Attached files

file filename
EX-32.1 - INTER PARFUMS INCv201161_ex32-1.htm
EX-32.2 - INTER PARFUMS INCv201161_ex32-2.htm
EX-31.1 - INTER PARFUMS INCv201161_ex31-1.htm
EX-31.2 - INTER PARFUMS INCv201161_ex31-2.htm
EX-10.143 - INTER PARFUMS INCv201161_ex10-143.htm
EX-10.144 - INTER PARFUMS INCv201161_ex10-144.htm
EX-10.144.1 - INTER PARFUMS INCv201161_ex10-144x1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
( MARK ONE )

x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2010.

OR

¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________to ________.

Commission File No. 0-16469

INTER PARFUMS, INC.
(Exact name of registrant as specified in its charter)

Delaware
13-3275609
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

551 Fifth Avenue, New York, New York             10176
(Address of Principal Executive Offices)        (Zip Code)

(212) 983-2640
(Registrants telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act).

Large accelerated Filer ¨
Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At November 8, 2010, there were 30,445,881 shares of common stock, par value $.001 per share, outstanding.

 
 

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

INDEX

 
Page Number
Part I.   Financial Information
1
   
Item 1. Financial Statements
 
   
Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009
2
   
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
3
   
Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
4
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
5
   
Notes to Consolidated Financial Statements
6
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
   
Item 4. Controls and Procedures
30
   
Part II.   Other Information
30
   
Item 6.   Exhibits
30
   
Signatures
31
 
 
 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Part I.  Financial Information

Item 1.  Financial Statements

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2009 included in our annual report filed on Form 10-K.

The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.

 
Page 1

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)

   
September 30,
2010
   
December 31,
2009
 
    
(unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 48,670     $ 100,467  
Short-term investments
    61,996        
Accounts receivable, net
    113,816       101,334  
Inventories
    106,273       85,428  
Receivables, other
    1,411       3,229  
Other current assets
    8,003       8,090  
Income tax receivable
    45        
Deferred tax assets
    5,651       4,088  
Total current assets
    345,865       302,636  
Equipment and leasehold improvements, net
    9,545       9,191  
Goodwill
    3,729       3,927  
Trademarks, licenses and other intangible assets, net
    94,272       101,799  
Other assets
    1,457       1,535  
Total assets
  $ 454,868     $ 419,088  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Loans payable – banks
  $ 6,548     $ 5,021  
Current portion of long-term debt
    11,273       11,732  
Accounts payable – trade
    57,987       48,138  
Accrued expenses
    56,932       37,440  
Income taxes payable
    6,236       1,646  
Dividends payable
    1,979       996  
Total current liabilities
    140,955       104,973  
Long-term debt, less current portion
    8,174       17,862  
Deferred tax liability
    7,337       8,840  
Equity:
               
Inter Parfums, Inc. shareholders’ equity:
               
Preferred stock, $.001 par; authorized 1,000,000 shares; none issued
               
Common stock, $.001 par; authorized 100,000,000 shares; outstanding 30,445,881 and 30,171,952 shares at September 30, 2010 and December 31, 2009, respectively
    30       30  
Additional paid-in capital
    48,674       45,126  
Retained earnings
    201,121       186,611  
Accumulated other comprehensive income
    18,306       30,000  
Treasury stock, at cost, 10,009,492 and 10,056,966 common shares at September 30, 2010 and December 31, 2009, respectively
    (34,151 )     (33,043 )
Total Inter Parfums, Inc. shareholders’ equity
    233,980       228,724  
Noncontrolling interest
    64,422       58,689  
Total equity
    298,402       287,413  
Total liabilities and equity
  $ 454,868     $ 419,088  

See notes to consolidated financial statements.

