INTER
PARFUMS, INC. AND SUBSIDIARIES
Item
2: |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
|
Forward
Looking Information
Statements
in this report which are not historical in nature are forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in such forward-looking statements are reasonable, we can give
no
assurance that such plans, intentions or expectations will be achieved.
In some
cases you can identify forward-looking statements by forward-looking words
such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will" and "would" or similar words. You should not rely on
forward-looking statements because actual events or results may differ
materially from those indicated by these forward-looking statements as
a result
of a number of important factors. These factors include, but are not limited
to,
the risks and uncertainties discussed under the headings “Forward Looking
Statements” and "Risk Factors" in Inter Parfums' annual report on Form 10-K for
the fiscal year ended December 31, 2006, and the reports Inter Parfums
files
from time to time with the Securities and Exchange Commission. Inter Parfums
does not intend to and undertakes no duty to update the information contained
in
this report.
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.
Our
prestige fragrance products are produced and marketed by our European operations
through our 71% owned subsidiary in Paris, Inter Parfums, S.A., which is
also a
publicly traded company as 29% of Inter Parfums, S.A. shares trade on the
Euronext.
We
produce and distribute our prestige products primarily under license agreements
with brand owners and prestige product sales represented approximately
87% of
net sales for the nine month period ended September 30, 2007. We have built
a
portfolio of brands, which include Burberry,
Lanvin, Paul Smith, S.T. Dupont, Christian Lacroix, Quiksilver/Roxy, Van
Cleef
& Arpels and Nickel
whose
products are distributed in over 120 countries around the world. Burberry
is our
most significant license; sales of Burberry products represented 56% and
59% of
net sales for the nine month periods ended September 30, 2007 and 2006,
respectively. Prestige cosmetics and prestige skin care products represent
less
than 3% of consolidated net sales.
Our
specialty retail and mass-market fragrance and fragrance related products
are
marketed through our United States operations and represented 13% of sales
for
the nine month period ended September 30, 2007. These products are sold
under
trademarks owned by us or pursuant to license or other agreements with
the
owners of the Gap,
Banana
Republic, New York & Company, Aziza and
Jordache
trademarks.
We
grow
our business in two distinct ways. First, we grow by adding new brands
to our
portfolio, either through new licenses or out-right acquisitions of brands.
Second, we grow through the creation of fragrance family extensions within
the
existing brands in our portfolio. Every two to three years, we create a
new
family of fragrances for each brand in our portfolio.
INTER
PARFUMS, INC. AND
SUBSIDIARIES
Our
business is not capital intensive, and it is important to note that we
do not
own any 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 finished
goods
for us and deliver them to the respective distribution center.
Recent
Important Events
Lanvin
In
July
2007, we acquired the worldwide rights to the Lanvin brand names and
international trademarks listed in Class 3 from Lanvin. Among other items,
Class
3 of the international classification of trademarks goods and services
include:
soaps, perfumery, essential oils, cosmetics and hair lotions. We paid
€22
million (approximately $29.7 million) in cash for the brand names and trademarks
and simultaneously terminated our existing license agreement. We also agreed
to
pay to Lanvin a sales based fee for technical and creative assistance in
new
product development to be rendered by Lanvin in connection with our use
of the
trademarks through June 30, 2019. In addition, Lanvin has the right to
repurchase the brand names and trademarks in 2025 for the greater of
€70
million or one times the average of the annual sales for the years ending
December 31, 2023 and 2024.
In
September 2007, in connection with the acquisition, we entered into a
€22
million
five-year credit agreement. The long-term credit facility, which bears
interest
at 0.40% above the three month EURIBOR rate provides for principal to be
repaid
in 20 equal quarterly installments.
New
York & Company
In
April
2007, we entered into an exclusive agreement with New York & Company, Inc.
under which we design and manufacture personal care products to be sold
at the
New York & Company retail locations and on their website. We are responsible
for product development, formula creation, packaging and manufacturing
while New
York & Company is responsible for marketing and selling in its
stores.
