Attached files

file filename
EX-31.1 - INTER PARFUMS INCv230904_ex31-1.htm
EX-31.2 - INTER PARFUMS INCv230904_ex31-2.htm
EX-32.2 - INTER PARFUMS INCv230904_ex32-2.htm
EX-32.1 - INTER PARFUMS INCv230904_ex32-1.htm
EX-3.1.7 - INTER PARFUMS INCv230904_ex3-1x7.htm
EX-10.148 - INTER PARFUMS INCv230904_ex10-148.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 June 30, 2011.

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 August 5, 2011, there were 30,539,241 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
  1
     
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
 
2
     
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and June 30, 2010
 
3
     
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2011 and June 30, 2010
 
4
     
Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2011 and June 30, 2010
 
5
     
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and June 30, 2010
 
6
     
Notes to Consolidated Financial Statements
 
7
     
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations
 
17
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
31
     
Item 4.   Controls and Procedures
 
32
     
Part II.   Other Information
 
33
     
Item 6.   Exhibits
 
33
     
Signatures
  
 

 
 

 
 
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, 2010 included in our annual report filed on Form 10-K.

The results of operations for the six months ended June 30, 2011 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)
(Unaudited)

   
June 30,
2011
   
December 31,
2010
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 38,774     $ 37,548  
Short-term investments
    14,102       49,391  
Accounts receivable, net
    118,237       97,593  
Inventories
    176,311       109,840  
Receivables, other
    2,727       3,688  
Other current assets
    5,388       4,635  
Deferred tax assets
    7,224       7,230  
Total current assets
    362,763       309,925  
Equipment and leasehold improvements, net
    14,903       11,207  
Goodwill
    3,922       3,654  
Trademarks, licenses and other intangible assets, net
    119,163       111,402  
Other assets
    2,076       1,917  
Total assets
  $ 502,827     $ 438,105  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Loans payable – banks
  $ 7,686     $ 5,250  
Current portion of long-term debt
    9,166       11,090  
Accounts payable - trade
    86,505       52,694  
Accrued expenses
    45,931       47,413  
Income taxes payable
    1,685       7,905  
Dividends payable
    2,443       1,979  
Total current liabilities
    153,416       126,331  
Long-term debt, less current portion
    1,983       5,039  
Deferred tax liability
    6,920       6,789  
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 30,534,081 and 30,445,881 shares at June 30, 2011 and December 31, 2010, respectively
    31       30  
Additional paid-in capital
    50,416       48,887  
Retained earnings
    218,414       205,453  
Accumulated other comprehensive income
    31,091       14,757  
Treasury stock, at cost, 10,009,492 common shares at June 30, 2011 and December 31, 2010
    (34,151 )     (34,151 )
Total Inter Parfums, Inc. shareholders’ equity
    265,801       234,976  
Noncontrolling interest
    74,707       64,970  
Total equity
    340,508       299,946  
Total liabilities and equity
  $ 502,827     $ 438,105  

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
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales
  $ 121,063     $ 107,765     $ 254,426     $ 227,138  
                                 
Cost of sales
    46,077       43,041       92,850       90,693  
                                 
Gross margin
    74,986       64,724       161,576       136,445  
                                 
Selling, general and administrative expenses
    64,139       53,240       125,188       108,938  
                                 
Income from operations
    10,847       11,484       36,388       27,507  
                                 
Other expenses (income):
                               
Interest expense
    390       510       830       1,098  
(Gain) loss on foreign currency
    567       514       148       2,896  
Interest income
    (389 )     (341 )     (706 )     (595 )
                                 
      568       683       272       3,399  
                                 
Income before income taxes
    10,279       10,801       36,116       24,108  
                                 
Income taxes
    3,851       3,818       12,348       8,175  
                                 
Net income
    6,428       6,983       23,768       15,933  
                                 
Less:  Net income attributable to the noncontrolling interest
    1,435       1,627       6,016       4,027  
                                 
Net income attributable to Inter Parfums, Inc.
  $ 4,993     $ 5,356     $ 17,752     $ 11,906  
                                 
Earnings per share:
                               
                                 
Net income attributable to Inter Parfums, Inc. common shareholders:
                               
Basic
  $ 0.16     $ 0.18     $ 0.58     $ 0.39  
Diluted
  $ 0.16     $ 0.18     $ 0.58     $ 0.39  
                                 
Weighted average number of shares outstanding:
                               
Basic
    30,506       30,361       30,490       30,277  
Diluted
    30,695       30,467       30,664       30,379  
                                 
Dividends declared per share
  $ 0.08     $ 0.065     $ 0.16     $ 0.13  

See notes to consolidated financial statements

 
Page 3

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Comprehensive income (loss):
                       
                         
Net income
  $ 6,428     $ 6,983     $ 23,768     $ 15,933  
                                 
Other comprehensive income:
                               
                                 
Net derivative instrument gain, net of tax
    82       (13 )     102       46  
                                 
Translation adjustments, net of tax
    3,963       (22,728 )     21,382       (39,764 )
                                 