 
Page 2

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
    
2010
   
2009
   
2010
   
2009
 
                         
Net sales
  $ 120,853     $ 117,542     $ 347,991     $ 296,555  
                                 
Cost of sales
    49,578       50,462       140,271       125,709  
                                 
Gross margin
    71,275       67,080       207,720       170,846  
                                 
Selling, general and administrative expenses
    54,692       53,169       163,630       139,812  
                                 
Income from operations
    16,583       13,911       44,090       31,034  
                                 
Other expenses (income):
                               
Interest expense
    529       482       1,627       2,192  
(Gain) loss on foreign currency
    (461 )     (854 )     2,435       (4,796 )
Interest income
    (382 )     (135 )     (977 )     (745 )
                                 
      (314 )     (507 )     3,085       (3,349 )
                                 
Income before income taxes
    16,897       14,418       41,005       34,383  
                                 
Income taxes
    5,488       4,807       13,663       11,763  
                                 
Net income
    11,409       9,611       27,342       22,620  
                                 
Less:  Net income attributable to the noncontrolling interest
    2,961       2,349       6,988       5,704  
                                 
Net income attributable to Inter Parfums, Inc.
  $ 8,448     $ 7,262     $ 20,354     $ 16,916  
                                 
Earnings per share:
                               
                                 
Net income attributable to Inter Parfums, Inc. common shareholders:
                               
Basic
  $ 0.28     $ 0.24     $ 0.67     $ 0.56  
Diluted
  $ 0.28     $ 0.24     $ 0.67     $ 0.56  
                                 
Weighted average number of shares outstanding:
                               
Basic
    30,443       30,061       30,332       30,097  
Diluted
    30,564       30,065       30,441       30,098  
                                 
Dividends declared per share
  $ 0.065     $ 0.033     $ 0.195     $ 0.099  

See notes to consolidated financial statements.

 
Page 3

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)

   
Inter Parfums, Inc. shareholders
             
                     
Accumulated
                   
         
Additional
         
other
                   
   
Common
   
paid-in
   
Retained
   
comprehensive
   
Treasury
   
Noncontrolling
       
   
stock
   
Capital
   
earnings
   
income
   
stock
   
interest
   
Total
 
Balance – January 1, 2009
  $ 30     $ 41,950     $ 168,025     $ 25,515     $ (31,319 )   $ 51,308     $ 255,509  
Comprehensive income:
                                                       
Net income
                16,916                   5,704       22,620  
Foreign currency translation adjustment
                      13,251                   13,251  
Net derivative instrument (loss), net of tax
                      (3,164 )           (1,084 )     (4,248 )
Sale of subsidiary shares to noncontrolling interests
          (53 )                       2,677       2,624  
Dividends
                (2,979 )                 (1,716 )     (4,695 )
Purchased treasury stock
                            (631 )           (631 )
Shares issued upon exercise of stock options
          200                               200  
Stock compensation
          381       149                   79       609  
Balance – September 30, 2009
  $ 30     $ 42,478     $ 182,111     $ 35,602     $ (31,950 )   $ 56,968     $ 285,239  
                                                         
Balance – January 1, 2010
  $ 30     $ 45,126     $ 186,611     $ 30,000     $ (33,043 )   $ 58,689     $ 287,413  
Comprehensive income:
                                                       
Net income
                20,354                   6,988       27,342  
Foreign currency translation adjustment
                      (12,423 )                 (12,423 )
Net derivative instrument gain, net of tax
                      729             285       1,014  
Shares issued upon exercise of stock options and warrants
          3,654                   493             4,147  
Purchase of subsidiary shares from noncontrolling interests
          (1,662 )                       (2,933 )     (4,595 )
Sale of subsidiary shares to noncontrolling interests
          1,108                         3,385       4,493  
Dividends
                (5,922 )                 (2,049 )     (7,971 )
Shares received as proceeds of option exercise
                            (1,601 )           (1,601 )
Stock compensation
          448       78                   57       583  
Balance – September 30, 2010
  $ 30     $ 48,674     $ 201,121     $ 18,306     $ (34,151 )   $ 64,422     $ 298,402  

See notes to consolidated financial statements.