Van
Cleef & Arpels
In
September 2006, we entered into an
exclusive, worldwide license agreement
with
Van
Cleef
& Arpels Logistics SA, for the creation, development and distribution of
fragrance and related bath and body products under the Van Cleef & Arpels
brand and related trademarks. Van Cleef & Arpels is a prestigious and
legendary world-renowned jewelry designer. The agreement runs through December
31, 2018. As an inducement to enter into this license agreement, in January
2007
we paid €18
million (approximately $23.8 million) to Van Cleef & Arpels Logistics SA in
a lump sum, up front payment, which amount is included in trademarks, licenses,
and other intangible assets in the accompanying consolidated balance sheets,
and
we purchased existing inventory held by YSL
Beauté, the
former licensee. The license agreement became effective on January 1, 2007.
INTER
PARFUMS, INC. AND
SUBSIDIARIES
In
January 2007, the up front payment was financed with an €18
million five-year credit agreement. The long-term credit facility, which
bears
interest at 4.1% provides for principal to be repaid in 20 equal quarterly
installments.
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. The following is a brief
discussion of the more critical accounting policies that we employ.
Revenue
Recognition
We
sell
our products to department stores, perfumeries, specialty retailers, mass-market
retailers, supermarkets 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 Euros or U.S. dollars.
Accounts
receivable reflect the granting of credit to these customers. We generally
grant
credit based upon our analysis of the customer’s financial position as well as
previously established buying patterns. We recognize revenues when merchandise
is shipped and the risk of loss passes to the customer. Net sales are comprised
of gross revenues less returns, and trade discounts and allowances.
Sales
Returns
Generally,
we do not permit customers to return their unsold products. However, on
a
case-by-case basis we occasionally allow customer returns. 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.
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.
Promotional
Allowances
We
have
various performance-based arrangements with certain retailers. These
arrangements primarily allow customers to take deductions against amounts
owed
to us for product purchases. The costs that the Company incurs for performance
based arrangements, shelf replacement costs and slotting fees are netted
against
revenues on the Company’s consolidated statement of income. Estimated accruals
for promotions and advertising programs are recorded in the period in which
the
related revenue is recognized. We review and revise the estimated accruals
for
the projected costs for these promotions. Actual costs incurred may differ
significantly, either favorably or unfavorably, from estimates if factors
such
as the level and success of the retailers’ programs or other conditions differ
from our expectations.
INTER
PARFUMS, INC. AND SUBSIDIARIES
Inventories
Inventories
are stated at the lower of cost or market 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 requirements 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.
Long-lived
assets, including trademarks, licenses, goodwill and other rights, are
reviewed
for impairment whenever events or changes in circumstances indicate that
the
carrying amount of any such asset may not be recoverable. If the sum of
the
undiscounted cash flows (excluding interest) is less than the carrying
value,
then we recognize an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. The estimate of undiscounted
cash flows is based upon, among other things, certain assumptions about
expected
future operating performance. Our estimates of undiscounted cash flows
may
differ from actual cash flows due to, among other things, economic conditions,
changes to our business model or changes in consumer acceptance of our
products.
In those cases where we determine that the useful life of long-lived assets
should be shortened, we would depreciate 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.
Income
Taxes
Deferred
income taxes are recognized for the tax consequences of temporary differences
by
applying enacted statutory tax rates applicable to future years to the
difference between the financial statement carrying amounts and the tax
bases of
existing assets and liabilities. Tax benefits recognized are reduced by a
valuation allowance where it is more likely than not that the benefits
may not
be realized.
