10-Q 1 g083245_10q.htm 10-Q
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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2022.

 

OR

 

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

 

Commission File No. 0-16469

 

INTER PARFUMS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

551 Fifth AvenueNew YorkNew York     10176
(Address of Principal Executive Offices)          (Zip Code)

 

(212) 983-2640
(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
 Common Stock, $.001 par value per share   IPAR    The Nasdaq Stock Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No

 

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).

Yes ☒ No ☐

 

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).

 

Large accelerated filer Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) 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 ☐ No

 

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, 2022, there were 31,875,625 shares of common stock, par value $.001 per share, outstanding.

 

 

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

INDEX

 

    Page Number
     
Part I.     Financial Information 1
     
Item 1.  Financial Statements  
     
  Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 2
     
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and September 30, 2021 3
     
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended  September 30, 2022 and September 30, 2021 4
     
  Consolidated Statements of Changes in Equity for the Nine Months Ended  September 30, 2022 and September 30, 2021 5
     
  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2022 and September 30, 2021 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
Item 4. Controls and Procedures 30
     
Part II.     Other Information 30
     
Item 6. Exhibits 31
     
Signatures 32

 

 

 

 

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, 2021, included in our annual report filed on Form 10-K.

 

The results of operations for the nine months ended September 30, 2022, 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)

 

               
ASSETS              
   September 30,
2022
   December 31,
2021
 
Current assets:          
Cash and cash equivalents  $41,277   $159,613 
Short-term investments   135,443    160,014 
Accounts receivable, net   220,112    159,281 
Inventories   283,237    198,914 
Receivables, other   8,050    10,308 
Other current assets   19,310    21,375 
Income taxes receivable   211    210 
Total current assets   707,640    709,715 
Property, equipment and leasehold improvements, net   153,246    149,352 
Right-of-use assets, net   27,834    33,728 
Trademarks, licenses and other intangible assets, net   189,273    214,047 
Deferred tax assets   10,344    7,936 
Other assets   22,857    30,586 
Total assets  $1,111,194   $1,145,364 
           
LIABILITIES AND EQUITY 
Current liabilities:          
Current portion of long-term debt  $12,593   $15,911 
Current portion of lease liabilities   4,852    6,014 
Accounts payable – trade   81,415    81,980 
Accrued expenses   132,834    136,677 
Income taxes payable   16,820    4,328 
Total current liabilities   248,514    244,910 
           
Long–term debt, less current portion   107,942    132,902 
Lease liabilities, less current portion   24,590    29,220 
           
Equity:          
Inter Parfums, Inc. shareholders’ equity:          
Preferred stock, $.001 par; authorized 1,000,000 shares; none issued        

Common stock, $.001 par; authorized 100,000,000 shares; outstanding 31,875,625 and 31,830,420 shares at September 30, 2022 and December 31, 2021, respectively

   32    32 
Additional paid-in capital   85,660    87,132 
Retained earnings   618,884    560,663 
Accumulated other comprehensive loss   (92,405)   (38,432)
Treasury stock, at cost, 9,864,805 shares at September 30, 2022 and December 31, 2021   (37,475)   (37,475)
Total Inter Parfums, Inc. shareholders’ equity   574,696    571,920 
Noncontrolling interest   155,452    166,412 
Total equity   730,148    738,332 
Total liabilities and equity  $1,111,194   $1,145,364 

 

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,
 
   2022   2021   2022   2021 
                 
Net sales  $280,462   $262,696   $775,865   $668,797 
                     
Cost of sales   98,562    95,269    281,525    243,772 
                     
Gross margin   181,900    167,427    494,340    425,025 
                     
Selling, general and administrative expenses   117,424    99,788    323,249    262,379 
                     
Impairment loss               2,393 
                     
Income from operations   64,476    67,639    171,091    160,253 
                     
Other expenses (income):                    
Interest expense   682    1,697    2,589    3,344 
(Gain) loss on foreign currency   273    (613)   (2,245)   (2,169)
Interest and investment income   (3,343)   (233)   (2,341)   (1,388)
Other (income) expense   346    (36)   (98)   (135)
                     
 Nonoperating Income (Expense)   (2,042)   815    (2,095)   (348)
                     
Income before income taxes   66,518    66,824    173,186    160,601 
                     
Income taxes   13,221    16,997    39,078    45,112 
                     
Net income   53,297    49,827    134,108    115,489 
                     
         Less:  Net income attributable to the noncontrolling interest   11,874    11,511    29,769    26,854 
                     
Net income attributable to Inter Parfums, Inc.  $41,423   $38,316   $104,339   $88,635 
                     
Earnings per share:                    
                     
Net income attributable to Inter Parfums, Inc. common shareholders:                    
Basic  $1.30   $1.21   $3.28   $2.80 
Diluted  $1.30   $1.20   $3.26   $2.79 
                     
Weighted average number of shares outstanding:                    
Basic   31,860    31,659    31,848    31,648 
Diluted   31,968    31,807    31,977    31,793 
                     
Dividends declared per share  $0.50   $0.25   $1.50   $0.75 

 

See notes to consolidated financial statements.

