UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
( MARK ONE )
for the quarterly period ended
OR
for the transition period from ________ to ________ .
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
| ( |
| (Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| |
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:
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act).
| ☒ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging Growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At
November 9, 2020, there were
INTER PARFUMS, INC. AND SUBSIDIARIES
INDEX
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, 2019 included in our annual report filed on Form 10-K.
The results of operations for the nine months ended September 30, 2020 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)
September 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Receivables, other | ||||||||
| Other current assets | ||||||||
| Income taxes receivable | ||||||||
| Total current assets | ||||||||
| Equipment and leasehold improvements, net | ||||||||
| Right-of-use assets, net | ||||||||
| Trademarks, licenses and other intangible assets, net | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | $ | ||||||
| Current portion of lease liabilities | ||||||||
| Accounts payable – trade | ||||||||
| Accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Dividends payable | ||||||||
| Total current liabilities | ||||||||
| Long–term debt, less current portion | ||||||||
| Lease liabilities, less current portion | ||||||||
| Equity: | ||||||||
| Inter Parfums, Inc. shareholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Total Inter Parfums, Inc. shareholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See notes to consolidated financial statements.
Page 2
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
| Three
Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Other expenses (income): | ||||||||||||||||
| Interest expense | ||||||||||||||||
| (Gain) loss on foreign currency | ( | ) | ||||||||||||||
| Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | |||||||||||
| Income before income taxes | ||||||||||||||||
| Income taxes | ||||||||||||||||
| Net income | ||||||||||||||||
| Less: Net income attributable to the noncontrolling interest | ||||||||||||||||
Net income attributable to Inter Parfums, Inc. | $ | $ | $ | $ | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. common shareholders: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Dividends declared per share | $ | $ | $ | |||||||||||||
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 September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Comprehensive income: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
Net derivative instrument loss, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
Transfer from OCI into earnings | ( | ) | ( | ) | ||||||||||||
| Translation adjustments, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | ||||||||||||||||
| Comprehensive income (loss) attributable to the noncontrolling interests: | ||||||||||||||||
| Net income | ||||||||||||||||
| Other comprehensive income: | ||||||||||||||||
Net derivative instrument loss, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Translation adjustments, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) attributable to the noncontrolling interests | ( | ) | ||||||||||||||
| Comprehensive income attributable to Inter Parfums, Inc. | $ | $ | $ | $ | ||||||||||||
See notes to consolidated financial statements.
.
Page 4
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
(Unaudited)
| Nine
months ended September 30, |
||||||||
| 2020 | 2019 | |||||||
| Common stock, beginning of period | $ | $ | ||||||
| Shares issued upon exercise of stock options | -- | |||||||
| Common stock, end of period | ||||||||
| Additional paid-in capital, beginning of period | ||||||||
| Shares issued upon exercise of stock options | ||||||||
| Share-based compensation | ||||||||
| Purchase of subsidiary shares from noncontrolling interest | ( | ) | ||||||
| Transfer of subsidiary shares purchased | ||||||||
| Additional paid-in capital, end of period | ||||||||
| Retained earnings, beginning of period | ||||||||
| Net income | ||||||||
| Dividends | ( | ) | ( | ) | ||||
| Share-based compensation | ||||||||
| Retained earnings, end of period | ||||||||
| Accumulated other comprehensive loss, beginning of period | ( | ) | ( | ) | ||||
| Foreign currency translation adjustment, net of tax | ( | ) | ||||||
| Transfer from other comprehensive income into earnings | ( | ) | ( | ) | ||||
| Net derivative instrument loss, net of tax | -- | ( | ) | |||||
| Accumulated other comprehensive loss, end of period | ( | ) | ( | ) | ||||
| Treasury stock, beginning and end of period | ( | ) | ( | ) | ||||
| Noncontrolling interest, beginning of period | ||||||||
| Net income | ||||||||
| Foreign currency translation adjustment, net of tax | ( | ) | ||||||
| Net derivative instrument loss, net of tax | ( | ) | ( | ) | ||||
| Share-based compensation | ||||||||
| Purchase of subsidiary shares from noncontrolling interest | ( | ) | ||||||
| Transfer of subsidiary shares purchased | ( | ) | ||||||
| Dividends | ( | ) | ( | ) | ||||
| Noncontrolling interest, end of period | ||||||||
| Total equity | $ | $ | ||||||
See notes to consolidated financial statements.
Page 5
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine
months ended September 30, |
||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
| |||||||
| Depreciation and amortization | ||||||||
| Provision for doubtful accounts | ||||||||
| Lease expense | ||||||||
| Share based compensation | ||||||||
| Deferred tax (benefit) | ( | ) | ( | ) | ||||
| Change in fair value of derivatives | ( | ) | ( | ) | ||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Income taxes, net | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of short-term investments | ( | ) | ( | ) | ||||
| Proceeds from sale of short-term investments | ||||||||
| Purchase of equity investment | ( | ) | ||||||
| Purchases of equipment and leasehold improvements | ( | ) | ( | ) | ||||
| Payment for intangible assets acquired | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Repayments of long-term debt | ( | ) | ( | ) | ||||
| Proceeds from issuance of long-term debt | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Purchase of subsidiary shares from noncontrolling interest | ( | ) | ||||||
| Dividends paid | ( | ) | ( | ) | ||||
| Dividends paid to noncontrolling interest | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents - beginning of period | ||||||||
| Cash and cash equivalents - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
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 consolidated financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2019.
| 2. | Impact of COVID-19 Pandemic: |
A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and caused a significant unfavorable impact on our results of operations.