 
Page 4

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine months ended
September 30,
 
    
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 27,342     $ 22,620  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    6,790       7,758  
Provision for doubtful accounts
    (116 )     947  
Noncash stock compensation
    623       724  
Deferred tax (benefit)
    (2,664 )     (2,385 )
Change in fair value of derivatives
    (201 )     (713 )
Changes in:
               
Accounts receivable
    (16,399 )     (1,880 )
Inventories
    (23,577 )     30,891  
Other assets
    2,872       (4,694 )
Accounts payable and accrued expenses
    32,770       (24,530 )
Income taxes payable, net
    3,857       4,851  
                 
Net cash provided by operating activities
    31,297       33,589  
                 
Cash flows from investing activities:
               
Purchases of equipment and leasehold improvements
    (3,235 )     (3,758 )
Purchases of short-term investments
    (67,629 )      
Maturities of short-term investments
    7,891        
Payment for intangible assets acquired
    (1,987 )     (622 )
Payment for acquisition of noncontrolling interests
    (4,595 )      
Proceeds from sale of stock of subsidiary
    4,493       2,608  
                 
Net cash used in investing activities
    (65,062 )     (1,772 )
                 
Cash flows from financing activities:
               
Proceeds (repayments) of loans payable – banks, net
    1,483       (4,025 )
Repayment of long-term debt
    (8,015 )     (10,360 )
Proceeds from exercise of options and warrants
    2,652       200  
Dividends paid
    (4,939 )     (2,979 )
Dividends paid to noncontrolling interest
    (2,049 )     (1,716 )
Purchase of treasury stock
    (106 )     (631 )
                 
Net cash used in financing activities
    (10,974 )     (19,511 )
                 
Effect of exchange rate changes on cash
    (7,058 )     3,000  
                 
Net increase (decrease) in cash and cash equivalents
    (51,797 )     15,306  
                 
Cash and cash equivalents - beginning of period
    100,467       42,404  
                 
Cash and cash equivalents - end of period
  $ 48,670     $ 57,710  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Interest
  $ 1,671     $ 2,000  
Income taxes
    10,296       9,746  

See notes to consolidated financial statements.

 
Page 5

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1.
Significant Accounting Policies:

The accounting policies we follow are set forth in the notes to our financial statements included in our Form 10-K which was filed with the Securities and Exchange Commission for the year ended December 31, 2009. We also discuss such policies in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q.

The consolidated financial statements include the accounts of the Company and its subsidiaries, including majority-owned Inter Parfums, S.A. (“IPSA”), a subsidiary whose stock is publicly traded in France. In 2010, IPSA formed and began operations of two new wholly-owned subsidiaries, Interparfums Singapore Pte. Ltd. and Interparfums Luxury Brands, Inc. All material intercompany balances and transactions have been eliminated.

2.
New Accounting Pronouncements - adopted:

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements” which amends ASC Subtopic 820, “Fair Value Measurements and Disclosures” (“ASU 2010-06”) to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new disclosure and clarifications of existing disclosures are effective for interim and annual periods beginning after December 31, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for interim and annual periods beginning after December 31, 2010. The adoption of the applicable provisions of this guidance did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued ASC topic 810 which amends the consolidation guidance applicable to variable interest entities and affects the overall consolidation analysis.  ASC topic 810 is effective for fiscal years beginning after November 15, 2009. The adoption of ASC topic 810 did not have a material impact on our consolidated financial statements.

There are no other new accounting pronouncements issued but not yet adopted that would have a material effect on the Company’s financial statements.

3. 
Inventories:

Inventories consist of the following:

(In thousands)
 
September 30,
2010
   
December 31,
2009
 
             
Raw materials and component parts
  $ 38,990     $ 29,052  
Finished goods
    67,283       56,376  
                 
    $ 106,273     $ 85,428  
 
 
Page 6

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

4.
Fair Value Measurement:

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.
 