 

Page 3

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

                         
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Comprehensive income:                    
                     
Net income  $53,297   $49,827   $134,108   $115,489 
                     
Other comprehensive income:                    
                     
Net derivative instrument gain (loss), net of tax   1,315    (609)   (173)   (703)
                     
Transfer from OCI into earnings           992     
                     
Translation adjustments, net of tax   (32,944)   (15,396)   (79,015)   (33,203)
                     
Comprehensive income   21,668    33,822    55,912    81,583 
                     
Comprehensive income attributable to the noncontrolling interests:                    
                     
Net income   11,874    11,511    29,769    26,854 
                     
Other comprehensive income (loss):                    
                     
Net derivative instrument gain (loss), net of tax   362    (166)   (49)   (192)
                     
Translation adjustments, net of tax   (10,012)   (3,974)   (24,174)   (10,389)
                     
Comprehensive income attributable to the noncontrolling interests   2,224    7,371    5,546    16,273 
                     
Comprehensive income attributable to Inter Parfums, Inc.  $19,444   $26,451   $50,366   $65,310 

 

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,
 
   2022   2021 
         
Common stock, beginning and end of period  $32   $32 
         
         
Additional paid-in capital, beginning of period   87,132    75,708 
Shares issued upon exercise of stock options   1,816    1,727 
Share-based compensation   1,017    1,175 
Purchase of subsidiary shares   (4,305)    
Shares issued for license acquisition       5,000 
Transfer of subsidiary shares purchased       (540)
Additional paid-in capital, end of period   85,660    83,070 
           
Retained earnings, beginning of period   560,663    503,567 
Net income   104,339    88,635 
Dividends   (47,782)   (23,740)
Share-based compensation   1,664    892 
Retained earnings, end of period   618,884    569,354 
           
Accumulated other comprehensive loss, beginning of   period   (38,432)   (5,997)
Foreign currency translation adjustment, net of tax   (54,841)   (22,814)
Transfer from other comprehensive income into earnings   992     
Net derivative instrument loss, net of tax   (124)   (511)
Accumulated other comprehensive loss, end of period   (92,405)   (29,322)
    (37,475)     (37,475)  
         
Treasury stock, beginning and end of period   (37,475)   (37,475)
           
Noncontrolling interest, beginning of period   166,412    166,615 
Net income   29,769    26,854 
Foreign currency translation adjustment, net of tax   (24,174)   (10,389)
Net derivative instrument loss, net of tax   (49)   (192)
Share-based compensation (adjustment)   (353)   (69)
Purchase of subsidiary shares   (152)    
Transfer of subsidiary shares purchased   55    1,153 
Dividends   (16,056)   (9,836)
Noncontrolling interest, end of period   155,452    174,136 
    738,332      
         
Total equity  $730,148   $759,795 

 

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,
 
   2022   2021 
Cash flows from operating activities:          
Net income  $134,108   $115,489 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   10,936    7,273 
Provision for doubtful accounts   2,004    1,369 
Noncash stock compensation   2,353    2,158 
Share of income of equity investment   (98)   (135)
Impairment loss       2,393 
Noncash lease expense   4,074    6,953 
Deferred tax provision (benefit)   (3,658)   739 
Change in fair value of derivatives   1,348    1,844 
Changes in:          
Accounts receivable   (89,605)   (79,112)
Inventories   (109,377)   (3,727)
Other assets   2,615    (13,460)
Operating lease liabilities   (3,887)   (6,169)
Accounts payable and accrued expenses   26,406    41,830 
Income taxes, net   14,606    23,816 
           
Net cash provided by (used in) operating activities   (8,175)   101,261 
           
Cash flows from investing activities:          
Purchases of short-term investments   (2,862)   (41,406)
Proceeds from sale of short-term investments   5,346    10,753 
Purchases of property, equipment and leasehold improvements   (32,615)   (131,322)
Payment for intangible assets acquired   (3,757)   (858)
           
Net cash used in investing activities   (33,888)   (162,833)
           
Cash flows from financing activities:          
Proceeds from issuance of long-term debt       158,992 
Repayment of long-term debt   (14,210)   (38,232)
Proceeds from exercise of options   1,816    1,727 
Purchase of subsidiary shares from noncontrolling interest   (4,402)    
Dividends paid   (47,782)   (23,741)
Dividends paid to noncontrolling interest   (16,056)   (9,831)
           
Net cash provided by (used in) financing activities   (80,634)   88,915 
           
Effect of exchange rate changes on cash   (4,413)   (7,934)
           
Net increase (decrease) in cash and cash equivalents   (127,110)   19,409 
           
Cash and cash equivalents - beginning of period   168,387    169,681 
           
Cash and cash equivalents - end of period  $41,227   $189,090 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $2,091   $1,582 
Income taxes   27,718    21,103 

 

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, 2021.

 

2.Impact of COVID-19 Pandemic:

 

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and in March 2020, the World Health Organization declared COVID-19 a pandemic. In response, various national, state, and local governments issued decrees prohibiting certain businesses from operating and certain classes of workers from reporting to work.

 

Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill and caused a significant unfavorable impact on our results of operations in 2020.

 

Business significantly improved in the second half of 2020 and continued to improve throughout 2021 and thus far in 2022, as retail stores reopened, and consumers increased online purchasing. While we expect this trend to continue, the introduction of variants of COVID-19 in various parts of the world has caused the temporary re-implementation of governmental restrictions to prevent further spread of the virus. In addition, international air travel remains curtailed in many jurisdictions due to both governmental restrictions and consumer health concerns. While COVID-19 has significantly restricted international travel, the travel retail business is beginning to pick up. We remain confident that travel retail will once again be a source of growth over the long-term. Lastly, the improved economy has put significant strains on our supply chain causing disruptions affecting the procurement of components, the ability to transport goods, and related cost increases. These disruptions have come at a time when demand for our product lines has never been stronger or more sustained. We have been addressing this issue since the beginning of 2021, by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. We do not expect the supply chain bottlenecks to begin lifting until the second half of 2023. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic might continue to have adverse effects on our results of our operations, financial position and cash flows through at least the first half of 2023.