In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate initially issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. More recently, those governments have set guidelines in allowing businesses to reopen and employees to return to offices. Beginning in March 2020, we implemented travel restrictions and we are following social distancing practices. Our teams were set up to work from home and carry on business as efficiently as possible. In all jurisdictions in which we operate we are following guidance from authorities and health officials in allowing our teams to gradually return to our offices, including, requiring personnel to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitization routines at our offices and distribution centers as the health and safety of our employees is paramount.
The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill. The duration and intensity of this global health emergency and its related disruptions are uncertain. Since March 2020, retail stores in many jurisdictions around the world began reopening and business has improved considerably. However, limited traffic in reopened stores and the virtual shutdown of international air traffic have and is expected to continue to have an unfavorable impact our business.
We have faced significant challenges in 2020 and we anticipate that these challenges will continue for at least the remainder of 2020 due to uncertain market conditions. Business has significantly improved during the three months ended September 30, 2020, as compared to the prior quarter as retail stores began reopening and consumers have increased their on-line purchasing. We expect this trend to continue, however, we do not see a resurgence anytime soon in travel retail as air traffic continues to suffer due in part to governmental restrictions on international air travel. In addition, the recent resurgence of COVID-19 cases in various parts of the world, including the United Kingdom, Ireland and other countries in Europe, has caused the re-implementation of government restrictions to prevent further spread of the virus. These restrictions include the temporary closure of businesses deemed “non-essential”, travel bans and restrictions, social distancing and quarantines. Lastly, the COVID-19 pandemic has led to high levels of unemployment and deteriorating economic conditions in many countries where our products are sold, forcing many consumers to limit discretionary purchases. We believe that the impact of the COVID-19 pandemic will continue to have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of this year and into 2021.
Page 7
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 3. | Recent Agreements: |
Origines-parfums
In
June 2020,
Moncler
In
June 2020,
S.T. Dupont
In
January 2020,
| 4. | Recent Accounting Pronouncements: |
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as updated in 2019 and 2020, which require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The new rules eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The new rules are effective for the Company in the first quarter of 2020 and there was no material impact on our consolidated financial statements.
There are no other recent accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.
Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 5. | Inventories: |
Inventories consist of the following:
(In thousands) | September
30, 2020 |
December
31, 2019 |
||||||
| Raw materials and component parts | $ | $ | ||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| 6. | 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.
| Fair
Value Measurements at September 30, 2020 |
||||||||||||||||
| Total | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
|||||||||||||
| Assets: | ||||||||||||||||
| Short-term investments | $ | $ | $ | $ | ||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Fair
Value Measurements at December 31, 2019 |
||||||||||||||||
| Total | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
|||||||||||||
| Assets: | ||||||||||||||||
| Short-term investments | $ | $ | $ | $ | ||||||||||||
| Foreign currency forward exchange contracts accounted for using hedge accounting | ||||||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swap | $ | $ | $ | $ | ||||||||||||
Page 9
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The carrying amount of cash and cash equivalents including money market funds, accounts receivable, other receivables, and 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.
| 7. | Derivative Financial Instruments: |
The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings. Any hedge ineffectiveness 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.
Gains and losses in derivatives designated as hedges are accumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial for both nine month periods ended September 30, 2020 and 2019.
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 at September 30, 2020 resulted in an asset and is included in other current assets on the accompanying balance sheet.
At
September 30, 2020, we had foreign currency contracts in the form of forward exchange contracts of approximately U.S. $
Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 8. | Leases: |
The Company leases its offices and warehouses, vehicles, and certain office equipment, substantially all of which are classified as operating leases. The Company currently has no material financing leases. The Company determines if an arrangement is a lease at inception. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term.
In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend or terminate, depending on the lease. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date for the location in which the lease is held in determining the present value of lease payments.
