select specialty and department stores worldwide. We have incorporated bebe’s signature look
into fragrances for the brand’s strong, hip, sexy, and sophisticated clientele. Scents currently available for domestic
and international markets include:
bebe
,
bebe Sheer, bebe gold, bebe Glam
and
bebe Glam 24 Karat
. In 2018,
Jetset Hollywood
and
Jetset South Beach
are scheduled to debut for the brand
.
Boucheron—
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 sunglasses. Currently Boucheron operates through over
40 boutiques worldwide as well as an e-commerce site.
Our
first new fragrance under the Boucheron brand,
Jaïpur Bracelet,
debuted in 2012, and
Boucheron Place Vendôme
,
which has a beautiful glasswork bottle with a cabochon, the emblematic stone of House Boucheron, 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, and a new member of the collection is planned for 2018.
Coach
—
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 collections 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
. Coach’s common
stock is traded on the New York Stock Exchange under the symbol COH and Coach’s Hong Kong Depositary Receipts are traded
on The Stock Exchange of Hong Kong Limited under the symbol 6388.
In
2016, we launched our first Coach fragrance, a women’s scent, which has quickly become a top selling prestige fragrance.
The 2017 launch of the brand’s signature scent for men produced excellent brand sales growth. For 2018, we will start the
year with a companion fragrance for the Coach signature scent for women followed in the second quarter with a new version of the
Coach men’s signature scent.
Dunhill—
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 department stores and specialty stores. Known for its commitment to elegance and innovation
and being a leader of British men’s style, the brand continues to blend innovation and creativity with traditional craftsmanship.
We
took over production and distribution of Dunhill legacy fragrances beginning in 2013, and we introduced a legacy scent flanker,
Desire Black
, in 2014. In 2015, we rolled out our new Dunhill scent,
Icon,
the success of which has made the Dunhill
brand our largest and fastest growing brand within our United States based operations. For 2016, we launched several product extensions
including
Icon Luxury Spray Set
and
Icon Elite.
Building upon the established success of the
Icon
fragrance
family, we launched
Icon Racing
in September 2017. In the second half of 2018 we will introduce a new Dunhill scent for
men called
Century.
French
Connection
— In September 2015, we entered into a 12-year license agreement to create, produce and distribute fragrances
and fragrance related products under the French Connection brand names. We took over distribution of selected fragrances within
the brand’s existing fragrance portfolio in 2016 and new products are planned for 2018.
French
Connection operates in the fashion orientated market place offering a fashion-forward range of quality products at affordable
prices. Its customers, typically aged 18-35, appreciate that the brand is at the leading edge of high street fashion and offers
quality and style in its products. French Connection designs, produces and distributes branded fashion clothing, accessories and
household items for men, women, and children in more than 50 countries around the world and has licensed partners operating French
Connection stores across Asia, Australia and the Middle East. French Connection operates retail stores and concessions in the
United Kingdom, Europe, United States and Canada and also operates an e-commerce business in each of those territories.
Hollister—
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 and in select Hollister retail
stores. In 2016 we launched a new men’s and women’s scent,
Wave
, for Hollister. In summer 2017, we
launched a fragrance duo,
Wave 2
, to complement the
Wave
franchise by Hollister. Also in the second half of
2018 we will introduce an entirely new fragrance family for Hollister.
The
quintessential apparel brand of the global teen consumer, 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.
Jimmy
Choo—
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 December 2017, we entered into an amended license agreement
which runs through December 31, 2031.
Jimmy
Choo encompasses a complete luxury accessories brand. Women’s shoes remain the core of the product offer, alongside handbags,
small leather goods, scarves, sunglasses, 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. Jimmy
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 Michael Kors Holdings Limited luxury fashion group.
Our
first fragrance under the Jimmy Choo brand, a women’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 9
th
best-selling men’s fragrance in the United States. In 2015, the launch of Jimmy Choo
Illicit
,
our third women’s fragrance under that label hit the market. For 2016, we debuted a new women’s flanker, Jimmy Choo
Illicit
Flower
. 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
.
The brand’s women’s signature scent will add still another member to the family with Jimmy Choo
Fever
debuting
during the summer of 2018.
Karl
Lagerfeld—
In October 2012, we entered into a 20-year worldwide license agreement with Karl Lagerfeld B.V., the internationally
renowned 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. Our first line, a premium namesake duo scent for both men and women, was launched in 2014.
However, in 2015, with sales concentrated in Russia and northern Europe, re-orders were disappointing and sales of this brand
declined despite the launch of
Private Klub
, a line extension.
We
are seeking to reinvigorate this brand by changing its strategic positioning and instituting new pricing with the launch of a
new duo called
Les Parfums Matières,
which debuted in the second half of 2017. Initial sales of this line have been
promising.
Lanvin—
In July 2007, we acquired the worldwide rights to the Lanvin brand names and international trademarks listed in Class 3, our
class of trade. A synonym of luxury and elegance, the Lanvin fashion house, founded in 1889 by Jeanne Lanvin, expanded into fragrances
in the 1920s.
Lanvin
is currently our third largest brand by sales volume. Lanvin fragrances occupy an important position in the selective 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
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 women’s line, Lanvin
Modern Princess
in limited distribution to counteract depressed sales in 2016, primarily owing to market weakness in Russia and China. In
2017, we successfully rolled out broader international distribution of Lanvin
Modern Princess
and premiered another interpretation
of
Éclat d’Arpège
. In the pipeline for 2018 are new interpretations of Éclat d’Arpège
and Modern Princess.
Montblanc—
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 related 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 products, which reflect today’s
exacting demands for timeless design, 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,
Legend,
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 Montblanc
Emblem Intense
and a new women’s
scent,
Lady Emblem
. In 2016, we further extended our successful Montblanc
Legend
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
.
For 2018 we will continue the global rollout
of
Legend Night
.
Oscar
de la Renta—
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 in
select markets, 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.
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.
Paul
Smith—
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 designer who creates fashion with a clear identity. Paul Smith has a modern style
which combines elegance, inventiveness and a sense of humor and enjoys a loyal following, especially in the UK and Japan. Fragrances
include:
Paul Smith
,
Paul Smith Extrême, Paul Smith Rose
and
Paul Smith Essential.
Repetto—
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 disappointing due to the lack of brand recognition.
Dance with Repetto
debuted in
the first quarter of 2018.
Rochas
—
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 class 3 (cosmetics)
and class 25 (fashion). Substantially the entire €106 million purchase price for the assets acquired (approximately $118
million) was allocated to trademarks with indefinite lives, including approximately $5.4 million in acquisition related expenses.
This
acquisition opened a new page in the Company’s history by integrating for the first time both fragrances and fashion. This is
allowing us to apply a global approach to managing a fragrance brand with complete freedom in terms of creativity and aesthetic
choices, as well as a very high degree of visibility to establish a position of even greater preeminence 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 portfolio of license agreements. We have been reviving the nearly century old brand’s luster, and our first
new fragrance for Rochas,
Mademoiselle Rochas
, had a successful launch that began in the first quarter of 2017. This success
was primarily attributable to the strength of the
Eau de Rochas
line and the successful rollout of
Mademoiselle Rochas
in markets beyond the traditional Rochas markets in France and Spain. For Rochas in 2018, we plan to continue the international
rollout of
Mademoiselle Rochas
in additional markets, debut flankers for
Eau de Rochas
and
Mademoiselle Rochas
and in 2019, launch our first new men’s line.
S.T.
Dupont—
In June 1997, we signed an exclusive worldwide license agreement with S.T. Dupont for the creation, manufacture
and distribution of S.T. Dupont 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
,
S.T. Dupont Essence Pure
,
S.T. Dupont Passenger
,
S.T. Dupont Passenger Cruise, 58
avenue Montaigne, So Dupont
and
S.T. Dupont Collection.
Van
Cleef & Arpels—
In September 2006, we entered into an exclusive 12-year worldwide license agreement for the creation,
development and distribution of fragrance products under the Van Cleef & Arpels brand and related trademarks.
Van
Cleef & Arpels fragrances in current distribution include:
First
,
Van Cleef pour Homme
,
Tsar
,
Van
Cleef
,
Féerie
,
Collection Extraordinaire
, and
Rêve.
For 2016, we launched a new men’s
line,
In New York
, and a new women’s line,
So First.
Sales of the
Collection Extraordinaire
line have
experienced continued growth since its debut. For 2017 we introduced a new addition to the Van Cleef & Arpels
Collection
Extraordinaire
assortment and for 2018, we are looking to add new lines to the collection. We are in discussions for an extension
of the Van Cleef & Arpels license, and although we expect to agree to an extension, we cannot assure you that one will be
reached.
Business
Strategy
Focus
on prestige beauty brands
. Prestige beauty brands are expected to contribute significantly to our growth. We focus on developing
and launching quality fragrances utilizing internationally renowned brand names. By identifying and concentrating in the most
receptive 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 successful launches. Certain fashion designers and other licensors choose us as
a partner, because our Company’s size enables us to work more closely with them in the product development process as well
as our successful track record.
Grow
portfolio brands through new product development and marketing
. We grow through the creation of fragrance family extensions
within the existing brands in our portfolio. Every year or two, we create a new family of fragrances for each brand in our portfolio.
We frequently introduce seasonal and limited edition fragrances as well. With new introductions, we leverage our ability and experience
to gauge trends in the market and further leverage the brand name into different product families in order to maximize sales and
profit potential. We have had success in introducing new fragrance families (sub-brands, flanker brands or flankers) within our
brand franchises. Furthermore, we promote the smooth and consistent performance of our prestige fragrance operations through knowledge
of the market, detailed analysis of the image and potential of each brand name, a “good dose” of creativity and a
highly professional approach to international distribution channels.
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 twenty 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 new licenses and acquire
new brands to strengthen our position in the prestige beauty market. To that end, during 2014, we signed fragrance licenses for
Abercrombie & Fitch and Hollister brands; in 2015, we signed fragrance licenses for Coach and French Connection, extended
our Montblanc fragrance license and purchased the Rochas brand, and in 2016, we extended the terms of our S.T. Dupont and bebe
licenses. In 2017, we extended our Jimmy Choo license through December 31, 2031 and our Paul Smith license until December 2021
and in February 2018, we signed a license agreement with GUESS?, Inc. As of December 31, 2017, we had cash, cash equivalents and
short-term investments of approximately $278 million, which we believe should assist us in entering new brand licenses or out-right
acquisitions. However, we cannot assure you that we will be able to enter into any future agreements, or acquire brands or assets
on terms favorable to us, or if we do, that any such transaction will be successful. We identify prestige brands that can be developed
and marketed into a full and varied product families and, with our technical knowledge and practical experience gained over time,
take licensed brand names through all phases of concept, development, manufacturing, marketing and distribution.
Expand
existing portfolio into new categories
. We intend to selectively broaden our product offering beyond the fragrance category
and offer other fragrance related products and personal care products under some of our existing brands. We believe such product
offerings meet customer needs and further strengthen customer loyalty.
Continue
to build global distribution footprint
. Our business is a global business and we intend to continue to build our global distribution
footprint. In order to adapt to changes in the environment and our business, and in addition to our arrangements with third party
distributors globally, we have formed and are operating distribution subsidiaries in the major markets of the United States, France,
Italy and Spain for distribution 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 building a global distribution footprint is part
of our long-term strategy, we may need to make certain decisions based on the short-term needs of the business. We believe that
in certain markets, vertical integration of our distribution network may be one of the keys to future growth of our Company, and
ownership of such distribution should enable us to better serve our customers’ needs in local markets and adapt more quickly
as situations may determine.
Production
and Supply
The
stages of the development and production process for all fragrances are as follows:
|
●
|
Simultaneous
discussions with perfume designers and creators (includes analysis of esthetic and olfactory trends, target clientele and market
communication approach)
|
|
●
|
Produce
mock-ups for final acceptance of bottles and packaging
|
|
●
|
Receive
bids from component suppliers (glass makers, plastic processors, printers, etc.) and packaging companies
|
|
●
|
Schedule
production and packaging
|
|
●
|
Issue
component purchase orders
|
|
●
|
Follow
quality control procedures for incoming components; and
|
|
●
|
Follow
packaging and inventory control procedures.
|
Suppliers
who assist us with product development include
:
|
●
|
Independent
perfumery design companies (Aesthete, Carré Basset, PI Design, Cent Degres)
|
|
●
|
Perfumers
(IFF, Givaudan, Firmenich, Robertet, Takasago, Mane) which create a fragrance consistent with our expectations and, that of the
fragrance designers and creators
|
|
●
|
Bottle
manufacturers (Pochet du Courval, Verescence, Verreries Brosse, Bormioli Luigi, Stoelzle Masnières ), caps (Qualipac ,
ALBEA, RPC, Codiplas, LF Beauty, Texen Group)) or boxes (Autajon , MMPP, Nortier, Draeger)
|
|
●
|
Production
specialists who carry out packaging (CCI, Edipar , Jacomo, SDPP, MF Productions, Biopack) or logistics (Bolloré Logistics
for storage, order preparation and shipment)
|
Suppliers’
accounts for our European operations are primarily settled in euro and for our United States operations, suppliers’ accounts
are primarily settled in U.S. dollars. For our European operations, prestige fragrances, components and contract filling needs
are purchased from many different suppliers located around the world. For United States operations, components for our prestige
fragrances are primarily sourced, produced and filled in the United States, and our mass market products are primarily manufactured,
produced or filled in the United States or China.
Marketing
and Distribution
Our
products are distributed in over 100 countries around the world through a selective distribution network. For our international
distribution, we either contract with independent distribution companies specializing in luxury goods or distribute prestige products
through our distribution subsidiaries. In each country, we designate anywhere from one to three distributors on an exclusive basis
for one or more of our name brands. We also distribute our products through a variety of duty free operators, such as airports
and airlines and select vacation destinations.
As
our business is a global one, we intend to continue to build our global distribution footprint. For distribution of brands within
our European based operations we operate through our distribution subsidiaries in the major markets of the United States, France,
Italy and Spain, in addition to our arrangements with third party distributors globally. Our third party distributors vary in
size depending on the number of competing brands they represent. This extensive and diverse network together with our own distribution
subsidiaries provides us with a significant presence in over 100 countries around the world.
Almost
45% of our European based prestige fragrance net sales are denominated in U.S. dollars. We address certain financial exposures
through a controlled program of risk management that includes the use of derivative financial instruments. We primarily
enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates.
The
business of our European operations has become increasingly seasonal due to the timing of shipments by our majority-owned distribution
subsidiaries to their customers, which are weighted to the second half of the year.
For
our United States operations, we distribute product to retailers and distributors in the United States as well as internationally,
including duty free and other travel-related retailers. We utilize our in-house sales team to reach our third party distributors
and customers outside the United States. In addition, the business of our United States operations has become increasingly seasonal
as shipments are weighted toward the second half of the year.
Geographic
Areas
United
States export sales were approximately $71.4 million, $77.5 million and $66.3 million in 2017, 2016 and 2015, respectively. Consolidated
net sales to customers by region are as follows:
(in thousands)
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
North America
|
|
$
|
176,900
|
|
|
$
|
149,000
|
|
|
$
|
125,700
|
|
Europe
|
|
|
214,800
|
|
|
|
194,700
|
|
|
|
170,600
|
|
Central and South America
|
|
|
51,200
|
|
|
|
44,000
|
|
|
|
41,100
|
|
Middle East
|
|
|
50,500
|
|
|
|
41,600
|
|
|
|
41,900
|
|
Asia
|
|
|
88,000
|
|
|
|
81,300
|
|
|
|
78,200
|
|
Other
|
|
|
9,900
|
|
|
|
10,500
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
591,300
|
|
|
$
|
521,100
|
|
|
$
|
468,500
|
|
Consolidated
net sales to customers in major countries are as follows:
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
173,000
|
|
|
$
|
144,000
|
|
|
$
|
122,000
|
|
United Kingdom
|
|
$
|
33,000
|
|
|
$
|
31,000
|
|
|
$
|
32,000
|
|
France
|
|
$
|
44,000
|
|
|
$
|
47,000
|
|
|
$
|
34,000
|
|
Competition
The
market for prestige fragrance products is highly competitive and sensitive to changing preferences and demands. The prestige fragrance
industry is highly concentrated around certain major players with resources far greater than ours. We compete with an original
strategy, regular and methodical development of quality fragrances for a growing portfolio of internationally renowned brand names.
Inventory
We
purchase raw materials and component parts from suppliers based on internal estimates of anticipated need for finished goods,
which enables us to meet production requirements for finished goods. We generally deliver product to customers within 72 hours
of the receipt of their orders. Our business is not capital intensive, and it is important to note that we do not own manufacturing
facilities. We act as a general contractor and source our needed components from our suppliers. These components are received
at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party
fillers which manufacture the finished product for us and then deliver them to one of our distribution centers.
Product
Liability
Our
United States operations maintain product liability coverage in an amount of $10.0 million, and our European operations maintain
product liability coverage in an amount of €20.0 million (approximately $24.0 million). Based upon our experience, we believe
this coverage is adequate and covers substantially all of the exposure we may have with respect to our products. We have never
been the subject of any material product liability claims.
Government
Regulation
A
fragrance is defined as a “cosmetic” under the Federal Food, Drug and Cosmetics Act. A fragrance must comply with
the labeling requirements of this FDC Act as well as the Fair Packaging and Labeling Act and its regulations. Some of our color
cosmetic products may contain menthol and are also classified as a “drug”. Under U.S. law, a product may be classified
as both a cosmetic and a drug. Additional regulatory requirements for products which are “drugs” include additional
labeling requirements, registration of the manufacturer and the semi-annual update of a drug list. In addition, various jurisdictions
prohibit the use of certain ingredients in fragrances and cosmetics.
Our
fragrances are subject to the approval of the Bureau of Alcohol, Tobacco and Firearms as a result of the use of specially denatured
alcohol. So far we have not experienced any difficulties in obtaining the required approvals.
Our
fragrance products that are manufactured or sold in Europe are subject to certain regulatory requirements of the European Union,
such as Cosmetic Directive 76/768/CEE and Regulation number 1223/2009 on cosmetic products, but as of the date of this report,
we have not experienced any material difficulties in complying with such requirements.
Trademarks
The
market for our products depends to a significant extent upon the value associated with our trademarks and brand names. We have
licenses or other rights to use, or own, the material trademark and brand name rights used in connection with the packaging, marketing
and distribution of our major products both in the United States and in other countries where such products are principally sold.
Therefore, trademark and brand name protection is important to our business. Although most of the brand names we license, use
or own are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting
trademark or brand name protection. In addition, the laws of certain foreign countries may not protect our intellectual property
rights to the same extent as the laws of the United States. The costs required to protect our trademarks and brand names may be
substantial.
Under
various license and other agreements we have the right to use certain registered trademarks throughout the world (except as otherwise
noted) for fragrance products. These registered trademarks include:
|
●
|
Abercrombie & Fitch
|
|
●
|
Agent Provocateur
|
|
●
|
Anna Sui
|
|
●
|
bebe
|
|
●
|
Boucheron
|
|
●
|
Coach
|
|
●
|
Dunhill
|
|
●
|
French Connection
|
|
●
|
Guess
(effective April 1, 2018)
|
|
●
|
Hollister
|
|
●
|
Jimmy Choo
|
|
●
|
Jordache
|
|
●
|
Karl Lagerfeld
|
|
●
|
Montblanc
|
In
addition, we are the registered trademark owner of several trademarks for fragrance and beauty products, including:
|
●
|
Rochas
|
|
●
|
Lanvin
|
|
●
|
Intimate
|
|
●
|
Aziza
|
Employees
As
of March 1, 2018, we had 355 full-time employees worldwide. Of these, 266 are full-time employees of our European operations,
with 109 employees engaged in sales activities and 157 in administrative, production and marketing activities. Our United States
operations have 89 employees, and of these, 13 were engaged in sales activities and 76 in administrative, production and marketing
activities. We believe that our relationship with our employees is good.
Item
1A. Risk Factors.
You
should carefully consider these risk factors before you decide to purchase or sell shares of our common stock. These factors could
cause our future results to differ materially from those expressed or implied in forward-looking statements made by us. The trading
price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
We
are dependent upon the continuation and renewal of various licenses and other agreements for a significant portion of our sales,
and the loss of one or more licenses or agreements could have a material adverse effect on us.
All
of our rights relating to prestige fragrance brands, other than Lanvin and Rochas, are derived from licenses or other agreements
from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses and other agreements
on terms favorable to us. Each license or agreement is for a specific term and may have additional optional terms. Generally,
each license is subject to us making required royalty payments (which are subject to certain minimums), minimum advertising and
promotional expenditures and meeting minimum sales requirements. Other agreements are generally subject to meeting minimum sales
requirements. Just as the loss of a license or other significant agreement may have a material adverse effect on us, a renewal
on less favorable terms may also negatively impact us.
Our
business could be adversely affected by a prolonged downturn or recession in the United States, Europe or other countries in which
we conduct business.
A
prolonged economic downturn or recession in the United States, Europe, China or any of the other countries in which we do significant
business could materially and adversely affect our business, financial condition and results of operations. In particular, such
a downturn or recession could adversely impact (i) the level of spending by our ultimate consumers, (ii) our ability to collect
accounts receivable on a timely basis from certain customers, (iii) our ability of certain suppliers to fill our orders for raw
materials, packaging or co-packed finished goods on a timely basis, and (iv) the mix of our product sales.
Consumers
may reduce discretionary purchases of our products as a result of a general economic downturn.
We
believe that a high degree of global economic uncertainty could have a negative effect on consumer confidence, demand and spending.
In addition, we believe that consumer spending on beauty products is influenced by general economic conditions and the availability
of discretionary income. Accordingly, we may experience sustained periods of declines in sales during periods of economic downturn
as it may affect consumer purchasing patterns. In addition, a general economic downturn may result in reduced traffic in our customers’
stores which may, in turn, result in reduced net sales to our retail store customers. Any resulting material reduction in our
sales could have a material adverse effect on our business, financial condition and operating results.
Uncertainties
and deterioration in global credit markets, as evidenced by previous reductions in sovereign credit ratings in the United States
and Europe, could negatively impact suppliers, customers and consumers, which could have an adverse impact on our business as
a whole.
Uncertainties
and deterioration in the global credit markets as evidenced by previous reductions in sovereign credit ratings in the United States
and Europe, could negatively impact our suppliers, customers and consumers which, in turn, could have an adverse impact on our
business. While thus far, uncertainties in global credit markets have not significantly affected our access to credit due to our
strong credit rating, a further deterioration in global financial markets could make future financing difficult or more expensive.
Such lack of credit or lack of credit on favorable terms could have a material adverse effect on our business, financial condition
and operating results.
If
our intangible assets, such as trademarks and licenses, become impaired, we may be required to record a significant non-cash charge
to earnings which would negatively impact our results of operations.
Under
United States generally accepted accounting principles, we review our intangible assets, including our trademarks and licenses,
for impairment annually in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate
the carrying value of our intangible assets may not be fully recoverable. The carrying value of our intangible assets may not
be recoverable due to factors such as reduced estimates of future cash flows, including those associated with the specific brands
to which intangibles relate, or slower growth rates in our industry. Estimates of future cash flows are based on a long-term financial
outlook of our operations and the specific brands to which the intangible assets relate. However, actual performance in the near-term
or long-term could be materially different from these forecasts, which could impact future estimates and the recorded value of
the intangibles. Any significant impairment to our intangible assets would result in a significant charge to earnings in our financial
statements during the period in which the impairment is determined to exist.
If
we are unable to protect our intellectual property rights, specifically trademarks and brand names, our ability to compete could
be negatively impacted.
The
market for our products depends to a significant extent upon the value associated with trademarks and brand names that we license,
use or own. We have licenses or other rights to use, or own the material trademark and brand name rights in connection with the
packaging, marketing and distribution of our major products both in the United States and in other countries where such products
are principally sold. Therefore, trademark and brand name protection is important to our business. Although most of the brand
names we license, use or own are registered in the United States and in certain foreign countries in which we operate, we may
not be successful in asserting trademark or brand name protection. In addition, the laws of certain foreign countries may not
protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our
trademarks and brand names may be substantial.
The
illegal distribution and sale by third parties of counterfeit versions of the Company’s products or the unauthorized diversion
by third parties of the Company’s products could have an adverse effect on the Company’s revenues and a negative impact
on the Company’s reputation and business.
Third
parties may illegally distribute and sell counterfeit versions of the Company’s products. These counterfeit products may
be inferior in terms of quality and other characteristics compared to the Company’s authentic products and/or the counterfeit
products could pose safety risks that the Company’s authentic products would not otherwise present to consumers. Consumers
could confuse counterfeit products with the Company’s authentic products, which could damage or diminish the image, reputation
and/or value of the Company’s brands and cause consumers to refrain from purchasing the Company’s products in the
future, which could adversely affect the Company’s revenues and have a negative impact on the Company’s reputation.
Our
success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks,
patents, copyrights and proprietary rights of other parties.
Our
commercial success depends at least in part on our ability to operate without infringing, misappropriating or otherwise violating
the trademarks, patents, copyrights and other proprietary rights of others. However, we cannot be certain that the conduct of
our business does not and will not infringe, misappropriate or otherwise violate such rights. Many companies have employed intellectual
property litigation as a way to gain a competitive advantage, and to the extent we gain greater visibility and market exposure,
we may also face a greater risk of being the subject of such litigation. For these and other reasons, third parties may allege
that our products, services or activities infringe, misappropriate or otherwise violate their trademark, patent, copyright or
other proprietary rights. Defending against allegations and litigation could be expensive, take significant time, divert management’s
attention from other business concerns, and delay getting our products to market. In addition, if we are found to be infringing,
misappropriating or otherwise violating third party trademark, patent, copyright or other proprietary rights, we may need to obtain
a license, which may not be available on commercially reasonable terms or at all, or redesign or rebrand our products, which may
not be possible. We may also be required to pay substantial damages or be subject to a court order prohibiting us and our customers
from selling certain products or engaging in certain activities. Our inability to operate our business without infringing, misappropriating
or otherwise violating the trademarks, patents, copyrights and proprietary rights of others could therefore have a material adverse
effect on our business, financial condition and results of operations.
The
success of our products is dependent on public taste.
Our
revenues are substantially dependent on the success of our products, which depends upon, among other matters, pronounced and rapidly
changing public tastes, factors which are difficult to predict and over which we have little, if any, control. In addition, we
have to develop successful marketing, promotional and sales programs in order to sell our fragrances and fragrance related products.
If we are not able to develop successful marketing, promotional and sales programs, then such failure will have a material adverse
effect on our business, financial condition and operating results.
We
are subject to extreme competition in the fragrance industry.
The
market for fragrance products is highly competitive and sensitive to changing market preferences and demands. Many of our competitors
in this market are larger than we are and have greater financial resources than are available to us, potentially allowing them
greater operational flexibility. Our success in the prestige fragrance industry is dependent upon our ability to continue to generate
original strategies and develop quality products that are in accord with ongoing changes in the market.
If
there is insufficient demand for our existing fragrance products, or if we do not develop future strategies and products that
withstand competition or we are unsuccessful in competing on price terms, then we could experience a material adverse effect on
our business, financial condition and operating results.