Comprehensive income (loss)
    10,473       (15,758 )     45,252       (23,785 )
                                 
Comprehensive income attributable to the noncontrolling interests:
                               
                                 
Net income
    1,435       1,627       6,016       4,027  
                                 
Other comprehensive income:
                               
                                 
Net derivative instrument gain, net of tax
    21       (26 )     22       48  
                                 
Translation adjustments, net of tax
    806       (5,384 )     5,128       (9,422 )
                                 
Comprehensive income (loss) attributable to the noncontrolling interests
    2,262       (3,783 )     11,166       (5,347 )
                                 
Comprehensive income(loss) attributable to Inter Parfums, Inc.
  $ 8,211     $ (11,975 )   $ 34,086     $ (18,438 )

See notes to consolidated financial statements.

 
Page 4

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
(Unaudited)

    
Inter Parfums, Inc. shareholders
             
                     
Accumulated
                   
         
Additional
         
other
                   
   
Common
   
paid-in
   
Retained
   
comprehensive
   
Treasury
   
Noncontrolling
       
   
stock
   
Capital
   
earnings
   
income
   
stock
   
interest
   
Total
 
Balance – January 1, 2010
  $ 30     $ 45,126     $ 186,611     $ 28,022     $ (33,043 )   $ 60,667     $ 287,413  
Comprehensive income:
                                                       
Net income
                11,906                   4,027       15,933  
Foreign currency translation adjustment
                      (30,342 )           (9,422 )     (39,764 )
Net derivative instrument gain (loss), net of tax
                      (2 )           48       46  
Shares issued upon exercise of stock options
          3,459                   493             3,952  
Purchase of subsidiary shares from noncontrolling interests
          (1,063 )                       (1,913 )     (2,976 )
Sale of subsidiary shares to noncontrolling interests
          1,039                         3,267       4,306  
Dividends
                (3,943 )                 (2,049 )     (5,992 )
Shares received upon exercise of stock options
                            (1,601 )           (1,601 )
Stock compensation
          298       78                   47       423  
Balance – June 30, 2010
  $ 30     $ 48,859     $ 194,652     $ (2,322 )   $ (34,151 )   $ 54,672     $ 261,740  
                                                         
Balance – January 1, 2011
  $ 30     $ 48,887     $ 205,453     $ 14,757     $ (34,151 )   $ 64,970     $ 299,946  
Comprehensive income:
                                                       
Net income
                17,752                   6,016       23,768  
Foreign currency translation adjustment
                      16,254             5,128       21,382  
Net derivative instrument gain, net of tax
                      80             22       102  
Shares issued upon exercise of stock options
    1       1,115                               1,116  
Purchase of subsidiary shares from noncontrolling interests
          (417 )                       (333 )     (750 )
Sale of subsidiary shares to noncontrolling interests
          479                         2,021       2,500  
Dividends
                (4,881 )                 (3,149 )     (8,030 )
Stock compensation
          352       90                   32       474  
Balance – June 30, 2011
  $ 31     $ 50,416     $ 218,414     $ 31,091     $ (34,151 )   $ 74,707     $ 340,508  

See notes to consolidated financial statements.

 
Page 5

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

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

   
Six months ended
June 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 23,768     $ 15,933  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    6,221       4,665  
Provision for doubtful accounts
    1,166       (186 )
Noncash stock compensation
    536       484  
Deferred tax (benefit)
    45       (1,572 )
Change in fair value of derivatives
    (193 )     (137 )
Changes in:
               
Accounts receivable
    (14,830 )     (15,968 )
Inventories
    (57,847 )     (24,428 )
Other assets
    928       5,460  
Accounts payable and accrued expenses
    24,637       34,370  
Income taxes payable, net
    (6,749 )     1,143  
                 
Net cash provided by (used in) operating activities
    (22,318 )     19,764  
                 
Cash flows from investing activities:
               
Purchases of short-term investments
    (4,022 )     (44,159 )
Proceeds from sale of short-term investments
    42,052       7,975  
Purchases of equipment and leasehold improvements
    (5,502 )     (2,567 )
Payment for intangible assets acquired
    (3,077 )     (1,834 )
                 
Net cash provided by (used in) investing activities
    29,451       (40,585 )
                 
Cash flows from financing activities:
               
Proceeds from (repayments of ) loans payable – banks, net
    1,988       (1,367 )
Repayment of long-term debt
    (5,859 )     (5,397 )
Proceeds from exercise of options
    1,116       2,457  
Proceeds from sale of stock of subsidiary
    2,500       4,306  
Payment for noncontrolling interests acquired
    (750 )     (2,976 )
Dividends paid
    (4,418 )     (2,960 )
Dividends paid to noncontrolling interest
    (3,149 )     (2,049 )
Purchase of treasury stock
          (106 )
                 
Net cash used in financing activities
    (8,572 )     (8,092 )
                 
Effect of exchange rate changes on cash
    2,665       (12,884 )
                 
Net increase (decrease) in cash and cash equivalents
    1,226       (41,797 )
                 
Cash and cash equivalents - beginning of period
    37,548       100,467  
                 
Cash and cash equivalents - end of period
  $ 38,774     $ 58,670  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Interest
  $ 924     $ 1,067  
Income taxes
    18,087       6,795  

See notes to consolidated financial statements.

