Attached files
file | filename |
---|---|
EX-32.1 - INTER PARFUMS INC | v201161_ex32-1.htm |
EX-32.2 - INTER PARFUMS INC | v201161_ex32-2.htm |
EX-31.1 - INTER PARFUMS INC | v201161_ex31-1.htm |
EX-31.2 - INTER PARFUMS INC | v201161_ex31-2.htm |
EX-10.143 - INTER PARFUMS INC | v201161_ex10-143.htm |
EX-10.144 - INTER PARFUMS INC | v201161_ex10-144.htm |
EX-10.144.1 - INTER PARFUMS INC | v201161_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.
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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.
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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