If
we are unable to acquire or license additional brands, or obtain the required financing for these agreements and arrangements,
then the growth of our business could be impaired.
Our
future expansion through acquisitions or new product license or distribution arrangements, if any, will depend upon the capital
resources and working capital available to us. Further, we may be unable to obtain financing or credit that we may require for
additional licenses, acquisitions or other transactions. We may be unsuccessful in identifying, negotiating, financing and consummating
such acquisitions or arrangements on terms acceptable to us, or at all, which could hinder our ability to increase revenues and
build our business. Just as the loss of a license or other significant agreement may have a material adverse effect on us, our
failure to acquire rights to new brands may also negatively impact us.
We
may engage in future acquisitions that we may not be able to successfully integrate or manage. These acquisitions may dilute our
stockholders and cause us to incur debt and assume contingent liabilities.
We
continuously review acquisition prospects that would complement our current product offerings, increase our size and geographic
scope of operations or otherwise offer growth and operating efficiency opportunities. The financing, if available, for any of
these acquisitions could significantly dilute our stockholders and/or result in an increase in our indebtedness. We may acquire
or make investments in businesses or products in the future, and such acquisitions may entail numerous integration risks and impose
costs on us, including:
|
●
|
difficulties in assimilating acquired operations
or products, including the loss of key employees from acquired businesses
|
|
●
|
diversion of management’s attention from
our core business
|
|
●
|
adverse effects on existing business relationships
with suppliers and customers
|
|
●
|
risks of entering markets in which we have no
or limited prior experience
|
|
●
|
dilutive issuances of equity securities
|
|
●
|
incurrence of substantial debt
|
|
●
|
assumption of contingent liabilities
|
|
●
|
incurrence of significant amortization expenses
related to intangible assets and the potential impairment of acquired assets and
|
|
●
|
incurrence of significant immediate write-offs.
|
Our
failure to successfully complete the integration of any acquired business could have a material adverse effect on our business,
financial condition and operating results.
Joint
arrangements or strategic alliances in geographic markets in which we have limited or no prior experience may expose us to additional
risks.
We
review, and from time to time may establish, arrangements and strategic alliances that we believe would complement our current
product offerings, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency
opportunities. These business relationships may require us to rely on the local expertise of our partners with respect to market
development, sales, local regulatory compliance and other matters. Further, there may be challenges with ensuring that such arrangements
or strategic alliances implement the appropriate internal controls to ensure compliance with the various laws and regulations
applicable to us as a U.S. public company. Accordingly, in addition to commercial and operational risk, these arrangements and
strategic alliances may entail risks such as reputational risk and regulatory compliance risk. In addition, there can be no assurance
that we will be able to identify suitable alliance or candidates, that we will be able to consummate any such alliances or arrangements
on favorable terms, or that we will realize the anticipated benefits of entering into any such alliances or arrangements.
We
are dependent upon Messrs. Jean Madar and Philippe Benacin, the loss of their services could harm our business
Jean
Madar, our Chief Executive Officer, and Philippe Benacin, our President and Chief Executive Officer of Interparfums SA, are responsible
for day-to-day operations as well as major decisions. Termination of their relationships with us, whether through death, incapacity
or otherwise, could have a material adverse effect on our operations, and we cannot assure you that qualified replacements can
be found.
Our
reliance on third party manufacturers could have a material adverse effect on us.
We
rely on outside sources to manufacture our fragrances and cosmetics. The failure of such third party manufacturers to deliver
either compliant, quality components or finished goods on a timely basis could have a material adverse effect on our business.
Although we believe there are alternate manufacturers available to supply our requirements, we cannot assure you that current
or alternative sources will be able to supply all of our demands on a timely basis. We do not intend to develop our own manufacturing
capacity. As these are third parties over whom we have little or no control, the failure of such third parties to provide components
or finished goods on a timely basis could have a material adverse effect on our business, financial condition and operating results.
Our
reliance on third party distributors could have a material adverse effect on us.
We
sell a substantial percentage of our prestige fragrances through independent distributors specializing in luxury goods. Given
the growing importance of distribution, we have modified our distribution model by owning a controlling interest in certain of
our distributors within key markets. However, we have little or no control over third party distributors and the failure of such
third parties to provide services on a timely basis could have a material adverse effect on our business, financial condition
and operating results. In addition, if we replace existing third party distributors with new third party distributors or with
our own distribution arrangements, then transition issues could have a material adverse effect on our business, financial condition
and operating results.
Terrorist attacks, acts of war or military actions, other
civil unrest or natural disasters may adversely affect territories in which we operate, and therefore affect our business, financial
condition and operating results.
Terrorist attacks such as those that have occurred
in Paris, France where we have our European headquarters, amongst other locations, and attempted terrorist attacks, military responses
to terrorist attacks, other military actions, or governmental action in response to or in anticipation of a terrorist attack, or
civil unrest as occurring in the Middle East, the Ukraine and Africa or natural disaster, may adversely affect prevailing economic
conditions, resulting in work stoppages, reduced consumer spending or reduced demand for our products. These developments subject
our worldwide operations to increased risks and, depending on their magnitude, could reduce net sales and therefore could have
a material adverse effect on our business, financial condition and operating results.
The
loss of or disruption in our distribution facilities could have a material adverse effect on our business, financial condition
and operating results.
We
currently have several distribution facilities in Europe and the United States. The loss of any of those facilities, as well as
the inventory stored in those facilities, would require us to find replacement facilities and assets. In addition, acts of God,
such as extreme weather conditions, natural disasters and the like or terrorist attacks, could disrupt our distribution operations.
If we cannot replace our distribution capacity and inventory in a timely, cost-efficient manner, then such failure could have
a material adverse effect on our business, financial condition and operating results.
Changes
in laws, regulations and policies that affect our business could adversely affect our financial results.
Our
business is subject to numerous laws, regulations and policies. Changes in the laws, regulations and policies, including the interpretation
or enforcement thereof, that affect, or will affect, our business, including changes in accounting standards, tax laws and regulations,
environmental or climate change laws, regulations or accords, trade rules and customs regulations, or increased cosmetics regulation,
and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result could adversely affect
our financial results.
Our
success depends, in part, on the quality and safety of our products.
Our
success depends, in part, on the quality and safety of our products. If our products are found to be defective or unsafe, or if
they otherwise fail to meet our consumers’ standards, then our relationships with customers or consumers could suffer, the
appeal of one or more of our brands could be diminished, and we could lose sales and/or become subject to liability claims, any
of which could result in a material adverse effect on our business, results of operations and financial condition.
We
are subject to risks related to our foreign operations.
We
operate on a global basis, with a substantial portion of our net sales and net income generated outside the United States, and
we anticipate for the foreseeable future that a substantial portion of our net sales and net income will be generated outside
the United States. A substantial portion of our cash, cash equivalents and short-term investments that result from these earnings
remain outside the United States. Foreign operations are subject to many risks and uncertainties, including:
● changes
in foreign laws, regulations and policies, including restrictions on trade, import and export license requirements, and tariffs
and taxes, as well as changes in United States laws and regulations relating to foreign trade and investment; and
● adverse
weather conditions, social, economic and geopolitical conditions, such as terrorist attacks, war or other military action.
These
risks could have a material adverse effect on our business, prospects, results of operations and financial condition.
The
United Kingdom’s pending departure from the European Union could adversely impact our business and financial results.
In
June 2016, the United Kingdom held a referendum for the United Kingdom to exit the European Union (“Brexit”), the
announcement of which resulted in significant but short-term currency exchange rate fluctuations and volatility in global stock
markets. Given the lack of certainty and comparable precedent, the implications of Brexit or how such implications might affect
the Company are unclear. Brexit could, among other things, disrupt trade and the free movement of goods, services and people between
the United Kingdom and the European Union or other countries as well as create legal and global economic uncertainty. These and
other potential implications of Brexit could adversely affect the Company’s business and financial results.
Changes
in foreign tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability
and cash flows.
In
addition to being subject to taxation in the United States, we are subject to income and other taxes in other foreign jurisdictions.
Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of
earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes
in tax laws and the discovery of new information in the course of our tax return preparation process. From time to time, tax proposals
are introduced or considered by the United States Congress or the legislative bodies in foreign jurisdictions that could also
affect our tax rate, the carrying value of our deferred tax assets, or our other tax liabilities. Our tax liabilities are also
affected by the amounts we charge for inventory, services, licenses, funding, cross-jurisdictional transfer pricing, and other
items in intercompany transactions. A negative determination or ultimate disposition in any tax audit, changes in tax laws or
tax rates, or the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows
in future periods.
The
international character of our business renders us subject to fluctuation in foreign currency exchange rates and international
trade tariffs, barriers and other restrictions.
A
substantial portion of our European operations’ net sales (almost 45%) are sold in U.S. dollars. In an effort to reduce
our exposure to foreign currency exchange fluctuations, we engage in a controlled program of risk management that includes the
use of derivative financial instruments for all major currencies with which we operate. Despite such actions, fluctuations in
foreign currency exchange rates for the U.S. dollar, particularly with respect to the euro, could have a material adverse effect
on our operating results. Possible import, export, tariff and other trade barriers, which could be imposed by the United States,
other countries or the European Union might also have a material adverse effect on our operating results.
Our
business is subject to governmental regulation, which could impact our operations.
Fragrance
products must comply with the labeling requirements of the Federal Food, Drug and Cosmetics Act as well as the Fair Packaging
and Labeling Act and their regulations. Some of our color cosmetic products may also be classified as a “drug”. Additional
regulatory requirements for products which are “drugs” include additional labeling requirements, registration of the
manufacturer and the semi-annual update of a drug list. In addition, various jurisdictions prohibit the use of certain ingredients
in fragrances and cosmetics.
Our
fragrances are subject to the approval of the Bureau of Alcohol, Tobacco and Firearms as a result of the use of specially denatured
alcohol. So far, we have not experienced any difficulties in obtaining the required approvals.
Our
fragrance products that are manufactured or sold in Europe are subject to certain regulatory requirements of the European Union,
such as Cosmetic Directive 76/768/CEE and Regulation number 1223/2009 on cosmetic products, but as of the date of this report,
we have not experienced any material difficulties in complying with such requirements.
However,
we cannot assure you that, should we use proscribed ingredients in our fragrance products that we develop or market, or develop
or market fragrance products with different ingredients, or should existing regulations or requirements be revised, we would not
in the future experience difficulty in complying with such requirements, which could have a material adverse effect on our results
of operations.
Our
information systems and websites may be susceptible to outages, hacking and other risks.
We
have information systems that support our business processes, including product development, production, marketing, order processing,
sales, distribution, finance and intra-company communications. We also have Internet websites in the United States and Europe.
These systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, hacking and similar
events. Despite the implementation of network security measures, our systems may be vulnerable to computer viruses, hacking and
similar disruptions from unauthorized tampering. The occurrence of these or other events could disrupt or damage our information
systems and adversely affect our business and results of operations.
Our
failure to protect our reputation, or the failure of our partners to protect their reputations, could have a material adverse
effect on our brand images.
Our
ability to maintain our reputation is critical to our various brand images. Our reputation could be jeopardized if we fail to
maintain high standards for merchandise quality and integrity or if we, or the third parties with whom we do business, do not
comply with regulations or accepted practices. Any negative publicity about these types of concerns may reduce demand for our
merchandise. Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations,
such as animal testing, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including
boycotts. Failure to comply with local laws and regulations, including applicable U.S. trade sanctions, to maintain an effective
system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation.
We are also dependent on the reputations of our brand partners and licensors, which can be affected by matters outside of our
control. Damage to our reputation or the reputations of our brand partners or licensors or loss of consumer confidence for any
of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows,
as well as require additional resources to rebuild our reputation.
Our
business is subject to seasonal variability.
Our
business has become increasingly seasonal due to the timing of shipments to our customers, which are weighted to the second half
of the year. Accordingly, our financial performance, sales, working capital requirements, cash flow and borrowings generally experience
variability during the third and fourth quarters.
The
trading prices of our securities periodically may rise or fall based on the accuracy of predictions of our earnings or other financial
performance.
Our
business planning process is designed to maximize our long-term strength, growth and profitability, not to achieve an earnings
target in any particular fiscal quarter. We believe that this longer-term focus is in the best interests of our Company and our
stockholders. At the same time, however, we recognize that it may be helpful to provide investors with guidance as to our forecast
of annual net sales and earnings per share. Accordingly, we provide guidance as to our expected annual net sales, and earnings
per share, which is updated as appropriate throughout the year. While we generally provide updates to our guidance when we report
our results each fiscal quarter if called for, we assume no responsibility to update any of our forward-looking statements at
such times or otherwise. In addition, longer-term guidance that we may from time to time provide is based on goals that we believe,
at the time guidance is given, are reasonably attainable.
In
all of our public statements when we make, or update, a forward-looking statement about our sales and/or earnings expectations
or expectations regarding other initiatives, we accompany such statements directly, or by reference to a public document, with
a list of factors that could cause our actual results to differ materially from those we expect. Such a list is included, among
other places, in our earnings press releases (by reference to our periodic filings with the Securities and Exchange Commission)
and in our periodic filings with the Securities and Exchange Commission (
e.g.,
in our reports on Form 10-K and Forms 10-Q).
These and other factors may make it difficult for outside observers, such as research analysts, to predict what our earnings will
be in any given fiscal quarter or year.
Outside
analysts and investors have the right to make their own predictions of our financial results for any future period. Outside analysts,
however, have access to no more material information about our results or plans than any other public investor, and we do not
endorse or adopt their predictions as to our future performance. Nor do we assume any responsibility to correct the predictions
of outside analysts or others when they differ from our own internal expectations. If and when we announce actual results that
differ from those that outside analysts or others have been predicting, the market price of our securities could be affected.
Investors who rely on the predictions of outside analysts or others when making investment decisions with respect to our securities
do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in the prices of our securities.
We
may become subject to possible liability for improper comparative advertising or “Trade Dress”.
Brand
name manufacturers and sellers of brand name products may make claims of improper comparative advertising or trade dress (packaging)
with respect to the likelihood of confusion between some of our mass market products and those of brand name manufacturers and
sellers. They may seek damages for loss of business or injunctive relief to seek to have the use of the improper comparative advertising
or trade dress halted. However, we believe that our displays and packaging constitute fair competitive advertising and are not
likely to cause confusion between our products and others. Further, we have not experienced to any material degree, any of such
problems to date.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties
United
States Operations
Use
|
|
Location
|
|
Approximate
Size
|
|
Term Expires
|
|
|
|
|
|
|
|
Office Space-Corporate headquarters and United
States operations
|
|
551
Fifth Avenue,
15
th
Floor,
New
York, NY
10176
|
|
16,800 square feet
|
|
April 30, 2024
|
|
|
|
|
|
|
|
Distribution center
|
|
60
Stults Road
Dayton,
NJ
08810
|
|
140,000 square feet
|
|
October 31, 2018
|
|
|
|
|
|
|
|
Corporate
Office for Inter Parfums USA Hong Kong Limited
|
|
Leighton
Centre
77
Leighton Road
Causeway
Bay,
Hong
Kong
Suite
1413
|
|
9,685
square feet
|
|
June 20, 2020
|
European
Operations
Use
|
|
Location
|
|
Approximate
Size
|
|
Term Expires
|
|
Other Information
|
|
|
|
|
|
|
|
|
|
Office Space-Paris corporate headquarters and
European operations
|
|
4
Rond Point Des
Champs
Elysees
Ground
and 1st Fl.
Paris, France
|
|
571 square meters
|
|
March 2022
|
|
Lessee has early termination right every 3 years
on 6 months’ notice
|
|
|
|
|
|
|
|
|
|
Office Space-Paris corporate headquarters and
European operations
|
|
4
Rond Point Des
Champs
Elysees
2nd
Fl.
Paris,
France
|
|
544 square meters
|
|
September 2026
|
|
Lessee has early termination right every 3 years
on 6 months’ notice
|
|
|
|
|
|
|
|
|
|
Office Space-Paris corporate headquarters and
European operations
|
|
4
Rond Point Des
Champs
Elysees
4th
Fl.
Paris,
France
|
|
540 square meters
|
|
March 2023
|
|
Lessee has early termination right every 3 years
on 6 months’ notice
|
|
|
|
|
|
|
|
|
|
Office Space-Paris corporate headquarters and
European operations
|
|
4
Rond Point Des
Champs
Elysees
5th
Fl.- left
Paris,
France
|
|
155 square meters
|
|
March 2022
|
|
Lessee has early termination right on 3 months’
notice
|
|
|
|
|
|
|
|
|
|
Office Space-Paris corporate headquarters and
European operations
|
|
4
Rond Point Des
Champs
Elysees
6th
Fl.-Right
Paris,
France
|
|
157 square meters
|
|
March 2022
|
|
Lessee has early termination right every 3 years
on 6 months’ notice
|
|
|
|
|
|
|
|
|
|
Office Space-Paris corporate headquarters and
European operations
|
|
4
Rond Point Des
Champs
Elysees
6th
Fl.- Left
Paris,
France
|
|
60 square meters
|
|
September 2026
|
|
Lessee has early termination right every 3 years
on 6 months’ notice
|
|
|
|
|
|
|
|
|
|
European Distribution Center
|
|
Criquebeuf
sur
Seine
(27340), the
“Le
Bosc Hetrel”
business
park
|
|
31,000 square meters
|
|
May 2020
|
|
NA
|
|
|
|
|
|
|
|
|
|
Rochas
Studio &
Production
Department
|
|
1
Rond Point des
Champs Elysees
2
nd
Fl.
Paris,
France
|
|
755 square meters
|
|
June
2021
|
|
Lessee has early termination right every 3 years
on 6 months’ notice
|
Office
Space –
Singapore
regional office, for Asia-Pacific region
European
operations
|
|
163
Penang Road,
#06-03/04
Winsland House 2,
Singapore
238463
|
|
2,900
square feet
|
|
November
2019
|
|
NA
|
|
|
|
|
|
|
|
|
|
Office Space-US Distribution for European operations
|
|
112 Madison Ave. New York, NY 10016
|
|
7,500 square feet
|
|
October 2024
|
|
Lessee has (i) early termination rights at the
5 year mark with 9 months’ notice; (ii) renewal option for 5 year term with 11-14 months’ notice; (iii) right
of first offer on the 11
th
floor
|
Interparfums SA has had an agreement with
Bolloré Logistics (and its predecessor, Sagatrans, S.A.) for warehousing and distribution services for several years. The
current agreement with Bolloré Logistics for warehousing and distribution services expires on December 31, 2020. Service
fees payable to Bolloré Logistics are calculated based upon a percentage of sales, which is customary in the industry.
Service fees actually paid were €4.2 million in 2017, €4.3 million in 2016 and €3.4 million in 2015.
We
believe our office and warehouse facilities are satisfactory for our present needs and those for the foreseeable future.
Item
3. Legal Proceedings
We
are not a party to any material lawsuits.
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The
Market for Our Common Stock
Our
Company’s common stock, $.001 par value per share, is traded on The Nasdaq Global Select Market under the symbol “IPAR”.
The following table sets forth in dollars, the range of high and low closing prices for the past two fiscal years for our common
stock.
Fiscal
2017
|
High
Closing Price
|
Low
Closing Price
|
Fourth
Quarter
|
46.30
|
41.05
|
Third
Quarter
|
42.10
|
35.55
|
Second
Quarter
|
38.50
|
34.25
|
First
Quarter
|
37.65
|
31.55
|
Fiscal
2016
|
High
Closing Price
|
Low
Closing Price
|
Fourth
Quarter
|
36.40
|
29.40
|
Third
Quarter
|
35.07
|
27.05
|
Second
Quarter
|
31.71
|
27.19
|
First
Quarter
|
32.47
|
20.37
|
As
of February 20, 2018, the number of record holders, which include brokers and broker’s nominees,
etc
., of our common
stock was 39. We believe there are approximately 10,400 beneficial owners of our common stock.
Corporate
Performance Graph
The
following graph compares the performance for the periods indicated in the graph of our common stock with the performance of the
Nasdaq Market Index and the average performance of a group of the Company’s peer corporations consisting of: Avon Products
Inc., CCA Industries, Inc., Colgate-Palmolive Co., Estée Lauder Companies, Inc., Inter Parfums, Inc., Kimberly Clark Corp.,
Natural Health Trends Corp., Procter & Gamble Co., Revlon, Inc., Spectrum Brands Holdings, Inc., Stephan Co., Summer Infant,
Inc. and United Guardian, Inc. The graph assumes that the value of the investment in our common stock and each index was $100
at the beginning of the period indicated in the graph, and that all dividends were reinvested.
Below
is the list of the data points for each year that corresponds to the lines on the above graph.
|
|
|
12/12
|
|
|
|
12/13
|
|
|
|
12/14
|
|
|
|
12/15
|
|
|
|
12/16
|
|
|
|
12/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter Parfums, Inc.
|
|
|
100.00
|
|
|
|
189.53
|
|
|
|
147.64
|
|
|
|
130.52
|
|
|
|
183.07
|
|
|
|
247.27
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
141.63
|
|
|
|
162.09
|
|
|
|
173.33
|
|
|
|
287.19
|
|
|
|
242.29
|
|
Peer Group
|
|
|
100.00
|
|
|
|
125.49
|
|
|
|
141.67
|
|
|
|
134.73
|
|
|
|
141.06
|
|
|
|
162.00
|
|
Dividends
In
January 2016, our Board of Directors authorized a 15% increase in the cash dividend to $0.60 per share on an annual basis. In
October 2016, our Board of Directors authorized a 13% increase in the annual dividend to $0.68 per share. In October 2017, our
Board of Directors authorized a 24% increase in the annual dividend to $0.84 per share. The next quarterly cash dividend of $0.21
per share is payable on April 13, 2018 to shareholders of record on March 30, 2018.
Sales
of Unregistered Securities
In
October, November, December 2017 and February 2018, our non-employee directors exercised stock options to purchase an aggregate
of 4,625 shares of restricted common stock. These transactions were exempt from the registration requirements of Section 5 of
the Securities Act under Sections 4(2) and 4(6) of the Securities Act. Each option holder agreed that, if the option is exercised,
the option holder would purchase his common stock for investment and not for resale to the public. Also, we provide all option
holders with all reports we file with the SEC and press releases issued by us.
Item
6. 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.
|
|
Years Ended December 31,
|
|
(In thousands except per share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
591,251
|
|
|
$
|
521,072
|
|
|
$
|
468,540
|
|
|
$
|
499,261
|
|
|
$
|
563,579
|
|
Cost of sales
|
|
|
214,965
|
|
|
|
194,601
|
|
|
|
179,069
|
|
|
|
212,224
|
|
|
|
234,800
|
|
Selling, general and administrative expenses
|
|
|
295,540
|
|
|
|
258,787
|
|
|
|
228,268
|
|
|
|
233,634
|
|
|
|
250,025
|
|
Operating income
|
|
|
78,623
|
|
|
|
66,678
|
|
|
|
61,203
|
|
|
|
53,403
|
|
|
|
78,754
|
|
Income before taxes
|
|
|
78,065
|
|
|
|
67,074
|
|
|
|
60,496
|
|
|
|
56,715
|
|
|
|
80,646
|
|
Net income attributable to the noncontrolling interest
|
|
|
13,659
|
|
|
|
9,917
|
|
|
|
8,532
|
|
|
|
7,909
|
|
|
|
11,755
|
|
Net income attributable to Inter Parfums, Inc.
|
|
|
41,594
|
|
|
|
33,331
|
|
|
|
30,437
|
|
|
|
29,436
|
|
|
|
39,211
|
|
Net income attributable to Inter Parfums, Inc. common shareholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.07
|
|
|
$
|
0.98
|
|
|
$
|
0.95
|
|
|
$
|
1.27
|
|
Diluted
|
|
$
|
1.33
|
|
|
$
|
1.07
|
|
|
$
|
0.98
|
|
|
$
|
0.95
|
|
|
$
|
1.27
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,172
|
|
|
|
31,072
|
|
|
|
30,996
|
|
|
|
30,931
|
|
|
|
30,764
|
|
Diluted
|
|
|
31,305
|
|
|
|
31,176
|
|
|
|
31,100
|
|
|
|
31,060
|
|
|
|
30,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
11,914
|
|
|
$
|
15,341
|
|
|
$
|
9,078
|
|
|
$
|
10,166
|
|
|
$
|
11,110
|
|
|
|
As at December 31,
|
|
(In thousands except per share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
Balance sheet and other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
208,343
|
|
|
$
|
161,828
|
|
|
$
|
176,967
|
|
|
$
|
90,138
|
|
|
$
|
125,650
|
|
Short-term investments
|
|
|
69,899
|
|
|
|
94,202
|
|
|
|
82,847
|
|
|
|
190,152
|
|
|
|
181,677
|
|
Working capital
|
|
|
382,171
|
|
|
|
337,977
|
|
|
|
337,674
|
|
|
|
382,935
|
|
|
|
399,344
|
|
Total assets
|
|
|
777,772
|
|
|
|
682,409
|
|
|
|
687,659
|
|
|
|
604,506
|
|
|
|
664,058
|
|
Short-term bank debt
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
298
|
|
|
|
6,104
|
|
Long-term debt (including current portion)
|
|
|
60,579
|
|
|
|
74,562
|
|
|
|
98,606
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Inter Parfums, Inc. shareholders’ equity
|
|
|
433,298
|
|
|
|
370,391
|
|
|
|
365,587
|
|
|
|
382,065
|
|
|
|
407,211
|
|
Dividends declared per share
|
|
$
|
0.72
|
|
|
$
|
0.62
|
|
|
$
|
0.52
|
|
|
$
|
0.48
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We
operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products.
We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance
products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which
is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.
We
produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European
based fragrance product sales represented approximately 81%, 78% and 77% of net sales for 2017, 2016 and 2015, respectively. We
have built a portfolio 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 countries
around the world.
With
respect to the Company’s largest brands, we own the Lanvin brand name for its class of trade, and license the Montblanc
and Jimmy Choo brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Montblanc
|
|
|
21
|
%
|
|
|
23
|
%
|
|
|
21
|
%
|
Jimmy Choo
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
20
|
%
|
Lanvin
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
15
|
%
|
Through our United States operations, we also
market fragrance and fragrance related products. United States operations represented 19%, 22% and 23% of net sales in 2017, 2016
and 2015, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of
the
Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French Connection, Hollister and Oscar de la Renta
brands.
Quarterly
sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season.
In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as
well as through our own distribution subsidiaries in Italy, Germany, Spain and the United States.
We
grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other
arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new
and established products through advertising, merchandising and sampling as well as by phasing out underperforming products so
we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and
supporting products influence our sales and operating performance each year. Our introduction of new products may have some
cannibalizing effect on sales of existing products, which we take into account in our business planning.
Our
business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general
contractor and source our needed components from our suppliers. These components are received at one of our distribution centers
and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished
product for us and then deliver them to one of our distribution centers.
As
with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong
brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing
markets and channels to grow market share.