 
Page 6

 
 
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, 2010. 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.

2.
New Accounting Pronouncements:

In May 2011, new accounting guidance on fair value measurements was issued, which requires updates to fair value measurement disclosures to conform US GAAP and International Financial Reporting Standards. This guidance includes additional disclosure requirements about Level 3 fair value measurements and is effective for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance will not affect the Company’s financial position, results of operations and cash flows, but will require additional disclosure.

In June 2011, new accounting guidance on comprehensive income was issued, which revises the presentation of comprehensive income in financial statements. The adoption of the new guidance will not affect the Company’s financial position, results of operations or cash flows, but will require the Company to disclose the total of comprehensive income, the components of net income and the components of other comprehensive income in either (i) a continuous statement of comprehensive income or (ii) as two separate but consecutive statements. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2011.

There are no other new accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.
 
3.
Recent Agreements:

The Gap Inc.

In July 2011, we renewed our exclusive agreement with The Gap, Inc. to develop, produce, manufacture and distribute fragrances for Gap and Banana Republic brand names to be sold in Gap and Banana Republic retail stores in the United States and Canada. In July 2011, we also renewed our license agreement with The Gap Inc. for international distribution of fragrances through Gap and Banana Republic stores as well as select specialty and department stores outside the United States, including duty-free and other travel related retailers.
 
These renewal agreements, which take effect on January 1, 2012 and run through December 31, 2014, contain terms and conditions similar to those of the original agreements.

Pierre Balmain

In July 2011, we entered into a twelve-year exclusive worldwide license agreement to create, produce and distribute perfumes and ancillary products under the Balmain brand. Our rights under the agreement commence on January 1, 2012 when we will take over the production and distribution of existing Balmain fragrances and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The Company paid an up front entry fee of €1.5 million (approximately $2.1 million) for this license.

 
Page 7

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Anna Sui

In June 2011, we entered into a ten-year exclusive worldwide fragrance license agreement, with two five-year renewal options, to create, produce and distribute perfumes and fragrance-related products under the Anna Sui brand. Our rights under the agreement commence on January 1, 2012 when we will take over production and distribution of the existing Anna Sui fragrance collections and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The license agreement replaces a previous license with Procter & Gamble that terminates on December 31, 2011. Inter Parfums is in negotiations to purchase the current inventory and other assets of the existing licensee, which is subject to a definitive agreement.

S. T. Dupont

In April 2011, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance lines through December 31, 2016. Our initial eleven-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended in 2006 for an additional three years until June 2011.

Lane Bryant

In March 2011, we entered into an exclusive agreement with a unit of Charming Shoppes, Inc. for its flagship brand, Lane Bryant. Under the agreement, Inter Parfums designs and manufactures personal care products for the Lane Bryant brand, while Lane Bryant is responsible for marketing, promoting and selling these products. The initial term of the contract, which may be extended by mutual consent, runs through December 31, 2015.

4.
Inventories:

Inventories consist of the following:

(In thousands)
 
June 30,
2011
   
December 31,
2010
 
             
Raw materials and component parts
  $ 62,480     $ 40,809  
Finished goods
    113,831       69,031  
                 
    $ 176,311     $ 109,840  

5.
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.

 
Page 8

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 
(In thousands)
   
Fair Value Measurements at June 30, 2011
 
     
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
  $ 14,102     $     $ 14,102     $  
Foreign currency forward exchange contracts not accounted for using hedge accounting
    650             650        
                                 
    $ 14,752     $     $ 14,752     $  
Liabilities:
                               
Interest rate swaps
  $ 160     $     $ 160     $  
 
(In thousands)
       
Fair Value Measurements at December 31, 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
  $ 49,391     $     $ 49,391     $  
Foreign currency forward exchange contracts not accounted for using hedge accounting
    1,024              1,024         
                                 
    $ 50,415     $     $ 50,415     $  
Liabilities:
                               
Interest rate swaps
  $ 333     $     $ 333     $  
 
The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, accounts payable and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans payable approximates fair value as the 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 from financial institutions and the value of interest rate swaps are the discounted net present value of the swaps using third party quotes obtained from financial institutions.

 
Page 9

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6.
Derivative Financial Instruments:

The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income statement. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no longer occur, then any gains or losses accumulated in other comprehensive income are reclassified to current-period earnings. Cash-flow hedges were highly effective, in all material respects.
 