As
of September 30, 2020, the weighted average remaining lease term was
| 9. | Share Based Payments: |
The
Company maintains stock option programs 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 to period. The fair value of shares vested for the nine months ended September
30, 2020 and 2019 aggregated $
The following table sets forth information with respect to nonvested options for the nine month period ended September 30, 2020:
| Number of Shares | Weighted
Average Grant Date Fair Value |
|||||||
| Nonvested options – beginning of period | $ | |||||||
| Nonvested options granted | $ | |||||||
| Nonvested options vested or forfeited | ( | ) | $ | |||||
| Nonvested options – end of period | $ | |||||||
Share
based payment expense decreased income before income taxes by $
Page 11
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes stock option information as of September 30, 2020:
Shares |
Weighted Average Exercise Price |
| ||||||
| Outstanding at January 1, 2020 | $ | |||||||
| Options granted | ||||||||
| Options forfeited | ( | ) | ||||||
| Options exercised | ( | ) | ||||||
| Outstanding at September 30, 2020 | $ | |||||||
| Options exercisable | $ | |||||||
| Options available for future grants | ||||||||
As
of September 30, 2020, the weighted average remaining contractual life of options outstanding is
Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the nine months ended September 30, 2020 and 2019 were as follows:
| (In thousands) | September
30, 2020 |
September
30, 2019 |
||||||
| Cash proceeds from stock options exercised | $ | $ | ||||||
| Tax benefits | ||||||||
| Intrinsic value of stock options exercised | ||||||||
The
weighted average fair values of the options granted by Inter Parfums, Inc. during the nine months ended September 30, 2020 and
2019 were $
The assumptions used in the Black-Scholes pricing model for the periods ended September 30, 2020 and 2019 are set forth in the following table:
| September
30, 2020 |
September
30, 2019 |
|||||||
| Weighted average expected stock-price volatility | % | % | ||||||
| Weighted average expected option life | ||||||||
| Weighted average risk-free interest rate | % | % | ||||||
| Weighted average dividend yield | % | % | ||||||
Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. 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 was based on the assumption that the dividend payout as authorized by the Board of Directors would increase as the earnings of the Company and its stock price continue to increase.
Page 12
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In
December 2018, Interparfums SA, our
In
March 2020, due to the potential impact on future net sales and operating results resulting from the COVID-19 pandemic, the estimated
number of shares to be distributed, after forfeited shares, was reduced from
The
fair value of the grant had been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE
Euronext on the date of grant.
In
June 2020, the performance conditions were modified effecting 96 employees. As of September 30, 2020, the number of shares to
be distributed, after forfeited shares, increased to
| 10. | 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 income attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net income 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 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 | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Numerator: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average shares | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | ||||||||||||||||
| Denominator for diluted earnings per share | ||||||||||||||||
| Earnings per share: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. | ||||||||||||||||
| common shareholders: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | ||||||||||||||||
Page 13
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Not
included in the above computations are the effect of antidilutive potential common shares which consist of outstanding options
to purchase
| 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. Both European operations and United States operations primarily represent the sale of prestige brand name fragrances.
Information on our operations by geographical areas is as follows:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net sales: | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Eliminations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | $ | $ | |||||||||||||
| Net income attributable to Inter Parfums, Inc.: | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Total Assets: | ||||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| Eliminations | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| 12. | Reclassifications: |
Certain prior year’s amounts in the accompanying consolidated statements of cash flows have been reclassified to conform to current period presentation.
Page 14
INTER PARFUMS, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Information
Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and “Risk Factors” in Inter Parfums’ annual report on Form 10-K for the fiscal year ended December 31, 2019 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. 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 80% and 77% of net sales for the nine months ended September 30, 2020 and 2019, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Moncler, Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas and Van Cleef & Arpels, whose products are distributed in over 120 countries around the world.
Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 20% and 23% of net sales for the nine months ended September 30, 2020 and 2019, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, MCM and Oscar de la Renta brands.
Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc, Coach, Jimmy Choo and GUESS brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:
Page 15
INTER PARFUMS, INC. AND SUBSIDIARIES
Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Montblanc. | 22 | % | 23 | % | ||||
| Coach. | 18 | % | 14 | % | ||||
| Jimmy Choo. | 16 | % | 17 | % | ||||
| GUESS. | 11 | % | 9 | % | ||||
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 own distribution subsidiaries in 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 underperforming products so we can devote greater resources to those products with greater potential. 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.
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. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates.
Page 16
INTER PARFUMS, INC. AND SUBSIDIARIES
Impact of COVID-19 Pandemic
A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and caused a significant unfavorable impact on our results of operations.
In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate initially issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. More recently, those governments have set guidelines in allowing businesses to reopen and employees to return to offices. Beginning in March 2020, we implemented travel restrictions and we are following social distancing practices. Our teams were set up to work from home and carry on business as efficiently as possible. In all jurisdictions in which we operate we are following guidance from authorities and health officials in allowing our teams to gradually return to our offices, including, requiring personnel to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitization routines at our offices and distribution centers as the health and safety of our employees is paramount.
The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill. The duration and intensity of this global health emergency and its related disruptions are uncertain. Since March 2020, retail stores in many jurisdictions around the world began reopening and business has improved considerably. However, we anticipate that limited traffic in reopened stores and the virtual shutdown of international air traffic has and will continue to have an unfavorable impact our business.
We have faced significant challenges in 2020 and we anticipate that these challenges will continue for at least the remainder of 2020 due to uncertain market conditions. Business has significantly improved during the three months ended September 30, 2020, as compared to the prior quarter as retail stores began reopening and consumers have increased their on-line purchasing. We expect this trend to continue, however, we do not see a resurgence anytime soon in travel retail as air traffic continues to suffer due in part to governmental restrictions on international air travel. In addition, the recent resurgence of COVID-19 cases in various parts of the world, including the United Kingdom, Ireland and other countries in Europe, has caused the re-implementation of government restrictions to prevent further spread of the virus. These restrictions include the temporary closure of businesses deemed "non-essential", travel bans and restrictions, social distancing and quarantines. Lastly, the COVID-19 pandemic has led to high levels of unemployment and deteriorating economic conditions in many countries where our products are sold, forcing many consumers to limit discretionary purchases. We believe that the impact of the COVID-19 pandemic will continue to have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of this year and into 2021.