INTER
PARFUMS, INC. AND
SUBSIDIARIES
Results
of Operations
Three
and Nine Months Ended September 30, 2007 as Compared to the Three and Nine
Months Ended September 30, 2006
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Three
months ended
September
30,
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Nine
months ended
September
30,
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2007
|
|
2006
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%
Change
|
|
2007
|
|
2006
|
|
%
Change
|
|
|
|
(in
millions)
|
|
European
based product sales
|
|
$
|
88.1
|
|
$
|
76.1
|
|
|
16
|
%
|
$
|
234.1
|
|
$
|
199.7
|
|
|
17
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%
|
United
States based product sales
|
|
|
14.2
|
|
|
13.6
|
|
|
4
|
%
|
|
36.1
|
|
|
31.2
|
|
|
16
|
%
|
|
|
$
|
102.3
|
|
$
|
89.7
|
|
|
14
|
%
|
$
|
270.2
|
|
$
|
230.9
|
|
|
17
|
%
|
Consolidated
net sales for the three months ended September 30, 2007 increased 14% to
$102.3
million, as compared to $89.7 million for the corresponding period of the
prior
year. At comparable foreign currency exchange rates, net sales increased
9% for
the period.
Consolidated
net sales for the nine months ended September 30, 2007 increased 17% to
$270.2
million, as compared to $230.9 million for the corresponding period of
the prior
year. At comparable foreign currency exchange rates, net sales increase
12% for
the period. The continued weakness of the US dollar relative to the euro
gave
rise to the difference between constant dollar and reported net
sales.
European
based prestige product sales increased 16% for the three months ended September
30, 2007 and 17% for the nine months ended September 30, 2007, as compared
to
the
corresponding periods of the prior year. Sales growth for the three months
ended
September 30, 2007 was driven by launches of our first Roxy
fragrance and our new Paul
Smith Rose
fragrance line. Despite the high threshold set in 2006 with the launch
of
Burberry
London,
Burberry fragrance achieved sales growth of 5% and 11% (0% and 4% in constant
dollars) for the three and nine months ended September 30, 2007, respectively,
as
compared to the
corresponding periods of the prior year.
In
January 2007, we began operations pursuant to our exclusive,
worldwide license with
Van
Cleef
& Arpels Logistics SA, a prestigious and legendary world-renowned jewelry
designer. The agreement runs through December 31, 2018, and the integration
of
the brand is now underway. Sales of existing products under the Van Cleef
&
Arpels brand aggregated approximately $4.0 million and $10.1 million for
the
three and nine month periods ended September 30, 2007, respectively.
During
the first half of 2007 we began operations of our four newly established
majority-owned European distribution subsidiaries. Shipments to these
subsidiaries are not recognized as sales until that merchandise is sold
by the
distribution subsidiary to its customers. Sales have been slightly below
expectations due to a slower than expected startup of our distribution
subsidiaries and their build-up inventory in preparation for the new product
launches and the holiday season.
INTER
PARFUMS, INC. AND SUBSIDIARIES
We
are
now preparing for a very active launch schedule for 2008 which begins in
the
first quarter of 2008, with a new fragrance family for Burberry fragrances.
Our
license with Quiksilver was recently amended to include men’s fragrance; the
debut of the first Quiksilver fragrance is scheduled for September 2008.
Other
brands expecting new products include: Lanvin, Roxy, Paul Smith and Van
Cleef
& Arpels.
With
respect to our United States specialty retail and mass-market products,
net
sales were up 4% and 16% for the three and nine month periods ended September
30, 2007, respectively, as compared to the corresponding periods of the
prior
year. In
early
2006, we began shipping Gap, Gap Outlet, Banana Republic and Banana Republic
Factory Stores, their existing fragrance and personal care products. In
August
2006 we launched the
Banana Republic Discover Collection, a family of five fragrances which
debuted
in all Banana Republic North American stores in September. The initial
collection consisted of three scents for women and two for men. Bath and
body
products as well as home fragrance products were also created to complement
the
fragrance selection. The Discover Collection was enlarged by two new scents
in
the fall of 2007, and the Banana Republic product selection continues to
grow
In
May
2007, over 150 Gap Body stores in the United States and Canada unveiled
the more
than 70 new bath and body products we created for them. The bath and body
line
was followed in the third quarter by new Gap eau de toilette products and
men’s
fragrance and grooming products. All product lines were rolled-out to
approximately 200 Gap stores in August and approximately 300 Gap stores
in
October. Finally, we are in process of shipping a complete assortment of
holiday
programs for both Gap and Banana Republic North American stores.