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
Instruments
  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)
 
   
Six months ended June
30,
     
Six months ended June
30,
     
Six months ended June
30,
 
   
2011
   
2010
     
2011
   
2010
     
2011
   
2010
 
Foreign exchange contracts
  $        
Gain (loss) on foreign currency
  $        
Gain (loss) on foreign currency
  $       (2,679 )
                       
   
Three months ended 
June 30,
     
Three months ended 
June 30,
     
Three months ended June
30,
 
   
2011
   
2010
      2011     2010       2011     2010  
Foreign exchange contracts
   $ —        —    
Gain (loss) on foreign currency
  $ —         —    
Gain (loss) on foreign currency
  $ —         —    
 
(A) The amount of gain (loss) recognized in income represents the amount excluded from the assessment of hedge effectiveness.
 
 
Page 10

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements

The following table presents 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
 
Six months ended 
June 30, 2011
   
Six months ended 
June 30, 2010
 
                 
Interest rate swaps
 
Interest expense
  $ 193     $ 137  
Foreign exchange contracts
 
Gain (loss) on foreign currency
  $ (43 )      $ (69 )
 
Derivatives Not Designated 
as Hedging Instruments  
 
Location of Gain (Loss)
recognized in Income on
Derivative
 
Three months
ended June 30,
2011
   
Three months
ended June 30, 
2010
 
                 
Interest rate swaps
 
Interest expense
  $ 74     $ 105  
Foreign exchange contracts
 
Gain (loss) on foreign currency
  $ (79 )      $ (11 )

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 not accounted for using hedge accounting as of June 30, 2011 and December 31, 2010 resulted in an asset and are included in other current assets on the accompanying balance sheet. 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.
 
At June 30, 2011, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $37 million and GB pounds 4.1 million which all have maturities of less than one year.

7.           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.

 
Page 11

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements

     
Fair Value Measurements at June 30, 2011
 
     
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
  $ 2,517     $     $     $ 2,517  
                                 
Goodwill
  $ 3,922     $     $     $ 3,922  
 
     
Fair Value Measurements at December 31, 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
  $ 2,337     $     $     $ 2,337  
                                 
Goodwill
  $ 3,654     $     $     $ 3,654  

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 six month periods ended June 30, 2011 other than for the effect of changes in foreign currency translation rates.

8.
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 during the six months ended June 30, 2011 and 2010 aggregated $0.05 million and $0.04 million, 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 three month period ended June 30, 2011:
 
   
Number of Shares
   
Weighted Average
Grant Date Fair Value
 
Nonvested options – beginning of period
    480,843     $ 4.32  
Nonvested options granted
    3,500     $ 5.27  
Nonvested options vested or forfeited
    (16,600 )   $ 4.06  
Nonvested options – end of period
    467,743     $ 4.34  

 
Page 12

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Share-based payment expense decreased income before income taxes by $0.27 million and $0.54 million for the three and six month periods ended June 30, 2011, respectively, as compared to $0.33 million and $0.60 million for the corresponding periods of the prior year.  Share-based payment expense decreased income attributable to Inter Parfums, Inc. by $0.15 million and $0.31 million for the three and six month periods ended June 30, 2011, respectively, as compared to $0.21 million and $0.33 million for the corresponding periods of the prior year.

The following table summarizes stock option information as of June 30, 2011:
 
   
Shares
   
Weighted Average
Exercise Price
 
             
Outstanding at January 1, 2011
    807,620     $ 12.78  
Options granted
    3,500       17.94  
Options cancelled
    (3,910 )     14.48  
Options exercised
    (88,200 )     12.65  
                 
Outstanding at June 30, 2011
    719,010     $ 12.81  
                 
Options exercisable
    251,268     $ 12.13  
Options available for future grants
    823,485          

As of June 30, 2011, the weighted average remaining contractual life of options outstanding is 3.12 years (2.23 years for options exercisable), the aggregate intrinsic value of options outstanding and options exercisable is $7.3 million and $2.7 million, respectively and unrecognized compensation cost related to stock options outstanding of Inter Parfums, Inc. aggregated $1.2 million. The amount of unrecognized compensation cost related to stock options outstanding of our majority-owned subsidiary, Interparfums, S.A., was €0.82 million. Options under Interparfums, S.A. plans vest over a four-year period.
 
Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the six months ended June 30, 2011 and June 30, 2010 were as follows:
 
(In thousands)
 
June 30,
2011
   
June 30,
2010
 
             
Cash proceeds from stock options exercised
  $ 1,116     $ 738  
Tax benefits
           
Intrinsic value of stock options exercised
    650       1,173  

No tax benefit was realized or recognized from stock options exercised as valuation reserves were allocated to those potential benefits.

 
Page 13

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The weighted average fair values of the options granted by Inter Parfums, Inc. during the six months ended June 30, 2011 and 2010 were $5.27 and $5.26 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 June 30, 2011 and 2010 are set forth in the following table. Expected volatility is estimated based on historic volatility of our common stock. We use the simplified method in developing our estimate of the expected term of the option as historic data regarding employee exercise behavior is incomplete for the new vesting parameters 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.
 