Operationally, we are prepared for increased demand in the post-COVID-19 environment, with business in Asia and North America already showing signs of a comeback. We have geared up to rapidly fill the distribution channels as the crisis subsides. In that regard, we have maintained reasonable inventory levels of components and finished goods, and we are gaining local market intelligence from our distributors and production capacity data from our suppliers. We do not anticipate any material impairment of trademarks, licenses and other intangible assets.
Page 17
INTER PARFUMS, INC. AND SUBSIDIARIES
Our conservative financial tradition has enabled us to amass and maintain hefty cash balances and nominal long-term debt. As of September 30, 2020, we had $204 million in cash, cash equivalents and short-term investments, and only $19.4 million of long-term debt. We also have $49 million available in untapped credit facilities. Nonetheless, we have taken several actions to minimize expenses and protect cash flow. Our operating cost structure, of which variable costs typically accounts for over two-thirds, has enabled us to minimize the impact of reduced net sales on our bottom line. In that regard, we have postponed the launch of several programs originally scheduled for this year until 2021 and moved related advertising and promotion expenses to 2021 as well. That includes our planned launches for the Kate Spade New York, Jimmy Choo, Anna Sui and GUESS brands. We have also taken several actions with an eye toward minimizing fixed expenses. While we have not terminated or furloughed any employees, we have instituted a hiring freeze and plan on significantly cutting bonuses for 2020. We have also temporarily suspended our quarterly cash dividend. These actions have had a favorable impact on the Company’s fixed expenditures and cash flow. Furthermore, our cash and credit management teams, together with our executive management teams are paying particular attention to the management of working capital. As a result of the above, we do not anticipate any short-term liquidity problems, nor do we anticipate any material credit losses.
Recent Important Events
Origines-Parfums
In June 2020, the Company through its 73% owned subsidiary, Interparfums SA, and Divabox SAS (“Divabox”), owner of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to which we acquired a 25% of Divabox capital for $14 million, through a capital increase. In connection with the acquisition, the Company entered into a $13.4 million, three-year term loan payable in three equal annual installments plus interest. As a website of reference for all selective fragrance brands, Origines-parfums is a key French player in the online beauty market recognized for its customer relationship expertise. This agreement should enhance the introduction of dedicated fragrance lines and products designed to address a specific consumer demand for this distribution channel and accelerate our digital development.
Moncler
In June 2020, the Company entered into an exclusive, 5-year worldwide license agreement with a potential 5-year extension with Moncler for the creation, development and distribution of fragrances under the Moncler brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. Moncler was founded at Monestier-de-Clermont, Grenoble, France, in 1952 and is currently headquartered in Italy. Over the years, the brand has combined style with constant technological research assisted by experts in activities linked to the world of the mountain. The Moncler outerwear collections marry the extreme demands of nature with those of city life. Our first fragrance launch for the Moncler brand is scheduled for the first quarter of 2022.
Page 18
INTER PARFUMS, INC. AND SUBSIDIARIES
S.T. Dupont
In January 2020, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2020, without any material changes in terms and conditions. Our initial 11-year license agreement with S.T. Dupont was signed in June 1997 and had previously been extended through December 31, 2019. The agreement will be extended annually in September of each year upon mutual consent.
Discussion of Critical Accounting Policies
Information regarding our critical accounting policies can be found in our 2019 Annual Report on Form 10-K filed with the SEC.
Results of Operations
Three and Nine Months Ended September 30, 2020 as Compared to the Three and Nine Months Ended September 30, 2019
Net Sales
| Three
months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||
| (In millions) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| European based brand product sales | $ | 129.7 | $ | 143.6 | (9.6 | )% | $ | 283.3 | $ | 412.9 | (31.4 | )% | ||||||||||||
| United States based product sales | 30.9 | 47.6 | (35.1 | )% | 71.7 | 122.8 | (41.6 | )% | ||||||||||||||||
| Total net sales | $ | 160.6 | $ | 191.2 | (16.0 | )% | $ | 355.0 | $ | 535.7 | (33.7 | )% | ||||||||||||
Net sales for the three months ended September 30, 2020 decreased 16.0% to $160.6 million, as compared to $191.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales declined 18.3%. For the three months ended September 30, 2020 and 2019, the average dollar/euro exchange rate was 1.17 and 1.11, respectively. Net sales for the nine months ended September 30, 2020 decreased 33.7% to $355.0 million, as compared to $535.7 million for the corresponding period of the prior year.
European based product sales decreased 9.6% and 31.4% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year. United States based product sales decreased 35.1% and 41.6% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year.
