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, 2015 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.

Regulation S-K Item 10(e)

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in commission filings,” prescribes the conditions for use of non-GAAP financial information in commission filings. We believe that our presentation of the non-GAAP financial information beginning on page 26 of this Form 10-Q is important supplemental measures of operating performance to investors. We believe that certain investors consider adjusted net income attributable to Inter Parfums, Inc. a useful means of evaluating our financial performance.

Overview

We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.

We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 79% and 78% of net sales for the six months ended June 30, 2016 and 2015, respectively. We have built a portfolio of prestige brands, which include Balmain, Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas and Van Cleef & Arpels , whose products are distributed in over 100 countries around the world. With respect to our largest brands, we own the Lanvin brand name for its class of trade, and license the Montblanc and Jimmy Choo brand names; for the six months ended June 30, 2016, sales of product for these brands represented 11%, 27%, and 19% of net sales, respectively.

INTER PARFUMS, INC. AND SUBSIDIARIES

Through our United States operations we also market fragrance and fragrance related products. United States operations represented 21% and 22% of net sales for the six months ended June 30, 2016 and 2015, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, Banana Republic, bebe, Dunhill, Hollister, Oscar de la Renta, and Shanghai Tang brands.

Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as well as through our distribution subsidiaries in Italy, Germany, Spain and the United States.

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as 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 product for us and then deliver them to one of our distribution centers.

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

During the six months ended June 30, 2016, the economic and political uncertainty and financial market volatility taking place in Eastern Europe, the Middle East and China had a small negative impact on our business, and at this time we do not believe it will significantly affect our overall business for the foreseeable future. However, if the degree of uncertainty or volatility worsens or is prolonged, then there will likely be a negative effect on ongoing consumer confidence, demand and spending and as a result, our business. Currently, we believe general economic and other uncertainties still exist in select markets in which we do business, and we continue to monitor global economic uncertainties and other risks that may affect our business.

Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because over 40% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. 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. 

INTER PARFUMS, INC. AND SUBSIDIARIES

Recent Important Event

Settlement with French Tax Authorities

As previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA, and in August 2015 issued a $6.9 million tax adjustment. It is the Company’s position that the French Tax Authorities are incorrect in their assessments and the Company believes that it has strong arguments to support its tax positions. The main issues challenged by the French Tax Authorities related to the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respectively. Interparfums Singapore Pte. and Interparfums (Suisse) SARL are wholly-owned subsidiaries of Interparfums SA. Due to the subjective nature of the issues involved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax Authorities. The settlement requires Interparfums SA to pay a tax assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as to future acceptable commission and royalty rates, which is not expected to have a significant impact on cash flow. The settlement, which is subject to formal documentation with the French Tax Authorities, was accrued for in March 2016.

Discussion of Critical Accounting Policies

We make estimates and assumptions in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations. These accounting policies generally require our management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management of the Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Board of Directors.

Revenue Recognition

We sell our products to department stores, perfumeries, specialty 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. 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.

INTER PARFUMS, INC. AND SUBSIDIARIES

Accounts Receivable

Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for sales returns and doubtful accounts. Accounts receivable balances are written-off against the allowance for doubtful accounts when they become uncollectible. Recoveries of accounts receivable previously recorded against the allowance are recorded in the consolidated statement of income when received. We generally grant credit based upon our analysis of the customer’s financial position as well as previously established buying patterns.

Sales Returns

Generally, we do not permit customers to return their unsold products. However, for U.S. distribution of our prestige products, we allow returns if properly requested, authorized and approved. We regularly review and revise, as deemed necessary, our estimate of reserves for future sales returns based primarily upon historic trends and relevant current data, including information provided by retailers regarding their inventory levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The types of known or anticipated events that we have considered, and will continue to consider, include, but are not limited to, the financial condition of our customers, store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products. We record estimated reserves for sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products are recorded as inventories and are valued based upon estimated realizable value. The physical condition and marketability of returned products are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as economic conditions, inventory levels or competitive conditions differ from our expectations.