   
June 30,
2011
   
June 30,
2010
 
             
Weighted-average expected stock-price volatility
    38 %     49 %
Weighted-average expected option life
 
4.5 years
   
4.18 years
 
Weighted-average risk-free interest rate
    2.0 %     2.5 %
Weighted-average dividend yield
    1.7 %     2.0 %

9.
Net Income Attributable to Inter Parfums, Inc. Common Shareholders:

Net income attributable to Inter Parfums, Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to Inter Parfums, Inc. by the weighted-average number of shares outstanding. Net earnings attributable to Inter Parfums, Inc. per share assuming dilution (“diluted EPS”), is computed using the weighted average number of shares outstanding, plus the incremental shares outstanding assuming the exercise of dilutive stock options and warrants using the treasury stock method. The reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:
 
   
Three months ended
   
Six months ended
 
(In thousands)
 
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Numerator:
                       
Net income attributable to Inter Parfums, Inc.
  $ 4,993     $ 5,356     $ 17,752     $ 11,906  
Effect of dilutive securities of consolidated subsidiary
    (5 )       (12 )       (59 )       (17 )  
Numerator for diluted earnings per share
  $ 4,988     $ 5,344     $ 17,693     $ 11,889  
Denominator:
                               
Weighted average shares
    30,506       30,361       30,490       30,277  
Effect of dilutive securities:
                               
Stock options and warrants
    189       106       174       102  
Denominator for diluted earnings per share
    30,695       30,467       30,664       30,379  
                                 
Earnings per share:
                               
Net income attributable to Inter Parfums, Inc.
                               
common shareholders:
                               
Basic
  $ 0.16     $ 0.18     $ 0.58     $ 0.39  
Diluted
    0.16       0.18       0.58       0.39  

 
Page 14

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.1 million shares of common stock for both the three and six month periods ended June 30, 2011, and 0.1 million and 0.3 million shares of common stock for the three and six month periods ended June 30, 2010, respectively, as well as outstanding warrants to purchase 0.15 million shares of common stock for both the three and six month periods ended June 30, 2010.

10.
Net Income Attributable to Inter Parfums, Inc. and Transfers From the Noncontrolling Interest:

(In thousands)
 
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income attributable to Inter Parfums, Inc.
  $ 4,993     $ 5,356     $ 17,752     $ 11,906  
Increase (decrease) in Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions
    (151 )     (985 )     62       (24 )
Change from net income attributable to Inter Parfums, Inc. and transfers from noncontrolling interest
  $ 4,842     $ 4,371     $ 17,814     $ 11,882  

11.
Segment and Geographic Areas:

 
The Company manufactures and distributes one product line, fragrances and fragrance related products. The Company manages its business in two segments, European based operations and United States based operations. The European assets are located, and operations are primarily conducted, in France. 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.

 
Page 15

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 
Information on our operations by geographical areas is as follows:

(In thousands)
 
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
United States
  $ 14,538     $ 15,838     $ 26,332     $ 26,916  
Europe
    106,525       91,927       228,094       200,222  
                                 
    $ 121,063     $ 107,765     $ 254,426     $ 227,138  
                                 
Net income (loss) attributable to Inter Parfums, Inc.:
                               
United States
  $ 230     $ 359     $ (64 )   $ (178 )
Europe
    4,763       4,975       17,816       12,062  
Eliminations of intercompany profits
          22             22  
                                 
    $ 4,993     $ 5,356     $ 17,752     $ 11,906  
                                 
                   
June 30,
   
December 31,
 
                    2011      2010   
Total Assets:
                               
United States
                  $ 57,555     $ 40,896  
Europe
                    454,560       398,547  
Eliminations of investment in subsidiary
                    (9,288 )     (1,338 )
                                 
                    $ 502,827     $ 438,105  

12. 
Accrued Expenses:

 
Accrued expenses include approximately $15.6 million and $14.7 million in advertising liabilities as of June 30, 2011 and December 31, 2010, respectively.

13. 
Reclassification:

Certain prior year amounts in the accompanying consolidated statements of cash flows have been reclassified to conform to current period presentation. More specifically, proceeds from sale of stock of subsidiary and payments for acquisition of noncontrolling interests have been reclassified from net cash provided by (used in) investing activities to net cash (used in) financing activities.

 
Page 16

 
 
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, 2010 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, Interparfums, S.A. (formerly Inter Parfums, S.A.), which is also a publicly traded company as 26% of Interparfums, S.A. shares trade on the Euronext. Prestige cosmetics and prestige skin care products represent less than 1% of consolidated net sales.

We produce and distribute our prestige products primarily under license agreements with brand owners, and prestige product sales represented approximately 90% and 88% of net sales for the six months ended June 30, 2011 and 2010. We have built a portfolio of prestige brands, which include Burberry, Lanvin, Van Cleef & Arpels, Jimmy Choo, Montblanc, Paul Smith, S.T. Dupont, Nickel and Boucheron, whose products are distributed in over 120 countries around the world. Shipments to our distribution subsidiaries are not recognized as sales until that merchandise is sold by our distribution subsidiary to its customers.