 

3.Recent Agreements:

 

Salvatore Ferragamo

 

In October 2021, we closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license was granted for the production and distribution of Ferragamo brand perfumes. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. The license became effective in October 2021 and will last for 10 years with a 5-year optional term, subject to certain conditions.

 

With respect to the management and coordination of activities related to the license agreement, the Company operates through a wholly-owned Italian subsidiary based in Florence, that was acquired from Salvatore Ferragamo on October 1, 2021. The acquisition together with the license agreement was accounted for as an asset acquisition.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on October 1, 2021. All amounts have been translated to U.S. dollars at the October 1, 2021 exchange rate.

 

(In thousands)

 

Inventories  $17,805 
Trademarks and licenses   15,880 
Other assets   3,033 
      
Assets acquired   36,718 
      
Liabilities assumed   (958)
Total consideration  $35,760 

 

Emanuel Ungaro

 

In October 2021, we also entered into a 10-year exclusive global licensing agreement with a 5-year optional term subject to certain conditions, with Emanuel Ungaro Italia S.r.l, for the creation, development and distribution of fragrances and fragrance related products, under the Emanuel Ungaro brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

 

Donna Karan and DKNY

 

In September 2021, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance related products under the Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. With this agreement, we are gaining several well-established and valuable fragrance franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious, as well as a significant loyal consumer base around the world. In connection with the grant of license, we issued 65,342 shares of Inter Parfums, Inc. common stock valued at $5.0 million to the licensor. The exclusive license became effective July 1, 2022, and we are planning to launch new fragrances under these brands in 2024.

 

Land and Building Acquisition - Future Headquarters in Paris

 

In April 2021, Interparfums SA, our 73% owned French Subsidiary, completed the acquisition of its headquarters at 10 rue de Solférino in the 7th arrondissement of Paris from the property developer. This is an office complex combining three buildings connected by two inner courtyards, and consists of approximately 40,000 total sq. ft.

 

The purchase price includes the complete renovation of the site and includes the purchase of several apartments in the surrounding area to be used as additional office space. As of September 30, 2022, $135.5 million of the purchase price, including approximately $4.1 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2022. The purchase price has been allocated approximately $55.9 million to land and $79.6 million to the building. The building, which was delivered on February 28, 2022, includes the building structure, development of the property, façade waterproofing, general and technical installations and interior fittings that will be depreciated over a range of 7 to 50 years. The Company has elected to depreciate the building cost based on the useful lives of its components. Approximately $3.4 million of cash held in escrow is included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2022.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

The acquisition was financed by a 10-year €120 million (approximately $117 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately €80 million of the variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum.

 

4.Recent Accounting Pronouncements:

 

There are no recent accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.

 

5.Inventories:

 

Inventories consist of the following: 

(In thousands)  September 30, 
2022
   December 31,
2021
 
Raw materials and component parts  $134,002   $111,312 
Finished goods   149,235    87,602 
           
Inventories  $283,237   $198,914 

 

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.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

                         
       Fair Value Measurements at September 30, 2022 
       Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
Assets:                
Short-term investments  $135,444   $16,248   $119,196   $ 
Interest rate swaps   6,066        6,066     
                     
Total assets  $141,510   $16,248   $125,262   $ 
Liabilities:                    
Foreign currency forward exchange contracts accounted for using hedge accounting  $1,840   $   $1,840   $ 
Foreign currency forward exchange contracts not accounted for using hedge accounting   7,154        7,154     
                     
Total liabilities  $8,994   $   $8,994   $ 

                         
       Fair Value Measurements at December 31, 2021 
       Quoted Prices in   Significant Other   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
Assets:                
Short-term investments  $160,014   $24,506   $135,508   $ 
Liabilities:                    
Foreign currency forward exchange contracts accounted for using hedge accounting  $1,982   $   $1,982   $ 
Foreign currency forward exchange contracts not accounted for using hedge accounting   63        63     
Interest rate swaps   (234)       (234)    
                     
Total liabilities  $1,811   $   $1,811   $ 

 

The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, cash held in escrow, accounts payable and accrued expenses approximate 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.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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 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. 

 

In connection with the April 2021 acquisition of the office building complex in Paris, €120 million of the purchase price was financed through a 10-year term loan. The Company entered into interest rate swap contracts related to €80 million of the loan, effectively exchanging the variable interest rate to a variable rate not to exceed 2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

 

Gains and losses in derivatives designated as hedges are accumulated in other comprehensive income 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 the nine months ended September 30, 2022 and 2021.

 

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps is included in other assets on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at September 30, 2022, resulted in a net liability and is included in accrued expenses on the accompanying balance sheet.

 

At September 30, 2022, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $90.0 million, GB £2.0 million and JPY ¥50.0 million, which all have maturities of less than one year.

 

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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, 2022, the weighted average remaining lease term was 6.0 years and the weighted average discount rate used to determine the operating lease liability was 2.6%. Rental expense related to operating leases was $1.2 million and $4.3 million for the three and nine months ended September 30, 2022, respectively, as compared to $1.9 million and $6.8 million for the corresponding periods of the prior year. Operating lease payments included in operating cash flows totaled $3.9 million and $6.2 million for the nine months ended September 30, 2022 and 2021, respectively, and noncash additions to operating lease assets totaled $0.5 million and $14.0 million for the nine months ended September 30, 2022 and 2021, respectively.