For
the past several years, the economic and political uncertainty and financial market volatility in Eastern Europe, the Middle East
and China had a minor negative impact on our business, but our sales in these regions have been improving and we do not anticipate
dramatic changes in business conditions for the foreseeable future. However, if the degree of uncertainty or volatility worsens
or is prolonged, then there will likely be a negative effect on ongoing consumer confidence, demand and spending and 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 other risks that may affect our business.
Our
reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our
net sales. However, earnings are positively affected by a strong dollar, because almost 45% of net sales of our European operations
are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S.
dollar has a favorable impact on our net sales while gross margins are negatively affected. Our Company addresses certain financial
exposures through a controlled program of risk management that includes the use of derivative financial instruments. We primarily
enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. We
are also carefully monitoring currency trends in the United Kingdom as a result of the volatility created from the United Kingdom’s
decision to exit the European Union. We have evaluated our pricing models and we do not expect any significant pricing changes.
However, if the devaluation of the British Pound worsens, it may affect future gross profit margins from sales in the territory.
Recent
Important Events
GUESS
License
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 will take effect on April 1, 2018, and our rights under such license agreement are subject to certain
minimum advertising expenditures and royalty payments as are customary in our industry.
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 has filed a claim for refund of approximately $3.6 million (€3.2
million) for these taxes paid since 2015 including accrued interest of approximately $0.4 million. The Company recorded the refund
claim in the accompanying financial statements as of December 31, 2017.
Impairment
Loss
The
Company reviews intangible assets with indefinite lives for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. Product sales of some of our legacy mass market product lines have been declining
for many years and now represent a very small portion of our net sales. During the fourth quarter of 2017, the Company set in
motion a plan to discontinue several of these product lines over the next few years. As a result, the Company recorded an impairment
loss of $2.1 million as of December 31, 2017, which represented approximately 50% of total intangible assets relating to our mass
market product lines. The Company also increased its inventory obsolescence reserves by $0.5 million as of December 31, 2017,
to adjust to net realizable value the inventory of the product lines expected to be discontinued.
Jimmy
Choo License Renewal
In
December 2017, the Company and J Choo Ltd amended their license agreement and extended their partnership through December 31,
2031. Our initial Jimmy Choo license was signed in 2009.
Paul
Smith License Renewal
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.
Settlement
with French Tax Authorities
As
previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA. The main issues challenged 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
in March 2016.
Discussion
of Critical Accounting Policies
We
make estimates and assumptions in the preparation of our financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions
and conditions. We believe the following discussion addresses our most critical accounting policies, which are those that are
most important to the portrayal of our financial condition and results of operations. These accounting policies generally require
our management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain. Management of the Company has discussed the selection of significant accounting policies
and the effect of estimates with the Audit Committee of the Board of Directors.
Revenue
Recognition
We
sell our products to department stores, perfumeries, specialty stores, and domestic and international wholesalers and distributors.
Sales of such products by our domestic subsidiaries are denominated in U.S. dollars and sales of such products by our foreign
subsidiaries are primarily denominated in either euro or U.S. dollars. We recognize revenues when contract terms are met, the
price is fixed and determinable, collectability is reasonably assured and product is shipped or risk of ownership has been transferred
to and accepted by the customer. Net sales are comprised of gross revenues less returns, trade discounts and allowances.
Accounts
Receivable
Accounts
receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for sales returns
and doubtful accounts. Accounts receivable balances are written-off against the allowance for doubtful accounts when they become
uncollectible. Recoveries of accounts receivable previously recorded against the allowance are recorded in the consolidated statement
of income when received. We generally grant credit based upon our analysis of the customer’s financial position as well
as previously established buying patterns.
Sales
Returns
Generally,
we do not permit customers to return their unsold products. However, for U.S. distribution of our prestige products, we allow
returns if properly requested, authorized and approved. We regularly review and revise, as deemed necessary, our estimate of reserves
for future sales returns based primarily upon historic trends and relevant current data, including information provided by retailers
regarding their inventory levels. In addition, as necessary, specific accruals may be established for significant future known
or anticipated events. The types of known or anticipated events that we have considered, and will continue to consider, include,
but are not limited to, the financial condition of our customers, store closings by retailers, changes in the retail environment
and our decision to continue to support new and existing products. We record estimated reserves for sales returns as a reduction
of sales, cost of sales and accounts receivable. Returned products are recorded as inventories and are valued based upon estimated
realizable value. The physical condition and marketability of returned products are the major factors we consider in estimating
realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either
favorably or unfavorably, from our estimates, if factors such as economic conditions, inventory levels or competitive conditions
differ from our expectations.
Inventories
Inventories
are stated at the lower of cost and net realizable value. Cost is principally determined by the first-in, first-out method. We
record adjustments to the cost of inventories based upon our sales forecast and the physical condition of the inventories. These
adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic
conditions or competitive conditions differ from our expectations.
Equipment
and Other Long-Lived Assets
Equipment,
which includes tools and molds, is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives
of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital
spending strategy can result in the actual useful lives differing from our estimates. In those cases where we determine that the
useful life of equipment should be shortened, we would depreciate the net book value in excess of the salvage value, over its
revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of equipment,
or market acceptance of products, could result in shortened useful lives.
We
evaluate indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when
events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not indicate that the
carrying value of an indefinite-lived intangible asset may not be recoverable. When testing indefinite-lived intangible assets
for impairment, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset.
The fair values used in our evaluations are estimated based upon discounted future cash flow projections using a weighted average
cost of capital of 6.22%. The cash flow projections are based upon a number of assumptions, including, future sales levels and
future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in
consumer acceptance of our products which are more subjective in nature. If the carrying value of an indefinite-lived intangible
asset exceeds its fair value, an impairment charge is recorded.
We
believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable.
However, if future actual results do not meet our expectations, we may be required to record further impairment charges, the amount
of which could be material to our results of operations.
At
December 31, 2017 indefinite-lived intangible assets aggregated $129.0 million. The following table presents the impact a change
in the following significant assumptions would have had on the calculated fair value in 2017 assuming all other assumptions remained
constant:
$ in millions
|
|
Change
|
|
|
Increase
(decrease)
to fair value
|
|
|
|
|
|
|
|
|
Weighted average cost of
capital
|
|
|
+10%
|
|
|
$
|
(24.4
|
)
|
Weighted average cost of capital
|
|
|
-10%
|
|
|
$
|
30.7
|
|
Future sales levels
|
|
|
+10%
|
|
|
$
|
22.3
|
|
Future sales levels
|
|
|
-10%
|
|
|
$
|
(22.3
|
)
|
Intangible
assets subject to amortization are evaluated for impairment testing whenever events or changes in circumstances indicate that
the carrying amount of an amortizable intangible asset may not be recoverable. If impairment indicators exist for an amortizable
intangible asset, the undiscounted future cash flows associated with the expected service potential of the asset are compared
to the carrying value of the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of
the intangible asset, no impairment charge is recorded. If our projection of undiscounted future cash flows is less than the carrying
value of the intangible asset, an impairment charge would be recorded to reduce the intangible asset to its fair value. The cash
flow projections are based upon a number of assumptions, including future sales levels and future cost of goods and operating
expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products
which are more subjective in nature. In those cases where we determine that the useful life of long-lived assets should be shortened,
we would amortize the net book value in excess of the salvage value (after testing for impairment as described above), over the
revised remaining useful life of such asset thereby increasing amortization expense. We believe that the assumptions we have made
in projecting future cash flows for the evaluations described above are reasonable.
In
determining the useful life of our Lanvin brand names and trademarks, we applied the provisions of ASC topic 350-30-35-3. The
only factor that prevented us from determining that the Lanvin brand names and trademarks were indefinite life intangible assets
was Item c. “Any legal, regulatory, or contractual provisions that may limit the useful life.” The existence of a
repurchase option in 2025 may limit the useful life of the Lanvin brand names and trademarks to the Company. However, this limitation
would only take effect if the repurchase option were to be exercised and the repurchase price was paid. If the repurchase option
is not exercised, then the Lanvin brand names and trademarks are expected to continue to contribute directly to the future cash
flows of our Company and their useful life would be considered to be indefinite.
With
respect to the application of ASC topic 350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our
Company if the repurchase option were exercised, and in applying ASC topic 350-30-35-8, we assumed that the repurchase option
is exercised. When exercised, Lanvin has an obligation to pay the exercise price and the Company would be required to convey the
Lanvin brand names and trademarks back to Lanvin. The exercise price to be received (Residual Value) is well in excess of the
carrying value of the Lanvin brand names and trademarks, therefore no amortization is required.
Derivatives
We
account for derivative financial instruments in accordance with ASC topic 815, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This
topic also requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet and that
they are measured at fair value.
We
currently use derivative financial instruments to hedge certain anticipated transactions and interest rates, as well as receivables
denominated in foreign currencies. We do not utilize derivatives for trading or speculative purposes. Hedge effectiveness
is documented, assessed and monitored by employees who are qualified to make such assessments and monitor the instruments. Variables
that are external to us such as social, political and economic risks may have an impact on our hedging program and the results
thereof.
Income
Taxes
The
Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The
net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently
anticipated tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets, where management
believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the
Company determines that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a
reduction of net income at that time. Accrued interest and penalties are included within the related tax asset or liability in
the accompanying financial statements. In addition, the Company follows the provisions of uncertain tax positions as addressed
in ASC topic 740.
Quantitative
Analysis
During
the three-year period ended December 31, 2017, we have not made any material changes in our assumptions underlying these critical
accounting policies or to the related significant estimates. The results of our business underlying these assumptions have not
differed significantly from our expectations.
While
we believe the estimates we have made are proper and the related results of operations for the period are presented fairly in
all material respects, other assumptions could reasonably be justified that would change the amount of reported net sales, cost
of sales, and selling, general and administrative expenses as they relate to the provisions for anticipated sales returns, allowance
for doubtful accounts and inventory obsolescence reserves. For 2017, had these estimates been changed simultaneously by 5% in
either direction, our reported gross profit would have increased or decreased by approximately $0.3 million and selling, general
and administrative expenses would have changed by approximately $0.04 million. The collective impact of these changes on 2017
operating income, net income attributable to Inter Parfums, Inc., and net income attributable to Inter Parfums, Inc. per diluted
common share would be an increase or decrease of approximately $0.4 million, $0.2 million and $0.01, respectively.
Results
of Operations
Net Sales
|
|
Years ended December 31,
|
|
(in millions)
|
|
2017
|
|
|
%
Change
|
|
|
2016
|
|
|
%
Change
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European based product sales
|
|
$
|
476.5
|
|
|
|
18
|
%
|
|
$
|
404.0
|
|
|
|
11
|
%
|
|
$
|
362.7
|
|
United States based product sales
|
|
|
114.8
|
|
|
|
(2
|
)%
|
|
|
117.1
|
|
|
|
11
|
%
|
|
|
105.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
591.3
|
|
|
|
13
|
%
|
|
$
|
521.1
|
|
|
|
11
|
%
|
|
$
|
468.5
|
|
Net
sales increased 13% in 2017 to $591.3 million, as compared to $521.1 million in 2016. At comparable foreign currency exchange
rates, net sales increased 12%. Net sales increased 11% in 2016 to $521.1 million, as compared to $468.5 million in 2015. At comparable
foreign currency exchange rates, net sales increased 12%. The average U.S. dollar/euro exchange rates were 1.13 in 2017 and 1.11
in both 2016 and 2015.
European
based prestige 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 prestige product sales increased
11% in 2016 to $404.0 million, as compared to $362.7 million in 2015. At comparable foreign currency exchange rates, European
based prestige product sales increased 12.5% in 2016.
Net
sales in 2017 were stronger than our original expectations, with our new
Coach for Men
fragrance contributing much of the
upside surprise. Coach brand sales, which commenced in the second half of 2016, increased 149% in 2017 reaching $57.5 million,
as compared to $23.1 million in 2016, quickly making it our fourth largest brand. 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 compared to $34.6 in 2016. Our three largest brands, Montblanc, Jimmy Choo and Lanvin, achieved year-over-year
sales growth of 4%, 20%, and 5%, respectively.
In
2016, Montblanc led the way in sales growth reaching $121.7 million in brand sales, a 25% increase from the prior year. The successful
launch of Montblanc
Legend Spirit
and the continued popularity of the original
Legend
line were important contributors
to Montblanc brand sales. Our newer brands were also contributors to the increase in net sales. Coach brand sales were well ahead
of expectations generating $23.1 million in incremental sales. Strong demand for the
Eau de Rochas
and
Rochas Man
lines in Spain and France contributed to the successful integration of Rochas, and brand sales aggregated $32.3 million in 2016.
In the absence of a major new product launch, Jimmy Choo fragrance sales declined 2% in 2016 as the bar was set unusually high
in 2015 when brand sales were up 18% compared to the preceding year. Lanvin brand sales declined 13% in 2016 as that brand’s
product sales continue to be affected by the economic slowdowns in its two flagship markets of Russia and China.
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. With continued sales of
our legacy scents combined with product launches for many of our brands, including Jimmy Choo, Lanvin, Coach, Van Cleef &
Arpels and Boucheron, we look for continued sales growth in 2018.
United
States based product sales aggregated $114.8 million in 2017, representing a slight decline from 2016, where a high bar was set
with sales up 11% to $117.1 million, as compared to $105.8 million in 2015. International distribution of our first new Abercrombie
& Fitch men’s scent,
First Instinct
, and the Hollister duo,
Wave
, were major contributors to our top line
growth in 2016 as they were rolled out into international markets throughout 2016 and 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. operations sales in 2017.
We
have an active year planned for our U.S. operations in 2018. Oscar de la Renta has introduced a new women’s scent,
Bella
Blanca
, and Dunhill will launch its new scent,
Century
. Abercrombie & Fitch will have several brand extensions
introduced throughout the year, and we will launch
Free Wave
, a brand extension for the Hollister
Wave
collection
coming to market early in the year. We also have a complete new Hollister fragrance family launching this summer. In addition,
we have
Fantasia Mermaid
, a brand extension for Anna Sui in the works.
Lastly,
we hope to benefit our worldwide operations from our strong financial position to potentially acquire one or more brands, either
on a proprietary basis or as a licensee. However, we cannot assure you that any new license or acquisition agreements will be
consummated.
Net
Sales to Customers by Region
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
|
|
|
|
North America
|
|
$
|
176.9
|
|
|
$
|
149.0
|
|
|
$
|
125.7
|
|
Western Europe
|
|
|
165.4
|
|
|
|
153.6
|
|
|
|
123.6
|
|
Eastern Europe
|
|
|
49.4
|
|
|
|
41.1
|
|
|
|
47.0
|
|
Central and South America
|
|
|
51.2
|
|
|
|
44.0
|
|
|
|
41.1
|
|
Middle East
|
|
|
50.5
|
|
|
|
41.6
|
|
|
|
41.9
|
|
Asia
|
|
|
88.0
|
|
|
|
81.3
|
|
|
|
78.2
|
|
Other
|
|
|
9.9
|
|
|
|
10.5
|
|
|
|
11.0
|
|
|
|
$
|
591.3
|
|
|
$
|
521.1
|
|
|
$
|
468.5
|
|
Virtually
all regions registered strong growth for the year ended December 31, 2017, as compared to 2016. Some of the strongest performing
regions were the laggards of recent years, namely Eastern Europe, the Middle East and Asia, which increased 20%, 21% and 8%, respectively.
Our largest markets, North America and Western Europe increased 18% and 8%, respectively.
In
2016, we continued to feel the effect of negative market conditions in Eastern Europe, the Middle East and China, while Western
Europe and North America continued to perform well.
Gross
Margins
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
|
|
|
|
Net sales
|
|
$
|
591.3
|
|
|
$
|
521.1
|
|
|
$
|
468.5
|
|
Cost of sales
|
|
|
215.0
|
|
|
|
194.6
|
|
|
|
179.0
|
|
Gross margin
|
|
$
|
376.3
|
|
|
$
|
326.5
|
|
|
$
|
289.5
|
|
Gross margin, as a percent of net sales
|
|
|
63.6
|
%
|
|
|
62.7
|
%
|
|
|
61.8
|
%
|
As
a percentage of net sales, gross profit margin was 63.6%, 62.7%, and 61.8% in 2017, 2016 and 2015, respectively. For European
operations, gross profit margin as a percentage of net sales was 67%, 66% and 65% in 2017, 2016 and 2015, respectively. The margin
fluctuation for European operations in 2017 and 2016 is primarily the result of increased product sales, much 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, the Rochas brand was also a major contributor as its
sales are concentrated in France and Spain, both of which are countries where we distribute directly to retailers.
We
carefully monitor movements in foreign currency exchange rates as almost 45% of our European based operations net sales is denominated
in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect
on our gross margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rate was 1.13 in 2017 and
1.11 in both 2016 and 2015. Currency fluctuation had only a minor effect on gross margin as a percentage of sales in our European
operations for 2017 and 2016.
For
United States operations, gross profit margin was 49.3%, 49.7% and 49.9% in 2017, 2016 and 2015, respectively. The slight fluctuation
in gross margin is the result of higher promotional product sales within the overall sales mix.
Costs
relating to purchase with purchase and gift with purchase promotions are reflected in cost of sales and aggregated $33.8 million,
$30.0 million and $25.4 million in 2017, 2016 and 2015, respectively, and represented 5.7%, 5.8% and 5.4% of net sales, respectively.
Generally,
we do not bill customers for shipping and handling costs and such costs, which aggregated $5.9 million, $5.1 million and $4.7
million in 2017, 2016 and 2015, respectively, are included in selling, general and administrative expenses in the consolidated
statements of income. As such, our Company’s gross margins may not be comparable to other companies, which may include these
expenses as a component of cost of goods sold.
Selling,
General & Administrative Expenses
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
|
|
|
|
Selling, general & administrative expenses
|
|
$
|
295.5
|
|
|
$
|
258.8
|
|
|
$
|
228.3
|
|
Selling,
general & administrative expenses as a percent of net sales
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
49
|
%
|
Selling,
general and administrative expenses increased 14% in 2017 as compared to 2016 and increased 13% in 2016 as compared to 2015. As
a percentage of sales, selling, general and administrative expenses were 50% in both 2017 and 2016, and 49% in 2015. For European
operations, selling, general and administrative expenses increased 18% in 2017, as compared to 2016 and represented 53% of sales
in both 2017 and 2016. As discussed in more detail below, the 2017 and 2016 increases, which are in line with the increase in
sales for European operations, are primarily from increased promotion and advertising expenditures.
For
United States operations, selling, general and administrative expenses decreased 2% in 2017 and represented 38% of sales in both
2017 and 2016. This decrease is in line with slight decline in sales for our U.S. operations.
Promotion
and advertising included in selling, general and administrative expenses aggregated $123.7 million, $99.0 million and $83.8 million
in 2017, 2016 and 2015, respectively. Promotion and advertising as a percentage of sales represented 20.9%, 19.0% and 17.9% of
net sales in 2017, 2016 and 2015, respectively. As planned, we invest heavily in promotional spending to support new product launches
and continued worldwide building of brand awareness for our brand portfolio.
Royalty
expense included in selling, general and administrative expenses aggregated $39.6 million, $37.8 million and $33.8 million in
2017, 2016 and 2015, respectively. Royalty expense as a percentage of sales represented 6.7%, 7.3% and 7.2% of net sales in 2017,
2016 and 2015, respectively. The decline in 2017 as a percentage of sales, relates primarily to a lower minimum guaranteed royalty
in connection with the renewals of two licenses as well as the 2016 exit from the Balmain license.
Service
fees, which are fees paid within our European operations to third parties relating to the activities of our distribution subsidiaries,
aggregated $11.7 million, $9.9 million and $12.3 million in 2017, 2016 and 2015, respectively. The 2017 increase is in line with
increased sales of European operations, while the 2016 decreased is a result of our U.S. distribution subsidiary, Interparfums
Luxury Brands, Inc.’s 2016 conversion to an in-house sales team model. However, much of this savings was mitigated by an
increase in compensation costs of the in-house sales team.
Buyout
of License
In
December 2016, the Company reached an agreement with the Balmain brand calling for Balmain to buyout the Balmain license agreement,
effective December 31, 2016, in exchange for a payment aggregating €5.4 million (approximately $5.7 million). As a result
of the buyout, the Company recognized a gain of $4.7 million as of December 31, 2016.
Impairment
Loss
The
Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Product sales of some of our legacy mass market product lines have been declining for
many years and now represent a very small portion of our net sales. During the fourth quarter of 2017, the Company set in motion
a plan to discontinue several of these product lines over the next few years. As a result, the Company recorded an impairment
loss of $2.1 million as of December 31, 2017.
Product
sales of our Karl Lagerfeld brand had not met with our original expectations. During the fourth quarter of 2016, the Company recorded
an impairment loss of $5.7 million as of December 31, 2016.
Income
from Operations
As
a result of the above analysis regarding net sales, gross profit margins, selling, general and administrative expenses, buyout
of license and impairment loss, income from operations increased 18% to $78.6 million in 2017 as compared to 2016, after increasing
9% to $66.7 million in 2016 from $61.2 million in 2015. Operating margins aggregated 13.3%, 12.8% and 13.1% for the years ended
December 31, 2017, 2016 and 2015, respectively. Excluding the gain on buyout of license in 2016 and impairment losses in both
2017 and 2016, as well as the $0.5 million inventory reserve in 2017, income from operations would have aggregated $80.2 million,
an increase of 18.5%, compared to 2016, and in 2016, income from operations would have aggregated $67.7 million, an increase of
10.6%, compared to 2015. Operating margins would have aggregated 13.6%, 13.0% and 13.1% for the years ended December 31, 2017,
2016 and 2015, respectively. In summary, excluding nonrecurring items during the past two years, the increase in gross margin
was mitigated by an increase in selling, general and administrative expenses, primarily promotion and advertising expenditures,
explaining the effect on operating margin. The Company plans to continue to increase sales without a substantial increase in fixed
costs. Our goal is to reach an operating margin of at least 14%.
Other
Income and Expenses
Interest
expense aggregated $2.0 million, $2.3 million and $2.8 million in 2017, 2016 and 2015, respectively. Interest expense is primarily
related to the financing of the Rochas brand acquisition. We use the credit lines available to us, as needed, to finance our working
capital needs as well as our financing needs for acquisitions. Loans payable – banks and long-term debt including current
maturities aggregated $60.6 million, $74.6 million and $98.6 million as of December 31, 2017, 2016 and 2015, respectively.
Foreign
currency losses aggregated $1.5 million, $0.6 million and $0.9 million in 2017, 2016 and 2015, respectively. We typically enter
into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated
in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency.
Almost 45% of 2017 net sales of our European operations were denominated in U.S. dollars.
Interest
and dividend income aggregated $3.0 million, $3.3 million and $3.0 million in 2017, 2016 and 2015, respectively. Cash and cash
equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.
Income
Taxes
On
December 22, 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: (i) reducing the future U.S. federal corporate tax
rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign
subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also established new tax laws that
will 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 U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision
designed to tax global intangible low-taxed income (“GILTI”); (iv) limitations on the deductibility of certain
executive compensation; (v) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vi) a
new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income
(“FDII”).
The
Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on
accounting for the tax effects of the Tax Act. SAB 118 provides a measurement 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 accordance
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 accounting for a certain income tax effect of the Tax Act is incomplete,
but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company
cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the
basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The
Company’s accounting for certain elements of the Tax Act is incomplete. However, the Company was able to make reasonable
estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis
of the impact of the Tax Act, the Company has 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 liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the Company
must determine the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of
non-U.S. income taxes paid on such earnings. While the Company was able to make a reasonable estimate of the transition tax, it
is continuing to gather additional information to more precisely compute the final amount. Likewise, while the Company was able
to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it may be affected by other analyses related
to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. Due
to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application
of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice to either: (1) treat taxes due on future
U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”);
or (2) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”).
The Company’s selection of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis
and potential future modifications to existing structure, which are not currently known. Accordingly, the Company has not made
any adjustments related to potential GILTI tax in our financial statements and has not made a policy decision regarding whether
to record deferred taxes on GILTI. The Company will continue to analyze the full effects of the Tax Act on its financial statements.
The impact of the Tax Act may differ from the current estimate, possibly materially, due to changes in interpretations and assumptions
the Company has made, future guidance that may be issued and actions the Company may take as a result of the law.
Our
effective income tax rate was 29.2%, 35.5% and 35.6% in 2017, 2016 and 2015, respectively. 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 has filed a claim for refund of approximately $3.6 million (€3.2 million) for these taxes paid since
2015 including accrued interest of approximately $0.4 million. The Company recorded the refund claim in the accompanying financial
statements as of December 31, 2017.
As
previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA, and in August 2015 issued a $6.9
million tax adjustment. The main issues challenged 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 March 31, 2016 and income tax expense for the nine months ended
September 30, 2016 includes the $1.9 million settlement.
Excluding
the effects of the Tax Act, the 2017 claim for refund and the 2016 settlement, our effective tax rate was 32.4%, 32.7% and 35.6%
in 2017, 2016 and 2015, respectively. The adoption in 2016 of Accounting Standards Update 2016-09 (“ASU 2016-09”)
resulted in the recognition of excess tax benefits of $0.7 million and $0.4 million in 2017 and 2016, respectively. In addition,
since 2016 the effective tax rate for European operations was favorably impacted by approximately 1.5%, due to lower tax rates
in France, Spain, and the United States.
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
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to European operations
|
|
$
|
48,236
|
|
|
$
|
35,037
|
|
|
$
|
31,328
|
|
Net income attributable to United States operations
|
|
|
7,017
|
|
|
|
8,211
|
|
|
|
7,641
|
|
Net income
|
|
|
55,253
|
|
|
|
43,248
|
|
|
|
38,969
|
|
Less: Net income attributable to the noncontrolling interest
|
|
|
13,659
|
|
|
|
9,917
|
|
|
|
8,532
|
|
Net income attributable to Inter Parfums, Inc.
|
|
$
|
41,594
|
|
|
$
|
33,331
|
|
|
$
|
30,437
|
|
Net income attributable to Inter Parfums, Inc. common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.07
|
|
|
$
|
0.98
|
|
Diluted
|
|
|
1.33
|
|
|
|
1.07
|
|
|
|
0.98
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,172,285
|
|
|
|
31,072,328
|
|
|
|
30,996,137
|
|
Diluted
|
|
|
31,305,101
|
|
|
|
31,175,598
|
|
|
|
31,100,215
|
|
Net
income has continued to increase over the past three years and aggregated $55.3 million, $43.2 million and $39.0 million in 2017,
2016 and 2015, respectively. Net income attributable to European operations was $48.2 million, $35.0 million and $31.3 million
in 2017, 2016 and 2015, respectively, while net income attributable to United States operations was $7.0 million, $8.2 million
and $7.6 million in 2017, 2016 and 2015, respectively. The significant fluctuations in net income for European operations in are
directly related to the previous discussions relating to changes in sales, gross profit margins, selling, general and administrative
expenses, 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 the prior year. In 2016, sales increased 11% while gross margins as a percentage of sales were
unchanged and selling, general and administrative expenses increased 9%, as compared to the corresponding period of the prior
year.