(In thousands)
       
Fair Value Measurements at September 30, 2010
 
          
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
  $ 61,996     $     $ 61,996     $  
Foreign currency forward
                               
exchange contracts
                               
accounted for using
                               
hedge accounting
    1,291             1,291        
Foreign currency forward
                               
exchange contracts
                               
not accounted for using
                               
hedge accounting
    2,899             2,899        
                                 
    $ 66,186     $     $ 66,186     $  
Liabilities:
                               
Interest rate swaps
  $ 441     $     $ 441     $  
 
(In thousands)
       
Fair Value Measurements at December 31, 2009
 
          
Quoted Prices in
   
Significant Other
   
Significant
 
          
Active Markets for
   
Observable
   
Unobservable
 
          
Identical Assets
   
Inputs
   
Inputs
 
    
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Foreign currency forward
                       
exchange contracts
                       
not accounted for using
                       
hedge accounting
  $ 5,620     $     $ 5,620     $  
                                 
Liabilities:
                               
Interest rate swaps
  $ 752     $     $ 752     $  

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. Short-term investments consist of certificates of deposit with maturities of approximately six months. The carrying amount of loans payable approximates fair value as the interest rates on the Company’s indebtedness approximate current market rates. The fair value of the Company’s long-term debt was estimated based on the current rates offered to companies for debt with the same remaining maturities and is approximately equal to its carrying value. Foreign currency forward exchange contracts are valued based on quotations of observable market transactions of spot and forward rates provided to us by financial institutions and the value of interest rate swaps are the discounted net present value of the swaps using quotes obtained from financial institutions. No transfers between Level 1 and Level 2 occurred during the nine months ended September 30, 2010.

 
Page 7

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents gains and losses in derivatives designated as hedges and the location of those gains and losses in the financial statements (in thousands):

Derivatives
Designated as
Hedging
Instuments
 
Amount of Gain
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
 
Location of Gain
(Loss) Recognized in
Income on Derivative
(Effective Portion)
 
Amount of Gain (Loss)
Recognized in Income
on Derivative (Effective
Portion) (A)
 
    
Nine months ended
September 30,
      
Nine months ended
September 30,
      
Nine months ended
September 30,
 
    
2010
   
2009
     
2010
   
2009
     
2010
   
2009
 
Foreign exchange contracts
  $ 1,291       1,857  
Gain (loss) on foreign currency
  $       4,725  
Gain (loss) on foreign currency
  $ (2,725 )     713  

   
Three months ended
September 30,
     
Three months ended
September 30,
     
Three months ended
September 30,
 
   
2010
   
2009
     
2010
   
2009
     
2010
   
2009
 
Foreign exchange contracts
  $ 1,291       2,295  
Gain (loss) on foreign currency
  $       1,534  
Gain (loss) on foreign currency
  $       11  

(A) The amount of gain (loss) recognized in income represents the amount excluded from the assessment of  hedge effectiveness.

The following tables present gains and losses in derivatives not designated as hedges and the location of those gains and losses in the financial statements (in thousands):
 
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
recognized in Income on
Derivative
 
Nine months ended
September 30, 2010
   
Nine months ended
September 30, 2009
 
                 
Interest rate swaps
 
Interest expense
  $ 262     $ (62 )
Foreign exchange contracts
 
Gain (loss) on foreign currency
  $ (85 )   $ 29  
 
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
recognized  in Income on
Derivative
 
Three months ended
September 30, 2010
   
Three months ended
September 30, 2009
 
                 
Interest rate swaps
 
Interest expense
  $ 125     $ 43  
Foreign exchange contracts
 
Gain (loss) on foreign currency
  $ (16 )      $ 5  
 
 
Page 8

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 accounted for using hedge accounting and not accounted for using hedge accounting as of September 30, 2010 and December 31, 2009, resulted in an asset and are included in other current assets on the accompanying balance sheets. Generally, increases or decreases in the fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative instrument is designated and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument will be recorded as a separate component of shareholders’ equity.
 
We 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. 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 as defined by ASC topic 815-10-10 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. Cash-flow hedges were highly effective, in all material respects.
 
At September 30, 2010, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $57 million and GB pounds 3 million which all have maturities of less than one year.