Sales
of
mass market fragrances and fragrance related products have been in a decline
for
several years. We believe that rising oil and gas prices are a significant
cause
for declining sales in the dollar store markets, as dollar store customers
have
less disposable cash. Although we have no plans to discontinue sales to
this
market, we have been and continue to consolidate our product offerings.
In
April
2007, we entered into an exclusive agreement with New York & Company, Inc.
under which we design and manufacture personal care products to be sold
at the
New York & Company retail locations and on their website. The initial line
of bath and body products designed and developed for New York & Company
stores will be in their stores for the 2007 Holiday season.
In
addition, we are actively pursuing other new business opportunities. However,
we
cannot assure you that any new license or acquisitions will be
consummated.
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Three
months ended
September
30,
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Nine
months ended
September
30,
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|
|
2007
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2006
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|
2007
|
|
2006
|
|
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|
(in
millions)
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Net
sales
|
|
$
|
102.3
|
|
$
|
89.7
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|
$
|
270.2
|
|
$
|
230.9
|
|
Cost
of sales
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|
|
42.2
|
|
|
41.0
|
|
|
110.1
|
|
|
102.2
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Gross
margin
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|
$
|
60.1
|
|
$
|
48.7
|
|
$
|
160.1
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|
$
|
128.7
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|
Gross
margin as a percent of net sales
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|
|
59
|
%
|
|
54
|
%
|
|
59
|
%
|
|
56
|
%
|
INTER
PARFUMS, INC. AND SUBSIDIARIES
Gross
profit margin was 59% for the three and nine month periods ended
September 30, 2007, respectively, as compared to 54% and 56% for the three
and nine month periods ended September 30, 2006, respectively. The gross
margin
increases for both the three and nine month periods ended September 30,
2007 are
the result of the commencement of operations of our newly established
majority-owned European distribution subsidiaries. Sales of products
from our
European based prestige fragrances generate significantly higher gross
profit
margins than sales of our United States based specialty retail and mass-market
products.
Generally,
we do not bill customers for shipping and handling costs and such costs,
which
aggregated $1.8 million and $4.6 million for the three and nine month
periods
ended September 30, 2007, respectively, as compared to $1.4 million and
$3.5
million for the corresponding period of the prior year, are included
in selling,
general and administrative expense in the consolidated statements of
income. As
such, our Company’s gross profit may not be comparable to other companies which
may include these expenses as a component of cost of goods sold.
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Three months ended
September 30,
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Nine months ended
September 30,
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2007
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2006
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2007
|
|
2006
|
|
|
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(in
millions)
|
|
|
|
|
|
|
|
|
|
|
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Selling,
general & administrative
|
|
$
|
47.7
|
|
$
|
39.3
|
|
$
|
129.2
|
|
$
|
103.7
|
|
Selling,
general & administrative as a percent of net sales
|
|
|
47
|
%
|
|
44
|
%
|
|
48
|
%
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|
45
|
%
|
Selling,
general and administrative expense increased 21% and 25% for
the
three and nine-month periods ended September 30, 2007, respectively,
as compared
to the corresponding periods of the prior year. As a percentage of sales,
selling, general and administrative expense was 47% and 48% of sales
for the
three and nine-month periods ended September 30, 2007, respectively,
as compared
to 44% and 45% for the corresponding periods of the prior year.
Promotion
and advertising included in selling, general and administrative expenses
aggregated $15.9 million and $41.6
million for the three and nine month periods ended September 30, 2007,
respectively, as compared to $13.1 million and $35.1 million, respectively,
for
the corresponding periods of the prior year. Royalty expense, included
in
selling, general, and administrative expenses, aggregated $9.1 million
and $26.6
million for the three and nine month periods ended September 30, 2007,
respectively, as compared to $10.5 million and $23.4 million, respectively,
for
the corresponding periods of the prior year. As previously reported,
royalty
expense for the three months ended September 30, 2006 includes a catch
up amount
of approx-imately $1.5 million resulting from the September 2006 Burberry
license amendment which, among other matters, simplified the method of
calculating royalties retroactive to January 1, 2006.