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 interest is
related to the profitability of our European operations, and aggregated 28.3% of European operations net income in both 2017 and
2016 and 27.2% in 2015. Net income attributable to Inter Parfums, Inc. aggregated $41.6 million, $33.3 million and $30.4 million
in 2017, 2016 and 2015, respectively. Net margins attributable to Inter Parfums, Inc. aggregated 7.0%, 6.4% and 6.5% in 2017,
2016 and 2015, 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 isolation 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.
Adjusted
Net Income Attributable to Inter Parfums, Inc. Reconciliation
Adjusted
net income attributable to Inter Parfums, Inc. is defined as net income attributable to Inter Parfums, Inc., plus the previously
discussed 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 adjustment to deferred tax benefit due to the Tax Act, and the tax recovery for
dividends net of minority interest for 2017, and the nonrecurring tax settlement payment 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.
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Inter Parfums, Inc.
|
|
$
|
41,594
|
|
|
$
|
33,331
|
|
|
$
|
30,437
|
|
Impairment loss (net of tax expense of $828)
|
|
|
1,295
|
|
|
|
—
|
|
|
|
—
|
|
Inventory reserve adjustment (net of tax expense of ($195)
|
|
|
305
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment to deferred tax benefit due to Tax Act
|
|
|
1,087
|
|
|
|
—
|
|
|
|
—
|
|
Tax recovery for dividends (net of minority interest of $973)
|
|
|
(2,590
|
)
|
|
|
—
|
|
|
|
—
|
|
Nonrecurring tax settlement payment (net of minority interest of $500)
|
|
|
—
|
|
|
|
1,400
|
|
|
|
—
|
|
Adjusted net income attributable to Inter Parfums, Inc.
|
|
$
|
41,691
|
|
|
$
|
34,731
|
|
|
$
|
30,437
|
|
Adjusted net income attributable to Inter Parfums, Inc. common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.34
|
|
|
$
|
1.12
|
|
|
$
|
0.98
|
|
Diluted
|
|
|
1.33
|
|
|
|
1.11
|
|
|
|
0.98
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,172,285
|
|
|
|
31,072,328
|
|
|
|
30,996,137
|
|
Diluted
|
|
|
31,305,101
|
|
|
|
31,175,598
|
|
|
|
31,100,215
|
|
Liquidity
and Capital Resources
The
Company’s financial position remains strong. At December 31, 2017, working capital aggregated $382 million and we had a
working capital ratio of almost 3.3 to 1. Cash and cash equivalents and short-term investments aggregated $278 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 89% of the Company’s total assets are held by European operations. In addition to
$265 million of the cash and cash equivalents and short-term investments referred to above, approximately $193 million of trademarks,
licenses and other intangible assets are held by European operations.
The
Company hopes to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary
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 $35.9 million, $54.6 million and $50.1 million in 2017, 2016 and 2015, respectively.
In 2017, working capital items used $32.5 million in cash from operating activities, as compared to $0.2 million in 2016 and $0.6
million in 2015. Although accounts receivable is up from that of the prior year, days sales outstanding continued to improve to
67 days in 2017, as compared to 71 days and 75 days in 2016 and 2015, respectively. Inventory days on hand aggregated 189 days
in 2017, as compared to 185 days in 2016 and 213 days in 2015, respectively. Fluctuations are primarily a function of new product
launch dates.
Cash
flows used in investing activities reflect the purchase and sales of short-term investments by our European operations. These
investments are primarily certificates of deposit with maturities greater than three months. At December 31, 2017, approximately
$69 million of certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event
of early withdrawal.
Our
business is not capital intensive as we do not own any manufacturing facilities. However, on a full year basis, we spent approximately
$3.0 million on capital expenditures including tools and molds, needed to support our new product development calendar. Capital
expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution
centers. In December 2016, the Company agreed to a buyout of its Balmain license, effective December 31, 2016, for a payment aggregating
€5.4 million (approximately $5.9 million). The Company received the buyout payment in May 2017.
In
connection with the 2015 acquisition of the Rochas brand, we entered into a 5-year term loan payable in equal quarterly installments
of €5.0 million (approximately $6.0 million) plus interest. This 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 rising 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.
Our
short-term financing requirements are expected to be met by available cash on hand at December 31, 2017, cash generated by operations
and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2018 consist of a $20.0
million unsecured revolving line of credit provided by a domestic commercial bank and approximately $30.0 million in credit lines
provided by a consortium of international financial institutions. There were no balances due from short-term borrowings as of
December 31, 2017 and 2016.
In
January 2015, our Board of Directors authorized an 8% increase to $0.52 per share. In January 2016, the Board of Directors authorized
a 15% increase in the annual dividend to $0.60 per share, in October 2016, our Board of Directors authorized a 13% increase in
the annual dividend to $0.68 per share and in October 2017 our Board of Directors authorized a further 24% increase in the annual
dividend to $0.84 per share. The next quarterly cash dividend of $0.21 per share is payable on April 13, 2018 to shareholders
of record on March 30, 2018. Dividends paid, including dividends paid once per year to noncontrolling stockholders of Interparfums
SA, aggregated $27.2 million, $22.9 million and $19.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The cash dividends to be paid in 2018 are not expected to have any significant impact on our financial position.
We
believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities,
so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs.
Inflation
rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the year
ended December 31, 2017.
Contractual
Obligations
The
following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations
($ in thousands):
Contractual Obligations
|
|
Payments due by period
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
Years
2-3
|
|
|
Years
4-5
|
|
|
More than
5 years
|
|
Long-Term Debt
|
|
$
|
60,579
|
|
|
$
|
24,372
|
|
|
$
|
36,207
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Operating Leases
|
|
$
|
25,748
|
|
|
$
|
5,835
|
|
|
$
|
8,136
|
|
|
$
|
6,614
|
|
|
$
|
5,163
|
|
Purchase Obligations
(1)
|
|
$
|
1,877,029
|
|
|
$
|
136,345
|
|
|
$
|
311,600
|
|
|
$
|
322,055
|
|
|
$
|
1,107,029
|
|
Total
|
|
$
|
1,963,356
|
|
|
$
|
166,552
|
|
|
$
|
355,943
|
|
|
$
|
328,669
|
|
|
$
|
1,112,192
|
|
(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, 2017, without consideration
for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations.
|
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
General
We
address certain financial exposures through a controlled program of risk management that primarily consists of the use of derivative
financial instruments. We primarily enter into foreign currency forward exchange contracts in order to reduce the effects of fluctuating
foreign currency exchange rates. We do not engage in the trading of foreign currency forward exchange contracts or interest rate
swaps.
Foreign
Exchange Risk Management
We
periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a
foreign currency and to manage risks related to future sales expected to be denominated in a currency other than our functional
currency. We enter into these exchange contracts for periods consistent with our identified exposures. The purpose of the hedging
activities is to minimize the effect of foreign exchange rate movements on the receivables and cash flows of Interparfums SA,
our French subsidiary, whose functional currency is the euro. All foreign currency contracts are denominated in currencies of
major industrial countries and are with large financial institutions, which are rated as strong investment grade
.
All
derivative instruments are required to be reflected as either assets or liabilities in the balance sheet measured at fair value.
Generally, increases or decreases in fair value of derivative instruments will be recognized as gains or losses in earnings in
the period of change. If the derivative is designated and qualifies as a cash flow hedge, then the changes in fair value of the
derivative instrument will be recorded in other comprehensive income.
Before
entering into a derivative transaction for hedging purposes, we determine that the change in the value of the derivative will
effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure
the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement.
At
December 31, 2017, we had foreign currency contracts in the form of forward exchange contracts with notional amounts of approximately
U.S. $10.1 million, GB £8.0 million and JPY ¥18.0 million which all have maturities of less than one year.
We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.
Interest
Rate Risk Management
We
mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped
for floating rate debt, or if floating rate debt should be swapped for fixed rate debt. We entered into an interest rate swap
in June 2015 on €100 million of debt, effectively exchanging the variable interest rate to a fixed rate of approximately
1.2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated
statements of income.
Item
8. Financial Statements and Supplementary Data
The
required financial statements commence on page F-1.
Supplementary
Data
Quarterly
Data (Unaudited)
For
the Year Ended December 31, 2017
(In
Thousands Except Per Share Data)
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
Full Year
|
|
Net sales
|
|
$
|
143,058
|
|
|
$
|
129,136
|
|
|
$
|
169,531
|
|
|
$
|
149,526
|
|
|
$
|
591,251
|
|
Gross margin
|
|
|
90,070
|
|
|
|
83,943
|
|
|
|
103,472
|
|
|
|
98,801
|
|
|
|
376,286
|
|
Net income
|
|
|
18,167
|
|
|
|
9,211
|
|
|
|
22,103
|
|
|
|
5,772
|
|
|
|
55,253
|
|
Net income attributable to Inter Parfums, Inc.
|
|
|
13,373
|
|
|
|
6,744
|
|
|
|
17,077
|
|
|
|
4,400
|
|
|
|
41,594
|
|
Net income attributable to Inter Parfums, Inc. per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
0.22
|
|
|
$
|
0.55
|
|
|
$
|
0.14
|
|
|
$
|
1.33
|
|
Diluted
|
|
$
|
0.43
|
|
|
$
|
0.22
|
|
|
$
|
0.55
|
|
|
$
|
0.14
|
|
|
$
|
1.33
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,145
|
|
|
|
31,169
|
|
|
|
31,175
|
|
|
|
31,200
|
|
|
|
31,172
|
|
Diluted
|
|
|
31,254
|
|
|
|
31,281
|
|
|
|
31,307
|
|
|
|
31,378
|
|
|
|
31,305
|
|
Quarterly
Data (Unaudited)
For
the Year Ended December 31, 2016
(In
Thousands Except Per Share Data)
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
Full Year
|
|
Net sales
|
|
$
|
111,522
|
|
|
$
|
117,157
|
|
|
$
|
157,622
|
|
|
$
|
134,771
|
|
|
$
|
521,072
|
|
Gross margin
|
|
|
71,317
|
|
|
|
74,428
|
|
|
|
94,832
|
|
|
|
85,894
|
|
|
|
326,471
|
|
Net income
|
|
|
9,448
|
|
|
|
7,729
|
|
|
|
21,479
|
|
|
|
4,592
|
|
|
|
43,248
|
|
Net income attributable to Inter Parfums, Inc.
|
|
|
7,334
|
|
|
|
5,831
|
|
|
|
16,239
|
|
|
|
3,927
|
|
|
|
33,331
|
|
Net income attributable to Inter Parfums, Inc. per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.19
|
|
|
$
|
0.52
|
|
|
$
|
0.13
|
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.19
|
|
|
$
|
0.52
|
|
|
$
|
0.13
|
|
|
$
|
1.07
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,039
|
|
|
|
31,055
|
|
|
|
31,080
|
|
|
|
31,072
|
|
|
|
31,072
|
|
Diluted
|
|
|
31,115
|
|
|
|
31,160
|
|
|
|
31,197
|
|
|
|
31,231
|
|
|
|
31,176
|
|
Item
9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this annual
report on Form 10-K (the “Evaluation Date”). Based on their review and evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of the Evaluation Date, our Company’s disclosure controls and procedures were effective.
Management’s
Annual Report on Internal Control over Financial Reporting
The
management of Inter Parfums, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13(a)-15(f) under the Securities Exchange Act of 1934. With the participation of the Chief Executive Officer
and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework and criteria established in
Internal Control – Integrated Framework (2013)
, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded
that our internal control over financial reporting was effective as of December 31, 2017.
Our
independent auditor, Mazars USA LLP, a registered public accounting firm, has issued its report on its audit of our internal control
over financial reporting. This report appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To Shareholders and the Board of Directors
of Inter Parfums, Inc.
Opinion on Internal Control over Financial
Reporting
We have audited Inter Parfums, Inc’s
(the Company’s) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as December
31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the balance sheets and the related
statements of income, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2017, and the related notes and the schedule listed in the Index in Item 15(a)(2) (collectively referred
to as the “financial statements”) of the Company, and our report dated March 13, 2018, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control
over Financial Reporting
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/
Mazars USA LLP
Mazars
USA LLP
New York, New York
March 13, 2018
Changes
in Internal Control Over Financial Reporting
There
has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act
of 1934) that occurred during the fourth quarter of 2017 that has materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
|
Item
9B.
|
Other
Information.
|
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
Executive
Officers and Directors
As
of the date of this report, our executive officers and directors were as follows:
Name
|
Position
|
Jean
Madar
|
Chairman
of the Board, Chief Executive Officer of Inter Parfums, Inc. and Director General of Interparfums SA
|
Philippe
Benacin
|
Vice
Chairman of the Board, President of Inter Parfums, Inc. and Chief Executive Officer of Interparfums SA
|
Russell
Greenberg
|
Director,
Executive Vice President and Chief Financial Officer
|
Philippe
Santi
|
Director,
Executive Vice President and Chief Financial Officer, Interparfums SA
|
François
Heilbronn
|
Director
|
Robert
Bensoussan
|
Director
|
Patrick
Choël
|
Director
|
Michel
Dyens
|
Director
|
Veronique
Gabai-Pinsky
|
Director
|
Frederic
Garcia-Pelayo
|
Executive
Vice President and Chief Operating Officer of Interparfums SA
|
Our
directors will serve until the next annual meeting of stockholders and thereafter until their successors shall have been elected
and qualified. Messrs. Jean Madar and Philippe Benacin have a verbal agreement or understanding to vote their shares and the shares
of their respective holding companies in a like manner.
With
the exception of Mr. Benacin, the officers are elected annually by the directors and serve at the discretion of the board
of directors. There are no family relationships between executive officers or directors of our Company.
Board
of Directors
Our
board of directors has the responsibility for establishing broad corporate policies and for the overall performance of our Company.
Although certain directors are not involved in day-to-day operating details, members of the board of directors are kept informed
of our business by various reports and documents made available to them. Our board of directors held 15 meetings (or executed
consents in lieu thereof), including meetings of committees of the full board of directors during 2017, and all of the directors
attended at least 75% of the meetings (or executed consents in lieu thereof) of the full board of directors and committees of
which they were a member. Our board of directors presently consists of nine (9) directors.
We
have adopted a Code of Business Conduct that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, as well as other persons performing similar functions, and we agree to provide to any person
without charge, upon request, a copy of our Code of Business Conduct. Any person who requests a copy of our Code of Business Conduct
should provide their name and address in writing to: Inter Parfums, Inc., 551 Fifth Avenue, New York, NY 10176, Att.: Shareholder
Relations. In addition, our Code of Conduct is also maintained on our website, at
www.interparfumsinc.com
.
During
2017, our board of directors had the following standing committees:
|
●
|
Audit
Committee – The Audit Committee has the sole authority and is directly responsible
for, the appointment, compensation and oversight of the work of the independent accountants
employed by our company which prepare or issue audit reports for our company. During
2017, the Audit Committee consisted of Messrs. Heilbronn, Levy and Choël, until
Mr. Levy retired in September 2018, when he was replaced by Ms. Gabai-Pinsky. The charter
of the Audit Committee is posted on our company’s website.
|
The
Company does not have an “audit committee financial expert” within the definition of the applicable Securities and
Exchange Commission rules. First, finding qualified nominees to serve as a director of a public company without substantial financial
resources has been challenging. Second, despite the applicable Securities and Exchange Commission rule which states that being
named as the audit committee financial expert does not impose any greater duty, obligation or liability, our company has been
met with resistance from both present and former directors to being named as such, primarily due to potential additional personal
liability. However, as the result of the background, education and experience of the members of the Audit Committee, our board
of directors believes that such committee members are fully qualified to fulfill their obligations as members of the Audit Committee.
|
●
|
Executive
Compensation and Stock Option Committee – The Executive Compensation and Stock
Option Committee oversees the compensation of our company’s executives and administers
our company’s stock option plans. During 2017, the members of such committee consisted
of Messrs. Heilbronn, Levy and Choël, until Mr. Levy retired in September 2018,
when he was replaced by Ms. Gabai-Pinsky. The charter of the Executive Compensation and
Stock Option Committee is posted on our company’s website.
|
|
●
|
Nominating
Committee – During 2017, the members of such committee consisted of Messrs. Heilbronn,
Levy and Choël, until Mr. Levy retired in September 2018, when he was replaced by
Ms. Gabai-Pinsky. The purpose of the Nominating Committee is to determine and recommend
qualified persons to the Board of Directors who will be put forth as management’s slate
of directors for vote of the Corporation’s stockholders, as well as to fill vacancies
in the Board of Directors. The charter of the Nominating Committee is posted on our company’s
website.
|
In
January 2018 our board of directors adopted a board diversity policy, which provides that the selection of candidates for appointment
to our board will be based on an overriding emphasis on merit, but the Nominating Committee will seek to fill board vacancies
by considering candidates that bring a diversity of background and industry or related expertise to our board. The Nominating
Committee is to consider an appropriate level of diversity having regard for factors such as skills, business and other experience,
education, gender, age, ethnicity and geographic location. A copy of the board diversity policy is posted on our company’s
website.
Business
Experience
The
following sets forth biographical information as to the business experience of each executive officer and director of our company
for at least the past five years.
Jean
Madar
Jean
Madar, age 57, a Director, has been the Chairman of the Board since our company’s inception, and is a co-founder of our
company with Mr. Philippe Benacin. From inception until December 1993 he was the President of our company; in January 1994, he
became Director General of Interparfums SA, our company’s subsidiary; and in January 1997, he became Chief Executive Officer
of our company. Mr. Madar was previously the managing director of Interparfums SA, from September 1983 until June 1985. At such
subsidiary, he had the responsibility of overseeing the marketing operations of its foreign distribution, including market research
analysis and actual marketing campaigns. Mr. Madar graduated from The French University for Economic and Commercial Sciences (ESSEC)
in 1983. We believe that Mr. Madar’s skills in guiding, leading and determining the strategic direction of our company since
its inception together with Mr. Benacin, in addition to his contacts in the fragrance and cosmetic industry, render him qualified
to serve as a member of our board of directors.
Philippe
Benacin
Mr.
Benacin, age 59, a Director, is President of our Company and the Chief Executive Officer of Interparfums SA, has been the Vice
Chairman of the Board since September 1991, and is a co-founder of our company with Mr. Madar. He was elected the Executive Vice
President in September 1991, Senior Vice President in April 1993, and President of the Company in January 1994. In addition, he
has been the Chief Executive Officer of Interparfums SA for more than the past five years. Mr. Benacin graduated from The French
University for Economic and Commercial Sciences (ESSEC) in 1983. In June 2014 Mr. Benacin was elected as a member of the Supervisory
Board of Vivendi, and Chairman of its Corporate Governance, Nominations and Remuneration Committee. We believe that Mr. Benacin’s
skills in guiding, leading and determining the strategic direction of our company since its inception together with Mr. Madar,
in addition to his contacts in the fragrance and cosmetic industry, render him qualified to serve as a member of our board of
directors.
Russell
Greenberg
Mr.
Greenberg, age 61, the Chief Financial Officer, was Vice-President, Finance when he joined the Company in June 1992; became Executive
Vice President in April 1993; and was appointed to our board of directors in February 1995. He is a certified public accountant
licensed in the State of New York, and is a member of the American Institute of Certified Public Accountants and the New York
State Society of Certified Public Accountants. After graduating from The Ohio State University in 1980, he was employed in public
accounting until he joined our company in June 1992. We believe that Mr. Greenberg’s skills in accounting and tax, as well
as his knowledge of the fragrance industry and our Company’s operations, render him qualified to serve as a member of our
board of directors.
Philippe
Santi
Philippe
Santi, age 56 and a Director since December 1999, is the Executive Vice President and Chief Financial Officer of Interparfums
SA. Mr. Santi, who is a Certified Accountant and Statutory Auditor in France, has been the Chief Financial Officer of Interparfums
SA since February 1995. Prior to February 1995, Mr. Santi was the Chief Financial Officer for Stryker France and an Audit Manager
for Ernst and Young. We believe that Mr. Santi’s skills in accounting and tax, as well as his knowledge of the fragrance
industry and our Company’s European operations, render him qualified to serve as a member of our board of directors.
Francois
Heilbronn
Mr.
Heilbronn, age 57, a Director since 1988, an independent director and a member of the Audit Committee, Nominating Committee and
the Executive Compensation and Stock Option Committee, is a graduate of Harvard Business School with a Master of Business Administration
degree and is currently the managing partner of the consulting firm of M.M. Friedrich, Heilbronn & Fiszer. He was formerly
employed by The Boston Consulting Group, Inc. from 1988 through 1992 as a manager. Mr. Heilbronn graduated from Institut d’ Etudes
Politiques de Paris in June 1983. From 1984 to 1986, he worked as a financial analyst for Lazard Freres & Co. In addition,
during 2009, Mr. Heilbronn became an Associate Professor in Business Strategy at Sciences Po, Paris, France. As the result of
his business and financial acumen, as well as his experience as managing partner of a business consulting firm in the area of
mergers and acquisitions of large international companies in retail, consumer goods and consumer services throughout the world,
we believe Mr. Heilbronn is qualified to serve as a member of our board of directors.
Robert
Bensoussan
Robert
Bensoussan, age 59, has been a Director since March 1997, and also is an independent director. Mr. Bensoussan is the co-founder
of Sirius Equity, a retail and branded luxury goods investment company. Since 2008, Sirius has invested in UK shoe and clothing
retailer LK Bennett, Italian sportswear retailer and wholesaler Jeckerson Spa and feelunique.com, Europe’s largest online beauty
retailer. Mr. Bensoussan served previously as Executive Chairman and CEO of LK Bennett and is now Non-Executive Chairman. He has
also acted as the Non-Executive Chairman of Jerkerson Spa since May 2008 and of feelunique.com since December 2012. Mr. Bensoussan
is a board member of lululemon athletica inc. He is also a member of three private Boards, including Men’s retailer Celio International
(Belgium), Zen Cars (Belgium), an electric car rental company, and Eaglemoss Ltd. (UK) a part-works publisher. Previously Mr.
Bensoussan was as director of, and had an indirect ownership interest J. Choo Limited until July 2011, and CEO (from 2001 to 2007)
and a member of the Board of Jimmy Choo Ltd (from 2001 to 2011), a privately held luxury shoe wholesaler and retailer. We believe
Mr. Bensoussan is qualified to serve as a member of our board of directors due to his business and financial acumen, as well as
his experience in the retail and branded luxury goods market.
Patrick
Choël
Mr.
Choël, age 74, was appointed to the board of directors in June 2006 as an independent director, and is a member of the Audit
Committee, Nominating Committee and the Executive Compensation and Stock Option Committee. Mr. Choël is a director of our
majority-owned subsidiary, Interparfums SA, a publicly held company, and Christian Dior and Guerlain, both privately held companies.
He is also the manager of Université 82, a business consultant and advisor. For approximately 10 years, through March 2004,
Mr. Choël was the President and CEO of two divisions of LVMH Moet Hennessy Louis Vuitton S.A., first Parfums Christian Dior,
a leading world-wide prestige beauty/fragrances business, and later, the LVMH Perfumes and Cosmetics Division, which included
such well-known brands as Parfums Christian Dior, Guerlain, and Parfums Givenchy, among others. Prior to such time, for approximately
30 years, he held various executive positions at Unilever, including President and CEO of Elida Fabergé France and President
and CEO of Chesebrough Pond’s USA. Because of this experience, especially in the prestige beauty business, we believe that
Mr. Choël is qualified to serve as a member of our board of directors.
Michel
Dyens
Michel
Dyens, age 78, is the owner, Chairman and Chief Executive Officer of Michel Dyens & Co., which he founded more than 25 years
ago. With headquarters in New York and Paris, Michel Dyens & Co. is a leading independent investment banking firm focused
on mergers and acquisitions. Michel Dyens & Co. has vast experience in the luxury goods, beauty, spirits and other premium
branded consumer goods in which it has concluded numerous landmark deals. Michel Dyens & Co. has advised in such deals as
the sale of the Grey Goose ultra-premium vodka brand to Bacardi, John Frieda Professional Hair Care and Molton Brown to the Kao
Company, the Svedka vodka brand to Constellation Brands, Chambord liqueur to Brown-Forman, Harry Winston to Aber Diamond Company
and Boucheron to Gucci. Michel Dyens & Co. also has a strong track record of deals in media and internet, including the deals
in which AuFeminin was sold to Axel Springer and Cyréalis to M6, among others.
In
2015, Michel Dyens & Co. represented Mr. ChinWook Lee, the founder and CEO of Dr. Jart+, for the sale of an interest in Have
& Be Co. Ltd. to The Estée Lauder Companies. Michel Dyens & Co. also advised the shareholders of the largest independent
hair color and hair care company in Brazil, Niely Cosmeticos in the sale of the company to L’Oréal, as well as advising
the owner of the super-premium liqueur St-Germain in the sale of the brand to Bacardi, the Colomer Group (American Crew and CND/Shellac
brands) in its sale to Revlon, and Sydney Frank Importing Company in the sale of the company to Jaegermeister. Other recent transactions
include the sale of Essie cosmetics business to L’Oréal, the acquisition of the Swiss watchmaker Hublot by LVMH,
the sale of TIGI (BedHead and Catwalk brands) to Unilever and the sale of NIOXIN Research Laboratories to Procter & Gamble.
Mr.
Dyens is also the owner of Varenne Enterprises, a media company which he founded more than 25 years ago. From April 2004 to September
2014, Mr. Dyens was an independent director of Interparfums SA. We believe Mr. Dyens is qualified to serve as a member of our
board of directors due to his knowledge of our company’s luxury business, his business and financial acumen, as well as
his experience in the luxury goods market.
Veronique
Gabai-Pinsky
Ms.
Gabai-Pinsky, age 52, was elected for the first time to our board in September 2017. She became a director of Interparfums SA
in April 2017. She was appointed President of Vera Wang Group in January 2016, after a year of consulting with the company and
she currently oversees all product categories and markets. Prior to joining Vera Wang, from 2006 to December 2014 Ms. Gabai-Pinsky
was the Global President for Aramis and Designers Fragrances as well as Beauty Bank and Idea Bank at the Estée Lauder Companies,
reporting to the Chief Executive Officer of such company. During her tenure, Ms. Gabai-Pinsky developed and ensured the growth
of several beauty and skin care brands, including Lab Series for Men. She was highly instrumental in the evolution of the fragrance
category for such company, as she improved its overall business model, globally grew brands such as Donna Karan and Michael Kors,
evolved and harmonized the portfolio, divested dilutive brands and brought in Tory Burch, Zegna and Marni under licenses. She
ultimately actively participated in the acquisitions of Le Labo, Frederic Malle, and By Kilian and assisted in the transformation
of the long-term strategic direction of such company.
In
the earlier years of her career, Ms. Gabai-Pinsky served as Vice President of Marketing and Communication for Guerlain, a division
of LVMH Moet Hennessy Louis Vuitton S.A., where she led the successful re-launch of Shalimar, the introduction of Aqua Allegoria,
and contributed to the re-focus of the beauty category around its pillars, Terracotta, Meteorites and Issima, while redesigning
all communication strategies and content. She started her career at L’Oréal, and was also Vice President of Marketing
for Giorgio Armani, where she was instrumental in the overall development of its fragrance business by developing the successful
Acqua di Gio for men and introducing the Emporio Armani franchise. A graduate from ESSEC Business School in Paris, France, she
has received several awards, including Marketer of the Year by Women’s Wear Daily in December 2013.