5. 
Goodwill and Other Intangible Assets:

We review goodwill and trademarks with indefinite lives for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The following table presents our assets and liabilities that are measured at fair value on a nonrecurring basis and are categorized using the fair value hierarchy.

(In thousands)
       
Fair Value Measurements at September 30, 2010
 
          
Quoted Prices in
   
Significant Other
   
Significant
 
          
Active Markets for
   
Observable
   
Unobservable
 
          
Identical Assets
   
Inputs
   
Inputs
 
    
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Description
                       
Trademark - Nickel
  $ 2,450     $     $     $ 2,450  
                                 
Goodwill
  $ 3,729     $     $     $ 3,729  


 
Page 9

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands)
       
Fair Value Measurements at December 31, 2009
 
          
Quoted Prices in
   
Significant Other
   
Significant
 
          
Active Markets for
   
Observable
   
Unobservable
 
          
Identical Assets
   
Inputs
   
Inputs
 
    
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Description
                       
Trademark – Nickel
  $ 2,586     $     $     $ 2,586  
                                 
Goodwill
  $ 3,927     $     $     $ 3,927  

The goodwill and trademarks referred to above relate to our Nickel skin care business, which is primarily a component of our European operations. Testing goodwill for impairment requires us to estimate the fair value of the reporting unit using significant estimates and assumptions. The assumptions we make will impact the outcome and ultimate results of the testing. In making our assumptions and estimates, we use industry accepted valuation models and set criteria that are reviewed and approved by management and, in certain instances, we engage third party valuation specialists to advise us. There was no change to the carrying amount of the intangible assets referred to above during the nine month period ended September 30, 2010 other than for the effect of changes in foreign currency translation rates.

6. 
Accrued Expenses:

 
Accrued expenses include approximately $22.1 million and $9.2 million in advertising liabilities as of September 30, 2010 and December 31, 2009, respectively.

7. 
Share-Based Payments:

We maintain 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 $0.04 million and $0.05 million during the nine months ended September 30, 2010 and 2009, respectively. Compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. It is generally our policy to issue new shares upon exercise of stock options. The following table sets forth information with respect to nonvested options for the nine months ended September 30, 2010:
 
    
Number of Shares
   
Weighted Average
Grant Date Fair Value
 
Nonvested options – beginning of year
    480,598     $ 3.92  
Nonvested options granted
    10,500     $ 5.26  
Nonvested options vested or forfeited
    (16,595 )   $ 3.66  
Nonvested options – end of year
    474,503     $ 3.96  

Share-based payment expense decreased income before income taxes by $0.17 million and $0.65 million for the three and nine month periods ended September 30, 2010, respectively, as compared to $0.22 million and $0.72 million for the corresponding periods of the prior year.  Share-based payment expense decreased income attributable to Inter Parfums, Inc. by $0.10 million and $0.37 million for the three and nine month periods ended September 30, 2010, respectively, as compared to $0.13 million and $0.41 million for the corresponding periods of the prior year.  The following table summarizes stock option information as of September 30, 2010:

 
Page 10

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    
Number of
Shares
   
Weighted
Average
Exercise Price
 
              
Outstanding at January 1, 2010
    920,825     $ 11.32  
Granted
    10,500       14.65  
Cancelled
    (6,200 )     11.27  
Exercised
    (226,455 )     10.00  
                 
Outstanding at September 30, 2010
    698,670     $ 11.80  
                 
Options exercisable at September 30, 2010
    224,167     $ 12.49  
Options available for future grants
    932,025          

As of September 30, 2010, the weighted average remaining contractual life of options outstanding is 3.29 years (2.56 years for options exercisable), the aggregate intrinsic value of options outstanding and options exercisable is $4.0 million and $1.2 million, respectively and unrecognized compensation cost related to stock options outstanding on Inter Parfums, Inc. stock aggregated $1.2 million. The amount of unrecognized compensation cost related to stock options outstanding of our majority-owned subsidiary, Inter Parfums S.A., was €0.31 million. Options under Inter Parfums, S.A. plans vest over a four-year period.
 
Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the nine months ended September 30, 2010 and September 30, 2009 were as follows:
 
(In thousands)
 
2010
   
2009
 
             
Cash proceeds from stock options exercised
  $ 771     $ 55  
Tax benefits
    162       145  
Intrinsic value of stock options exercised
    1,195       11  

The weighted average fair values of the options granted by Inter Parfums, Inc. during the nine months ended September 30, 2010 and 2009 were $5.26 and $1.92 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value of options granted.
 
The assumptions used in the Black-Scholes pricing model for the periods ended September 30, 2010 and 2009 are set forth in the following table:
 
   
September 30,
 2010
   
September 30,
 2009
 
             
Weighted-average expected stock-price volatility
    49 %     46 %
Weighted-average expected option life
 
4.18 years
   
3.75 years
 
Weighted-average risk-free interest rate
    2.5 %     1.7 %
Weighted-average dividend yield
    2.0 %     2.2 %
 
 
Page 11

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Expected volatility is estimated based on historic volatility of our common stock. We use the simplified method in developing its estimate of the expected term of the option as historic data regarding employee exercise behavior is incomplete for the new vesting parameters we recently instituted. 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 in place at the time of stock-based award grant would continue with no anticipated increases.
 
8. 
Shareholders’ Equity:

As of December 31, 2009 we had 300,000 outstanding warrants for the purchase of 300,000 shares of our common stock. In May 2010, we received proceeds of $1.7 million upon the exercise of 150,000 of the warrants and in July 2010 the remaining 150,000 expired unexercised.

In April 2010, both the Chief Executive Officer and the President each exercised 75,000 outstanding stock options of the Company’s common stock. The aggregate exercise prices of $1.5 million were paid by them tendering to the Company an aggregate of 95,744 shares of the Company’s common stock, previously owned by them, valued at fair market value on the date 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 an additional 6,782 shares for payment of certain withholding taxes resulting from his option exercises.

9.
Earnings Per Share:

Basic earnings per share is computed using the weighted average number of shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of shares outstanding during each period, plus the incremental shares outstanding assuming the exercise of dilutive stock options and warrants using the treasury stock method.  The following table sets forth the computation of basic and diluted earnings per share:
 
(In thousands)
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
    
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
Net income attributable to Inter Parfums, Inc.
  $ 8,448     $ 7,262     $ 20,354     $ 16,916  
Effect of dilutive securities of consolidated subsidiary
    (34 )           (51 )     (18 )
                                 
    $ 8,414     $ 7,262     $ 20,303     $ 16,898  
Denominator:
                               
Weighted average shares
    30,443       30,061       30,332       30,097  
Effect of dilutive securities:
                               
Stock options and warrants
    121       4       109       1  
                                 
      30,564       30,065       30,441       30,098  

 
Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 13,500 and 202,500 shares of common stock for the three and nine month periods ended September 30, 2010, and 1.0 million and 1.1 million shares of common stock for the three and nine month periods ended September 30, 2009, respectively, as well as outstanding warrants to purchase 300,000 shares of common stock for both the three and nine month periods ended September 30, 2009.

 
Page 12

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

10.
Comprehensive Income:

(In thousands)
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Comprehensive income:
                       
Net income
  $ 11,409     $ 9,611     $ 27,342     $ 22,620  
Other comprehensive income, net of tax:
                               
Foreign currency translation adjustment
    27,341       9,049       (12,423 )     13,251  
Change in fair value of derivatives
    968       (1,148 )     1,014       (1,919 )
Net gains reclassified into earnings from equity
          (751 )           (2,329 )
Comprehensive income:
    39,718       16,761       15,933       31,623  
Less comprehensive income attributable to the noncontrolling interest
    3,198       1,832       7,273       4,620  
                                 
Comprehensive income attributable to Inter Parfums, Inc.
  $ 36,520     $ 14,929     $ 8,660     $ 27,003  