The
balance of the increase in selling, general and administrative expenses
as a
percentage of sales for the 2007 periods as compared to the 2006 periods
is the
result of operating expenses related to our newly established majority-owned
European distribution subsidiaries.
Income
from operations increased 31% to $12.4 million for the for the three
month
period ended September 30, 2007, as compared to $9.4 million for the
corresponding period of the prior year. Income from operations increased
24% to
$31.0 million for the nine month period ended September 30, 2007, as
compared to
$25.0 million for the corresponding period of the prior year. Operating
margins
were 12.1% and 11.5% of net sales for the three and nine month periods
ended
September 30, 2007, respectively, as compared to 10.5% and 10.8% for
the
corresponding periods of the prior year.
INTER
PARFUMS, INC. AND SUBSIDIARIES
Interest
expense aggregated $0.9 million and $2.2 million for the three and nine
month
periods ended September 30, 2007, as compared to $0.3 million and $0.8
million
for the corresponding periods of the prior year. We
use
the credit lines available to us, as needed, to finance our working capital
needs. In addition, an €18
million and a €22
million
long-term credit agreements were entered into in January 2007 and September
2007, respectively to finance payments required for the Van Cleef & Arpels
license agreement and the acquisition of the Lanvin trademarks.
Foreign
currency gains or (losses) aggregated $0.02 million and ($0.10) million
for
the
three and nine month periods ended September 30, 2007, respectively,
as compared
to gains of $0.07 million and $0.40 million for the three and nine month
periods
ended September 30, 2006, respectively. We
enter
into foreign currency forward exchange contracts to manage exposure related
to
certain foreign currency commitments.
Our
effective income tax rate was 34% and 33% for the three and nine month
periods
ended September 30, 2007, respectively, as compared to 34% for both the
three
and nine month periods ended September 30, 2006. Jurisdictions in which
our new
distribution subsidiaries operate carry slightly lower effective tax
rates than
France and the United States thereby reducing our overall effective tax
rate. No
significant changes in tax rates were experienced nor were any expected
in the
jurisdictions where we operate.
Net
income increased 22% to $5.7 million for the three month period ended
September 30, 2007, as compared to $4.6 million for the corresponding
period of the prior year. Net income increased 24% to $15.2 million for
the nine
month period ended September 30, 2007, as compared to $12.3 million for
the
corresponding period of the prior year.
Diluted
earnings per share were $0.27 and $0.23 for the three month periods ended
September 30, 2007 and 2006, respectively and diluted earnings per share
were
$0.74 and $0.60 for the nine month periods ended September 30, 2007 and
2006,
respectively. Weighted average shares outstanding aggregated 20.4 million
for
both the three and nine month periods ended September 30, 2007, as compared
to
20.3 million for both corresponding periods of the prior year. On a diluted
basis, average shares outstanding were 20.7 million for both the three
and nine
month periods ended September 30, 2007, as compared to 20.5 million and
20.6 million for the corresponding periods of the prior year.
Liquidity
and Capital Resources
Our
financial position remains strong. At September 30, 2007, working capital
aggregated $172 million and we had a working capital ratio of 2.4 to
1. Cash and
cash equivalents aggregated $54 million.
INTER
PARFUMS, INC. AND SUBSIDIARIES
In
July
2007, we acquired the worldwide rights to the Lanvin brand names and
international trademarks listed in Class 3 from Lanvin. Among other items,
Class
3 of the international classification of trademarks goods and services
include:
soaps, perfumery, essential oils, cosmetics and hair lotions. We paid
€22
million (approximately $29.7 million) in cash for the brand names and
trademarks
and simultaneously terminated our existing license agreement. We also
agreed to
pay to Lanvin a sales based fee for technical and creative assistance
in new
product development to be rendered by Lanvin in connection with our use
of the
trademarks through June 30, 2019. In addition, Lanvin has the right to
repurchase the brand names and trademarks in 2025 for the greater of
€70
million or one times the average of the annual sales for the years ending
December 31, 2023 and 2024. In September 2007, in connection with the
acquisition, we entered into a €22
million
five-year credit agreement. The long-term credit facility, which bears
interest
at 0.40% above the three month EURIBOR rate provides for principal to
be repaid
in 20 equal quarterly installments.