Inventories

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

Equipment and Other Long-Lived Assets

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

INTER PARFUMS, INC. AND SUBSIDIARIES

We evaluate indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 8.02%. The cash flow projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment charge is recorded.

We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable and currently no impairment indicators exist for our indefinite-lived intangible assets. 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.

At June 30, 2016 and December 31, 2015 indefinite-lived intangible assets aggregated approximately $119.5 million. The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2015 assuming all other assumptions remained constant:

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 amortize the net book value in excess of the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby increasing amortization expense.

INTER PARFUMS, INC. AND SUBSIDIARIES

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

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

Derivatives

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

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

Income Taxes

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently anticipated tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of net income at that time. In addition, the Company follows the provisions of uncertain tax positions as addressed in ASC topic 740.

Net sales for the three months ended June 30, 2016 increased 14.8% to $117.2 million, as compared to $102.0 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 14.2%. Net sales for the six months ended June 30, 2016 increased 8.2% to $228.7 million, as compared to $211.3 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 8.4% for the period.

European based product sales increased 14.8% and 10.3% for the three and six months ended June 30, 2016, respectively, as compared to the corresponding periods of the prior year. There was no discernable effect of foreign currency exchange rates for the three and six months ended June 30, 2016. For the three and six months ended June 30, 2016, Montblanc, our largest brand, generated sales of $26.3 million and $61.4 million, respectively, representing an increase of 32% and 31%, as compared to the corresponding periods of the prior year. The successful launch of Montblanc Legend Spirit and the continued popularity of the original Legend line were important contributors to brand sales. Our second largest brand, Jimmy Choo, generated sales of $22.0 million and $43.4 million for the three and six months ended June 30, 2016, respectively, representing an increase of 43% and 17%, as compared to the corresponding periods of the prior year. The increase is due in great part to the ongoing roll-out of Jimmy Choo Illicit , our third women's line which debuted last year and the steady performance of the Jimmy Choo Man line. Lanvin fragrances sales for the three and six months ended June 30, 2016, were down 19% and 22%, respectively, as compared to the corresponding periods of the prior year. The decline is primarily due to the economic slowdowns in its two flagship markets of Russia and China. We hope to counter this trend with a new Lanvin women's line Modern Princess , launching in selected markets this fall and internationally in 2017. Rochas brand fragrances generated $15.3 million in sales thus far this year, primarily due to sales in the brand’s foundational markets of Spain and France.

We maintain confidence in our future as we have strengthened advertising and promotional investments supporting portfolio brands and accelerated brand development. Our expectations reflect plans to continue to build upon the strength of our brands and our worldwide distribution network. For the remainder of 2016, we expect most of the growth for our European operations to come from our newest brands, Coach and Rochas. Our first Coach women’s line is set to launch in September 2016, and we have already ramped up our distribution network for our current Rochas product lines while we prepare for a new Rochas product line for 2017. With respect to our other European based brands, only Van Cleef & Arpels will see a launch of a new scent family in 2016. For our other brands, line extensions and/or flankers are in the works. Lastly, we hope to benefit from our strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee.

INTER PARFUMS, INC. AND SUBSIDIARIES

United States based product sales increased 14.8% and 1.3% for the three and six months ended June 30, 2016, respectively, as compared to the corresponding periods of the prior year. International distribution of our first new Abercrombie & Fitch men’s scent, First Instinct , and the Hollister duo, Wave , were major contributors to our top line growth for the three months ended June 30, 2016. In the second half of 2016, distribution of these new scents will continue to roll out to additional international markets. Dunhill, which launched its Icon fragrance line in the first quarter of 2015, continues to be a consistent top performing brand with sales up 23% and 3% for the three and six months ended June 30, 2016, respectively, as compared to the corresponding periods of the prior year.

For the six months ended June 30, 2016, we continued to feel the effect of negative market conditions in Eastern Europe, the Middle East and China, while in constant dollars, Western Europe and North America continue to perform well.