11.
Net Income Attributable to Inter Parfums, Inc. and Transfers From the Noncontrolling Interest:

(In thousands)
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net income attributable to Inter Parfums, Inc.
  $ 8,448     $ 7,262     $ 20,354     $ 16,916  
Decrease in Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions
    (530 )     (36 )     (554 )     (53 )
Change from net income attributable to Inter Parfums, Inc. and transfers from noncontrolling interest
  $ 7,918     $ 7,226     $ 19,800     $ 16,863  

12. 
Segment and Geographic Areas:

 
We manufacture and distribute one product line, fragrances and fragrance related products and we manage our business in two segments, European based operations and United States based operations. The European assets are primarily located, and operations are primarily conducted, in France. European operations primarily represent the sale of prestige brand name fragrances and United States operations primarily represent the sale of specialty retail and mass market fragrances. Information on our operations by geographical areas is as follows:

 
Page 13

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands)
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales:
                       
United States
  $ 11,645     $ 13,541     $ 38,561     $ 31,150  
Europe
    109,208       104,001       309,430       265,405  
Eliminations of intercompany sales
                       
                                 
    $ 120,853     $ 117,542     $ 347,991     $ 296,555  
                                 
Net income (loss) attributable to Inter Parfums, Inc.:
                               
United States
  $ (266 )   $ 288     $ (444 )   $ (1,057 )
Europe
    8,714       6,969       20,776       17,941  
Eliminations of intercompany profits
          5       22       32  
                                 
    $ 8,448     $ 7,262     $ 20,354     $ 16,916  
                                 
                   
September 30,
   
December 31,
 
   
                 
2010
   
2009
 
Total Assets:
                               
United States
                  $ 44,642     $ 45,580  
Europe
                    419,537       382,628  
Eliminations of investment in subsidiary
                    (9,311 )     (9,120 )
                                 
                    $ 454,868     $ 419,088  

13. 
Entry into Definitive Agreements:

Nine West

In July 2010, we entered into an exclusive worldwide license agreement with Nine West Development Corporation for the creation, production, marketing and global distribution of women’s fragrances under the Nine West brand. The agreement, which runs through December 31, 2016, contains a provision for further renewal if certain conditions are met. The agreement also provides for direct sales to Nine West retail stores in the United States, as well as a licensing component, enabling us to sell women's fragrances to better department stores and specialty retailers worldwide. Our rights under such license agreement are subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry.

Betsey Johnson

In July 2010, we entered into an exclusive worldwide agreement with Betsey Johnson LLC under which we will design, manufacture and sell fragrance, color cosmetics as well as other personal care products across a broad retail spectrum. The agreement, which runs through December 31, 2015 with a five year optional term if certain conditions are met, encompasses both direct sales to global Betsey Johnson stores and e-commerce site, as well as a licensing component, enabling us to sell these fragrance and beauty products to specialty and department stores as well as other retail outlets worldwide. Our rights under such license agreement are subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry.

 
Page 14

 

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, 2009 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 74% owned subsidiary in Paris, Inter Parfums, S.A., which is also a publicly traded company as 26% of Inter Parfums, S.A. shares trade on the Euronext. Prestige cosmetics and prestige skin care products represent less than 3% of consolidated net sales.

We produce and distribute our prestige products primarily under license agreements with brand owners, and prestige product sales represented approximately 89% of net sales for both nine month periods ended September 30, 2010 and 2009. We have built a portfolio of brands, which include Burberry, Lanvin, Van Cleef & Arpels, Jimmy Choo, Montblanc, Paul Smith, S.T. Dupont and Nickel whose products are distributed in over 120 countries around the world. Burberry is our most significant license, as sales of Burberry products represented 56% and 58% of net sales for the nine months ended September 30, 2010 and 2009, respectively.