Burberry is our most significant license, as sales of Burberry products represented 47% and 57% of net sales for the six months ended June 30, 2011 and 2010, respectively. In addition, we own the Lanvin brand name for our class of business and sales of Lanvin product represented 14% and 13% of net sales for the six months ended June 30, 2011 and 2010, respectively.

Our specialty retail and mass-market fragrance and fragrance related products are marketed through our United States operations and represented 10% and 12% of sales for the six months ended June 30, 2011 and 2010. These fragrance products are sold under trademarks owned by us or pursuant to license or other agreements with the owners of the Gap, Banana Republic, Brooks Brothers, bebe, Betsey Johnson, Nine West, Lane Bryant and Jordache trademarks.

 
Page 17

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Historically, seasonality has not been a major factor for our Company as quarterly sales fluctuations were more influenced by the timing of launches than by the third and fourth quarter holiday season. However, in certain markets where we now sell direct to retailers, seasonality is more evident. In 2007 we commenced operations of our European distribution subsidiaries in Italy, Germany, Spain and the United Kingdom, and in January 2011 we commenced operations of our United States distribution subsidiary. In addition, the introduction of our specialty retail product lines for U. S. retailers has also contributed to a concentration of sales in the second half of the year.

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and 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.

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 which are then delivered to one of our distribution centers.

As with any business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share.

Our reported net sales are impacted by changes in foreign currency exchange rates. A weak U.S. dollar has a positive impact on our net sales. However, earnings are negatively affected by a weak 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

The Gap Inc.

In July 2011, we renewed our exclusive agreement with The Gap, Inc. to develop, produce, manufacture and distribute fragrances for Gap and Banana Republic brand names to be sold in Gap and Banana Republic retail stores in the United States and Canada. In July 2011, we also renewed our license agreement with The Gap Inc. for international distribution of fragrances through Gap and Banana Republic stores as well as select specialty and department stores outside the United States, including duty-free and other travel related retailers.

 
Page 18

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

These renewal agreements, which take effect on January 1, 2012 and run through December 31, 2014, contain terms and conditions similar to those of the original agreements.

Pierre Balmain

In July 2011, we entered into a twelve-year exclusive, worldwide license agreement to create, produce and distribute perfumes and ancillary products under the Balmain brand. Our rights under the agreement commence on January 1, 2012 when we will take over the production and distribution of existing Balmain fragrances and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The Company paid an up front entry fee of €1.5 million (approximately $2.1 million) for this license.

Anna Sui

In June 2011, we entered into a ten-year exclusive worldwide fragrance license agreement, with two five-year renewal options, to create, produce and distribute perfumes and fragrance-related products under the Anna Sui brand. Our rights under the agreement commence on January 1, 2012 when we will take over production and distribution of the existing Anna Sui fragrance collections and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The license agreement replaces a previous license with Procter & Gamble that terminates on December 31, 2011. Inter Parfums is in negotiations to purchase the current inventory and other assets of the existing licensee, which is subject to a definitive agreement.

S. T. Dupont

In April 2011 we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance lines through December 31, 2016. Our initial eleven-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended in 2006 for an additional three years until June 2011.

Lane Bryant

In March 2011, we entered into an exclusive agreement with a unit of Charming Shoppes, Inc. for its flagship brand, Lane Bryant. Under the agreement, Inter Parfums designs and manufactures personal care products for the Lane Bryant brand, while Lane Bryant is responsible for marketing, promoting and selling these products. The initial term of the contract, which may be extended by mutual consent, runs through December 31, 2015.

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.

 
Page 19

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

The judgments used by management in applying critical accounting policies could be affected by a further and 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 receivables, 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 additional 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.

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 and for U.S. based customers of prestige products, we 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 costs for these promotions. Actual costs incurred may differ significantly, either favorably or unfavorably, from estimates if factors such as the level and success of the retailers’ programs or other conditions differ from our expectations.

 
Page 20

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Inventories

Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. We record adjustments to the cost of inventories based upon our sales forecast and the physical condition of the inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions or competitive conditions differ from our expectations.

Equipment and Other Long-Lived Assets

Equipment, which includes tools and molds, is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital spending strategy can result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of equipment should be shortened, we would depreciate the net book value in excess of the salvage value, over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of equipment, or market acceptance of products, could result in shortened useful lives.

We evaluate goodwill and indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not (i) reduce the fair value of the reporting unit below its fair value or (ii) indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable.  Impairment of goodwill is evaluated using a two step process. The first step involves a comparison of the estimated fair value of the reporting unit to the carrying value of that unit. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, the second step of the process involves comparison of the implied fair value of goodwill (based on industry purchase and sale transaction data) with its carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized as an amount equal to the excess. For indefinite-lived intangible assets, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, impairment is recorded.

Goodwill relates 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. We have determined that we may be inclined to sell the Nickel business within the next few years. Therefore, as of December 31, 2009, we measured fair value of the business to be equal to the average amount offered by several potential purchasers of the Nickel business. As a result, the carrying amount of the goodwill exceeded its implied fair value resulting in an impairment loss of $1.7 million in 2009. The same evaluation was performed in 2010 and no further impairment was noted. We expect Nickel brand sales to remain steady over the next few years as the result of new product launches in combination with an economic recovery. In estimating future sales, we use our internal budgets developed from recent sales data for existing products and planned timing of new product launches. If sales for the reporting unit decreased 10%, we could incur an additional goodwill impairment charge of €0.5 million.