Ms.
Gabai-Pinksy is an independent director, and is a member of the Audit Committee, Executive Compensation and Stock Option Committee
and the Nominating Committee of our company. We believe Ms. Gabi-Pinsky is qualified to serve as a member of our board of directors
due to her more than 25 years of experience in the luxury, fashion, beauty and fragrance fields, success as a brand builder, creative
thinker, business acumen, and a broad understanding of consumers, brands and business models.
Frederic
Garcia-Pelayo
Frederic
Garcia-Pelayo, age 58, has been with Interparfums SA for more than the past 20 years. He is currently the Executive Vice President
and Chief Operating Officer of Interparfums SA, and was previously the Director of its Luxury and Fashion division beginning in
March 2005. He was also previously the Director of Marketing and Distribution for Perfume and Cosmetics and was first named Executive
Vice President in 2004.
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely upon a review of Forms 3, 4 and 5 and any amendments to such forms furnished to us, and written representations from various
reporting persons furnished to us, we are not aware of any reporting person who has failed to file the reports required to be
filed under Section 16(a) of the Securities Exchange Act of 1934 on a timely basis.
Item
11. Executive Compensation
Compensation
Discussion and Analysis
General
The
executive compensation and stock option committee of our board of directors is comprised entirely of independent directors and
oversees all elements of compensation (base salary, annual bonus, long-term incentives and perquisites) of our company’s
executive officers and administers our company’s stock option plans, other than the non-employee directors stock option
plan, which is self-executing.
The
objectives of our compensation program are designed to strike a balance between offering sufficient compensation to either retain
existing or attract new executives on the one hand, and maintaining compensation at reasonable levels on the other hand. We do
not have the resources comparable to the cosmetic giants in our industry, and, accordingly, cannot afford to pay excessive executive
compensation. In furtherance of these objectives, our executive compensation packages generally include a base salary, as well
as annual incentives tied to individual performance and long-term incentives tied to our operating performance.
Mr.
Madar, the Chairman and Chief Executive Officer, takes the initiative after discussions with Mr. Russell Greenberg, Executive
Vice President, Chief Financial Officer and a Director, and recommends executive compensation levels for executives for United
States operations. Mr. Benacin, the Chief Executive Officer of Interparfums SA, takes the initiative after discussions with Philippe
Santi, the Chief Financial Officer of Interparfums SA, and recommends executive compensation levels for executives for European
operations. The recommendations are presented to the compensation committee for its consideration, and the compensation committee
makes a final determination regarding salary adjustments and annual award amounts to executives, including Jean Madar and Philippe
Benacin. Messrs. Madar and Benacin are not present during deliberations or determination of their executive compensation by the
compensation committee. Further, Messrs. Madar and Benacin, in addition to being executive officers and directors, are our largest
beneficial shareholders, and therefore, their interests are aligned with our shareholder base in keeping executive compensation
at a reasonable level.
The
compensation committee was pleased that the most recent shareholder advisory vote on executive compensation held at our last annual
meeting of shareholders in September 2017 overwhelmingly approved the compensation policies and decisions of the compensation
committee. The compensation committee has determined to continue its present compensation policies in order to determine similar
future decisions.
Our
compensation committee believes that individual executive compensation is at a level comparable with executives in other companies
of similar size and stage of development that operate in the fragrance industry, and takes into account our company’s performance
as well as our own strategic goals. Further, the compensation committee believes that its present policies to date, with its emphasis
on rewarding performance, has served to focus the efforts of our executives, which in turn has permitted our company to weather
economic and political turmoil in certain parts of the world and keep our company on track for continued profitability, which
management believes will result in enhanced shareholder value.
During
2017, the members of such committee consisted of Messrs. Heilbronn, Levy and Choël, until Mr. Levy retired in September 2017,
when he was replaced by Ms. Gabai-Pinsky. Accordingly, it should be noted that executive compensation arrangements for 2017 were
finalized in the first quarter of 2017 (other than year-end option grants), several months prior to Ms. Gabai-Pinsky joining our
board of directors. Finally, we were saddened to learn that Mr. Levy passed away in December 2017.
Elements
of Compensation
General
The
compensation of our executive officers is generally comprised of base salaries, including a fee paid to the holding companies
of each of Messrs. Madar and Benacin, annual cash bonuses and long-term equity incentive awards. In determining specific components
of compensation, the compensation committee considers individual performance, level of responsibility, skills and experience,
other compensation awards or arrangements and overall company performance. The compensation committee reviews and approves all
elements of compensation for all of our executive officers taking into consideration recommendations from the Chief Executive
Officer of our company and the Chief Executive Officer of Interparfums SA, as well as information regarding compensation levels
at competitors in our industry.
Our
named executive officers have all been with the company for more than the past ten (10) years, with Messrs. Madar and Benacin
being founders of the company in 1985. As Messrs. Madar and Greenberg for United States operations, and Benacin and Santi for
European operations, are most familiar with the individual performance, level of responsibility, skills and experience of each
executive officer in their respective operating segments, the compensation committee relies upon the information provided by such
executive officers in determining individual performance, level of responsibility, skills and experience of each executive officer.
The
compensation committee views the competitive market place very broadly, which would include executive officers from both public
and privately held companies in general, including fashion and beauty companies, but not limited to the peer companies contained
in the corporate performance graph contained in our annual report. Rather than tie the compensation committee’s determination
of compensation proposals to any specific peer companies, the members of our committee have used their business experience, judgment
and knowledge to review the executive compensation proposals recommended to them by Mr. Madar for United States operations and
Mr. Benacin for European operations. As such, compensation committee did not determine the need to “benchmark” of
any material item of compensation or overall compensation.
The
members of the compensation committee have extensive experience and business acumen and are well qualified in determining the
appropriateness of executive compensation levels. Mr. Heilbronn is a managing partner of a business consulting firm in the area
of mergers and acquisitions of large international companies in retail, consumer goods and consumer services throughout the world.
Prior to his death, Mr. Levy had over thirty years’ experience as an executive officer, including more than ten years as
President and Chief Executive Officer of well-known cosmetic companies such as Cosmair and Sanofi Beaute (France). Mr. Choël,
the final committee member, is presently a business consultant and advisor, who previously worked as President and Chief Executive
Officer of two divisions of LVMH Moet Hennessy Louis Vuitton S.A., which included such well-known brands as Parfums Christian
Dior, Guerlain, and Parfums Givenchy. Mr. Choël has also been President and CEO of both Elida Fabergé France and Chesebrough
Pond’s USA. Ms. Gabai-Pinsky has executive experience, as she was appointed President of Vera Wang Group in January 2016,
and prior to joining Vera Wang, from 2006 to December 2014, Ms. Gabai-Pinsky was the Global President for Aramis and Designers
Fragrances as well as Beauty Bank and Idea Bank at the Estée Lauder Companies.
Base
Salary
Base
salaries for executive officers are initially determined by evaluating the responsibilities of the position held and the experience
of the individual, and by reference to the competitive market place for executive talent. Base salaries for executive officers
are reviewed on an annual basis, and adjustments are determined by evaluating our operating performance, the performance of each
executive officer, as well as whether the nature of the responsibilities of the executive has changed.
As
stated above, as Messrs. Madar and Greenberg for United States operations, and Benacin and Santi for European operations, are
most familiar with the individual performance, level of responsibility, skills and experience of each executive officer in their
respective segments, the committee relies upon the information provided by such executive officers in determining individual performance,
level of responsibility, skills and experience of each executive officer.
For
executive officers of United States operations, the bulk of their annual compensation is in base salary including a fee paid to
the holding company for Mr. Madar for services rendered outside the United States. However, for executive officers of European
operations base salary comprises a smaller percentage of overall compensation. We have paid a lower percentage of overall compensation
in the form of base salary to executive officers of European operations for several years, principally because European operations
historically have had higher profitability than United States operations, and European operations are run differently from United
States operations by the Chief Executive Officer of European operations, Mr. Benacin. As the result of this historically higher
profitability, European operations have had the ability to pay higher bonus compensation in addition to base salary. As bonus
compensation is and has historically been discretionary, no targets were set in order to maintain flexibility. Further, if results
of operations for European operations were not satisfactory (again, no target amounts were set to maintain flexibility), then
bonus compensation, as well as overall compensation could be lowered without otherwise affecting base salary. Finally, by keeping
annual bonus compensation at a higher percentage of overall compensation and base salary at a lower percentage, our company benefits
because the base amount for annual salary adjustments would be smaller.
For
2017 and 2016, Mr. Benacin did not receive any increase in his base salary of €420,000 ($474,000), while in 2015, Mr. Benacin
did receive a modest increase of €6,000 from €414,000 to €420,000. Further, Mr. Benacin’s personal holding
company received the same $250,000 in 2017 that it received in 2016 and 2015 for services rendered outside of the United States
by Mr. Benacin for the benefit of the Company’s United States operations in his capacity as President of our company. Payment
is being made by the Company’s United States operations to Mr. Benacin’s holding company in accordance with the consulting
agreement with Mr. Benacin’s holding company, which provides for review on an annual basis of the amount of compensation
payable to such company.
The
compensation committee took into account the following salient factors in authorizing payment to Mr. Benacin’s holding company—
services rendered to United States operations for several years by Mr. Benacin in connection with licensing and distribution of
international brands, as well as future services to be performed by Mr. Benacin internationally relating to licensing and distribution
of international brands for United States operations.
For
2017, two named executive officers of Interparfums SA, Mr. Philippe Santi, Executive Vice President and the Chief Financial Officer
of Interparfums SA, and Mr. Frederic Garcia-Pelayo, Executive Vice President and Chief Operating Officer of Interparfums SA, each
received €52,800 ($59,632) salary increases that brought their 2017 base salaries to €360,000 ($406,584). This increase
was awarded primarily to reward these two executive officers for their contributions in European Operations achieving increases
in both the sales and earnings. For 2016 Messrs. Santi and Mr. Frederic Garcia-Pelayo each received €7,200 ($8,000) salary
increases that brought their 2016 base salaries to €307,200 ($340,000), which was in line with their modest increases in
their base salaries to €300,000 in 2015. The compensation committee considered the recommendations of Mr. Benacin, results
of operations for the year, as well as the services performed for European operations by Messrs. Santi and Garcia-Pelayo in authorizing
these salary levels.
A
different approach is taken for United States operations as that segment is smaller and less profitable. A more significant base
salary is paid in order to attract and retain employees with the skills and talents needed to run the operation with a lesser
emphasis placed on bonuses. Neither of the executive officers for United States operations have employment agreements (although
Mr. Madar’s personal holding company has a consulting agreement that provides for review on an annual basis of the amount
of compensation payable to such company), as we believe that having flexibility in structuring annual base salary is a benefit,
which permits us to act quickly to meet a changing economic environment.
For
each of 2017, 2016 and 2015, Mr. Madar’s base salary remained steady and aggregated $630,000, which includes $250,000 received
by Mr. Madar’s personal holding company in each year for services rendered outside of the United States by Mr. Madar in
his capacity as Chief Executive Officer. In determining Mr. Madar’s base salary including the consulting fee for 2017, the
Committee took into account Mr. Madar’s leadership of our company in general, the increasing profitability of United States
operations over the past several years, and his leadership in assisting United States operations in obtaining new licensing opportunities
and his assistance in developing new products and expanding international distribution of U.S. operations.
Russell
Greenberg, the Executive Vice President and Chief Financial Officer, has received the same $30,000 increase in base salary for
2017, 2016 and 2015, and for 2017 his base salary was $630,000. In connection with these increases in salary, the Compensation
Committee considered the following material factors in granting Mr. Greenberg his salary increases: his individual performance,
level of responsibility, skill and experience, as well as the recommendation of the Chief Executive Officer.
Bonus
Compensation/Annual Incentives
As
discussed above, we have paid a higher percentage of overall compensation in the form of bonus compensation to executive officers
of European operations for several years, principally because European operations historically have had higher profitability than
United States operations. As the result of this historically higher profitability, European operations have had the ability to
pay higher bonus compensation in addition to base salary. As bonus compensation is discretionary, no targets were set in order
to maintain flexibility. Further, if results of operations for European operations were not satisfactory (again, no target amounts
were set to maintain flexibility), then bonus compensation, as well as overall compensation could be lowered without otherwise
affecting base salary. Individual performance, level of responsibility, skill and experience, were the salient factors considered
by the Compensation Committee in awarding bonus compensation described below.
For
2017 Mr. Benacin, the chief decision maker for European operations, proposed and the compensation committee concurred in the payment
of bonus compensation of €90,000 ($101,646) to Mr. Benacin (approximately 21% of base salary), and €268,000 ($302,679)
to each of Messrs. Santi and Garcia- Pelayo (approximately 74% of base salary). This bonus compensation for Mr. Benacin has ranged
from 17% to 21% of his salary over the past three years. However, the bonus compensation has decreased both in terms of actual
payments and in percentage of salary for Messrs. Santi and Garcia-Pelayo from bonus compensation awarded in both 2016 and 2015,
which are set forth below.
For
2016, Mr. Benacin proposed and the compensation committee concurred in the payment of bonus compensation of €70,000 ($77,000)
to Mr. Benacin (approximately 17% of base salary), and €290,000 ($321,000) to each of Messrs. Santi and Garcia- Pelayo (approximately
94% of base salary). This bonus compensation was in line with payments made for 2015 which are set forth below. For 2015, Mr.
Benacin proposed and the compensation committee concurred in the payment of bonus compensation of €86,000 ($95,000) to Mr.
Benacin (approximately 20% of base salary), and €280,000 ($311,000) to each of Messrs. Santi and Garcia- Pelayo (approximately
93% of base salary).
A
different approach is taken for United States operations as that segment is smaller and less profitable. As discussed above, a
more significant base salary is paid in order to attract and retain employees with the skills and talents needed to run United
States operations with a lesser emphasis placed on bonuses. Based upon the recommendation of the Chief Executive Officer, for
each of 2017, 2016 and 2015, Mr. Greenberg received a discretionary cash bonus of $50,000. The Compensation Committee considered
the following material factors in granting Mr. Greenberg his bonuses: his individual performance, level of responsibility, skill
and experience, as well as the recommendation of the Chief Executive Officer.
Mr.
Madar, the Chief Executive Officer has not received any cash bonus in the past three years.
As
required by French law, Interparfums SA maintains its own profit sharing plan for all French employees who have completed three
months of service, including executive officers of our European operations other than Mr. Benacin, the Chief Executive Officer
of Interparfums SA. Benefits are calculated based upon a percentage of taxable income of Interparfums SA and allocated to employees
based upon salary. The maximum amount payable per year per employee is €29,420, or approximately $33,227.
Calculation
of the total annual benefits contribution is made according to the following formula:
67%
of (Interparfums SA net income, less 2.5% of shareholders equity without net income for the year) times a fraction, the numerator
of which is wages, and the denominator of which is net income before tax + wages + taxes (other than income tax) + valuation allowances
+ amortization expenses + interest expenses.
Contribution
to individual employees is then made pro rata based upon their individual salaries for the year.
Long-Term
Incentives
Stock
Options
. We link long-term incentives with corporate performance through the grant of stock options. All options are granted
with an exercise price equal to the fair market value of the underlying shares of our common stock on the date of grant, and terminate
on or shortly after severance of the executive’s relationship with us. Unless the market price of our common stock increases,
corporate executives will have no tangible benefit. Thus, they are provided with the additional incentive to increase individual
performance with the ultimate goal of increasing our overall performance. We believe that enhanced executive incentives which
result in increased corporate performance tend to build company loyalty. As a general rule, the number of options granted is determined
by several factors including individual performance, company operating results and past option grants to such executives.
For
executive officers of United States operations and European operations, we typically grant nonqualified stock options with a term
of 6 years that vest ratably over a 5-year period on a cumulative basis, so that the option will become fully exercisable at the
beginning of the sixth year from the date of grant.
We
believe that the vesting period of these options serve a dual purpose: 1. executives will not receive any benefit if they leave
prior to such portion of the option vesting; and 2. having a vesting period, matches the service period with the potential benefits
of the option. Pursuant to our stock option plan, non-qualified stock options granted to executives terminate immediately upon
the executive’s termination of association with our company. This termination provision coupled with a vesting period reduces
benefits afforded to an executive when an executive officer leaves our employ.
Over
the past several years, as our company has grown and the market price of our common stock has increased, Messrs. Madar and Benacin
have realized substantial compensation as the result of the exercise of their options. As the two executives most responsible
for continued growth and success of our company, the compensation committee believes the granting of options is an appropriate
tool to tie a substantial portion of their compensation to the success of our company and is completely warranted.
The
actual compensation realized as the result of the exercise of options in the past, as well as the future potential of such rewards,
are powerful incentives for increased individual performance and ultimately increased company performance. In view of the fact
that the executive officers named above contribute significantly to our profitable operations, the compensation committee believes
the option grants are valid incentives for these executive officers and are fair to our shareholders. Generally we grant options
to executive officers in December of each year.
In
December for each of the years 2015 and 2016, upon the recommendation of the company’s Chief Executive Officer, the compensation
committee granted options to purchase a total of 19,000 shares of our common stock to each of Jean Madar and Philippe Benacin
at the fair market value on the date of grant. In 2017 in view of the contributions of both Messrs. Madar and Benacin to the company’s
increased profitability, upon the recommendation of the company’s Chief Executive Officer, the compensation committee granted
options to purchase a total of 25,000 shares of our common stock to the personal holding companies of each of Jean Madar and Philippe
Benacin at the fair market value on the date of grant. Option grants to Messrs. Madar and Benacin, either directly or indirectly
to their personal holding companies, were identical as each is the Chief Executive Officer of their respective operating segments.
Also in December for each of the years 2015-2017, the compensation committee granted options to purchase 25,000 shares to Mr.
Greenberg, the Chief Financial Officer. The Compensation Committee determined that the option grants for Mr. Greenberg, which
have remained the same for years 2015-2017, were reasonable, so based upon the recommendation of the Chief Executive Officer,
it determined to keep the option grants for such executive officer at the same level for 2017.
Upon
recommendation of both Messrs. Madar and Benacin, in December 2016 and 2015, the compensation committee authorized the grants
of options to purchase a total of 6,000 shares to Messrs. Santi and Garcia-Pelayo, which was the same amount as the aggregate
amount granted for 2014 (as options were granted in December 2014 and January 2015). However, for 2017, upon the recommendations
of Messrs. Madar and Benacin the option grants were increased to purchase an aggregate of 10,000 shares for Messrs. Santi and
Garcia-Pelayo, by the grants of options to purchase 6,000 in December 2017 and 4,000 shares in January 2018. The compensation
committee believes that these grants were proper in view of their contribution to our company’s results in each of 2015,
2016 and 2017.
Interparfums
SA Stock Compensation Plan.
In September 2016, Interparfums SA, approved a plan to grant an aggregate of 15,100 shares
of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers,
subject to certain corporate performance conditions. The shares, 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. Under this plan, Mr. Benacin is estimated to receive 3,000 shares and Messrs. Santi and
Garcia are estimated to receive 7,000 shares each, all subject to adjustment for stock splits.
The
fair value of the grant of €22.46 per share (approximately $25.00 per share) has been determined based on the quoted stock
price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant taking into account the dividend yield as
no dividends on this grant will be earned until the shares are distributed. The estimated number of shares to be distributed of
137,381, subject to adjustment for stock splits, has been determined taking into account employee turnover. The aggregate cost
of the grant of €3.1 million (approximately $3.4 million) will be recognized as compensation cost by Interparfums SA on a
straightline basis over the requisite three year service period. For the year ended December 31, 2017 and 2016, $1.2 million and
$0.4 million, respectively, of compensation cost has been recognized.
Stock
Appreciation Rights.
Our stock option plans authorize us to grant stock appreciation rights, or SARs. A SAR represents a right
to receive the appreciation in value, if any, of our common stock over the base value of the SAR. To date, we have not granted
any SARs under our plans. While the compensation committee currently does not plan to grant any SARs under our plans, it may choose
to do so in the future as part of a review of the executive compensation strategy.
Restricted
Stock.
We have not in the past, and we do not have any future plans to grant restricted stock to our executive officers. However,
while the compensation committee currently does not plan to authorize any restricted stock plans, the compensation committee may
choose to do so in the future as part of a review of the executive compensation strategy. Our French operating subsidiary, Interparfums,
SA, however, has instituted the Interparfums SA Stock Compensation Plan in September 2016 as discussed above.
Other
Compensation
Mr.
Benacin is the Chief Executive Officer of Interparfums SA (European operations), as well as a founder of our company, and we believe
we should recognize his responsibility, skills and experience, as well as the results of our company. For 2017, Mr. Benacin received
an automobile allowance of €10,800, which is the same amount paid in since 2010. Also, Mr. Garcia-Pelayo, Director Export
Sales of Interparfums SA, also receives an automobile allowance of €7,300 per year.
No
Stock Ownership Guidelines
We
do not require any minimum level of stock ownership by any of our executive officers. As stated above, Messrs. Madar and Benacin,
are our largest beneficial shareholders, which aligns their interests with our shareholder base in keeping executive compensation
at a reasonable level.
Retirement
and Pension Plans
We
maintain a 401(k) plan for United States operations. However, we do not match any contributions to such plan, as we have determined
that base compensation together with annual bonuses and stock option awards, are sufficient incentives to retain talented employees.
Our European operations maintain a pension plan for its employees as required by French law. For 2017, each of Messrs. Benacin,
Santi and Garcia-Pelayo received an increase of €14,500 ($16,376) in their vale of deferred compensation earnings.
Compensation
Committee Report
We
have reviewed and discussed with management the Compensation Discussion and Analysis provisions to be included in this Annual
Report on Form 10-K for fiscal year ended December 31, 2017 and the proxy statement for the upcoming annual meeting of shareholders.
Based on this review and discussion, we recommend to the board of directors that the Compensation Discussion and Analysis referred
to above be included in this Annual Report on Form 10-K as well as the proxy statement for the upcoming annual meeting of shareholders.
Francois
Heilbronn
Patrick
Choël and
Veronique
Gabai-Pinsky
The
following table sets forth a summary of all compensation awarded to, earned by or paid to our “named executive officers,”
who are our principal executive officer, our principal financial officer, and each of the three most highly compensated executive
officers of our company. This table covers all such compensation during fiscal years ended December 31, 2017, December 31,
2016 and December 31, 2015. For all compensation related matters disclosed in the summary compensation table, and elsewhere where
applicable, all amounts paid in euro have been converted to U.S. dollars at the average rate of exchange in each year.
SUMMARY COMPENSATION TABLE
|
Name and Principal Position
|
|
Year
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock Awards ($)
|
|
|
Option Awards ($)(1)
|
|
|
Non-Equity Incentive Plan Compensation ($)(2)
|
|
|
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
|
|
|
All Other Compensation ($)(3)
|
|
|
Total ($)
|
|
Jean Madar,
|
|
2017
|
|
630,000
|
|
|
-0-
|
|
|
-0-
|
|
|
247,237
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
877,237
|
|
Chairman and
|
|
2016
|
|
630,000
|
|
|
-0-
|
|
|
-0-
|
|
|
141,709
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
771,709
|
|
Chief Executive Officer
|
|
2015
|
|
630,000
|
|
|
-0-
|
|
|
-0-
|
|
|
112,408
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
742,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Greenberg,
|
|
2017
|
|
630,000
|
|
|
50,000
|
|
|
-0-
|
|
|
247,237
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
927,237
|
|
Chief Financial Officer and
|
|
2016
|
|
600,000
|
|
|
50,000
|
|
|
-0-
|
|
|
186,456
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
836,456
|
|
Executive Vice President
|
|
2015
|
|
570,000
|
|
|
50,000
|
|
|
-0-
|
|
|
147,905
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
767,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philippe Benacin, President Inter
|
|
2017
|
|
723,348
|
|
|
101,646
|
|
|
-0-
|
|
|
247,237
|
|
|
-0-
|
|
|
16,376
|
|
|
12,198
|
|
|
1,100,805
|
|
Parfums, Inc., Chief Executive
|
|
2016
|
|
714,722
|
|
|
77,462
|
|
|
84,232
|
|
|
141,706
|
|
|
-0-
|
|
|
15,824
|
|
|
11,951
|
|
|
1,045,897
|
|
Officer of Interparfums SA
|
|
2015
|
|
716,074
|
|
|
95,434
|
|
|
-0-
|
|
|
112,408
|
|
|
-0-
|
|
|
18,573
|
|
|
11,985
|
|
|
954,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philippe Santi, Executive Vice
|
|
2017
|
|
406,584
|
|
|
302,679
|
|
|
-0-
|
|
|
59,337
|
|
|
26,069
|
|
|
16,376
|
|
|
-0-
|
|
|
811,045
|
|
President and Chief Financial
|
|
2016
|
|
339,948
|
|
|
320,914
|
|
|
196,754
|
|
|
44,749
|
|
|
-0-
|
|
|
15,824
|
|
|
-0-
|
|
|
918,189
|
|
Officer, Interparfums SA
|
|
2015
|
|
332,910
|
|
|
310,716
|
|
|
-0-
|
|
|
42,271
|
|
|
17,276
|
|
|
18,573
|
|
|
-0-
|
|
|
721,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frédéric Garcia-Pelayo,
|
|
2017
|
|
406,584
|
|
|
302,679
|
|
|
-0-
|
|
|
59,337
|
|
|
26,069
|
|
|
16,376
|
|
|
8,245
|
|
|
819,290
|
|
Executive Vice President and
|
|
2016
|
|
339,948
|
|
|
320,914
|
|
|
196,754
|
|
|
44,749
|
|
|
-0-
|
|
|
15,824
|
|
|
7,525
|
|
|
925,714
|
|
Chief Operating Officer Interparfums SA
|
|
2015
|
|
332,910
|
|
|
310,716
|
|
|
-0-
|
|
|
42,271
|
|
|
17,276
|
|
|
18,573
|
|
|
7,590
|
|
|
817,424
|
|
1
Amounts reflected under Option Awards represent the grant date fair values in 2017, 2016 and 2015 based on the fair value of stock
option awards using a Black-Scholes option pricing model. The assumptions used in this model are detailed in Footnote 13 to the
audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017 and filed with
the SEC.
2
As required by French law, Interparfums SA maintains its own profit sharing plan for all French employees who have completed three
months of service, including executive officers of our European operations other than Mr. Benacin, the Chief Executive Officer
of Interparfums SA Benefits are calculated based upon a percentage of taxable income of Interparfums SA and are allocated to employees
based upon salary. The maximum amount payable per year is 29,420 euro, or approximately $33,227.
Calculation
of total annual benefits contribution is made according to the following formula:
67%
of (Interparfums SA net income, less 2.5% of shareholders equity without net income for the year) times a fraction, the numerator
of which is wages, and the denominator of which is net income before tax + wages + taxes (other than income tax) + valuation allowances
+ amortization expenses + interest expenses.