As expected, the impact of the COVID-19 pandemic, most notably store closures in many countries where our products are sold, was the primary reason for the decline in sales across all brands and geographic markets. However, business is rebounding better than anticipated. Since the early days of the pandemic, our sales have increased sequentially each and every month, thanks to store re-openings and a robust e-commerce business being conducted by our retail customers.
Page 19
INTER PARFUMS, INC. AND SUBSIDIARIES
For our European operations, the third quarter rate of decline in sales slowed to 9.6% from 68.6% in the second quarter. In general, sales benefitted from the favorable turnaround of several of our markets, notably Asia and North America. Among our largest brands, comparable quarter Montblanc and Jimmy Choo brand sales declined 11.3% and 31.0%, respectively, which is better understood in the context of the high bars set in 2019 with the rollout of Montblanc’s Explorer and Jimmy Choo’s Urban Hero. Coach and Lanvin fragrance sales were actually ahead of last year’s third quarter by 7.9% and 1.8%, respectively. Coach brand sales continued to benefit from the debut of Coach Dreams earlier this year, while favorable sales trends in Lanvin’s key markets, Asia and Eastern Europe, were key sales catalysts.
As compared to the second quarter, there has also been dramatic improvement by our U.S. operations, even though sales have been hampered by the lack of new product launches this year. Notably, our largest U.S. brand, GUESS, had its Bella Vita blockbuster launch rescheduled until next year. We also postponed the major launch of Anna Sui Sky. The 2021 new product pipeline is especially rich, and therefore we anticipate considerable sales gains over the current year.
We recognize that there will continue to be significant challenges for the remainder of 2020 and possibly into early 2021. In particular, the one market which shows little sign of a turnaround is travel retail. We do not see a resurgence anytime soon in travel retail as air traffic continues to suffer due in part to governmental restrictions on international travel.
Net Sales to Customers by Region
| Nine
months ended September 30, |
||||||||
| (In millions) | 2020 | 2019 | ||||||
| North America | $ | 114.0 | $ | 164.1 | ||||
| Western Europe | 106.4 | 138.9 | ||||||
| Asia | 57.0 | 88.9 | ||||||
| Middle East | 30.4 | 57.8 | ||||||
| Central and South America | 23.4 | 37.9 | ||||||
| Eastern Europe | 19.4 | 41.2 | ||||||
| Other | 4.4 | 6.9 | ||||||
| $ | 355.0 | $ | 535.7 | |||||
The impact of the COVID-19 pandemic has broadly impacted all regions, with the steepest declines in the Middle East, Eastern Europe and Asia. Travel retail accounted for much of the decline in the Asian market.
Gross margin
| Three
months ended September 30, |
Nine
months ended September 30, |
|||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net sales | $ | 160.6 | $ | 191.2 | $ | 355.0 | $ | 535.7 | ||||||||
| Cost of sales | 63.4 | 76.8 | 141.9 | 204.4 | ||||||||||||
| Gross margin | $ | 97.2 | $ | 114.4 | $ | 213.1 | $ | 331.3 | ||||||||
Gross margin as a percent of net sales | 60.5 | % | 59.8 | % | 60.0 | % | 61.8 | % | ||||||||
Gross profit margin was 60.5% and 60.0% for the three and nine months ended September 30, 2020, respectively, as compared to 59.8% and 61.8% as for the three and nine months ended September 30, 2019, respectively. For European operations, gross profit margin was 62.4% and 62.3% for the three and nine months ended September 30, 2020, respectively, as compared to 62.8% and 64.7% for the corresponding periods of the prior year.
Page 20
INTER PARFUMS, INC. AND SUBSIDIARIES
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 weaker dollar in the third quarter of 2020 resulted in a nominal decline in our gross margin. Gross margin for the nine months ended September 30, 2020 includes a charge of approximately $2.0 million relating to the assumption of a return liability for products sold by the former licensee of a brand license entered into in 2019.
For U.S. operations, gross profit margin was 52.5% and 51.2% for the three and nine months ended September 30, 2020, respectively, as compared to 51.0% and 52.3% for the corresponding periods of the prior year. Although gross margin improved during the third quarter of 2020, as compared to the corresponding period of the prior year due primarily to product mix, for the nine months ended September 30, 2020, certain expenses such as depreciation of tools and molds together with the distribution of point of sale materials exaggerated the decline in gross margin for the periods as a percentage of sales.
Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $1.6 million and $3.8 million for the three and nine month periods ended September 30, 2020, respectively, as compared to $2.4 million and $5.9 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
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (In millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Selling, general and administrative expenses | $ | 65.8 | $ | 77.8 | $ | 169.5 | $ | 238.9 | ||||||||
| Selling, general and administrative expenses as a percent of net sales | 41.0 | % | 40.7 | % | 47.7 | % | 44.6 | % | ||||||||
Selling, general and administrative expenses decreased 15.4% and 29.1% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year. As a percentage of sales, selling, general and administrative expenses were 41.0% and 47.7% for the three and nine months ended September 30, 2020, respectively, as compared to 40.7% and 44.6% for the three and nine months ended September 30, 2019, respectively.