 
Page 21

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

To determine fair value of indefinite-lived intangible assets, we use an income approach, including the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. The relief-from-royalty calculations require us to make a number of assumptions and estimates concerning future sales levels, market royalty rates, future tax rates and discount rates. We use this method to determine if an impairment charge is required relating to our Nickel brand trademarks. For the year ended December 31, 2009, an impairment charge relating to the Nickel trademark in the amount of $0.54 million was recorded. No impairment charge was required in 2010. We assumed a market royalty rate of 6% and a discount rate of 7.4%.

The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2010 assuming all other assumptions remained constant:

In thousands
       
Increase (decrease)
 
   
Change
   
to fair value
 
             
Weighted average cost of capital
    +10 %   $ (219 )
Weighted average cost of capital
    -10 %   $ 280  
Future sales levels
    +10 %   $ 266  
Future sales levels
    -10 %   $ (266 )

The fair values used in our evaluations are also estimated based upon discounted future cash flow projections using a weighted average cost of capital of 7.4%. The cash flow projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. We believe that the assumptions that we have made in projecting future cash flows for the evaluations described above are reasonable and currently no impairment indicators exist for our indefinite-lived assets other than the Nickel trademarks referred to above. However, if future actual results do not meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results of operations.

 
Page 22

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Intangible assets subject to amortization are evaluated for impairment testing whenever events or changes in circumstances indicate that the carrying amount of an amortizable intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no impairment charge is recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangible asset, an impairment charge would be recorded to reduce the intangible asset to its fair value. The cash flow projections are based upon a number of assumptions, including future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable and currently no impairment indicators exist for our intangible assets subject to amortization. In those cases where we determine that the useful life of long-lived assets should be shortened, we would depreciate the net book value in excess of the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby increasing amortization expense.

In determining the useful life of our Lanvin brand names and trademarks, we applied the provisions of ASC topic 350-30-35-3. The only factor that prevented us from determining that the Lanvin brand names and trademarks were indefinite life intangible assets was Item c. “Any legal, regulatory, or contractual provisions that may limit the useful life”. The existence of a repurchase option in 2025 may limit the useful life of the Lanvin brand names and trademarks to the Company. However, this limitation would only take effect if the repurchase option were to be exercised and the repurchase price was paid. If the repurchase option is not exercised, then the Lanvin brand names and trademarks are expected to continue to contribute directly to the future cash flows of our Company and their useful life would be considered to be indefinite.

With respect to the application of ASC topic 350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exercised, and in applying ASC topic 350-30-35-8 we assumed that the repurchase option is exercised. When exercised, Lanvin has an obligation to pay the exercise price and the Company would be required to convey the Lanvin brand names and trademarks back to Lanvin. The exercise price to be received (Residual Value) is well in excess of the carrying value of the Lanvin brand names and trademarks, therefore no amortization is required.

Derivatives

We account for derivative financial instruments in accordance with ASC topic 815, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This topic also requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet and that they are measured at fair value.

We currently use derivative financial instruments to hedge certain anticipated transactions and interest rates, as well as receivables denominated in foreign currencies. We do not utilize derivatives for trading or speculative purposes. Hedge effectiveness is documented, assessed and monitored by employees who are qualified to make such assessments and monitor the instruments. Variables that are external to us such as social, political and economic risks may have an impact on our hedging program and the results thereof.

 
Page 23

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

Income Taxes

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently anticipated tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of net earnings at that time.

The Company follows the provisions of uncertain tax positions as addressed in  ASC topic 740-10-65-1.

Results of Operations

Three and Six Months Ended June 30, 2011 as Compared to the Three and Six Months Ended June 30, 2010

Net sales
 
Three months ended
June 30,
   
Six months ended
June 30,
 
(In millions)
 
2011
   
%
Change
   
2010
   
2011
   
%
Change
   
2010
 
                                     
European based product sales
  $ 106.5       16 %   $ 91.9     $ 228.1       14 %   $ 200.2  
United States based product sales
    14.6       (8 )%     15.9       26.3       (2 )%     26.9  
                                                 
Total net sales
  $ 121.1       12 %   $ 107.8     $ 254.4       12 %   $ 227.1  

Net sales for the three months ended June 30, 2011 increased 12% to $121.1 million, as compared to $107.8 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 5% for the period. Net sales for the six months ended June 30, 2011 increased 12% to $254.4 million, as compared to $227.1 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 8% for the period. The weakness of the U.S. dollar relative to the euro during the three month period ended June 30, 2011 gave rise to the difference between constant dollar and reported net sales.