Contribution
to individual employees is then made pro rata based upon their individual salaries for the year.
3
The following table identifies (i) perquisites and other personal benefits provided to our named executive officers in fiscal
2017, and quantifies those required by SEC rules to be quantified and (ii) all other compensation that is required by SEC rules
to be separately identified and quantified.
Name and Principal Position
|
|
Perquisites and other Personal Benefits ($)
|
|
|
Personal Automobile Expense($)
|
|
|
Lodging Expense($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jean Madar, Chairman Chief Executive Officer
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Greenberg, Chief Financial Officer and Executive Vice President
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philippe Benacin, President of Inter Parfums, Inc. and Chief Executive Officer of Interparfums SA
|
|
|
-0-
|
|
|
|
12,198
|
|
|
|
-0-
|
|
|
|
12,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philippe Santi, Executive Vice President and Chief Financial Officer, Interparfums SA
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frédéric Garcia-Pelayo, Executive Vice President and Chief Operating Officer, Interparfums SA
|
|
|
-0-
|
|
|
|
8,245
|
|
|
|
-0-
|
|
|
|
8,245
|
|
Plan
Based Awards
The
following table sets certain information relating to each grant of an award made by our company to the executive officers of our
company listed in the Summary Compensation Table during the past fiscal year.
|
|
|
|
Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant Date
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
|
|
|
Estimated Future Payouts
Under Equity Incentive Plan Awards
|
|
|
All Other Stock Awards: Number of Shares of Stock or Units (#)
|
|
|
All Other Option Awards: Number of Securities Underlying Options (#)
|
|
|
Exercise or Base Price of Option Awards
($/Sh)
|
|
|
Closing Price
($/Sh)
|
|
|
|
|
|
Threshold ($)
|
|
|
Target
($)
|
|
|
Maximum ($)
|
|
|
Threshold (#)
|
|
|
Target (#)
|
|
|
Maximum (#)
|
|
|
|
|
|
|
|
|
|
Jean Madar*
|
|
12/29/17
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
25,000
|
|
|
43.80
|
|
|
43.45
|
|
Russell Greenberg
|
|
12/29/17
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
25,000
|
|
|
43.80
|
|
|
43.45
|
|
Philippe Benacin*
|
|
12/29/17
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
25,000
|
|
|
43.80
|
|
|
43.45
|
|
Philippe Santi
|
|
12/29/17
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
6,000
|
|
|
43.80
|
|
|
43.45
|
|
Philippe Santi
|
|
01/19/18
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
4,000
|
|
|
49.9025
|
|
|
47.80
|
|
Frédéric Garcia-Pelayo
|
|
12/29/17
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
6,000
|
|
|
43.80
|
|
|
43.45
|
|
Frédéric Garcia-Pelayo
|
|
01/19/18
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
4,000
|
|
|
49.9025
|
|
|
47.80
|
|
*Options
were granted to the personal holding companies of Messrs. Madar and Benacin, as each of Messrs. Madar and Benacin own 99.99% of
their respective personal holding companies.
Options
As
discussed above, we typically grant nonqualified stock options with a term of 6 years that vest ratably of a 5-year period on
a cumulative basis, so that the option will become fully exercisable at the beginning of the sixth year from the date of grant.
We
believe that the vesting period of these options serves a dual purpose: 1. executives will not receive any benefit if they leave
prior to such portion of the option vesting; and 2. having a vesting period matches the service period with the potential benefits
of the option.
Under
our company’s stock option plans, the exercise price is determined by the average of the high and low price on the date
of grant, not the closing price as reported by The Nasdaq Stock Market.
We
also note that the Summary Compensation Table does not include income realized by the named executive officers as the result of
the exercise of stock options, but rather reflects the dollar amount recognized for financial statement reporting purposes for
options granted in accordance with ASC topic 718-20. However, value realized as the result of stock option exercises is set forth
in the table entitled “Option Exercises and Stock Vested”.
Interparfums
SA Stock Compensation Plan.
No
options were granted by Interparfums SA to the executive officers of our company listed in the Summary Compensation Table during
the past fiscal year.
In
September 2016, Interparfums SA approved a plan to grant an aggregate of 15,100 shares of its stock to employees with no performance
condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions.
The shares, 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. Under this
plan in September 2019, Mr. Benacin is estimated to receive 3,000 shares of Interparfums SA stock, and Messrs. Santi and Garcia
are estimated to 7,000 shares each, all subject to adjustment for stock splits.
The
fair value of the grant of €22.46 per share (approximately $25.00 per share) has been determined based on the quoted stock
price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant taking into account the dividend yield as
no dividends on this grant will be earned until the shares are distributed. The estimated number of shares to be distributed of
137,381, subject to adjustment for stock splits, has been determined taking into account employee turnover. The aggregate cost
of the grant of €3.1 million (approximately $3.4 million) will be recognized as compensation cost by Interparfums SA on a
straightline basis over the requisite three year service period. For the year ended December 31, 2017 and 2016, $1.2 million and
$0.4 million, respectively, of compensation cost has been recognized.
Interparfums
SA Profit Sharing Plan
As
required by French law, Inter Parfums, SA maintains its own profit sharing plan for all French employees who have completed three
months of service, including executive officers of our European operations other than Mr. Benacin, the Chief Executive Officer
of Inter Parfums, SA. Benefits are calculated based upon a percentage of taxable income of Interparfums SA and allocated to employees
based upon salary. The maximum amount payable per year per employee is €29,420, or approximately $33,227.
Calculation
of total annual benefits contribution is made according to the following formula:
67%
of (Interparfums SA net income, less 2.5% of shareholders equity without net income for the year) times a fraction, the numerator
of which is wages, and the denominator of which is net income before tax + wages + taxes (other than income tax) + valuation allowances
+ amortization expenses + interest expenses.
Contribution to individual
employees is then made pro rata based upon their individual salaries for the year.
Outstanding Equity Awards at Fiscal
Year-End
The following table sets forth certain
information relating to outstanding equity awards of our Company held by the executive officers listed in the Summary Compensation
Table as of December 31, 2017.
OUTSTANDING EQUITY AWARDS AT FISCAL
YEAR-END
|
Option
Awards
|
Name
|
Number
of Securities Underlying Unexercised Options (#) Exercisable
(1)
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
|
Option Exercise Price ($)
|
Option
Expiration Date
|
Jean
Madar
|
19,000
|
-0-
|
-0-
|
19.325
|
12/30/18
|
|
15,200
|
3,800
|
-0-
|
35.75
|
12/30/19
|
|
11,400
|
7,600
|
-0-
|
27.795
|
12/30/20
|
|
7,600
|
11,400
|
-0-
|
23.605
|
12/30/21
|
|
3,800
|
15,200
|
-0-
|
32.825
|
12/29/22
|
|
-0-
|
25,000
(2)
|
-0-
|
43.80
|
12/28/23
|
|
|
|
|
|
|
Russell
Greenberg
|
25,000
|
-0-
|
-0-
|
19.325
|
12/30/18
|
|
20,000
|
5,000
|
-0-
|
35.75
|
12/30/19
|
|
15,000
|
10,000
|
-0-
|
27.795
|
12/30/20
|
|
10,000
|
15,000
|
-0-
|
23.605
|
12/30/21
|
|
5,000
|
20,000
|
-0-
|
32.825
|
12/29/22
|
|
-0-
|
25,000
|
-0-
|
43.80
|
12/28/23
|
|
|
|
|
|
|
Philippe
Benacin
|
19,000
|
-0-
|
-0-
|
19.325
|
12/30/18
|
|
15,200
|
3,800
|
-0-
|
35.75
|
12/30/19
|
|
11,400
|
7,600
|
-0-
|
27.795
|
12/30/20
|
|
7,600
|
11,400
|
-0-
|
23.605
|
12/30/21
|
|
3,800
|
15,200
|
-0-
|
32.825
|
12/29/22
|
|
-0-
|
25,000
(2)
|
-0-
|
43.80
|
12/28/23
|
|
|
|
|
|
|
Philippe
Santi
|
1,200
|
-0-
|
-0-
|
19.325
|
12/30/18
|
|
400
|
400
|
-0-
|
22.195
|
1/30/19
|
|
4,000
|
1,000
|
-0-
|
35.75
|
12/30/19
|
|
3,000
|
2,000
|
-0-
|
27.795
|
12/30/20
|
|
400
|
600
|
-0-
|
25.821
|
1/27/2021
|
|
2,400
|
3,600
|
-0-
|
23.605
|
12/30/21
|
|
1,200
|
4,800
|
-0-
|
32.825
|
12/29/22
|
|
-0-
|
6,000
|
-0-
|
43.80
|
12/28/23
|
|
|
|
|
|
|
Frédéric
Garcia-Pelayo
|
1,800
|
-0-
|
-0-
|
19.325
|
12/30/18
|
|
1,600
|
400
|
-0-
|
22.195
|
1/30/19
|
|
4,000
|
1,000
|
-0-
|
35.75
|
12/30/19
|
|
3,000
|
2,000
|
-0-
|
27.795
|
12/30/20
|
|
400
|
600
|
-0-
|
25.821
|
1/27/2021
|
|
2,400
|
3,600
|
-0-
|
23.605
|
12/30/21
|
|
1,200
|
4,800
|
-0-
|
32.825
|
12/29/22
|
|
-0-
|
6,000
|
-0-
|
43.80
|
12/28/23
|
[Footnotes from table
above]
1 All options expire 6 years from the date of grant, and vest
20% each year commencing one year after the date of grant.
2 Options are held in the name of personal holding company.
The following table sets certain information
relating to outstanding equity awards granted by Interparfums SA, our majority-owned French subsidiary which has its shares traded
on the NYSE Euronext, held by the executive officers of our company listed in the Summary Compensation Table as of the end of
the past fiscal year.
OUTSTANDING EQUITY AWARDS AT FISCAL
YEAR-END
OF INTERPARFUMS SA
|
Option
Awards
|
Stock
Awards
|
Name
|
Number
of Securities Underlying Unexercised Options (#) Exercisable)
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
|
Option
Exercise Price ($)
|
Option Expiration Date
|
Number
of Shares or Units of Stock that Have Not Vested (#)
|
Market
Value of Shares or Units of Stock that Have Not Vested ($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested (#)(1)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that Have Not Vested ($)(2)
|
|
|
|
|
|
|
|
|
|
|
Jean
Madar
|
-0-
|
-0-
|
-0-
|
-0-
|
N/A
|
-0-
|
-0-
|
-0-
|
NA
|
|
|
|
|
|
|
|
|
|
|
Russell
Greenberg
|
-0-
|
-0-
|
-0-
|
-0-
|
N/A
|
-0-
|
-0-
|
-0-
|
NA
|
|
|
|
|
|
|
|
|
|
|
Philippe
Benacin
|
-0-
|
-0-
|
-0-
|
-0-
|
N/A
|
-0-
|
-0-
|
3,000
|
86,647
|
|
|
|
|
|
|
|
|
|
|
Philippe
Santi
|
-0-
|
-0-
|
-0-
|
-0-
|
N/A
|
-0-
|
-0-
|
7,000
|
202,176
|
|
|
|
|
|
|
|
|
|
|
Frédéric
Garcia-Pelayo
|
-0-
|
-0-
|
-0-
|
-0-
|
N/A
|
-0-
|
-0-
|
7,000
|
202,176
|
[
Footnotes
from table above]
1 Estimated number of shares
are to be issued only to the extent that the performance conditions have been met.
In September 2016, Interparfums SA, approved
a plan to grant an aggregate of 15,100 shares of its stock to employees with no performance condition requirement, and an aggregate
of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The shares, 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. Under this plan in September 2019,
Mr. Benacin is estimated to receive 3,000 shares of Interparfums SA stock, and Messrs. Santi and Garcia are estimated to 7,000
shares each, all subject to adjustment for stock splits.
The fair value of the grant of €22.46
per share (approximately $25.00 per share) has been determined based on the quoted stock price of Interparfums SA shares as reported
by the NYSE Euronext on the date of grant taking into account the dividend yield as no dividends on this grant will be earned
until the shares are distributed. The estimated number of shares to be distributed of 137,381, subject to adjustment for stock
splits, has been determined taking into account employee turnover. The aggregate cost of the grant of €3.1 million (approximately
$3.4 million) will be recognized as compensation cost by Interparfums SA on a straightline basis over the requisite three year
service period. For the year ended December 31, 2017 and 2016, $1.2 million and $0.4 million, respectively, of compensation cost
has been recognized.
Option Exercises and Stock Vested
The following table sets forth certain
information relating to each option exercise affected during the past fiscal year, and each vesting of stock, including restricted
stock, restricted stock units and similar instruments of our company during the past fiscal year, for the executive officers of
our company listed in the Summary Compensation Table.
OPTION
EXERCISES AND STOCK VESTED
|
|
Option
Awards
|
Stock
Awards
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value Realized on Exercise
($)
1
|
Number
of Shares Acquired on Vesting (#)
|
Value
Realized On Vesting ($)
|
|
|
|
|
|
Jean
Madar
|
19,000
|
539,588
|
-0-
|
-0-
|
|
|
|
|
|
Russell
Greenberg
|
20,000
|
449,287
|
-0-
|
-0-
|
|
|
|
|
|
Philippe
Benacin
|
19,000
|
537,665
|
-0-
|
-0-
|
|
|
|
|
|
Philippe
Santi
|
600
|
16,782
|
-0-
|
-0-
|
|
|
|
|
|
Frédéric
Garcia-Pelayo
|
1,200
|
35,209
|
-0-
|
-0-
|
[Footnotes from table above]
|
1
|
Total value realized on exercise of options in dollars
is based upon the difference between the fair market value of the common stock on the
date of exercise, and the exercise price of the option.
|
Regarding Interparfums SA, our majority-owned
French subsidiary which has its shares traded on the Euronext, no options were exercised during the past fiscal year, and there
was no vesting of stock, including restricted stock, restricted stock units and similar instruments during the past fiscal year,
for the executive officers of our company listed in the Summary Compensation Table.
Pension Benefits
The following table sets forth certain
information relating to payment of benefits in connection with retirement plans during the past fiscal year, for the executive
officers of our company listed in the Summary Compensation Table.
PENSION BENEFITS
Name
|
Plan
Name
|
Number of Years Credited Service
(#)
|
Present
Value of Accumulated Benefit ($)
|
Payments During Last Fiscal Year
($)
|
Jean
Madar
|
NA
|
NA
|
-0-
|
-0-
|
Russell
Greenberg
|
NA
|
NA
|
-0-
|
-0-
|
Philippe
Benacin
|
Inter
Parfums SA Pension Plan
|
NA
|
291,000
|
16,376
|
Philippe
Santi
|
Inter
Parfums SA Pension Plan
|
NA
|
518,000*
|
16,376
|
Frédéric
Garcia-Pelayo
|
Inter
Parfums SA Pension Plan
|
NA
|
288,000
|
16,376
|
*Includes contributions made individually by Mr. Santi.
Interparfums SA maintains a pension plan
for all of its employees, including all executive officers. The calculation of commitments for severance benefits involves estimating
the probable present value of projected benefit obligations. This projected benefit obligations is then prorated to take into
account seniority of the employees of Interparfums SA on the calculation date.
In calculating benefits, the following
assumptions were applied:
- voluntary retirement at age 65;
- a rate of 45% for employer payroll contributions
for all employees;
- a 4% average annual salary increase;
- an annual rate of turnover for all employees under
55 years of age and nil above;
- the TH 00-02 mortality table for men and the TF
00-02 mortality table for women;
- a discount rate of 2.0%.
The normal retirement age is 65 years,
but employees, including Messrs. Benacin, Santi and Garcia-Pelayo, can collect reduced benefits if they retire at age 62.
Nonqualified Deferred Compensation
We do not maintain any nonqualified deferred
compensation plans.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information
about the relationship of the annual total compensation of our mean employee and the annual total compensation of Mr. Jean Madar,
Chief Executive Officer (the “CEO”):
For 2017, our last completed fiscal year
:
Our median employee’s compensation
was $53,799.
Our Chief Executive Officer’s total
2017 compensation was $877,237 as reported in the Summary Compensation Table on page 74.
Accordingly, our 2017 CEO to Median Employee Pay Ratio was 16.31 to 1.
This pay ratio is a reasonable estimate
calculated in a manner consistent with SEC rules based on our payroll and employment records. We identified our median employee
using our total employee population as of December 31, 2017 by applying a consistently applied compensation measure across our
global employee population. For our consistently applied compensation measure, we used all compensation, including actual base
salary, bonuses, commissions, and any overtime paid during the 12-month period ending December 31, 2017. We did not use any material
estimates, assumptions, adjustments or statistical sampling to determine the worldwide median employee.
The SEC rules for identifying the median
compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to
adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their
compensation practices. As such, the pay ratio reported by other companies may not be comparable to the pay ratio reported above,
as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions,
estimates and assumptions in calculating their own pay ratios.
Employment and Consulting
Agreements
As part of our acquisition in 1991 of the
controlling interest in Interparfums SA, now a subsidiary, we entered into an employment agreement with Philippe Benacin. The
agreement provides that Mr. Benacin will be employed as Vice Chairman of the Board and President and Chief Executive Officer of
Inter Parfums Holdings and its subsidiary, Interparfums SA. The initial term expired on September 2, 1992, and has subsequently
been automatically renewed for additional annual periods. The agreement provides for automatic annual renewal terms, unless either
party terminates the agreement upon 120 days’ notice. For 2018, Mr. Benacin presently receives an annual salary of €444,000
(approximately $501,454), and automobile expenses of €10,800 (approximately $12,198), which are subject to increase in the
discretion of the board of directors. The agreement also provides for indemnification and a covenant not to compete for one year
after termination of employment.
In 2014, we entered into a consulting agreement
with Mr. Benacin’s holding company, Philippe Benacin Holding SAS, which provides for review on an annual basis of the amount
of compensation payable to such company. The agreement also provides for indemnification for Mr. Benacin and his holding company
and a covenant not to compete for one year after termination of the agreement. The agreement was for one year, with automatic
one year renewals unless either party terminates on 120 days’ notice or Mr. Benacin ceases to be the President of our company.
For 2015 through 2017, Mr. Benacin’s personal holding company received $250,000 for services rendered outside of the United
States by Mr. Benacin in his capacity as President. This consulting agreement has been renewed at $250,000 for 2018. In addition,
in December 2017 the amount of options granted for the benefit of Mr. Benacin was increased from the 19,000 share grants that
had been made in each of the past several years to 25,000 shares, and were granted to his personal holding company instead of
Mr. Benacin directly.
In 2013, we enter into a consulting agreement
with Mr. Madar’s holding company, Jean Madar Holding SAS, which provides for review on an annual basis of the amount of
compensation payable to such company. The agreement also provides for indemnification for Mr. Madar and his holding company and
a covenant not to compete for one year after termination of the agreement. The agreement was for one year, with automatic one
year renewals unless either party terminates on 120 days’ notice or Mr. Madar ceases to be the Chief Executive Officer of
our company. For 2015 through 2017, Mr. Madar’s personal holding company received $250,000 for services rendered outside
of the United States by Mr. Madar in his capacity as Chief Executive Officer. For 2018, as the result of Mr. Madar spending more
time outside of the United States, we have changed the allocation of cash compensation paid to Mr. Madar personally and to his
holding company, but not the aggregate amount. The amount of salary paid to Mr. Madar in 2018 has been reduced by $220,000 from
$380,000 to $160,000, while payments to his holding company have been increased by the like amount of $220,000, from $250,000
to $470,000. Therefore, for 2018 total cash compensation for Mr. Madar to be paid to him and his personal holding company remains
unchanged at $630,000. In addition, in December 2017 the amount of options granted for the benefit of Mr. Madar was increased
from the 19,000 share grants that had been made in each of the past several years to 25,000 shares, and were granted to his personal
holding company instead of Mr. Madar directly.
Compensation of Directors
The following table sets forth certain
information relating to the compensation for each of our directors who is not an executive officer of our Company named in the
Summary Compensation Table for the past fiscal year.
|
|
|
DIRECTOR
COMPENSATION
|
|
|
Name
|
Fees Earned or Paid in Cash ($)
|
Stock Awards ($)
|
Option Awards ($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Change in Pension Value and Nonqualified
Deferred Compensation Earnings
|
All
Other Compensation
($)
|
Total ($)
|
Francois
Heilbronn
1
|
21,000
|
-0-
|
7,668
|
-0-
|
-0-
|
21,276
|
49,944
|
Jean
Levy
2
|
18,500
|
-0-
|
7,668
|
-0-
|
-0-
|
26,023
|
52,191
|
Robert
Bensoussan
3
|
15,000
|
-0-
|
7,668
|
-0-
|
-0-
|
19,670
|
42,338
|
Patrick
Choël
4
|
21,000
|
-0-
|
7,668
|
-0-
|
-0-
|
10,042
|
38,710
|
Michel
Dyens
5
|
15,000
|
-0-
|
7,668
|
-0-
|
-0-
|
-0-
|
22,668
|
Veronique
Gabai-Pinsky
6
|
3,500
|
-0-
|
17,910
|
-0-
|
-0-
|
-0-
|
21,410
|
[Footnotes from table
above]
|
1.
|
As of the end of the last fiscal year, Mr. Heilbronn held options
to purchase an aggregate of 4,000 shares of our common stock.
|
|
2.
|
Mr. Levy retired from out board of directors on September 12, 2017,
and passed away in December 2017. As of the end of the last fiscal year, the Estate of
Mr. Levy held options to purchase an aggregate of 2,500 shares of our common stock.
|
|
3.
|
As of the end of the last fiscal year, Mr. Bensoussan held options
to purchase an aggregate of 4,000 shares of our common stock.
|
|
4.
|
As of the end of the last fiscal year, Mr. Choël held options
to purchase an aggregate of 3,500 shares of our common stock.
|
|
5.
|
As of the end of the last fiscal year, Mr. Dyens held
options to purchase an aggregate of 4,000 shares of our common stock.
|
|
6.
|
As of the end of the last fiscal year, Ms. Gabai-Pinsky
held options to purchase an aggregate of 2,000 shares of our common stock.
|
For 2017, all nonemployee directors received
$5,000 for each board meeting at which they participate in person, and $2,500 for each meeting held by conference telephone. In
addition, the annual fee for each member of the audit committee is $6,000.
We maintain stock option plans for our
nonemployee directors. The purpose of these plans is to assist us in attracting and retaining key directors who are responsible
for continuing the growth and success of our company. Under such plans, options to purchase 1,000 shares are granted on each February
1st to all nonemployee directors for as long as each is a nonemployee director on such date. However, if a nonemployee director
does not attend certain of the board meetings, then such option grants are reduced according to a schedule. In addition, options
to purchase 2,000 shares are granted to each nonemployee director upon his or her initial election or appointment to our board,
but if such option is granted within six months of the next February 1 automatic grant, then such nonemployee director would not
be eligible to receive that February 1 grant.
On February 1, 2018, options to purchase
1,000 shares were granted to each of our outside directors, Francois Heilbronn, Robert Bensoussan, Patrick Choël and Michel
Dyens, all at the exercise price of $45.60 per share under the 2016 plan. All of such options were granted at the fair market
value and vest ratably over a 4 year period.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The following table sets forth information
with respect to the beneficial ownership of our common stock by (a) each person we know to be the beneficial owner of more than
5% of our outstanding common stock, (b) our executive officers and directors and (c) all of our directors and officers as
a group. Each of Messrs. Madar and Benacin own 99.99% of their respective personal holding companies. As of March 9, 2018, we
had 31,270,893 shares of common stock outstanding.
Name and Address
of Beneficial Owner
|
Amount
of Beneficial Ownership
1
|
Approximate
Percent of Class
|
Jean Madar
c/o Interparfums SA
4, Rond Point Des Champs Elysees
75008 Paris, France
|
7,155,548
2
|
22.9%
|
Philippe Benacin
c/o Interparfums SA
4, Rond Point Des Champs Elysees
75008 Paris, France
|
6,958,940
3
|
22.2%
|
Russell Greenberg
c/o Inter Parfums, Inc.
551 Fifth Avenue
New York, NY 10176
|
65,000
4
|
Less
than 1%
|
Philippe Santi
Interparfums SA
4, Rond Point Des Champs Elysees
75008, Paris France
|
13,200
5
|
Less
than 1%
|
Francois Heilbronn
60 Avenue de Breteuil
75007 Paris, France
|
32,563
6
|
Less
than 1%
|
Robert Bensoussan
c/o Sirius Equity LLP
52 Brook Street
W1K 5DS London
|
11,000
7
|
Less
than 1%
|
1
All shares of common stock are directly held with sole voting power and sole power to dispose, unless otherwise stated.
Options which are exercisable within 60 days are included in beneficial ownership calculations. Jean Madar, the Chairman of
the Board and Chief Executive Officer of the Company and Philippe Benacin, the Vice Chairman of the Board and President of
the Company, have a verbal agreement or understanding to vote the shares each beneficially owns in a like manner.
2
Consists of 66,207 shares held directly, 7,032,341 shares held indirectly through Jean Madar Holding SAS, a personal holding
company, and options to purchase 57,000 shares.
3
Consists of 55,876 shares held directly, 6,846,064 shares held indirectly through Philippe Benacin Holding SAS, a personal
holding company, and options to purchase 57,000 shares.
4
Consists
of shares of common stock underlying options.
5
Consists
of shares of common stock underlying options.
6
Consists
of 31,063 shares held directly and options to purchase 2,500 shares.
7
Consists of 3,500 shares held directly and options to purchase 2,500 shares.
Name and Address
of Beneficial Owner
|
Amount
of Beneficial Ownership
1
|
Approximate
Percent of Class
|
Patrick Choël
140 Rue de Grenelle
75007, Paris, France
|
2,250
8
|
Less
than 1%
|
Michel Dyens
Michel Dyens & Co.
17 Avenue Montaigne
75008 Paris, France
|
1,250
9
|
Less
than 1%
|
Veronique Gabai-Pinsky
Vera Wang
15 E. 26
th
Street
New York NY 10010
|
-0-
|
-0-
|
Frederic Garcia-Pelayo
Interparfums SA
4, Rond Point Des Champs Elysees
75008, Paris France
|
14,600
10
|
Less
than 1%
|
Blackrock, Inc.
55 East 52
nd
Street
New York, NY 10055
11
|
2,727,317
|
8.8%
|
The Vanguard Group
12
100 Vanguard Blvd.
Malvern, PA 19355
|
1,559,400
|
5.4%
|
All Directors and Officers
(As a Group 10 Persons)
|
14,250,726
13
|
45.3
%
|
The following table sets forth certain
information as of the end of our last fiscal year regarding all equity compensation plans that provide for the award of equity
securities or the grant of options, warrants or rights to purchase our equity securities.
8
Consists of 1,125 shares held directly and options to purchase 1,500 shares.
9
Consists of shares of common stock underlying options.
10
Consists of shares of common stock underlying options.
11
Information based upon Schedule 13G Amendment 2 of Blackrock, Inc. dated January 25, 2018 as filed with the Securities
and Exchange Commission.