For European operations net sales decreased 9.6% and 31.4% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our European operations decreased 11.4% and 29.4% for the same periods, respectively. In addition, selling, general and administrative expenses of our European operations represented 41.3% and 47.3% of net sales for the three and nine months ended September 30, 2020, respectively, as compared to 42.1% and 46.0% for the three and nine months ended September 30, 2019, respectively.
Page 21
INTER PARFUMS, INC. AND SUBSIDIARIES
U.S. operations net sales decreased 35.1% and 41.6% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our U.S. operations decreased 29.2% and 27.7% for the three and nine months ended September 30, 2020, as compared to the corresponding periods of the prior year, and represented 39.7% and 49.5% of net sales for the three and nine months ended September 30, 2020, respectively, as compared to 36.3% and 40.0% for the corresponding periods of the prior year. Our U.S. operations are significantly smaller than those of our European operations and carry higher fixed costs that could not be leveraged as efficiently as those of our European operations with the decline in net sales.
We had significant promotional programs planned for 2020. At the time of initial retail store closings, certain advertising and promotional programs were well underway and could not be halted. Since then we have severely curtailed our promotional activities. We postponed the launch of several programs originally scheduled for this year until 2021 along with related advertising and promotion programs. Promotion and advertising included in selling, general and administrative expenses aggregated $17.6 million and $51.9 million for the three and nine months ended September 30, 2020, respectively, as compared to $28.7 million and $92.5 million for the corresponding periods of the prior year. Promotion and advertising represented 10.9% and 14.6% of net sales for the three and nine months ended September 30, 2020, respectively, as compared to 15.0% and 17.3% for the corresponding periods of the prior year. Once the COVID-19 pandemic recedes, we will once again invest heavily in promotional spending to support new product launches and to build brand awareness.
Royalty expense included in selling, general and administrative expenses aggregated $11.7 million and $26.3 million for the three and nine months ended September 30, 2020, respectively, as compared to $14.1 million and $39.2 million for the corresponding periods of the prior year. Royalty expense represented 7.3% and 7.4% of net sales for the three and nine months ended September 30, 2020, as compared to 7.4% and 7.3% of net sales for the corresponding periods of the prior year. As a result of the COVID-19 pandemic we reached agreements with most of our licensors to waive or significantly reduce minimum guaranteed royalties for 2020.
As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations was $31.4 million for the three months ended September 30, 2020, as compared to $36.6 million for the corresponding period of the prior year. Income from operations was $43.6 million for the nine months ended September 30, 2020, as compared to $92.4 million for the corresponding period of the prior year. For the nine months ended September 30, 2020, our operating margin was 12.3%, as compared to 17.2% for the corresponding period of the prior year.
Other Income and Expense
Interest expense aggregated $0.1 million and $1.5 million for the three and nine months ended September 30, 2020, respectively, as compared to $0.4 million and $1.2 million for the corresponding periods of the prior year. Interest expense is primarily related to the financing of brand acquisitions. We also use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions.
Page 22
INTER PARFUMS, INC. AND SUBSIDIARIES
Foreign currency gains (losses) aggregated $(0.9) million and $0.1 million for the three and nine months ended September 30, 2020, respectively, as compared to losses of $0.1 million and $0.8 million for the corresponding periods of the prior year. 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. Over 40% of net sales of our European operations are denominated in U.S. dollars.
Interest income aggregated $0.4 million and $2.2 million for the three and nine months ended September 30, 2020, respectively, as compared to $0.6 million and $2.9 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
Pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is expected to be cut from 33% to 25% over a three-year period beginning in 2020. Our effective tax rate for European operations was 28% for the nine months ended September 30, 2020, as compared to 30% for the corresponding period of the prior year. The decrease is the result of favorable tax rates in other jurisdictions where our European operations conduct business such as Singapore, Switzerland and the United States.
As a result of the true-up of our 2019 tax accrual estimates for U.S. operations, income taxes resulted in a nominal benefit for the nine months ended September 30, 2020, as compared to an expense of 16.6% for the corresponding period of the prior year. Our effective tax rate for U.S. operations typically differs from the 21% statutory rate due to benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income slightly offset by state and local taxes.
The French authorities are considering that the existence of IP Suisse, a wholly-owned subsidiary of Interparfums SA, does not, in and of itself, constitute a permanent establishment and therefore Interparfums, SA should pay French taxes on all or part of the profits of that entity. The French Tax Authority notified the Company that IP Suisse will be the subject of a tax audit covering the period January 1, 2010 through December 31, 2018. No claim or assessment for any taxes or penalties has been made at this time. The Company disagrees and is prepared to vigorously defend its position. Consequently, no provision has been made in the accompanying financial statements as we believe it is more likely than not that our position will be sustained based on its technical merits. Although we believe that we have sufficient arguments to support our position, there exists a risk that the French authorities may prevail. The Company’s exposure in connection with this matter is approximately $5.8 million, net of recovery taxes already paid to the Swiss authorities and excluding interest.
Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate.