 

9.Share-Based Payments:

 

The Company maintains a stock option program for key employees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the granting of both nonqualified and incentive options. Options granted under the plans typically have a six-year term and vest over a four to five-year period. The fair value of shares vested during the nine months ended September 30, 2022 and 2021 aggregated $0.11 million and $0.09 million, respectively. Compensation cost, net of forfeitures, is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated based on historic trends. It is generally our policy to issue new shares upon exercise of stock options.

 

The following table sets forth information with respect to nonvested options for the nine months ended September 30, 2022:

 

   Number of Shares   Weighted Average
Grant-Date Fair Value
 
Nonvested options – beginning of period   209,510   $13.45 
Nonvested options granted        
Nonvested options vested or forfeited   (10,460)  $12.14 
Nonvested options – end of period   199,050   $13.52 

 

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Share-based payment expense decreased income before income taxes by $0.47 million and $2.35 million for the three and nine months ended September 30, 2022, respectively, as compared to $0.71 million and $2.16 million for the corresponding periods of the prior year. Share-based payment expense decreased income attributable to Inter Parfums, Inc. by $0.34 million and $1.52 million for the three and nine months ended September 30, 2022, respectively, as compared to $0.48 million and $1.42 million for the corresponding periods of the prior year.

 

The following table summarizes stock option information as of September 30, 2022:

 

   Shares   Weighted Average Exercise Price 
         
Outstanding at January 1, 2022   524,900   $57.58 
Options forfeited   (1,480)   67.41 
Options exercised   (45,205)   40.16 
           
Outstanding at September 30, 2022   478,215   $59.20 
           
Options exercisable   279,165   $54.40 
Options available for future grants   614,015      

 

As of September 30, 2022, the weighted average remaining contractual life of options outstanding is 2.12 years (1.76 years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $7.8 million and $5.9 million, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $1.9 million.

 

Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the nine months ended September 30, 2022 and 2021 were as follows:

 

(In thousands)  September 30, 
2022
   September 30, 
2021
 
         
Cash proceeds from stock options exercised  $1,816   $1,727 
Tax benefits   320    240 
Intrinsic value of stock options exercised   2,105    1,562 

 

The weighted average fair values of the options granted by Inter Parfums, Inc. during the nine months ended September 30, 2021 were $11.35 per share on the date of grant using the Black-Scholes option pricing model to calculate the fair value of options granted. There were no options granted during the nine months ended September 30, 2022. The assumptions used in the Black-Scholes pricing model for the period ended September 30, 2021 is set forth in the following table:

 

    September 30, 
2021
 
      
Weighted average expected stock-price volatility    25%
Weighted average expected option life    5 years 
Weighted average risk-free interest rate    0.4%
Weighted average dividend yield    1.6%

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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 reflects 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 continues to increase.

 

In December 2018, Interparfums SA approved a plan to grant an aggregate of 26,600 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The corporate performance conditions were met and therefore in June 2022, 211,955 shares, adjusted for stock splits, were distributed. The aggregate cost of the grant of approximately $4.8 million was recognized as compensation cost on a straight-line basis over the requisite three-year service period.

 

In March 2022, Interparfums SA approved an additional plan to grant an aggregate of 88,400 shares to all Interparfums SA employees and corporate officers having more than six months of employment at grant date, subject to certain corporate performance conditions. The shares, subject to adjustment for stock splits, will be distributed in June 2025 and will follow the same guidelines as the December 2018 plan.

 

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. The estimated number of shares to be distributed of 66,905 has been determined taking into account employee turnover. The aggregate cost of the grant of approximately $3.2 million will be recognized as compensation cost on a straight-line basis over the requisite three and a quarter year service period.

 

Similar to the December 2018 plan, in order to avoid dilution of the Company’s ownership of Interparfums SA, all shares distributed or to be distributed pursuant to these plans will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. During the nine months ended September 30, 2022, the Company acquired 63,281 shares at an aggregate cost of $3.0 million.

 

All share purchases and issuances have been classified as equity transactions on the accompanying balance sheet.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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 
(In thousands)  September 30,   September 30, 
   2022   2021   2022   2021 
Numerator:                
Net income attributable to Inter Parfums, Inc.  $41,422   $38,316   $104,339   $88,635 
Denominator:                    
Weighted average shares   31,860    31,659    31,848    31,648 
Effect of dilutive securities:                    
Stock options   108    148    128    145 
Denominator for diluted earnings per share   31,968    31,807    31,976    31,793 
                     
Earnings per share:                    
Net income attributable to Inter Parfums, Inc. common shareholders:                    
Basic  $1.30   $1.21   $3.28   $2.80 
Diluted   1.30    1.20    3.26    2.79 

 

Not included in the above computations are the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.15 million shares of common stock for both three and nine months ended September 30, 2022, as compared to 0.17 and 0.23 million shares of common stock for the three and nine months ended September 30, 2021, respectively.

 

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Notes to Consolidated Financial Statements

 

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:

 

(In thousands)  Three months ended
September 30,
   Nine months ended
September 30,
 
   2022   2021   2022   2021 
Net sales:                    
United States  $82,183   $56,382   $229,129   $142,089 
Europe   198,318    206,087    546,787    527,004 
Eliminations   (39)   227    (51)   (296)
                     
   $280,462   $262,696   $775,865   $668,797 
                     
Net income attributable to Inter Parfums, Inc.:                    
United States  $10,881   $8,391   $27,386   $18,668 
Europe   30,542    29,925    76,953    69,967 
                     
   $41,423   $38,316   $104,339   $88,635 

 

   September 30,   December 31, 
   2022   2021 
Total Assets:          
United States  $280,270   $247,703 
Europe   858,342    931,735 
Eliminations   (27,418)   (34,074)
   $1,111,194   $1,145,364 
           

 

 

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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, 2021, 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 70% and 79% of net sales for the nine months ended September 30, 2022 and 2021, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, S.T. Dupont, 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 30% and 21% of net sales for the nine months ended September 30, 2022 and 2021, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, Donna Karan, DKNY, Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta and Ungaro 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.