Gross profit margin was 64% of net sales for both the three and six months ended June 30, 2016, as compared to 59% and 61% for the corresponding periods of the prior year. For European operations, gross profit margin was 67% for both the three and six months ended June 30, 2016, as compared to 59% and 61% for the corresponding periods of the prior year. The gross profit margin increase for European operations is primarily the result of increased product sales, much of which is through our distribution subsidiaries that sell product directly to retailers. In addition to increased sales of Montblanc and Jimmy Choo products sold through our United States distribution subsidiary, the Rochas brand was also a major contributor as its sales are concentrated in France and Spain, both of which are countries where we distribute direct to retailers. We carefully monitor movements in foreign currency exchange rates as over 40% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross profit margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rate for the three and six months ended June 30, 2016 was 1.12 and 1.13, respectively, as compared to 1.11 and 1.12 for the corresponding periods of the prior year. We are also carefully monitoring currency trends in the United Kingdom as a result of the volatility created from the United Kingdom’s decision to exit the European Union. We are evaluating our current pricing models and currently we do not expect any significant pricing changes. However, if the devaluation of the British Pound continues, it may affect future gross profit margins from sales in the territory. We do not expect any material losses on accounts receivables to be collected in British Pounds as we routinely hedge those amounts.

INTER PARFUMS, INC. AND SUBSIDIARIES

For U.S. operations, gross profit margin was 53% and 51% for the three and six months ended June 30, 2016, respectively, as compared to 47% and 49% for the corresponding periods of the prior year. The increase for the three and six months ended June 30, 2016 is primarily the result of a shift in product mix during the periods as sales growth for our U.S. operations has primarily come from our higher margin prestige product licenses, such as Abercrombie & Fitch, Hollister, Oscar de la Renta and Dunhill, while sales of lower margin specialty retail and mass market products have been in a decline. This trend is expected to continue throughout 2016 although some quarterly fluctuations may occur.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $1.2 million and $2.3 million for the three and six month periods ended June 30, 2016, respectively, as compared to $1.1 million and $2.2 million for the corresponding periods of the prior year, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross profit may not be comparable to other companies, which may include these expenses as a component of cost of goods sold.

Selling, general and administrative expenses increased 21% and 18% for the three and six months ended June 30, 2016, respectively, as compared to the corresponding periods of the prior year. Selling, general and administrative expenses were 54% and 51% of net sales for the three and six months ended June 30, 2016, as compared to 51% and 47% for the corresponding periods of the prior year. For European operations, selling, general and administrative expenses increased 19% and 21% for the three and six months ended June 30, 2016, as compared to the corresponding periods of the prior year and represented 57% and 53% of sales for the three and six months ended June 30, 2016, as compared to 55% and 48% for the corresponding periods of the prior year. The increase is primarily the result of higher promotional and advertising expenses. For U.S. operations, selling, general and administrative expenses were 44% of sales for both the three and six months ended June 30, 2016, as compared to 39% and 41% for the corresponding periods of the prior year. Similar to the increase in gross profit margin, the increase is primarily the result of sales growth coming from our prestige product licenses, such as Abercrombie & Fitch, Hollister, Oscar de la Renta and Dunhill, which bear royalty and advertising expenses.

INTER PARFUMS, INC. AND SUBSIDIARIES

Promotion and advertising included in selling, general and administrative expenses aggregated $24.9 million and $41.0 million for the three and six months ended June 30, 2016, respectively, as compared to $17.5 million and $30.1 million for the corresponding periods of the prior year. Promotion and advertising represented 21% and 18% of net sales for the three and six months ended June 30, 2016, respectively, as compared to 17% and 14% for the corresponding periods of the prior year. The increase in 2016 is primarily the result of advertising and promotional expenditures incurred in connection with the launch of Montblanc Legend Spirit and the continued geographic rollout of Jimmy Choo Illicit .

Royalty expense included in selling, general and administrative expenses aggregated $8.5 million and $16.7 million for the three and six months ended June 30, 2016, respectively, as compared to $7.6 million and $16.2 million for the corresponding periods of the prior year. Royalty expense represented 7.2% and 7.3% of net sales for the three and six months ended June 30, 2016, as compared to 7.5% and 7.7% of net sales for the corresponding period of the prior year. Royalty expense for the three and six months ended June 30, 2015 include $0.6 million and $1.2 million, respectively, relating to the June 2015 settlement with Burberry regarding the royalty liability.