12
Information based upon Schedule 13G of The Vanguard Group, an investment advisor, dated February 9, 2018 as filed
with the Securities and Exchange Commission.
13
Consists of
14,036,176
shares
held directly or indirectly, and options to purchase
214,550
shares.
Equity Compensation Plan Information
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a)
|
Weighted-average
exercise price of outstanding options, warrants and rights (b)
|
Number
of securities remaining
available for future issuance under equity compensation plans (excluding securities reflected in column
(a)) (c)
|
Equity
compensation plans approved by security holders
|
730,980
|
31.92
|
929,985
|
Equity
compensation plans not approved by security holders
|
-0-
|
N/A
|
-0-
|
Total
|
730,980
|
31.92
|
929,985
|
Item 13. Certain Relationships and Related Transactions,
and Director Independence
Transactions with European Subsidiaries
We have guaranteed the obligations of our
majority-owned, French subsidiary, Interparfums SA under our former Burberry license and our Paul Smith license agreement. We
also provide (or had provided on our behalf) certain financial, accounting and legal services for Interparfums SA, and during
2017, 2016 and 2015 fees for such services were $233,625, $214,112 and $198,500, respectively. In 2017, Inter Parfums USA, LLC,
a United States subsidiary, renewed a license agreement for five years that was initially signed in 2012 on the same terms with
Interparfums Suisse (SARL), a Swiss subsidiary of Interparfums SA, for the right to sell amenities under the Lanvin brand name
to luxury hotels, cruise lines and airlines in return for royalty payments as are customary in our industry.
Option Exercise with Tender of Previously Owned Shares
The Chief Executive Officer and the President
each exercised 19,000 and 19,000 and outstanding stock options of the Company’s common stock in 2016 and 2015, respectively.
The aggregate exercise prices of $0.7 million in 2016 and $0.5 million in 2015 were paid by them tendering to the Company in 2016
and 2015, an aggregate of 20,568 and 18,764 shares, respectively, of the Company’s common stock, previously owned by them,
valued at fair market value on the dates of exercise. All shares issued pursuant to these option exercises were issued from treasury
stock of the Company. In addition, the Chief Executive Officer tendered in 2016 and 2015 an additional 2,179 and 1,299 shares,
respectively, for payment of certain withholding taxes resulting from his option exercises.
Consulting Agreements
In 2014, we entered into a consulting agreement
with Mr. Benacin’s holding company, Philippe Benacin Holding SAS, which provides for review on an annual basis of the amount
of compensation payable to such company. The agreement also provides for indemnification for Mr. Benacin and his holding company
and a covenant not to compete for one year after termination of the agreement. The agreement was for one year, with automatic
one year renewals unless either party terminates on 120 days’ notice or Mr. Benacin ceases to be the President of our company.
For 2015 through 2017, Mr. Benacin’s personal holding company received $250,000 for services rendered outside of the United
States by Mr. Benacin in his capacity as President. This consulting agreement has been renewed at $250,000 for 2018. In addition,
in December 2017 the amount of options granted for the benefit of Mr. Benacin was increased from the 19,000 share grants that
had been made in each of the past several years to 25,000 shares, and were granted to his personal holding company instead of
Mr. Benacin directly.
In 2013, we enter into a consulting agreement
with Mr. Madar’s holding company, Jean Madar Holding SAS, which provides for review on an annual basis of the amount of
compensation payable to such company. The agreement also provides for indemnification for Mr. Madar and his holding company and
a covenant not to compete for one year after termination of the agreement. The agreement was for one year, with automatic one
year renewals unless either party terminates on 120 days’ notice or Mr. Madar ceases to be the Chief Executive Officer of
our company. For 2015 through 2017, Mr. Madar’s personal holding company received $250,000 for services rendered outside
of the United States by Mr. Madar in his capacity as Chief Executive Officer. For 2018, as the result of Mr. Madar spending more
time outside of the United States, we have changed the allocation of cash compensation paid to Mr. Madar personally and to his
holding company, but not the aggregate amount. The amount of salary paid to Mr. Madar for his services in the United States in
2018 has been reduced by $220,000 from $380,000 to $160,000, while payments to his holding company have been increased by the
like amount of $220,000, from $250,000 to $470,000. Therefore, for 2018 total cash compensation for Mr. Madar to be paid to him
and his personal holding company remains unchanged at $630,000. In addition, in December 2017 the amount of options granted for
the benefit of Mr. Madar was increased from the 19,000 share grants that had been made in each of the past several years to 25,000
shares, and were granted to his personal holding company instead of Mr. Madar directly.
Procedures for Approval of Related Person Transactions
Transactions between related persons, such
as between an executive officer or director and our company, or any company or person controlled by such officer or director,
are required to be approved by our Audit Committee of our board of directors. Our Audit Committee Charter contains such explicit
authority, as required by the applicable rules of The Nasdaq Stock Market.
Director Independence
The following are our directors who are
“independent directors” within the applicable rules of The Nasdaq Stock Market:
|
Francois Heilbronn
Robert Bensoussan
Patrick Choël
Michel Dyens
Veronique Gabai-Pinsky
|
We follow and comply with the independent
director definitions as provided by The Nasdaq Stock Market rules in determining the independence of our directors, which are
posted on our company’s website. In addition, such rules are also available on The Nasdaq Stock Market’s website.
In addition, The Nasdaq Stock Market maintains more stringent rules relating to director independence for the members of our Audit
Committee, and the members of our Audit Committee, Messrs. Heilbronn and Choël, as well as Ms. Gabai-Pinsky, are independent
within the meaning of those rules.
Board Leadership Structure and Risk Management
For more than the past ten (10) years,
Jean Madar has held the positions of Chairman of the Board of Directors and Chief Executive Officer of our company. Almost since
inception, Mr. Madar has been allocated the responsibility of overseeing our United States operations and the operation of Inter
Parfums, Inc., as a public company. Philippe Benacin, as Chief Executive Officer of Interparfums SA, has been allocated the responsibility
of overseeing our European operations and its operation as a public company in France. In addition, Mr. Benacin is also the Vice
Chairman of the Board of Directors of our company. Our board of directors is comfortable with this approach, as the two largest
stockholders of our company are also directly responsible for the operations of our company’s two operating segments. Accordingly,
our board of directors does not have a “Lead Director,” a non-management director who controls the meetings of our
board of directors.
Our board of directors manages risk by
(i) review of period operating reports and discussions with management; (ii) approval of executive compensation incentive plans
through its committee, the Executive Compensation and Stock Option Committee; (iii) approval of related party transactions through
its committee, the Audit Committee; and (iv) approval of material transactions not in the ordinary course of business. Since our
inception, we have never been the subject of any material product liability claims, and we have had no recent material property
damage claims.
Further, we periodically enter into foreign
currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and to manage risks
related to future sales expected to be denominated in a foreign currency. We enter into these exchange contracts for periods consistent
with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements
on the receivables and cash flows of Interparfums SA, our French subsidiary, whose functional currency is the Euro. All foreign
currency contracts are denominated in currencies of major industrial countries and are with large financial institutions, which
are rated as strong investment grade
.
In addition, we mitigate interest rate
risk by continually monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating
rate debt, or if floating rate debt should be swapped for fixed rate debt.
Item 14. Principal Accountant Fees and Services
Fees
The following sets forth the fees billed
to us by Mazars USA LLP (formerly WeiserMazars LLP), as well as discusses the services provided for the past two fiscal years,
fiscal years ended December 31, 2017 and December 31, 2016.
Audit Fees
Fees billed by Mazars USA LLP and its affiliate,
Mazars S.A. for audit services and review of the financial statements contained in our Quarterly Reports on Form 10-Q were $1.0
million for both 2017 and 2016.
Audit-Related Fees
Mazars USA LLP did not bill us for any
audit-related services during 2017 or 2016.
Tax Fees
Mazars USA LLP billed us $28,000 and $16,400
for tax services during 2017 and 2016, respectively.
All Other Fees
Mazars USA LLP did not bill us for any
other services during 2017 or 2016.
Audit Committee Pre-Approval Policies
and Procedures
The Audit Committee has the sole authority
for the appointment, compensation and oversight of the work of our independent accountants, who prepare or issue an audit report
for us.
During the first quarter of 2017, the audit
committee authorized the following non-audit services to be performed by Mazars USA LLP.
|
●
|
We authorized
the engagement of Mazars USA LLP if deemed necessary to provide tax consultation in the
ordinary course of business for fiscal year ended December 31, 2017.
|
|
●
|
We authorized
the engagement of Mazars USA LLP if deemed necessary to provide tax consultation as may
be required on a project by project basis that would not be considered in the ordinary
course of business, of up to a $5,000 fee limit per project, subject to an aggregate
fee limit of $25,000 for fiscal year ended December 31, 2017. If we require further tax
services from Mazars USA LLP, then the approval of the audit committee must be obtained.
|
|
●
|
If we require
other services by Mazars USA LLP on an expedited basis such that obtaining pre-approval
of the audit committee is not practicable, then the Chairman of the Committee has authority
to grant the required pre-approvals for all such services.
|
|
●
|
We imposed a
cap of $100,000 on the fees that Mazars USA LLP can charge for services on an expedited
basis that are approved by the Chairman without obtaining full audit committee approval.
|
|
●
|
None of the non-audit
services of either of the Company’s auditors had the pre-approval requirement waived
in accordance with Rule 2-01(c)(7)(i)(C) of Regulation S-X.
|
In the first quarter of 2018, the audit
committee authorized the same non-audit services to be performed by Mazars USA LLP during 2017 as disclosed above.
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands
except share and per share data)
(1) The Company
and its Significant Accounting Policies
Business of the
Company
Inter Parfums, Inc. and its subsidiaries
(the “Company”) are in the fragrance business and manufacture and distribute a wide array of fragrances and fragrance
related products.
Substantially all of our prestige
fragrance brands are licensed 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 and Jimmy Choo brand names. As a percentage of net sales, product sales for the Company’s largest brands
were as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Montblanc
|
|
|
21
|
%
|
|
|
23
|
%
|
|
|
21
|
%
|
Jimmy Choo
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
20
|
%
|
Lanvin
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
15
|
%
|
No other brand represented 10%
or more of consolidated net sales.
Basis of Preparation
The
consolidated financial statements include the accounts of the Company, including 73% owned Interparfums SA, a subsidiary whose
stock is publicly traded in France. In 2015, Interparfums SA formed a subsidiary in Spain, Parfums Rochas. The subsidiary is 51%
owned by Interparfums SA with the remaining 49% owned by its Rochas distributor for Spain. The subsidiary is responsible for Rochas
brand distribution in the territory. All material intercompany balances and transactions have been eliminated
.
Management Estimates
Management makes assumptions
and estimates to prepare financial statements in conformity with accounting principles generally accepted in the United States
of America. Those assumptions and estimates directly affect the amounts reported and disclosures included in the consolidated financial
statements. Actual results could differ from those assumptions and estimates. Significant estimates for which changes in the near
term are considered reasonably possible and that may have a material impact on the financial statements are disclosed in these
notes to the consolidated financial statements.
Foreign Currency
Translation
For foreign subsidiaries with
operations denominated in a 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 during the year. Gains and losses from translation
adjustments are accumulated in a separate component of shareholders’ equity.
Cash and Cash
Equivalents and Short-Term Investments
All highly liquid investments
purchased with a maturity of three months or less are considered to be cash equivalents. From time to time, the Company has short-term
investments 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 held at financial institutions outside the United States and are readily convertible into U.S.
dollars.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Accounts Receivable
Accounts receivable represent
payments due to the Company for previously recognized net sales, reduced by allowances for sales returns and doubtful accounts
or balances which are estimated to be uncollectible, which aggregated $5.1 million and $5.3 million as of December 31, 2017 and
2016, respectively. Accounts receivable balances are written-off against the allowance for doubtful accounts when they become uncollectible.
Recoveries of accounts receivable previously recorded against the allowance are recorded in the consolidated statement of income
when received. We generally grant credit based upon our analysis of the customer’s financial position, as well as previously
established buying patterns.
Inventories
Inventories, including promotional
merchandise, only include inventory considered saleable or usable in future periods, and is stated at the lower of cost and net
realizable value, with cost being determined on the first-in, first-out method. Cost components include raw materials, direct
labor and overhead (e.g., indirect labor, utilities, depreciation, purchasing, receiving, inspection and warehousing) as well as
inbound freight. Promotional merchandise is charged to cost of sales at the time the merchandise is shipped to the Company’s
customers.
Derivatives
All derivative instruments are
recorded as either assets or liabilities and measured at fair value. The Company uses derivative instruments to principally manage
a variety of market risks. For derivatives designated as hedges of the exposure to changes in fair value of the recognized asset
or liability or a firm commitment (referred to as fair value hedges), the gain or loss is recognized in earnings in the period
of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that
accounting is to include in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.
For cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported in equity (as a component
of accumulated other comprehensive income) and is subsequently reclassified into earnings in the same period or periods during
which the hedged forecasted transaction affects earnings. The ineffective portion of the gain or loss of a cash flow hedge is reported
in earnings immediately. The Company also holds certain instruments for economic purposes that are not designated for hedge accounting
treatment. For these derivative instruments, changes in their fair value are recorded in earnings immediately.
Equipment and
Leasehold Improvements
Equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives for equipment, which range between three and ten years and the shorter of the lease
term or estimated useful asset lives for leasehold improvements. Depreciation provided on equipment used to produce inventory,
such as tools and molds, is included in cost of sales.
Long-Lived Assets
Indefinite-lived intangible
assets principally consist of trademarks which are not amortized. The Company evaluates indefinite-lived intangible assets for
impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as
an unexpected decline in sales, that would more likely than not indicate that the carrying value of an indefinite-lived intangible
asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires a comparison
of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations are estimated
based upon discounted future cash flow projections using a weighted average cost of capital of 6.22% in both 2017 and 2016. The
cash flow projections are based upon a number of assumptions, including future sales levels, future cost of goods and operating
expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products
which are more subjective in nature. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an
impairment charge is recorded.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Intangible assets subject to
amortization are evaluated for impairment testing whenever events or changes in circumstances indicate that the carrying amount
of an amortizable intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset,
the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value
of the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no
impairment charge is recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangible
asset, an impairment charge would be recorded to reduce the intangible asset to its fair value.
Revenue Recognition
The Company sells its products
to department stores, perfumeries, specialty stores and domestic and international wholesalers and distributors. Sales of such
products by our domestic subsidiaries are denominated in U.S. dollars, and sales of such products by our foreign subsidiaries
are primarily denominated in either euro or U.S. dollars. The Company recognizes revenues when title, ownership, and risk of loss
pass to the customer, all of which occurs upon shipment or delivery of the product and is based on the applicable shipping terms.
Net sales are comprised of gross revenues less returns, trade discounts and allowances. The Company does not bill its customers’
freight and handling charges. All shipping and handling costs, which aggregated $5.9 million, $5.1 million and $4.7 million in
2017, 2016 and 2015, respectively, are included in selling, general and administrative expenses in the consolidated statements
of income. The Company grants credit to all qualified customers and does not believe it is exposed significantly to any undue
concentration of credit risk. No one customer represented 10% or more of net sales in 2017, 2016 or 2015.
Sales Returns
Generally, the Company does not
permit customers to return their unsold products. However, for U.S. based customers, we allow returns if properly requested, authorized
and approved. The Company regularly reviews and revises, as deemed necessary, its estimate of reserves for future sales returns
based primarily upon historic trends and relevant current data including information provided by retailers regarding their inventory
levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The
types of known or anticipated events that we consider include, but are not limited to, the financial condition of our customers,
store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products.
The Company records estimated reserves for sales returns as a reduction of sales, cost of sales and accounts receivable. Returned
products are recorded as inventories and are valued based upon estimated realizable value. The physical condition and marketability
of returned products are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable
values of returned products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as
economic conditions, inventory levels or competitive conditions differ from our expectations.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Payments to Customers
The Company records revenues
generated from purchase with purchase and gift with purchase promotions as sales and the costs of its purchase with purchase and
gift with purchase promotions as cost of sales. Certain other incentive arrangements require the payment of a fee to customers
based on their attainment of pre-established sales levels. These fees have been recorded as a reduction of net sales.
Advertising and
Promotion
Advertising and promotional costs
are expensed as incurred and recorded as a component of cost of goods sold (in the case of free goods given to customers) or selling,
general and administrative expenses. Advertising and promotional costs included in selling, general and administrative expenses
were $123.7 million, $99.0 million and $83.8 million for 2017, 2016 and 2015, respectively. Costs relating to purchase with purchase
and gift with purchase promotions that are reflected in cost of sales aggregated $33.8 million, $30.0 million and $25.4 million
in 2017, 2016 and 2015, respectively.
Package Development
Costs
Package development costs associated
with new products and redesigns of existing product packaging are expensed as incurred.
Operating Leases
The Company recognizes rent expense
from operating leases with various step rent provisions, rent concessions and escalation clauses on a straight-line basis over
the applicable lease term. The Company considers lease renewals in the useful life of its leasehold improvements when such
renewals are reasonably assured. In the event the Company receives capital improvement funding from its landlord, these amounts
are recorded as deferred liabilities and amortized over the remaining lease term as a reduction of rent expense.
License Agreements
The Company’s license agreements
generally provide the Company with worldwide rights to manufacture, market and sell fragrance and fragrance related products using
the licensors’ trademarks. The licenses typically have an initial term of approximately 5 to 15 years, and are potentially
renewable subject to the Company’s compliance with the license agreement provisions. The remaining terms, including
the potential 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 on net sales to third parties.
In certain cases, the Company
may pay an entry fee to acquire, or enter into, a license where the licensor or another licensee was operating a pre-existing fragrance
business. In those cases, the entry fee is capitalized as an intangible asset and amortized over its useful life.
Most license agreements require
minimum royalty payments, incremental royalties based on net sales levels and minimum spending on advertising and promotional activities.
Royalty expenses are accrued in the period in which net sales are recognized while advertising and promotional expenses are accrued
at the time these costs are incurred.
In addition, the Company is exposed
to certain concentration risk. Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties,
and our business is dependent upon the continuation and renewal of such licenses.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per share data)
Income Taxes
The Company accounts for income
taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in its financial statements or tax returns. The net deferred tax
assets assume sufficient future earnings for their realization, as well as the continued application of currently enacted tax rates. Included
in net deferred tax assets is a valuation allowance for deferred tax assets, where management believes it is more-likely-than-not
that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred
tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of net earnings at that time.
Accrued interest and penalties are included within the related tax asset or liability in the accompanying financial statements.
Issuance of Common
Stock by Consolidated Subsidiary
The difference between the Company’s
share of the proceeds received by the subsidiary and the carrying amount of the portion of the Company’s investment deemed
sold, is reflected as an equity adjustment in the consolidated balance sheets.
Treasury Stock
The Board of Directors may authorize
share repurchases of the Company’s common stock (Share Repurchase Authorizations). Share repurchases under Share Repurchase
Authorizations may be made through open market transactions, negotiated purchase or otherwise, at times and in such amounts within
the parameters authorized by the Board. Shares repurchased under Share Repurchase Authorizations are held in treasury for general
corporate purposes, including issuances under various employee stock option plans. Treasury shares are accounted for under the
cost method and reported as a reduction of equity. Share Repurchase Authorizations may be suspended, limited or terminated at any
time without notice.
Recent Accounting
Pronouncements
In August 2017, the Financial
Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to improve accounting
for hedging activities. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better
portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted
improvements to simplify the application of hedge accounting guidance. This ASU is effective for annual and interim periods beginning
after December 15, 2018 and early adoption is permitted. We are currently evaluating the standard to determine the impact of its
adoption on our consolidated financial statements.
In August 2016, the FASB issued
an ASU to eliminate the diversity in practice related to the classification of certain cash receipts and payments in the statement
of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This ASU is effective for annual and interim
periods beginning after December 15, 2017 and early adoption is permitted. We have evaluated the standard and determined that there
will be no material impact on our consolidated financial statements.
In February 2016, the FASB issued
an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective
approach, with early adoption permitted. We are currently evaluating the standard to determine the impact of its adoption on our
consolidated financial statements.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
In November 2015, the FASB issued
an ASU that requires all deferred tax liabilities and assets to be classified as noncurrent on the balance sheet. This ASU is
effective for annual and interim reporting periods beginning after December 15, 2016. In January 2017, the Company adopted the
standard retrospectively, which resulted in reclassifications among accounts on the consolidated balance sheet, but had no other
impact on our results of operations, financial condition or cash flows. The effect of the adoption on prior periods was a reclassification
from current assets to noncurrent assets of approximately $8 million.
In May 2014, the FASB issued
an ASU which superseded the most current revenue recognition requirements. This new revenue recognition standard requires entities
to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration
which the entity expects to be entitled to in exchange for those goods or services. The new standard also includes enhanced disclosure
requirements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early
adoption permitted for annual periods after December 31, 2016. We have adopted the standard as of December 31, 2017 and determined
that other than a modification of our revenue recognition policy, there has been no material impact on our consolidated financial
statements.
There are no other recent accounting
pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.
In December 2016, the Company
reached an agreement with the Balmain brand calling for Balmain to buyout the Balmain license agreement, effective December 31,
2016, in exchange for a payment aggregating $5.7 million. As a result of the buyout, the Company recognized a gain of $4.7 million
as of December 31, 2016, and received the buyout payment in May 2017.
Guess
In February 2018, the Company entered into an exclusive,
15-year worldwide license agreement with GUESS for the creation, development and distribution of fragrances under the GUESS brand.
This license will take effect on April 1, 2018, and our rights under such license agreement are subject to certain minimum advertising
expenditures and royalty payments as are customary in our industry.
Jimmy Choo License Renewal
In December 2017, the Company and J Choo Ltd amended their license agreement and extended their partnership
through December 31, 2031,
without any material changes in operating
conditions from the prior license. Our initial Jimmy Choo license was signed in 2009.
Paul Smith License Renewal
In May 2017, the Company renewed
its license agreement with Paul Smith by an additional four years. The original agreement, signed in December 1998, together with
previous extensions, provided the Company with the exclusive worldwide license rights to create, produce and distribute fragrances
and fragrance related products under the Paul Smith brand through December 31, 2017. The recent extension extends the partnership
through December 31, 2021 without any material changes in operating conditions from the prior license. The license agreement is
subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry.
S.T. Dupont License Renewal
In September 2016, the Company
extended its license agreement with S.T. Dupont by three years. The original agreement, signed in July 1997, together with previous
extensions, provided the Company with the exclusive worldwide license rights to create, produce and distribute fragrances and related
products under the S.T. Dupont brand through December 31, 2016. The recent extension is effective on January 1, 2017 and extends
the partnership through December 31, 2019 without any material changes in operating conditions from the prior license. The license
agreement is subject to certain minimum sales, advertising expenditures and royalty payments, as are customary in our industry.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Raw materials and component parts
|
|
$
|
46,884
|
|
|
$
|
36,821
|
|
Finished goods
|
|
|
90,174
|
|
|
|
60,156
|
|
|
|
$
|
137,058
|
|
|
$
|
96,977
|
|
Overhead included in inventory
aggregated $5.0 million and $3.1 million as of December 31, 2017 and 2016, respectively. Included in inventories is an inventory
reserve, which represents the difference between the cost of the inventory and its estimated realizable value, based upon sales
forecasts and the physical condition of the inventories. In addition, and as necessary, specific reserves for future known or anticipated
events may be established. Inventory reserves aggregated $5.4 million as of December 31, 2017 and 2016.
|
(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, 2017
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
69,899
|
|
|
$
|
—
|
|
|
$
|
69,899
|
|
|
$
|
—
|
|
Foreign
currency forward exchange contracts accounted for using hedge accounting
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
Foreign currency forward exchange contracts not accounted for using hedge
accounting
|
|
|
119
|
|
|
|
—
|
|
|
|
119
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,044
|
|
|
$
|
—
|
|
|
$
|
70,044
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
529
|
|
|
$
|
—
|
|
|
$
|
529
|
|
|
$
|
—
|
|
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
94,202
|
|
|
$
|
—
|
|
|
$
|
94,202
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts accounted for using hedge accounting
|
|
$
|
181
|
|
|
$
|
—
|
|
|
$
|
181
|
|
|
$
|
—
|
|
Foreign currency forward exchange contracts not accounted for using hedge accounting
|
|
|
418
|
|
|
|
—
|
|
|
|
418
|
|
|
|
—
|
|
Interest rate swap
|
|
|
908
|
|
|
|
—
|
|
|
|
908
|
|
|
|
—
|
|
|
|
$
|
1,507
|
|
|
$
|
—
|
|
|
$
|
1,507
|
|
|
$
|
—
|
|
The carrying amount of cash and
cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, accounts payable
and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans
payable approximates fair value as the variable interest rates on the Company’s indebtedness approximate current market rates.
Foreign currency forward exchange
contracts are valued based on quotations from financial institutions and the value of interest rate swaps are the discounted net
present value of the swaps using third party quotes from financial institutions.
|
(6)
|
Derivative Financial Instruments
|
The
Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign
currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Before entering
into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between
the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates.
High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the
cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the
dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable
to the change in spot-forward difference which is reported in current period earnings
. Any hedge ineffectiveness is also
recognized as a gain or loss on foreign currency in the income statement. For hedge contracts that are no longer deemed highly
effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income are reclassified to
earnings. If it is probable that the forecasted transaction will no longer occur, then any gains or losses accumulated in
other comprehensive income are reclassified to current-period earnings.
In connection with the Rochas
acquisition, $108 million of the purchase price was paid in cash on the closing date and was financed entirely through a 5-year
term loan. As the payment at closing was due in dollars and we had planned to finance it with debt in euro, the Company entered
into foreign currency forward contracts to secure the exchange rate for the $108 million purchase price at $1.067 per 1 euro. This
derivative was designated and qualified as a cash flow hedge.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Gains and losses in derivatives
designated as hedges are accumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as
hedges are included in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial
in each of the years in the three-year period ended December 31, 2017. For the years ended December 31, 2017 and 2016, interest
expense includes a gain of $0.5 million and $0.1 million, respectively, relating to an interest rate swap.
All
derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value.
The valuation
of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheets. The valuation
of foreign currency forward exchange contracts at December 31, 2017, resulted in an asset and is included in other current assets
on the accompanying balance sheet. The valuation of foreign currency forward exchange contracts at December 31, 2016, resulted
in a liability and is included in accrued expenses on the accompanying balance sheet.