Our specialty retail and mass-market fragrance and fragrance related products are marketed through our United States operations and represented 11% of sales for both nine month periods ended September 30, 2010 and 2009. Trademarks used pursuant to license or other agreements with the brand owners include Gap, Banana Republic, New York & Company, Brooks Brothers, bebe, Betsey Johnson, Nine West 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, new specialty retail agreements or out-right acquisitions of brands. Second, we grow through the introduction of new products and supporting new and established products through advertising, merchandising and sampling as well as phasing out existing products that no longer meet the needs of our consumers. 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.

 
Page 15

 

INTER PARFUMS, INC. AND SUBSIDIARIES

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 good for us and ship it back to our distribution center.

As with any business, many aspects of our operations are subject to influences outside our control. The economic challenges and uncertainties in a number of countries where we do business impacted our business in early 2009. However, improving sales trends which began in the second half of 2009 have continued thus far into 2010.
 
Our reported net sales are impacted by changes in foreign currency exchange rates. A stronger U.S. dollar has an adverse impact on our net sales. However, earnings are less affected by a stronger dollar because in excess of 35% of net sales of our European operations are denominated in U.S. dollars, while all costs of our European operations are incurred in euro. 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. 

Recent Important Events

Nine West

In July 2010, we entered into an exclusive worldwide license agreement with Nine West Development Corporation for the creation, production, marketing and global distribution of women’s fragrances under the Nine West brand. The agreement, which runs through December 31, 2016, contains a provision for further renewal if certain conditions are met. The agreement also provides for direct sales to Nine West retail stores in the United States, as well as a licensing component, enabling us to sell women's fragrances to better department stores and specialty retailers worldwide. Our rights under such license agreement are subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. Plans call for our first Nine West fragrance launch in 2011.

Betsey Johnson

In July 2010, we entered into an exclusive worldwide agreement with Betsey Johnson LLC of New York, NY, under which we will design, manufacture and sell fragrance, color cosmetics as well as other personal care products across a broad retail spectrum. The agreement, which runs through December 31, 2015 with a five year optional term if certain conditions are met, encompasses both direct sales to global Betsey Johnson stores and e-commerce site, as well as a licensing component, enabling us to sell these fragrance and beauty products to specialty and department stores as well as other retail outlets worldwide. Our rights under such license agreement are subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. While we introduced a new twist on a vintage Betsey Johnson fragrance in August 2010, plans call for our first new Betsey Johnson product launch in 2011.

 
Page 16

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Gap and Banana Republic

Although the initial term of our agreement with The Gap, Inc. covering the Gap and Banana Republic brands in the United States and Canada expired on August 31, 2009, we had entered into a series of short-term extension agreements to continue the relationship as it previously existed while we were in discussions with The Gap, Inc. for a formal extension of the agreement. In March 2010, we signed a new specialty retail agreement with The Gap, Inc. covering the Gap and Banana Republic brands in the United States and Canada, with terms and conditions similar to those of the original agreement. This new agreement expires December 31, 2011.

Montblanc

In January 2010, we announced that we had entered into an exclusive worldwide license agreement with Montblanc International GMBH to create, produce and distribute perfumes and ancillary products under the Montblanc brand. Our rights under such license agreement, which took effect on July 1, 2010 and runs through December 31, 2020, are subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. We also paid an upfront entry fee of €1 million for this license, and purchased inventory from the former licensee which aggregated approximately €2.9 million. Plans call for our first new Montblanc fragrance launch in 2011.

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 judgments used by management in applying critical accounting policies could be affected by a prolonged general deterioration in the economic environment, which could negatively influence future financial results and availability of continued financing. Specifically, subsequent evaluations of our accounts receivable, inventories, and deferred tax assets in light of the factors then prevailing, could result in significant changes in our allowance and reserve accounts in future periods, which in turn could generate significant charges. Similarly, the valuation of certain intangible assets could be negatively impacted by prolonged and severely depressed market conditions thus leading to the recognition of impairment losses. The following is a brief discussion of the more critical accounting policies that we employ.

 
Page 17

 

INTER PARFUMS, INC. AND SUBSIDIARIES

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 euro 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, 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 our Company incurs for performance-based arrangements, shelf replacement costs and slotting fees are netted against revenues on our 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 cost