Page 23
INTER PARFUMS, INC. AND SUBSIDIARIES
Net Income and Earnings per Share
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| (In thousands except per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net income European operations | $ | 18,943 | $ | 20,856 | $ | 31,175 | $ | 54,760 | ||||||||
| Net income U.S. operations | 2,909 | 5,802 | 993 | 12,475 | ||||||||||||
| Net income | 21,852 | 26,658 | 32,168 | 67,235 | ||||||||||||
| Less: Net income attributable to the noncontrolling interest | 5,314 | 5,810 | 8,688 | 15,176 | ||||||||||||
| Net income attributable to Inter Parfums, Inc. | $ | 16,538 | $ | 20,848 | $ | 23,480 | $ | 52,059 | ||||||||
| Earnings per share: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. common shareholders: | ||||||||||||||||
| Basic | $ | 0.52 | $ | 0.66 | $ | 0.74 | $ | 1.66 | ||||||||
| Diluted | $ | 0.52 | $ | 0.66 | $ | 0.74 | $ | 1.64 | ||||||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | 31,533 | 31,452 | 31,531 | 31,444 | ||||||||||||
| Diluted | 31,619 | 31,676 | 31,651 | 31,681 | ||||||||||||
Net income was $21.9 million and $32.2 million for the three and nine months ended September 30, 2020, as compared to $26.7 million and $67.2 million for the corresponding periods 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, and selling, general and administrative expenses, most of which was caused by the effects of the COVID-19 pandemic.
The noncontrolling interest arises from 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. The noncontrolling interest is also affected by the profitability of Interparfums SA’s 51% owned distribution subsidiary in Spain. Net income attributable to the noncontrolling interest aggregated 28% of European operations’ net income for all periods presented.
Liquidity and Capital Resources
Our conservative financial tradition has enabled us to amass significant cash balances and nominal long-term debt. As of September 30, 2020, we had $204 million in cash, cash equivalents and short-term investments, 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 such cash and cash equivalents and short-term investments. As of September 30, 2020, long-term debt aggregated only $19.4 million and we also have $49 million available in untapped credit facilities. Nonetheless, in response to the COVID-19 pandemic, we have taken several actions to minimize expenses and protect cash flow. Our operating cost structure, of which variable costs in a typical year account for over two-thirds, has enabled us to minimize the impact of reduced net sales on our bottom line. In that regard, we have postponed the launch of several programs originally scheduled for this year until 2021 and moved related advertising and promotion programs to 2021 as well. We have also taken several actions with an eye toward minimizing fixed expenses. While we have not terminated or furloughed any employees, we have instituted a hiring freeze and plan on significantly cutting bonuses for 2020. We have also temporarily suspended our quarterly cash dividend. While these actions have had a favorable impact on the Company’s fixed expenditures and cash flow, our cash and credit management teams together with our executive management teams are paying particular attention to the management of working capital. As a result of the above, we have not had nor do we not anticipate any short-term liquidity problems.
Page 24
INTER PARFUMS, INC. AND SUBSIDIARIES
As of September 30, 2020, we had a working capital ratio of 4.5 to 1. Approximately 86% of the Company’s total assets are held by European operations, and approximately $182 million of trademarks, licenses and other intangible assets are also held by European operations.
The Company hopes to continue 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 are regularly 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 $20.2 million for the nine months ended September 30, 2020, as compared to cash provided by operating activities of $6.7 million for the corresponding period of the prior year. For the nine months ended September 30, 2020, working capital items used $62.4 million in cash from operating activities, as compared to $65.8 million in the 2019 period. We anticipate significant challenges for the remainder of 2020 due to uncertain market conditions promulgated by the COVID-19 pandemic. Since March 2020, retail stores in several jurisdictions around the world began reopening and business is rebounding better than expected. Accounts receivables are up considerably from June 2020. However, the September 30, 2020 balance is reasonable considering the upturn in third quarter 2020 net sales and collection activity remains strong as day’s sales outstanding was 78 days, as compared to 84 days for the corresponding period of the prior year. Inventory levels are up approximately 3% from year end and reflect levels needed to support current net sales expectations and new product launches.
Cash flows used in investing activities in 2020 reflect purchases of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. Approximately $59 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. On a full year basis, we expect to 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 June 2020, the Company and Divabox, owner of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to which we acquired 25% of Divabox capital for $14 million through a capital increase. In connection with the acquisition, the Company entered into a $13.4 million, three-year term loan payable in three equal annual installments plus interest.
Page 25
INTER PARFUMS, INC. AND SUBSIDIARIES
Our short-term financing requirements are expected to be met by available cash on hand at September 30, 2020, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2020 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $29 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both September 30, 2020 and September 30, 2019.
In October 2019, the Board of Directors authorized a 20% increase in the annual dividend to $1.32 per share. In April 2020, as a result of the uncertainties raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspension of the quarterly cash dividend. The Board also indicated that it expects to revisit this issue with an eye towards reinstitution of the dividend when the business environment is more favorable.
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 nine months ended September 30, 2020.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We address certain financial exposures through a controlled program of risk management that primarily consists of the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts in order to reduce the effects of fluctuating foreign currency exchange rates. We do not engage in the trading of foreign currency forward exchange contracts or interest rate swaps.