Service fees relating to the activities of our distribution subsidiaries aggregated $2.0 million and $4.5 million for the three and six months ended June 30, 2016, respectively, as compared to $2.2 million and $4.7 million for the corresponding periods of the prior year.

As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations increased 39% to $11.5 million for the three months ended June 30, 2016, as compared to $8.2 million for the corresponding period of the prior year. Income from operations decreased to $29.0 million for the six months ended June 30, 2016, as compared to $29.3 million for the corresponding period of the prior year. Operating margins were 9.8% and 12.7% of net sales for the three and six months ended June 30, 2016, respectively, as compared to 8.1% and 13.9% for the corresponding periods of the prior year.

Other Income and Expense

Interest expense aggregated $0.7 million and $1.7 million for the three and six months ended June 30, 2016, respectively, as compared to $0.6 million and $0.8 million for the corresponding periods of the prior year. The increase in 2016 is primarily related to the July 2015, financing of the Rochas brand acquisition. We also use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for brand acquisitions.

Foreign currency gain or (loss) aggregated $0.7 and ($0.1) million for the three and six months ended June 30, 2016, respectively, as compared to losses of ($0.1) million and ($2.1) million for the corresponding periods of the prior year. The volatility in currency exchange rates during the first quarter of 2015 had not been seen in many years. The loss incurred during the six months ended June 30, 2015, primarily represents losses from intercompany accounts between our majority owned subsidiary, Interparfums SA, and its other foreign subsidiaries, which were not hedged by the use of foreign currency forward exchange contracts. We typically enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency.

INTER PARFUMS, INC. AND SUBSIDIARIES

Interest income aggregated $0.6 million and $2.0 million for the three and six months ended June 30, 2016, respectively, as compared to $0.8 million and $2.0 million for the corresponding periods of the prior year. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

Income Taxes

As previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA, and in August 2015 issued a $6.9 million tax adjustment. It is the Company’s position that the French Tax Authorities are incorrect in their assessments and the Company believes that it has strong arguments to support its tax positions. The main issues challenged by the French Tax Authorities related to the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respectively. Interparfums Singapore Pte. and Interparfums (Suisse) SARL are wholly-owned subsidiaries of Interparfums SA. Due to the subjective nature of the issues involved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax Authorities. The settlement requires Interparfums SA to pay a tax assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as to future acceptable commission and royalty rates, which is not expected to have a significant impact on cash flow. The settlement, which is subject to formal documentation with the French Tax Authorities, was accrued as of March 31, 2016.

Excluding the settlement, our effective income tax rate was 36% and 35% for the three and six-month periods ended June 30, 2016, respectively, as compared to 34% for both corresponding periods of the prior year. The increase for the 2016 is primarily the result of small permanent differences and we expect our effective rate, excluding the settlement, to be approximately 35% for the full year ended December 31, 2016. Our effective tax rates differ from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions.

Net income was $7.7 million for the three months ended June 30, 2016, as compared to $5.5 million for the corresponding period of the prior year. Net income was $17.2 million for the six months ended June 30, 2016, as compared to $18.8 million for the corresponding period of the prior year. The reasons for significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin, selling, general and administrative expenses and the pending settlement with the French Tax Authorities. As previously discussed, improved gross profit margins within our European operations were offset by increased advertising and promotional expenditures in connection with the launch of Montblanc Legend Spirit and the continued rollout of Jimmy Choo Illicit . In addition, for our European operations, net income for the first quarter of 2016 includes the effect of the $1.9 million pending income tax settlement with the French Tax Authorities. For United States operations, in summary, for the six months ended June 30, 2016 sales, gross margin and selling, general and administrative expenses increased 1%, 5% and 9% respectively, as compared to the corresponding period of the prior year.