 

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As a percentage of net sales, product sales for the Company’s largest brands were as follows:

 

  

Nine Months Ended  

September 30, 

 
   2022   2021 
         
Montblanc   19%   20%
Jimmy Choo   18%   19%
Coach   15%   17%
GUESS   11%   10%

 

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 primarily sell directly to retailers in France 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 well diversified and strong brand portfolio with global reach and potential. As part of our strategy, we also 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 almost 50% 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.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

The Russian invasion of Ukraine has negatively impacted our operations in both Russia and Ukraine. Since the invasion, we have been following regulations and sanctions which vary by country. In fiscal 2021, our operations in Ukraine and Russia accounted for approximately 4% of consolidated net sales. Future impacts on our business, including sanctions and counter-sanctions, are difficult to predict due to the high level of uncertainty as to how these developments will evolve.

 

We are monitoring the effects of this conflict, including the risks that may affect our business, and expect that we will adjust our plans accordingly as the situation progresses. We do not expect any material credit losses as most of our receivables on sales to Russia and Ukraine are covered by insurance or are being paid in advance.

 

For the nine months ended September 30, 2022, the activities related to Russia and Ukraine did not have a material impact on our consolidated financial statements.

 

Impact of COVID-19 Pandemic

 

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and in March 2020, the World Health Organization declared COVID-19 a pandemic. In response, various national, state, and local governments issued decrees prohibiting certain businesses from operating and certain classes of workers from reporting to work.

 

Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill and caused a significant unfavorable impact on our results of operations in 2020.

 

Business significantly improved in the second half of 2020 and continued to improve throughout 2021 and thus far in 2022, as retail stores reopened, and consumers increased online purchasing. While we expect this trend to continue, the introduction of variants of COVID-19 in various parts of the world has caused the temporary re-implementation of governmental restrictions to prevent further spread of the virus. In addition, international air travel remains curtailed in many jurisdictions due to both governmental restrictions and consumer health concerns. While COVID-19 has significantly restricted international travel, the travel retail business is beginning to pick up. We remain confident that travel retail will once again be a source of growth over the long-term. Lastly, the improved economy has put significant strains on our supply chain causing disruptions affecting the procurement of components, the ability to transport goods, and related cost increases. These disruptions have come at a time when demand for our product lines has never been stronger or more sustained. We have been addressing this issue since the beginning of 2021, by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. We do not expect the supply chain bottlenecks to begin lifting until the second half of 2023. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic might continue to have adverse effects on our results of our operations, financial position and cash flows through at least the first half of 2023.

 

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Recent Important Events

 

Salvatore Ferragamo

 

In October 2021, we closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license was granted for the production and distribution of Ferragamo brand perfumes. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. The license became effective in October 2021 and will last for 10 years with a 5-year optional term, subject to certain conditions.

 

With respect to the management and coordination of activities related to the license agreement, the Company operates through a wholly-owned Italian subsidiary based in Florence, that was acquired from Salvatore Ferragamo on October 1, 2021. The acquisition together with the license agreement was accounted for as an asset acquisition.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on October 1, 2021. All amounts have been translated to U.S. dollars at the October 1, 2021 exchange rate.

 

(In thousands)     
      
Inventories  $17,805 
Trademarks and licenses   15,880 
Other assets   3,033 
      
Assets acquired   36,718 
      
Liabilities assumed   (958)
Total consideration  $35,760 

 

Emanuel Ungaro

 

In October 2021, we also entered into a 10-year exclusive global licensing agreement a with a 5-year optional term subject to certain conditions, with Emanuel Ungaro Italia S.r.l, for the creation, development and distribution of fragrances and fragrance related products under the Emanuel Ungaro brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

 

Donna Karan and DKNY

 

In September 2021, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance related products under the Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. With this agreement, we are gaining several well-established and valuable fragrance franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious, as well as a significant loyal consumer base around the world. In connection with the grant of license, we issued 65,342 shares of Inter Parfums, Inc. common stock valued at $5.0 million to the licensor. The exclusive license became effective July 1, 2022, and we are planning to launch new fragrances under these brands in 2024.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Land and Building Acquisition – Future Headquarters in Paris

 

In April 2021, Interparfums SA, our 73% owned French Subsidiary, completed the acquisition of its headquarters at 10 rue de Solférino in the 7th arrondissement of Paris from the property developer. This is an office complex combining three buildings connected by two inner courtyards, and consists of approximately 40,000 total sq. ft.

 

The purchase price includes the complete renovation of the site and includes the purchase of several apartments in the surrounding area to be used as additional office space. As of September 30, 2022, $135.5 million of the purchase price, including approximately $4.1 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2022. The purchase price has been allocated approximately $55.9 million to land and $79.6 million to the building. The building, which was delivered on February 28, 2022, includes the building structure, development of the property, façade waterproofing, general and technical installations and interior fittings that will be depreciated over a range of 7 to 50 years. The Company has elected to depreciate the building cost based on the useful lives of its components. Approximately $3.4 million of cash held in escrow is included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2022.