In
June
2007, the minority shareholders if Nickel S.A., a consolidated subsidiary
of the
Company, exercised their rights to sell their remaining 32.5% interest
in Nickel
S.A. to the Company for approximately $4.7 million in cash. The acquisition
was
accounted for under the purchase method.
In
September 2006, we entered into an exclusive, worldwide license agreement
with
Van Cleef & Arpels Logistics SA, for the creation, development and
distribution of fragrance and related bath and body products under the
Van Cleef
& Arpels brand and related trademarks. As an inducement to enter into this
license agreement, in January 2007 we paid €18 million (approximately $23.8
million) to Van Cleef & Arpels Logistics SA in a lump sum, up front payment
and we purchased existing inventory of approximately $2.1 million held
by YSL
Beauté, the former licensee. In January 2007, the up front payment was financed
with an €18
million five-year credit agreement. The long-term credit facility, which
bears
interest at 4.1% provides for principal to be repaid in 20 equal quarterly
installments.
Cash
used
in operating activities aggregated $8.7 million and $6.6 million for
the
nine-month periods ended September 30, 2007 and 2006, respectively. A
significant inventory build up during the first nine months of 2007 (up
39% from
December 31, 2006 without currency effect) is required to support the
2007
product launch schedule as well as the anticipated debut of the newest
Burberry
fragrance planned for the first quarter of 2008.
Cash
flows used in investing activities in 2007, reflects the payment of $4.7
million
for the remaining portion of Nickel S.A. and the $57.1 million payments
required
in connection with our acquisition of the Van Cleef & Arpels license
agreement and the Lanvin trademarks. The proceeds from long-term debt
facilities
entered into in connection with these acquisitions are reflected in financing
activities.
Cash
flows used in investing activities in 2007 also reflects net proceeds
of
approximately $13 million from the sale of short-term investments which
was used
to finance our working capital needs. Approximately $1.8 million was
spent for
capital items. Our business is not capital intensive as we do not own
any
manufacturing facilities. We typically spend between $2.0 and $3.0 million
per
year on tools and molds, depending on our new product development calendar.
The
balance of capital expenditures is for office fixtures, computer equipment
and
industrial equipment needed at our distribution centers. Capital expenditures
in
2007 are expected to be in the range of $2.5 million to $3.5 million,
considering our 2007 launch schedule and the renovation of our United
States
corporate offices.
INTER
PARFUMS, INC. AND SUBSIDIARIES
In
December 2006, our board of directors authorized an increase of our cash
dividend for 2007 from $0.16 to $0.20 per share, aggregating approximately
$4.1
million per annum, payable $.05 per share on a quarterly basis. Our next
cash
dividend of $.05 per share will be paid on January 15, 2008 to shareholders
of
record on December 31, 2007. Dividends paid, including dividends paid
once per
year to minority shareholders of Inter Parfums, S.A., aggregated $4.5
million
and $3.7 million for the nine month periods ended September 30, 2007
and 2006,
respectively. The cash dividend for 2007 represents a small part of our
cash
position and is not expected to have any significant impact on our financial
position.
Our
short-term financing requirements are expected to be met by available
cash on
hand at September 30, 2007, cash generated by operations and short-term
credit
lines provided by domestic and foreign banks. The principal credit facilities
for 2007 consist of a $12.0 million unsecured revolving line of credit
provided
by a domestic commercial bank and approximately $45.0 million in credit
lines
provided by a consortium of international financial institutions.
We
believe that funds generated from operations, supplemented by our present
cash
position and available credit facilities, 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 nine month period ended
September 30, 2007.