Foreign Exchange Risk Management
We periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and to manage risks related to future sales expected to be denominated in a currency other than our functional currency. We enter into these exchange contracts for periods consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the receivables and cash flows of Interparfums SA, whose functional currency is the euro. All foreign currency contracts are denominated in currencies of major industrial countries and are with large financial institutions, which are rated as strong investment grade.
All derivative instruments are required to be reflected as either assets or liabilities in the balance sheet measured at fair value. Generally, increases or decreases in fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative is designated and qualifies as a cash flow hedge, then the changes in fair value of the derivative instrument will be recorded in other comprehensive income.
Page 26
INTER PARFUMS, INC. AND SUBSIDIARIES
Before entering into a derivative transaction for hedging purposes, we determine that the change in the value of the derivative will effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement.
At September 30, 2020, we had foreign currency contracts in the form of forward exchange contracts of approximately U.S. $48 million and GB £4.0 million with maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.
Interest Rate Risk Management
We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based on their review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Page 27
INTER PARFUMS, INC. AND SUBSIDIARIES
Part II. Other Information
Items 1. Legal Proceedings, 2. Unregistered Sales of Equity Securities and Use of Proceeds, 3. Defaults Upon Senior Securities, 4. Mine Safety Disclosures and 5. Other Information, are omitted as they are either not applicable or have been included in Part I.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated and supplemented below, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K may not be the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
The COVID-19 pandemic has had, and we expect will continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.
The public health crisis caused by the COVID-19 pandemic and the measures being taken by governments, businesses, including us, our suppliers, our distributors, retailers and the public, to limit COVID-19’s spread, have had and we expect will continue to have, certain negative impacts on our business including, but not limited to, the following:
| ● | We have experienced a decrease in sales of our products in markets around the world that have been affected by the COVID-19 pandemic. In particular, sales of our products have been significantly negatively affected by shelter-in-place regulations and closings of retailers around the world. We believe the most significant impact occurred in the second quarter of 2020. However, this negative trend is likely to continue, as recent increases in COVID-19 cases in Europe has resulted in certain governments once again tightening restrictions. If the COVID-19 pandemic further intensifies, its negative impacts on our sales could be more prolonged and may become more severe. |
| ● | Deteriorating economic and political conditions in many of our major markets affected by the COVID-19 pandemic, such as increased unemployment, decreases in disposable income, declines in consumer confidence, or economic slowdowns could cause a further decrease in demand for our products. |
| ● | Due to the closings of a substantial number of retailers that sell our products we have faced, and may continue to face, increasing delays in payment of accounts receivables from our customers. We may have to write-off certain receivables as a result of the COVID-19 pandemic’s damaging impacts on their respective businesses, the extent of which is not presently known. |
| ● | We have faced, and may continue to face, increasing delays in the delivery of components as a result of shipping delays due to, among other things, additional safety requirements imposed by port authorities, closures of or congestion at ports, and capacity constraints of transportation contractors. |
| ● | We may be required to record significant impairment charges with respect to noncurrent assets, including trademarks, licenses and other intangible assets whose fair values may be negatively affected by the effects of the COVID-19 pandemic on our operations. |
Page 28
INTER PARFUMS, INC. AND SUBSIDIARIES
| ● | As a result of the COVID-19 pandemic, in all jurisdictions in which we operate we are following guidance as well as requirements from authorities and health officials in allowing our teams to gradually return to our offices, including, requiring personnel to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitization routines at our offices and distribution centers. However, we may experience reductions in productivity and disruptions to our business routines while such guidance and restrictions remain in place. |
| ● | Actions we have taken or may take, or decisions on potential actions that we did not take, as a consequence of the COVID-19 pandemic may result in claims or litigation against us. |
| ● | The resumption of normal business operations after the disruptions caused by the COVID-19 pandemic may be delayed or constrained by its lingering effects on consumers, suppliers or third-party distributors. |
COVID-19 pandemic and governmental responses could exacerbate many of our risk factors.
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, could exacerbate many of the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 pandemic and governmental responses could cause a global recession.
The pandemic has significantly increased economic and demand uncertainty. To date the impact of COVID-19 has caused a global economic slowdown, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of any such slowdown or recession. A global recession would exacerbate the risk factors discussed above that could have a material adverse effect on our results of operations, financial condition and cash flows.
Page 29
INTER PARFUMS, INC. AND SUBSIDIARIES
Item 6. Exhibits.
The following documents are filed herewith:
| Exhibit No. | Description | Page Number | ||
| 31.1 | Certifications required by Rule 13a-14(a) of Chief Executive Officer | Page 32 | ||
| 31.2 | Certifications required by Rule 13a-14(a) of Chief Financial Officer and Principal Accounting Officer | Page 33 | ||
| 32.1 | Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer | Page 34 | ||
| 32.2 | Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer | Page 35 | ||
| 101 | Interactive data files |
Page 30
INTER PARFUMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 9th day of November 2020.
| INTER PARFUMS, INC. | ||
| By: | /s/ Russell Greenberg | |
| Executive Vice President and | ||
| Chief Financial Officer | ||
Page 31