European based prestige product sales increased 16% for the three months ended June 30, 2011 and 14% for the six months ended June 30, 2011, as compared to the corresponding periods of the prior year. This sales growth was due to a number of factors, including the commencement of prestige product distribution in the U.S. by our subsidiary, Interparfums Luxury Brands as of January 1, 2011. Other markets that were especially strong during the six month period ending June 30, 2011 include South America, Eastern Europe and Asia, where comparable prestige product sales in local currency were up 19%, 16% and 14%, respectively. Sales for the three month period ended June 30, 2011 were less than expected due to the June opening of our new 340,000 square foot distribution center outside of Paris. The transfer of inventory and certain other unforeseen transitional issues caused a delay in shipments until the third quarter of 2011. We do not expect these issues to impact our sales expectations for the full year ended December 31, 2011.

 
Page 24

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES

From a product standpoint, the Jimmy Choo signature fragrance debuted with limited distribution in the first half. With strong demand on order renewals plus broader distribution anticipated in the second half of 2011, we increased our production forecast for the year. First time sales of Montblanc’s historic lines and the launch of Legend for men, brand sales which aggregated $8.8 million and $17.7 million for the three and six months ended June 30, 2011, are also running well ahead of budget. In local currency, first half Burberry brand sales declined 13%, in line with expectations, as last year’s period benefited from the worldwide launch of Burberry Sport. Similarly in local currency, first half Van Cleef & Arpels sales were 22% below those of last year’s first half which included the launch of Oriens.

We are gearing up for a very active 2011, reflecting several factors including the continued strength of our brands and worldwide distribution network. Our growth expectations for 2011 reflect the impact of our taking control over U.S. distribution for our prestige brands and the inclusion of the Montblanc fragrance business for the full year in 2011. In addition, we have a strong line-up of new product launches and brand extensions to drive sales growth. In addition to the Jimmy Choo launch discussed above, early in 2011 we began the integration of existing fragrance lines under the Boucheron brand. In March 2011, we debuted Legend, our first new Montblanc fragrance for men, as well as a new men’s and women’s scent for Paul Smith fragrances. Most importantly, to further strengthen the Burberry brand’s potential for sustained growth in the years ahead, a major new women’s line will be launched in Fall 2011. Finally, with respect to Burberry Beauty, the color cosmetics collection, plans call for additional products to be rolled out throughout the year and distribution is expected to be expanded by approximately 60 additional retail outlets for a total of approximately 90. We are currently reviewing Burberry Beauty results, as well as the anticipated financial commitment which may be necessary, in order to determine the appropriate level of distribution for the Burberry Beauty in the years to come.

With respect to our United States specialty retail and mass-market products, net sales for the three months ended June 30, 2011 were $14.6 million, as compared to $15.9 million for the corresponding period of the prior year. Net sales for the six months ended June 30, 2011 were $26.3 million, as compared to $26.9 million for the corresponding period of the prior year.

After a 16% increase in 2010 and a 6.5% increase in the first quarter of 2011, sales declined slightly during the three months ended June 30, 2011. Most of our new specialty retail product introductions and holiday programs are scheduled to ship in the second half of 2011.

International distribution of specialty retail products continues to perform well. In addition, our bebe signature fragrance has done especially well in overseas markets and we expanded bebe distribution into additional third party retail outlets.

For the Banana Republic brand, a new women’s scent, Wildbloom, was launched early this year and brand extensions for the Discover and Republic of Men and Republic of Women collections are being prepared. Building upon the success of the Gap brand’s Close and Stay fragrances, a third women’s signature scent, Near, launched in 2011. A new men’s scent, Deep, has also been added to build the brands men’s fragrance portfolio. We are also adding more lip color and lip care products into the Gap beauty mix, along with their first nail color products. We are in the development stage for several new fragrance concepts and line extensions for our other specialty retail brands. The debut of products for Betsey Johnson and Nine West, are planned for the second half of 2011.

 
Page 25

 
 
INTER PARFUMS, INC. AND SUBSIDIARIES
 
We have been actively pursuing other new business opportunities and in March 2011, we entered into an exclusive agreement with a unit of Charming Shoppes, Inc. for its flagship brand, Lane Bryant. We have worked with Lane Bryant to develop a line of performance-based bath, body and specialty products, which is now being sold under Lane Bryant’s Cacique® brand. The initial line of products was launched at 130 Lane Bryant stores and at www.lanebryant.com in late spring. Chain wide rollout is anticipated in early 2012. Additional products, including a fine fragrance, are contemplated for holiday 2011.

In addition, we are actively pursuing other new business opportunities. However, we cannot assure that any new licenses, acquisitions or specialty retail agreements will be consummated.

Gross margin
 
Three months ended
June 30,
   
Six months ended
June 30,
 
(In millions)
 
2011
   
2010
   
2011
   
2010
 
                         
Net sales
  $ 121.1     $ 107.8     $ 254.4     $ 227.1  
Cost of sales
    46.1       43.1       92.8       90.7  
                                 
Gross margin
  $ 75.0     $ 64.7     $ 161.6     $ 136.4  
Gross margin as a percent of net sales
    62 %     60 %     64 %