Contractual
Obligations
We
lease
our office and warehouse facilities under operating leases expiring through
2013. Obligations pursuant to these leases for the years ended December
31,
2007, 2008, 2009, 2010, 2011 and thereafter are $6.0 million, $6.1 million,
$6.2
million, $6.0 million, $4.6 million and $2.8 million, respectively.
We
are
obligated under a number of license agreements for the use of trademarks
and
rights in connection with the manufacture and sale of our products. Royalty
obligations pursuant to these license agreements for the years ended
December
31, 2007, 2008, 2009, 2010, 2011 and thereafter are $32.2 million, $33.3
million, $34.9 million, $35.4 million, $34.3 million and $201.0 million,
respectively. Advertising commitments pursuant to license agreements
for the
years ended December 31, 2007, 2008, 2009, 2010, 2011 and thereafter
are $103.1
million, $111.5 million, $118.0 million, $114.0 million, $112.0 million
and
$707.3 million, respectively. Future advertising commitments were estimated
based on planned future sales for the license terms that were in effect
at
December 31, 2006, without consideration for potential renewal periods.
The
figures included above do not reflect the fact that historically our
distributors have shared our advertising obligations on an approximate
50/50
basis.
Item
3: 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. Our French subsidiary primarily enters 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.
INTER
PARFUMS, INC. AND SUBSIDIARIES
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 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
Inter Parfums, S.A., 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, 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.
We
believe that our risk of loss as the result of nonperformance by any
of such
financial institutions is remote and in any event would not be material.
The
contracts have varying maturities with none exceeding one year. Costs
associated
with entering into such contracts have not been material to our financial
results. At September 30, 2007, we had foreign currency contracts in
the form of
forward exchange contracts in the amount of approximately U.S. $40.1
million and
GB Pounds 3.1 million.
Interest
Rate Risk Management
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.
We have
entered into two (2) interest rate swaps to reduce exposure to rising
variable
interest rates. The first swap, entered into in 2004, effectively exchanged
the
variable interest rate of 0.6% above the three month EURIBOR to a variable
rate
based on the 12 month EURIBOR rate with a floor of 3.25% and a ceiling
of 3.85%.
The remaining balance owed pursuant to this facility is €5.6 million. The second
swap entered into in September 2007 on €22 million of debt, effectively
exchanged the variable interest rate of 0.6% above the three month EURIBOR
to a
fixed rate of 4.42%. These derivative instruments are recorded at fair
value and
changes in fair value are reflected in the accompanying consolidated
statements
of income.
INTER
PARFUMS, INC. AND SUBSIDIARIES
Item
4. 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 quarterly report on Form 10-Q (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 adequate and effective to ensure that material
information relating to our Company and its consolidated subsidiaries
would be
made known to them by others within those entities, so that such material
information is recorded, processed and reported in a timely manner, particularly
during the period in which this quarterly report on Form 10-Q was being
prepared, and that no changes were required at this time.
Changes
in Internal Controls
There
has
been no change in our internal control over financial reporting (as defined
in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during
the
quarterly period covered by this report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, the Company's
internal
control over financial reporting.
Part
II. Other Information
Items
1, Legal Proceedings, 1A,
Risk
Factors, 2, Unregistered Sales of Equity Securities and Use of Proceeds,
3,
Defaults Upon Senior Securities, 4, Submission of Matters to a Vote of
Security
Holders
and
5,
Other Information,
are
omitted as they are either not applicable or have been included in
Part
I.
Item
6. Exhibits.
The
following document is filed herewith:
Exhibit
No.
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Description
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4.21.2
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Amendment
to the
Company’s 2004 Nonemployee Director Stock Option
Plan |
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31.1
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Certifications
required by Rule 13a-14(a) of Chief Executive Officer
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31.2
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Certifications
required by Rule 13a-14(a) of Chief Financial Officer
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32
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Certification
required by Section 906 of the Sarbanes-Oxley
Act
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INTER
PARFUMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned
thereunto
duly authorized on the 6th day of November 2007.
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INTER
PARFUMS, INC.
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By:
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/s/
Russell Greenberg
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Executive
Vice President and
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Chief
Financial Officer
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