 

The acquisition was financed by a 10-year €120 million (approximately $117 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately €80 million of the variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum.

 

Discussion of Critical Accounting Policies

 

Information regarding our critical accounting policies can be found in our 2021 Annual Report on Form 10-K filed with the SEC.

 

Results of Operations

 

Three and Nine Months Ended September 30, 2022 as Compared to the Three and Nine Months Ended September 30, 2021

 

Net Sales:

 

(in millions) 

Three months ended  

September 30, 

  

Nine months ended  

September 30, 

 
  

2022

  

2021

  

% Change

  

2022

  

2021

  

% Change

 
                     
European based product sales  $198.3   $206.1    (4%)  $546.7   $527.0    4%
United States based product sales   82.2    56.6    45%   229.2    141.8    62%
   $280.5   $262.7    7%  $775.9   $668.8    16%
                               

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Net sales for the three months ended September 30, 2022, increased 7% from the three months ended September 30, 2021. At comparable foreign currency exchange rates, net sales increased 12% from the third quarter of 2021 of which 9% is related to new brands. The average dollar/euro exchange rate for the current third quarter was 1.01 compared to 1.18 in the third quarter of 2021, while for the nine months ended September 2022 the average dollar/euro exchange rate was 1.06 compared to 1.19 in the nine months ended September 2021. Net sales for the nine months ended September 30, 2022, increased 16% as compared to the nine months ended September 2021. At comparable foreign currency exchange rates, net sales increased 21% from the nine months ended September 2021 of which 8% is related to new brands.

 

Despite supply chain disruptions, inflation, lockdowns, transportation issues, the strength of the dollar, sanctions, the slow recovery of international travel, logistics difficulties in the U.S. caused by a change in shipping software by our local partner in the first half of this year, and the war in Eastern Europe, 2022 is proving to be an exceptionally strong year for us on both sides of the Atlantic. Our U.S. operations growth was substantially due to the incremental sales of Ferragamo, Donna Karan and DKNY. New flankers which launched this year includes Away by Abercrombie & Fitch, and Wave X by Hollister.

 

For the three months ended September 30, 2022, the surge in the dollar masked the gains by our leading brands within our European operations. Montblanc, for example, net sales declined by 6% in dollars but grew 10% in euro. Similarly, Jimmy Choo brand sales rose 12% in dollars and 32% in euro, while Coach sales decreased 12% in dollars and grew 3% in euros. In fact, in total, our European operations generated sales growth of 12% in euro but decreased 4% in dollars. This year, we launched Coach Open Road and Jimmy Choo I Want Choo Forever, along with the continued rollouts of the Moncler duo and Montblanc Legend Red, Jimmy Choo Man Aqua, Lanvin Mon Éclat, Kate Spade Sparkle and Coach Wild Rose.

 

The favorable trends in the first half continued into the third quarter and we look forward to executing our plans for the remainder of the year. Our brands are in high demand in a robust environment for the fragrance industry. We have a number of new product launches in the fourth quarter of the year, including Cosmic Sky for Anna Sui, Ferragamo AMO Oriental Wood and Signorina Limited Edition for U.S. operations. In addition, during the fourth quarter of the year, we will continue the distribution of existing Donna Karan and DKNY fragrances. For European operations, Kate Spade Cherie and a new member of the Collection Extraordinaire by Van Cleef & Arpels will debut. In sum, 2022 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds.

 

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Net Sales to Customers by Region  Nine months ended September 30, 
(In millions)  2022   2021 
         
North America  $284.7   $273.4 
Western Europe   196.3    146.8 
Asia   120.2    97.8 
Middle East   66.3    46.8 
Central and South America   56.2    43.8 
Eastern Europe   45.6    54.0 
Other   6.6    6.2 
   $775.9   $668.8 

 

Our U.S. distribution subsidiary for European based products had encountered shipping related issues following a change in the distribution software by its logistics partner in the first half of 2022. Although those issues have been resolved, U.S. sales of European brands were negatively impacted. As a result, sales in our largest market, North America, rose only 4% as compared to Western Europe and Asia where comparable sales increased 34% and 23%, respectively. Our sales in the Middle East, and Central and South America, were also robust, up 41% and 28%, respectively. Only sales in Eastern Europe declined owing to the war in Ukraine.

 

Gross Profit margin  Three months ended   Nine months ended 
   September 30,   September 30, 
(in millions)  2022   2021   2022   2021 
                 
European operations                    
Net sales  $198.2   $206.1   $546.7   $527.0 
Cost of sales   60.5    68.7    176.1    177.4 
Gross margin  $137.7   $137.4   $370.6   $349.6 
Gross margin as a % of net sales   69.5%   66.6%   67.8%   66.3%
                     
United States operations                    
Net sales  $82.2   $56.6   $229.1   $141.8 
Cost of sales   38.0    26.6    105.4    66.4 
Gross margin  $44.2   $30.0   $123.7   $75.4 
Gross margin as a % of net sales   53.8%   53.1%   54.0%   53.2%

 

For European based operations, gross profit margin as a percentage of net sales was 69.5% and 67.8% for the three and nine months ended September 30, 2022, respectively, as compared to 66.6% and 66.3% for the corresponding periods of the prior year. We carefully monitor movements in foreign currency exchange rates as almost 50% of our European based operations net sales is 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 margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rate was 1.01 in the 2022 third quarter compared to 1.18 in the third quarter of 2021. The margin gains in 2022 are primarily the result of the stronger U.S. dollar. Our pricing actions as well as favorable mix, resulting from less giftset sales compared to the prior year, also added to our gross margin gains, however, increased transportation and component costs offset much of those benefits.