The noncontrolling interest arises from our 73% owned subsidiary, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. The noncontrolling interest is also affected by the profitability of Interparfums SA’s 51% owned distribution subsidiaries in Germany and Spain. Net income attributable to the noncontrolling interest aggregated 31% and 26% of European operations’ net income for the three and six months ended June 30, 2016, respectively, as compared to 27% for both corresponding periods of the prior year.

INTER PARFUMS, INC. AND SUBSIDIARIES

Adjusted Net Income Attributable to Inter Parfums, Inc.

Adjusted Net Income Attributable to Inter Parfums, Inc., is deemed a “non-GAAP financial measure” under the rules of the Securities and Exchange Commission. This non-GAAP measure is calculated using GAAP amounts derived from our consolidated financial statements. Adjusted net income attributable to Inter Parfums, Inc. has limitations and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations or other consolidated income or cash flow data prepared in accordance with GAAP. Because not all companies use identical calculations, this presentation of adjusted income may not be comparable to a similarly titled measure of other companies.

Adjusted Net Income Attributable to Inter Parfums, Inc. Reconciliation

Adjusted net income attributable to Inter Parfums, Inc. is defined as net income attributable to Inter Parfums, Inc., plus the pending nonrecurring tax settlement, net of the portion of the settlement attributable to the noncontrolling interest. We believe that certain investors consider adjusted net income attributable to Inter Parfums, Inc. a useful means of evaluating our financial performance. The following table provides a reconciliation of net income attributable to Inter Parfums, Inc. to adjusted net income attributable to Inter Parfums, Inc. for the period indicated.

INTER PARFUMS, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

The Company’s financial position remains strong. At June 30, 2016, working capital aggregated $338 million and we had a working capital ratio of almost 3.5 to 1. Cash and cash equivalents and short-term investments aggregated $232 million, most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to cash and cash equivalents and short-term investments held by our European operations. Approximately 88% of the Company’s total assets are held by European operations and approximately $192 million of trademarks, licenses and other intangible assets are held by European operations.

The Company hopes to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. Opportunities for external growth continue to be examined, with the priority of maintaining the quality and homogeneous nature of our portfolio. However, we cannot assure you that any new license or acquisition agreements will be consummated.

Cash used in operating activities aggregated $5.9 million and $9.0 million for the six months ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016, working capital items used $27.9 million in cash from operating activities, as compared to $34.5 million in the 2015 period. Although accounts receivable is up 5% from year end, the balance is reasonable based on second quarter 2016 sales levels and reflects continued strong collection activity as day’s sales outstanding is 78 days, as compared to 80 days for the corresponding period of the prior year. We continue to monitor collection activities actively and adjust customer credit limits as needed. Inventory levels are up approximately 25% from year end and reflect levels needed to support second half sales including our new product launches.

Cash flows used in investing activities in 2016 reflect the purchase and sales, in our European operations, of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. Approximately $73 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. Our business is not capital intensive as we do not own any manufacturing facilities. However, on a full year basis, we spend approximately $4.0 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers.

In connection with the 2015 acquisition of the Rochas brand, we entered into a 5-year term loan payable in equal quarterly installments of €5.0 million ($5.5 million) plus interest. In order to reduce exposure to rising variable interest rates, the Company entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. The swap is a derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

Our short-term financing requirements are expected to be met by available cash on hand at June 30, 2016, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2016 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $28.0 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both June 30, 2016 and June 30, 2015.

INTER PARFUMS, INC. AND SUBSIDIARIES

In January 2016, the Board of Directors authorized a 15% increase in the annual dividend to $0.60 per share. The next quarterly cash dividend of $0.15 per share is payable on October 14, 2016 to shareholders of record on September 30, 2016. Dividends paid also include dividends paid once per year to the noncontrolling shareholders of Interparfums SA, which aggregated $4.9 million and $4.8 million for the six months ended June 30, 2016 and 2015, respectively. The annual cash dividend represents a small part of our cash position and is not expected to have any significant impact on our financial position.

We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs.

Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the six months ended June 30, 2016.