At December 31, 2017, the
Company had foreign currency contracts in the form of forward exchange contracts with notional amounts of approximately U.S. $10.1 million,
GB £8.0 million and JPY ¥18.0 million, which all have maturities of less than one year.
|
(7)
|
Equipment and Leasehold Improvements
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
37,074
|
|
|
$
|
31,325
|
|
Leasehold improvements
|
|
|
1,639
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,713
|
|
|
|
32,960
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
28,383
|
|
|
|
22,884
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,330
|
|
|
$
|
10,076
|
|
Depreciation and amortization expense was $3.8 million, $3.7 million and $3.3 million in 2017, 2016, and
2015, respectively.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
|
(8)
|
Trademarks, Licenses and Other Intangible Assets
|
2017
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Trademarks (indefinite lives)
|
|
$
|
129,033
|
|
|
$
|
—
|
|
|
$
|
129,033
|
|
Trademarks (finite lives)
|
|
|
46,461
|
|
|
|
72
|
|
|
|
46,389
|
|
Licenses (finite lives)
|
|
|
69,439
|
|
|
|
46,857
|
|
|
|
22,582
|
|
Other intangible assets (finite lives)
|
|
|
14,949
|
|
|
|
12,458
|
|
|
|
2,491
|
|
Subtotal
|
|
|
130,849
|
|
|
|
59,387
|
|
|
|
71,462
|
|
Total
|
|
$
|
259,882
|
|
|
$
|
59,387
|
|
|
$
|
200,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Gross
|
|
|
|
Accumulated
|
|
|
|
Net Book
|
|
|
|
|
Amount
|
|
|
|
Amortization
|
|
|
|
Value
|
|
Trademarks (indefinite lives)
|
|
$
|
115,793
|
|
|
$
|
—
|
|
|
$
|
115,793
|
|
Trademarks (finite lives)
|
|
|
40,794
|
|
|
|
63
|
|
|
|
40,731
|
|
Licenses (finite lives)
|
|
|
62,102
|
|
|
|
37,206
|
|
|
|
24,896
|
|
Other intangible assets (finite lives)
|
|
|
12,861
|
|
|
|
10,413
|
|
|
|
2,448
|
|
Subtotal
|
|
|
115,757
|
|
|
|
47,682
|
|
|
|
68,075
|
|
Total
|
|
$
|
231,550
|
|
|
$
|
47,682
|
|
|
$
|
183,868
|
|
Amortization expense was $6.0 million,
$5.9 million and $5.8 million in 2017, 2016 and 2015, respectively. Amortization expense is expected to approximate $6.1 million,
$3.9 million, and $3.4 million in 2018, 2019, 2020, respectively, and $2.8 million 2021 and 2022. The weighted average amortization
period for trademarks, licenses and other intangible assets with finite lives are 18 years, 14 years and 2 years, respectively,
and 14 years on average.
The Company reviews intangible
assets with indefinite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable. There were no impairment charges for trademarks with indefinite useful lives in 2016 and 2015. Product sales of
some of our legacy mass market product lines have been declining for many years and now represent a very small portion of our net
sales. During the fourth quarter of 2017, the Company set in motion a plan to discontinue several of these product lines over the
next few years. As a result, the Company recorded an impairment loss of $2.1 million as of December 31, 2017, which represented
approximately 50% of total intangible assets relating to our mass market product lines. The fair values used in our evaluations
are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 6.22%. The cash flow
projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense
levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are
more subjective in nature. The Company believes that the assumptions it has made in projecting future cash flows for the evaluations
described above are reasonable and currently no other impairment indicators exist for our indefinite-lived assets. However, if
future actual results do not meet our expectations, the Company may be required to record an impairment charge, the amount of which
could be material to our results of operations.
The cost of trademarks, licenses
and other intangible assets with finite lives is being amortized by the straight-line method over the term of the respective license
or the intangible assets estimated useful life which range from three to twenty years. If the residual value of a finite life intangible
asset exceeds its carrying value, then the asset is not amortized. The Company reviews intangible assets with finite lives for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Product sales
of our Karl Lagerfeld brand have not met with our original expectations. During the fourth quarter of 2016, the Company recorded
an impairment loss of $5.7 million.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Trademarks
(finite lives) primarily represent Lanvin brand names and trademarks and in connection with their purchase, Lanvin was granted
the right to repurchase the brand names and trademarks in 2025 for the greater of
€
70
million (approximately $84 million) or one times the average of the annual sales for the years ending December 31, 2023 and 2024
(residual value). Because the residual value of the intangible asset exceeds its carrying value, the asset is not amortized.
Accrued expenses consist of the
following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Advertising liabilities
|
|
$
|
27,418
|
|
|
$
|
26,526
|
|
Salary (including bonus and related taxes)
|
|
|
18,488
|
|
|
|
13,085
|
|
Royalties
|
|
|
11,409
|
|
|
|
10,697
|
|
Due vendors (not yet invoiced)
|
|
|
11,228
|
|
|
|
1,496
|
|
Retirement reserves
|
|
|
9,113
|
|
|
|
6,391
|
|
Other
|
|
|
4,187
|
|
|
|
4,414
|
|
|
|
$
|
81,843
|
|
|
$
|
62,609
|
|
|
(10)
|
Loans Payable – Banks
|
Loans payable – banks consist
of the following:
The Company and its domestic subsidiaries have available a $20 million unsecured revolving line of credit
due on demand, which bears interest at the daily one-month LIBOR plus 2% (the one-month LIBOR was 1.56% as of December 31, 2017).
The line of credit which has a maturity date of December 18, 2018 is expected to be renewed on an annual basis. Borrowings
outstanding pursuant to lines of credit were zero as of December 31, 2017 and 2016.
The Company’s foreign subsidiaries
have available credit lines, including several bank overdraft facilities totaling approximately $30 million. These credit lines
bear interest at EURIBOR plus between 0.5% and 0.8% (EURIBOR was minus 0.19% at December 31, 2017). Outstanding amounts were
zero as of December 31, 2017 and 2016.
The weighted average interest
rate on short-term borrowings was zero as of December 31, 2017 and 2016.
In June 2015, the Company financed
its Rochas brand acquisition with a $111 million, 5-year term loan payable in equal quarterly installments plus interest. This
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 rising
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, 2017
are approximately $21 million per year through 2019 and, $11 million in 2020.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Leases
The
Company leases its office and warehouse facilities under operating leases which are subject to various step rent provisions, rent
concessions and escalation clauses expiring at various dates through 2023. 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 $11.2
million, $10.7 million and $9.9 million in 2017, 2016 and 2015, respectively. Minimum future annual rental payments are as follows:
2018
|
|
|
$
|
5,835
|
|
2019
|
|
|
|
4,565
|
|
2020
|
|
|
|
3,571
|
|
2021
|
|
|
|
3,594
|
|
2022
|
|
|
|
3,020
|
|
Thereafter
|
|
|
|
5,163
|
|
|
|
|
|
|
|
|
|
|
$
|
25,748
|
|
License Agreements
The Company is party to a number
of license and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products
expiring at various dates through 2032. In connection with certain of these license agreements, the Company is subject to minimum
annual advertising commitments, minimum annual royalties and other commitments as follows:
2018
|
|
|
$
|
136,345
|
|
2019
|
|
|
|
151,209
|
|
2020
|
|
|
|
160,391
|
|
2021
|
|
|
|
168,161
|
|
2022
|
|
|
|
153,894
|
|
Thereafter
|
|
|
|
1,107,029
|
|
|
|
|
|
|
|
|
|
|
$
|
1,877,029
|
|
Future
advertising commitments are estimated based on planned future sales for the license terms that were in effect at December 31, 2017,
without consideration for potential renewal periods. The above figures do not reflect the fact that our distributors share our
advertising obligations.
Royalty expense included in selling, general, and administrative expenses, aggregated $39.6 million,
$37.8 million and $33.8 million, in 2017, 2016 and 2015, respectively, and represented 6.7%, 7.3% and 7.2% of net sales for the
years ended December 31, 2017, 2016 and 2015, respectively.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
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 $0.9 million in both
2017 and 2016.
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 2017:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Nonvested options – beginning of year
|
|
|
401,440
|
|
|
$
|
7.14
|
|
Nonvested options granted
|
|
|
174,600
|
|
|
$
|
9.82
|
|
Nonvested options vested or forfeited
|
|
|
(144,805
|
)
|
|
$
|
7.13
|
|
Nonvested options – end of year
|
|
|
431,235
|
|
|
$
|
8.22
|
|
The effect of share-based payment
expenses decreased income statement line items as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income before income taxes
|
|
$
|
2,100
|
|
|
$
|
1,200
|
|
|
$
|
800
|
|
Net income attributable to Inter Parfums, Inc.
|
|
|
1,150
|
|
|
|
700
|
|
|
|
500
|
|
Diluted earnings per share attributable to Inter Parfums, Inc.
|
|
|
0.04
|
|
|
|
0.02
|
|
|
|
0.01
|
|
The following table summarizes
stock option activity and related information for the years ended December 31, 2017, 2016 and 2015:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares under option - beginning of
year
|
|
|
684,540
|
|
|
$
|
26.94
|
|
|
|
709,300
|
|
|
$
|
24.34
|
|
|
|
639,495
|
|
|
$
|
23.19
|
|
Options granted
|
|
|
174,600
|
|
|
|
43.48
|
|
|
|
148,950
|
|
|
|
32.61
|
|
|
|
158,300
|
|
|
|
23.79
|
|
Options exercised
|
|
|
(103,230
|
)
|
|
|
19.03
|
|
|
|
(123,150
|
)
|
|
|
18.69
|
|
|
|
(80,685
|
)
|
|
|
13.82
|
|
Options forfeited
|
|
|
(24,930
|
)
|
|
|
29.49
|
|
|
|
(50,560
|
)
|
|
|
27.18
|
|
|
|
(7,810
|
)
|
|
|
27.77
|
|
Shares under option - end of
year
|
|
|
730,980
|
|
|
|
31.92
|
|
|
|
684,540
|
|
|
|
26.94
|
|
|
|
709,300
|
|
|
|
24.34
|
|
At December 31, 2017, options
for 929,985 shares were available for future grant under the plans. The aggregate intrinsic value of options outstanding is $8.5
million as of December 31, 2017 and unrecognized compensation cost related to stock options outstanding aggregated $3.4 million,
which will be recognized over the next five years.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
The weighted average fair values
of options granted by Inter Parfums, Inc. during 2017, 2016 and 2015 were $9.82, $7.43 and $5.99 per share, respectively, on the
date of grant using the Black-Scholes option pricing model to calculate the fair value.
The assumptions used in the Black-Scholes
pricing model are set forth in the following table:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted-average expected stock-price volatility
|
|
|
28
|
%
|
|
|
29
|
%
|
|
|
33
|
%
|
Weighted-average expected option life
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
Weighted-average risk-free interest rate
|
|
|
2.2
|
%
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
Weighted-average dividend yield
|
|
|
2.0
|
%
|
|
|
2.1
|
%
|
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Proceeds from stock options exercised, excluding cashless exercise of $0.7 million and $0.5 million in 2016 and 2015, respectively
|
|
$
|
1,963
|
|
|
$
|
1,579
|
|
|
$
|
653
|
|
Tax benefits
|
|
$
|
600
|
|
|
$
|
400
|
|
|
$
|
260
|
|
Intrinsic value of stock options exercised
|
|
$
|
2,258
|
|
|
$
|
1,860
|
|
|
$
|
1,137
|
|
The following table summarizes
additional stock option information as of December 31, 2017:
|
|
|
|
Options outstanding
|
|
|
|
|
Number
|
|
weighted average remaining
|
|
Options
|
Exercise prices
|
|
outstanding
|
|
contractual life
|
|
exercisable
|
$19.33
|
|
77,960
|
|
1.00 years
|
|
77,960
|
$22.20
|
|
2,800
|
|
1.08 years
|
|
2,000
|
$23.61
|
|
117,540
|
|
4.00 years
|
|
45,150
|
$25.29 - $28.82
|
|
13,000
|
|
2.85 years
|
|
5,500
|
$26.40
|
|
4,000
|
|
3.08 years
|
|
1,000
|
$27.80
|
|
102,600
|
|
3.00 years
|
|
59,120
|
$29.36
|
|
2,000
|
|
1.68 years
|
|
1,500
|
$32.12 - $32.83
|
|
137,900
|
|
4.93 years
|
|
28,955
|
$33.95
|
|
4,000
|
|
4.09 years
|
|
—
|
$35.75
|
|
99,580
|
|
2.00 years
|
|
78,560
|
$40.15
|
|
2,000
|
|
4.70 years
|
|
—
|
$43.80
|
|
167,600
|
|
6.00 years
|
|
—
|
Totals
|
|
730,980
|
|
3.86 years
|
|
299,745
|
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
As of December 31, 2017, the
weighted average exercise price of options exercisable was $27.45 and the weighted average remaining contractual life of options
exercisable is 2.51 years. The aggregate intrinsic value of options exercisable at December 31, 2017 is $4.8 million.
The Chief Executive Officer and
the President each exercised 19,000 outstanding stock options of the Company’s common stock in 2016 and 2015. The aggregate
exercise prices of $0.7 million in 2016 and $0.5 million in 2015 were paid by them tendering to the Company in 2016 and 2015 an
aggregate of 20,658 and 18,764 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 Executive Officer tendered in 2016 and 2015 an additional 2,179 and 1,299 shares, respectively, 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 performance condition requirement,
and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance 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.
The fair value of the grant of
$25.00 per share has been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext
on the date of grant taking into account the dividend yield as no dividends on this grant will be earned until the shares are distributed.
The estimated number of shares to be distributed of 137,381, subject to adjustment for stock splits, has been determined taking
into account employee turnover. The aggregate cost of the grant, approximately $3.4 million, will be recognized as compensation
cost by Interparfums SA on a straight-line basis over the requisite three year service period. The total compensation cost recognized
in 2017 and 2016 was $1.2 million and $0.4 million, respectively.
To avoid dilution of the Company’s
ownership of Interparfums SA, all shares to be distributed pursuant to this plan will be pre-existing shares of Interparfums SA,
purchased in the open market by Interparfums SA. In 2016, 108,348 shares were acquired in the open market at an aggregate cost
of $2.9 million, and such amount has been classified as an equity transaction on the accompanying balance sheet.
Dividends
In October 2017, the Board of
Directors of the Company authorized a 24% increase in the annual dividend to $0.84 per share. The quarterly dividend aggregating
approximately $6.6 million ($0.21 per share) declared in December 2017 was paid in January 2018. The next quarterly dividend
of $0.21 per share will be paid on April 13, 2018 to shareholders of record on March 30, 2018.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
|
(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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$
|
41,594
|
|
|
$
|
33,331
|
|
|
$
|
30,437
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
31,172,285
|
|
|
|
31,072,328
|
|
|
|
30,996,137
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
132,816
|
|
|
|
103,270
|
|
|
|
104,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
31,305,101
|
|
|
|
31,175,598
|
|
|
|
31,100,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Inter Parfums, Inc. common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.07
|
|
|
$
|
0.98
|
|
Diluted
|
|
|
1.33
|
|
|
|
1.07
|
|
|
|
0.98
|
|
Not included in the above computations
is the effect of anti-dilutive potential common shares, which consist of outstanding options to purchase 165,000, 267,000, and
272,000 shares of common stock for 2017, 2016, and 2015, respectively.
|
(15)
|
Segments and Geographic Areas
|
The
Company
manufactures and distributes one product line, fragrances
and fragrance related products. The Company
manages its business in two segments, European based operations and United States
based operations. The European assets are located, and operations are primarily conducted, in France. Both European and United
States operations primarily represent the sale of prestige brand name fragrances.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
Information on the Company’s
operations by segments is as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
116,244
|
|
|
$
|
117,256
|
|
|
$
|
105,851
|
|
Europe
|
|
|
476,660
|
|
|
|
404,198
|
|
|
|
362,911
|
|
Eliminations of intercompany sales
|
|
|
(1,653
|
)
|
|
|
(382
|
)
|
|
|
(222
|
)
|
|
|
$
|
591,251
|
|
|
$
|
521,072
|
|
|
$
|
468,540
|
|
Net income attributable to Inter Parfums, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,051
|
|
|
$
|
8,285
|
|
|
$
|
7,640
|
|
Europe
|
|
|
34,577
|
|
|
|
25,120
|
|
|
|
22,797
|
|
Eliminations
|
|
|
(34
|
)
|
|
|
(74
|
)
|
|
|
—
|
|
|
|
$
|
41,594
|
|
|
$
|
33,331
|
|
|
$
|
30,437
|
|
Depreciation and amortization expense including impairment loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,943
|
|
|
$
|
1,816
|
|
|
$
|
1,583
|
|
Europe
|
|
|
7,971
|
|
|
|
13,525
|
|
|
|
7,495
|
|
|
|
$
|
11,914
|
|
|
$
|
15,341
|
|
|
$
|
9,078
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
58
|
|
|
$
|
22
|
|
|
$
|
18
|
|
Europe
|
|
|
2,925
|
|
|
|
3,309
|
|
|
|
2,977
|
|
|
|
$
|
2,983
|
|
|
$
|
3,331
|
|
|
$
|
2,995
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Europe
|
|
|
1,991
|
|
|
|
2,340
|
|
|
|
2,824
|
|
|
|
$
|
1,991
|
|
|
$
|
2,340
|
|
|
$
|
2,826
|
|
Income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,764
|
|
|
$
|
4,278
|
|
|
$
|
3,923
|
|
Europe
|
|
|
19,069
|
|
|
|
19,596
|
|
|
|
17,604
|
|
Eliminations
|
|
|
(21
|
)
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
$
|
22,812
|
|
|
$
|
23,826
|
|
|
$
|
21,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
92,909
|
|
|
$
|
89,930
|
|
|
$
|
80,761
|
|
Europe
|
|
|
694,385
|
|
|
|
602,077
|
|
|
|
616,199
|
|
Eliminations of investment in subsidiary
|
|
|
(9,522
|
)
|
|
|
(9,598
|
)
|
|
|
(9,301
|
)
|
|
|
$
|
777,772
|
|
|
$
|
682,409
|
|
|
$
|
687,659
|
|
Additions to long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
980
|
|
|
$
|
930
|
|
|
$
|
1,283
|
|
Europe
|
|
|
3,089
|
|
|
|
4,812
|
|
|
|
122,663
|
|
|
|
$
|
4,069
|
|
|
$
|
5,742
|
|
|
$
|
123,946
|
|
Total long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,284
|
|
|
$
|
12,247
|
|
|
$
|
13,133
|
|
Europe
|
|
|
201,541
|
|
|
|
181,697
|
|
|
|
197,535
|
|
|
|
$
|
210,825
|
|
|
$
|
193,944
|
|
|
$
|
210,668
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
781
|
|
|
$
|
194
|
|
|
$
|
365
|
|
Europe
|
|
|
8,808
|
|
|
|
7,848
|
|
|
|
6,817
|
|
Eliminations
|
|
|
69
|
|
|
|
48
|
|
|
|
—
|
|
|
|
$
|
9,658
|
|
|
$
|
8,090
|
|
|
$
|
7,182
|
|
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
United States export sales were
approximately $71.4 million, $77.5 million and $66.3 million in 2017, 2016 and 2015, respectively. Consolidated net sales to customers
by region are as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
North America
|
|
$
|
176,900
|
|
|
$
|
149,000
|
|
|
$
|
125,700
|
|
Europe
|
|
|
214,800
|
|
|
|
194,700
|
|
|
|
170,600
|
|
Central and South America
|
|
|
51,200
|
|
|
|
44,000
|
|
|
|
41,100
|
|
Middle East
|
|
|
50,500
|
|
|
|
41,600
|
|
|
|
41,900
|
|
Asia
|
|
|
88,000
|
|
|
|
81,300
|
|
|
|
78,200
|
|
Other
|
|
|
9,900
|
|
|
|
10,500
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
591,300
|
|
|
$
|
521,100
|
|
|
$
|
468,500
|
|
Consolidated net sales to customers in major countries
are as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
173,000
|
|
|
$
|
144,000
|
|
|
$
|
122,000
|
|
United Kingdom
|
|
$
|
33,000
|
|
|
$
|
31,000
|
|
|
$
|
32,000
|
|
France
|
|
$
|
44,000
|
|
|
$
|
47,000
|
|
|
$
|
34,000
|
|
The Company or its subsidiaries
file income tax returns in the U.S. federal, and various states and foreign jurisdictions.
The Company assessed its uncertain
tax positions and determined that it has no uncertain tax position at December 31, 2017.
The components of income before
income taxes consist of the following:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. operations
|
|
$
|
10,761
|
|
|
$
|
12,441
|
|
|
$
|
11,564
|
|
Foreign operations
|
|
|
67,304
|
|
|
|
54,633
|
|
|
|
48,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,065
|
|
|
$
|
67,074
|
|
|
$
|
60,496
|
|
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
The provision for current and
deferred income tax expense (benefit) consists of the following:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,050
|
|
|
$
|
3,792
|
|
|
$
|
3,660
|
|
State and local
|
|
|
302
|
|
|
|
309
|
|
|
|
220
|
|
Foreign
|
|
|
19,051
|
|
|
|
21,099
|
|
|
|
16,806
|
|
|
|
|
23,403
|
|
|
|
25,200
|
|
|
|
20,686
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(554
|
)
|
|
|
113
|
|
|
|
30
|
|
State and local
|
|
|
(55
|
)
|
|
|
9
|
|
|
|
1
|
|
Foreign
|
|
|
18
|
|
|
|
(1,496
|
)
|
|
|
810
|
|
|
|
|
(591
|
)
|
|
|
(1,374
|
)
|
|
|
841
|
|
Total income tax expense
|
|
$
|
22,812
|
|
|
$
|
23,826
|
|
|
$
|
21,527
|
|
The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net deferred tax assets:
|
|
|
|
|
|
|
|
|
Foreign net operating loss carry-forwards
|
|
$
|
520
|
|
|
$
|
821
|
|
Inventory and accounts receivable
|
|
|
1,557
|
|
|
|
1,875
|
|
Profit sharing
|
|
|
4,212
|
|
|
|
3,187
|
|
Stock option compensation
|
|
|
502
|
|
|
|
864
|
|
Effect of inventory profit elimination
|
|
|
3,166
|
|
|
|
2,888
|
|
Other
|
|
|
222
|
|
|
|
(724
|
)
|
Total gross deferred tax assets, net
|
|
|
10,179
|
|
|
|
8,911
|
|
Valuation allowance
|
|
|
(520
|
)
|
|
|
(821
|
)
|
Net deferred tax assets
|
|
|
9,659
|
|
|
|
8,090
|
|
Deferred tax liabilities (long-term):
|
|
|
|
|
|
|
|
|
Trademarks and licenses
|
|
|
(3,821
|
)
|
|
|
(3,449
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax liabilities
|
|
|
(3,821
|
)
|
|
|
(3,449
|
)
|
Net deferred tax assets
|
|
$
|
5,838
|
|
|
$
|
4,641
|
|
Valuation allowances are provided
for foreign net operating loss carry-forwards, as future profitable operations from certain foreign subsidiaries might not be sufficient
to realize the full amount of net operating loss carry-forwards.
No other valuation allowances
have been provided as management believes that it is more likely than not that the asset will be realized in the reduction of future
taxable income.
Tax Cuts and Jobs Act
On December 22, 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: (i) reducing the future U.S. federal corporate tax rate from 35% to 21%; (ii) requiring
companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and (iii) bonus depreciation
that will allow for full expensing of qualified property.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
The Tax Act also established
new tax laws that will 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 U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a
new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production
activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the
use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation
an immediate deduction for a portion of its foreign derived intangible income (“FDII”).
The Securities and Exchange Commission
staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the
Tax Act. SAB 118 provides a measurement 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 accordance 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 accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable
estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate
to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws
that were in effect immediately before the enactment of the Tax Act.
The Company’s accounting
for certain elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of the effects and,
therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax Act,
the Company has 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
liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the Company must determine the amount
of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid
on such earnings. While the Company was able to make a reasonable estimate of the transition tax, it is continuing to gather additional
information to more precisely compute the final amount. Likewise, while the Company was able to make a reasonable estimate of the
impact of the reduction to the corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but
not limited to, the state tax effect of adjustments made to federal temporary differences. Due to the complexity of the new GILTI
tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under GAAP, the
Company is allowed to make an accounting policy choice to either: (1) treat taxes due on future U.S. inclusions in taxable
income related to GILTI as a current-period expense when incurred (the “period cost method”); or (2) factor in
such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s
selection of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis and potential future
modifications to existing structure, which are not currently known. Accordingly, the Company has not made any adjustments related
to potential GILTI tax in our financial statements and has not made a policy decision regarding whether to record deferred taxes
on GILTI. The Company will continue to analyze the full effects of the Tax Act on its financial statements. The impact of the Tax
Act may differ from the current estimate, possibly materially, due to changes in interpretations and assumptions the Company has
made, future guidance that may be issued and actions the Company may take as a result of the law.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
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 has filed a claim for refund of approximately $3.6 million (€3.2 million) for these taxes paid since 2015 including
accrued interest of approximately $0.4 million. The Company recorded the refund claim in the accompanying financial statements
as of December 31, 2017.
Settlement with French
Tax Authorities
As previously reported, the French
Tax Authorities examined the 2012 tax return of Interparfums SA. The main issues challenged 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 in March 2016.
Other Tax Matters
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 2014.
Differences between the United
States Federal statutory income tax rate and the effective income tax rate were as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State and local taxes, net of Federal benefit
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Deferred tax effect of statutory tax rate changes
|
|
|
1.4
|
|
|
|
—
|
|
|
|
—
|
|
Foreign income tax recovery
|
|
|
(4.6
|
)
|
|
|
—
|
|
|
|
—
|
|
Effect of foreign taxes greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
(less than) U.S. statutory rates
|
|
|
(1.0
|
)
|
|
|
1.5
|
|
|
|
1.6
|
|
Other
|
|
|
(0.8
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rates
|
|
|
29.2
|
%
|
|
|
35.5
|
%
|
|
|
35.6
|
%
|
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
(In thousands except share and per
share data)
|
(17)
|
Accumulated Other Comprehensive Loss
|
The components of accumulated other
comprehensive loss consist of the following:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative instruments, beginning of year
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Net derivative instrument loss, net of tax
|
|
|
54
|
|
|
|
(17
|
)
|
|
|
—
|
|
Net derivative instruments, end of year
|
|
|
37
|
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments, beginning of year
|
|
|
(57,965
|
)
|
|
|
(48,091
|
)
|
|
|
(15,823
|
)
|
Translation adjustments
|
|
|
40,096
|
|
|
|
(9,874
|
)
|
|
|
(32,268
|
)
|
Cumulative translation adjustments, end of year
|
|
|
(17,869
|
)
|
|
|
(57,965
|
)
|
|
|
(48,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(17,832
|
)
|
|
$
|
(57,982
|
)
|
|
$
|
(48,091
|
)
|
|
(18)
|
Net Income Attributable to Inter Parfums, Inc. and Transfers from the Noncontrolling Interest
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Inter Parfums, Inc.
|
|
$
|
41,594
|
|
|
$
|
33,331
|
|
|
$
|
30,437
|
|
Decrease in Inter Parfums,
Inc.’s additional paid-in capital for subsidiary share transactions
|
|
|
—
|
|
|
|
(1,926
|
)
|
|
|
(192
|
)
|
Change from net income attributable to Inter Parfums, Inc. and transfers
from noncontrolling interest
|
|
$
|
41,594
|
|
|
$
|
31,405
|
|
|
$
|
30,245
|
|
See accompanying reports of independent registered public accounting
firm.