 

As previously mentioned, supply chain disruptions affecting the procurement of components, the ability to transport goods, and related cost increases have and are expected to continue to have a negative impact on sales and gross margin. We have been addressing these issues and have implemented processes to mitigate the potential impact.

 

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For United States operations, gross profit margin was 53.8% and 54.0% for the three and nine months ended September 30, 2022, respectively, as compared to 53.1% and 53.2% for the corresponding periods of the prior year. The increase in sales for the nine months ended September 30, 2022, as compared to the corresponding period of the prior year, allowed us to better absorb fixed expenses such as depreciation and point of sale expenses, and we also benefited from favorable giftset mix.

 

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $5.5 million and $11.0 million for the three and nine months ended September 30, 2022, respectively, as compared to $3.3 million and $7.1 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   Nine months ended, 
    September 30,   September 30, 
(In millions)  2022   2021   2022   2021 
                 
European Operations                    
Selling, general and administrative expenses  $83.4   $79.9   $231.2   $210.2 
Selling, general and administrative expenses as a percent of net sales   42.1%   38.8%   42.3%   39.9%
                     
United States Operations                    
Selling, general and administrative expenses  $34.0   $19.9   $92.1   $52.2 
Selling, general and administrative expenses as a percent of net sales   41.4%   35.1%   40.2%   36.8%

 

For European operations, selling, general and administrative expenses increased 4.4% and 10.0% for the three and nine months ended September 30, 2022, as compared to the corresponding period of the prior year, and represented 42.1% and 42.3% of net sales for the three and nine months ended September 30, 2022, respectively, as compared to 38.8% and 39.9% for the three and nine months ended September 30, 2021, respectively. For United States operations, selling, general and administrative expenses increased 71.1% and 76.5% for the three and nine months ended September 30, 2022, as compared to the corresponding period of the prior year, and represented 41.4% and 40.2% of net sales for the three and nine months ended September 30, 2022, respectively, as compared to 35.1% and 36.8% for the three and nine months ended September 30, 2021, respectively. As discussed in more detail below, the increased selling, general and administrative expenses as a percent of net sales are primarily the result of increases in promotion and advertising expenditures. Additionally, as the US based operations have been growing, expenses related to salaries and benefits has grown more rapidly as we build the organization to support the growth.

 

Promotion and advertising included in selling, general and administrative expenses aggregated $44.8 million and $124.9 million for the three and nine months ended September 30, 2022, respectively, as compared to $40.3 million and $95.3 million for the corresponding periods of the prior year. Promotion and advertising represented 16.0% and 16.1% of net sales for the three and nine months ended September 30, 2022, respectively, as compared to 15.3% and 14.2% for the corresponding periods of the prior year. Throughout 2021, sales rebounded far more rapidly than originally anticipated causing us to play catchup with promotional and adverting programs throughout the year. Promotion and advertising are integral parts of our industry, and we continue to invest heavily to support new product launches and to build brand awareness. We believe that our promotion and advertising efforts have had a beneficial effect on online net sales. All of our brands have benefitted from newly launched and enhanced e-commerce sites in existing markets in collaboration with our retail customers on their e-commerce sites. We also continue to develop and implement omnichannel concepts and compelling content to deliver an integrated consumer experience. We anticipate that on a full year basis, promotion and advertising expenditures will aggregate approximately 21% of net sales, which is in line with pre-COVID historical averages.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Royalty expense included in selling, general and administrative expenses aggregated $23.1 million and $61.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $20.5 million and $52.0 million for the corresponding periods of the prior year. Royalty expense represented 8.3% and 7.9 % of net sales for the three and nine months ended September 30, 2022, as compared to 7.8% of net sales for both the corresponding periods of the prior year. Royalty expense as a percentage of net sales increased in 2022 as the mix of sales with a royalty basis has increased year over year.

 

Income from Operations

 

As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, our operating margins aggregated 23.0% and 22.1% for the three and nine months ended September 30, 2022, respectively, as compared to 25.7% and 24.0% for the corresponding periods of the prior year.

 

Other Income and Expense

 

Traditionally, interest expense was primarily related to the financing of brand and licensing acquisitions. However, in April 2021, we completed the acquisition of the headquarters of Interparfums SA. The acquisition was financed by a 10-year €120 million (approximately $117 million) bank loan which bears interest at one-month Euribor plus 0.75%. Also in 2021, approximately €80 million of the variable rate debt was swapped for variable rate debt with a maximum interest rate of 2%.

 

We 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. Gains and losses on foreign currency transactions have not been significant. Almost 50% of net sales of our European operations are denominated in U.S. dollars.

 

Interest and investment income for the three months ended September 30, 2022, includes a gain of $2.3 million, as compared to a loss of $0.1 million for the corresponding period of the prior year, resulting from the interest rate swap. For the nine months ended September 30, 2022, the Company recognized a gain of $6.4 million related to the interest rate swap which was largely offset by losses of $5.3 million on marketable equity securities during the same period.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Income Taxes

 

Our consolidated effective tax rate was 23% for the nine months ended September 30, 2022, as compared to 28% for the corresponding periods of the prior year.

 

The effective tax rate for European operations was 25% for the nine months ended September 30, 2022, as compared to 30% for the corresponding period of the prior year. As previously disclosed, a global settlement agreement was reached with the French Tax Authorities in June 2021, whereby Interparfums SA agreed to pay €2.5 million (approximately $3.0 million) relating to activities between Interparfums SA and its wholly owned subsidiary, Inter Parfums (Suisse) Sarl. The balance of the decline is primarily the result of a decrease in the French corporate income tax rate from 28% to 25%.

 

Our effective tax rate for U.S. operations was 11% for the nine months ended September 30, 2022, as compared to 17% for the corresponding period of the prior year. Our effective tax rate differs from the 21% statutory rate due to state, local and foreign taxes, offset by benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income. Additionally, in the third quarter our U.S. operations recognized a one-time tax benefit of $2.5 million associated with the 2021 Salvatore Ferragamo acquisition. At the time of the acquisition, we had not recognized deferred tax benefits as there were uncertainties concerning its potential recoverability; however, as of September 30, 2022, the recoverability is deemed likely. The lower effective tax rate in 2021 is primarily a result of discrete tax items related to benefits received from the exercise of stock options.

 

Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Net Income

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2022   2021   2022   2021 
(In thousands)                
                 
Net income European operations  $42,417   $41,455   $106,722   $96,822 
Net income United States operations   10,880    8,372    27,386    18,667 
                     
Net income   53,297    49,827    134,108    115,489 
                     
Less: Net income attributable to the noncontrolling interest   11,874    11,511    29,769    26,854 
                     
Net income attributable to Inter Parfums, Inc.  $41,423   $38,316   $104,339   $88,635 

 

Net income attributable to European operations was $42.4 million and $106.7 million for the three and nine months ended September 30, 2022, respectively, as compared to $41.5 million and $96.8 million for the corresponding period of the prior year. Net income attributable to United States operations was $10.9 million and $27.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $8.4 million and $18.7 million for the corresponding period of the prior year. The 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.

 

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. Net income attributable to the noncontrolling interest is directly related to the profitability of our European operations and aggregated 28% of European operations net income for all periods presented. Net margins attributable to Inter Parfums, Inc. for the nine months ended September 30, 2022 and 2021 aggregated 13.4% and 13.3%, respectively.

 

Liquidity and Capital Resources

 

Our conservative financial tradition has enabled us to amass significant cash balances. As of September 30, 2022, we had $177 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, 2022, short-term investments include approximately $16.2 million of marketable equity securities.

 

As of September 30, 2022, working capital aggregated $459 million and we had a working capital ratio of 2.9 to 1. Approximately 77% of the Company’s total assets are held by European operations, and approximately $146 million of trademarks, licenses and other intangible assets are also held by European operations.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

The Company is party to a number of license and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various dates through 2033. In connection with certain of these license agreements, the Company is subject to minimum annual advertising commitments, minimum annual royalties and other commitments. See Item 8. Financial Statements and Supplementary Data – Note 12 – Commitments in our 2021 annual report on Form 10-K. Future advertising commitments are estimated based on planned future sales for the license terms that were in effect at December 31, 2021, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations.

 

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. As we recently reported, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance related products under the Donna Karan and DKNY brands. This license took effect on July 1, 2022. 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 $8.2 million for the nine months ended September 30, 2022, as compared to cash provided by operating activities of $101.3 million for the corresponding period of the prior year. For the nine months ended September 30, 2022, working capital items used $159.2 million in cash from operating activities, as compared to $36.8 million in the 2021 period. Although from a cash flow perspective accounts receivable is up 56% from year end 2021, the balance is reasonable based on 2022 record sales levels and reflects a combination of high volumes of shipments towards the end of the third quarter as well as some payment schedules extended going into the holiday season resulting in day’s sales outstanding increasing to 80 days, up from 70 days in the corresponding period of the prior year. While the day’s sales outstanding has increased, we are still seeing strong collection activity and do not anticipate any issues with collections of accounts receivable. From a cash flow perspective, inventory levels as of September 30, 2022, increased 55% from year end 2021. As of December 31, 2021, although inventories include product needed to support new launches, the overall balance was lower than historic levels due primarily to supply chain disruptions. We have been addressing this issue by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. We believe that our inventory levels are reasonable to support our projected sales and new product pipeline while not exceeding reasonable levels and creating excess and obsolete liabilities.

 

Cash flows used in investing activities in 2022 reflect purchases and sales of short-term investments. These investments include certificates of deposit with maturities greater than three months. Approximately $41 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 typically spend approximately $5.0 million on tools and molds, depending on our new product development calendar. During the nine months ended September 30, 2022, approximately $23.7 million was added to property costs relating to our new Paris corporate headquarters. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Our short-term financing requirements are expected to be met by available cash on hand at September 30, 2022, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2022 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $26 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding pursuant to these facilities as of both September 30, 2022 and 2021.

 

In February 2021, our Board of Directors authorized an annual dividend of $1.00, payable quarterly. In February 2022, our Board authorized a 100% increase in the annual dividend to $2.00 per share. The next quarterly cash dividend of $0.50 per share is payable on December 30, 2022, to shareholders of record on December 15, 2022.

 

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, 2022.

 

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.

 

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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, 2022, we had foreign currency contracts in the form of forward exchange contracts of approximately U.S. $90.0 million, GB £2.0 million and JPY ¥50.0 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.

 

Part II. Other Information

 

Items 1. Legal Proceedings, 1A. Risk Factors, 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.

 

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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 32
     
31.2 Certifications required by Rule 13a-14(a) of Chief Financial Officer and Principal Accounting Officer 33
     
32.1 Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer 34
     
32.2 Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer 35
     
101 Interactive data files  

 

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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 2022.

 

    INTER PARFUMS, INC.
     
  By: /s/ Michel Atwood
    Chief Financial Officer

 

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