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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(MARK ONE)
| Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended |
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.
(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 ☐ (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 ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At May 10, 2022, there were shares of common stock, par value $.001 per share, outstanding.
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, 2021, included in our annual report filed on Form 10-K.
The results of operations for the three months ended March 31, 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 | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Receivables, other | ||||||||
| Other current assets | ||||||||
| Income taxes receivable | ||||||||
| Total current assets | ||||||||
| Property, 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 | ||||||||
| Total current liabilities | ||||||||
| Long–term debt, less current portion | ||||||||
| Lease liabilities, less current portion | ||||||||
| Equity: | ||||||||
| Inter Parfums, Inc. shareholders’ equity: | ||||||||
| Preferred stock, $ par; authorized shares; issued | -- | |||||||
| Common stock, $ par; authorized shares; outstanding and shares at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost, shares at March 31, 2022 and December 31, 2021 | ( | ) | ( | ) | ||||
| 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 March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross margin | ||||||||
| Selling, general and administrative expenses | ||||||||
| Impairment loss | ||||||||
| Income from operations | ||||||||
| Other expenses (income): | ||||||||
| Interest expense | ||||||||
| Gain on foreign currency | ( | ) | ( | ) | ||||
| Interest and investment (income) loss | ( | ) | ||||||
| Other 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)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Comprehensive income: | ||||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Net derivative instrument gain (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 (loss): | ||||||||
| Net derivative instrument gain (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)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Common stock, beginning and end of period | $ | $ | ||||||
| Additional paid-in capital, beginning of period | ||||||||
| Shares issued upon exercise of stock options | ||||||||
| Share-based compensation | ||||||||
| Additional paid-in capital, end of period | ||||||||
| Retained earnings, beginning of period | ||||||||
| Net income | ||||||||
| Dividends | ( | ) | ( | ) | ||||
| Share-based compensation (adjustment) | ||||||||
| 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 gain (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 gain (loss), net of tax | ( | ) | ||||||
| Share-based compensation (adjustment) | ( | ) | ||||||
| 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)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||
| Noncash stock compensation | ||||||||
| Share of income of equity investment | ( | ) | ( | ) | ||||
| Impairment loss | ||||||||
| Noncash lease expense | ||||||||
| Deferred tax provision | ||||||||
| Change in fair value of derivatives | ( | ) | ||||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| 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 | ||||||||
| Purchases of property, equipment and leasehold improvements | ( | ) | ( | ) | ||||
| Payment for intangible assets acquired | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Proceeds from exercise of options | ||||||||
| 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, 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, in the near-term, we continue to believe that global travel retail will once again be a growth opportunity for 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 later in 2022. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic may have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of 2022.
| 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.
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.
Page 7
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.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed
(In thousands)
| Inventories | $ | |||
| Trademarks and licenses | ||||
| Other assets | ||||
| Assets acquired | ||||
| Liabilities assumed | ( | ) | ||
| Total Consideration | $ |
Emanuel Ungaro
In October 2021,
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 shares of Inter Parfums, Inc. common
stock valued at $
Land and Building Acquisition - Future Headquarters in Paris
In April 2021, Interparfums SA,
our
Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The purchase price
includes the complete renovation of the site. As of March 31, 2022, $
The acquisition was financed
by a -year €
| 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) | March 31, 2022 |
|
December 31, 2021 | |||||
| Raw materials and component parts | $ | $ | ||||||
| Finished goods | ||||||||
| Inventories | ||||||||
| $ | $ |
| 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 March 31, 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 | $ | $ | $ | $ | ||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | ||||||||||||||||
| Total Assets | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign currency forward exchange contracts accounted for using hedge accounting | $ | $ | $ | $ | ||||||||||||
| Interest rate swaps | ( | ) | ( | ) | ||||||||||||
| Total Liabilities | ||||||||||||||||
| $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
Page 9
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 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 | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign currency forward exchange contracts accounted for using hedge accounting | $ | $ | $ | $ | ||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | ||||||||||||||||
| Interest rate swaps | ( | ) | ( | ) | ||||||||||||
| Total Liabilities | ||||||||||||||||
| . | $ | $ | $ | $ | ||||||||||||
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.
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.
Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the April
2021 acquisition of the office building complex in Paris, €
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 three months ended March 31, 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 long-term debt on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at March 31, 2022, resulted in a net liability and is included in accrued expenses on the accompanying balance sheet.
At March 31, 2022, we had foreign
currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $
| 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 March 31, 2022, the weighted
average remaining lease term was years and the weighted average discount rate used to determine the operating lease liability
was
Page 11
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 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 to -year period. The fair value of shares vested during the three months ended March 31, 2022 and 2021 aggregated $ and $, 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.
| 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 $ and $ for the three months ended March 31, 2022
and 2021, respectively, and decreased income attributable to Inter Parfums, Inc. by $
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2022 | $ | |||||||
| Options forfeited | ( | ) | ||||||
| Options exercised | ( | ) | ||||||
| Outstanding at March 31, 2022 | $ | |||||||
| Options exercisable | $ | |||||||
| Options available for future grants | ||||||||
As of March 31, 2022, the weighted average remaining contractual life of options outstanding is years ( years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $ and $, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $.
Page 12
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| (In thousands) | March 31, 2022 | March 31, 2021 | ||||||
| Cash proceeds from stock options exercised | $ | $ | ||||||
| Tax benefits | ||||||||
| Intrinsic value of stock options exercised | ||||||||
| March 31, 2021 | ||||||
| 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 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 continue to increase.
In December 2018, Interparfums SA approved a plan to grant an aggregate of shares of its stock to employees with no performance condition requirement, and an aggregate of shares to officers and managers, subject to certain corporate performance conditions. The shares, subject to adjustment for stock splits, will be distributed in June 2022. In order to avoid dilution of the Company’s ownership of Interparfums SA, all shares to be distributed pursuant to the plan will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA in prior years.
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. As of March 31, 2022, the number of shares to be distributed, after forfeited shares, was
resulting from modifications and stock splits. The increase in shares anticipated to be distributed were transferred from treasury
shares at the Interparfums SA level.
| 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.
Page 13
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| Three months ended | ||||||||
| (In thousands) | March 31, | |||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||
Not included in the above computations are the effect of antidilutive potential common shares which consist of outstanding options to purchase shares of common stock for the three months ended March 31, 2021. There were antidilutive potential common shares outstanding for the three months ended March 31, 2022.
Page 14
INTER PARFUMS, INC. AND SUBSIDIARIES
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 March 31, | |||||||
| 2022 | 2021 | |||||||
| Net sales: | ||||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| Eliminations | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Net income attributable to Inter Parfums, Inc.: | ||||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| $ | $ | |||||||
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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.
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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, IPSA, which is also a publicly traded company as 27% of IPSA 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 73% and 80% of net sales for the three months ended March 31, 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 27% and 20% of net sales for the three months ended March 31, 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, 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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INTER PARFUMS, INC. AND SUBSIDIARIES
As a percentage of net sales, product sales for the Company’s largest brands were as follows:
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Montblanc | 19% | 20% | ||||||
| Jimmy Choo | 15% | 18% | ||||||
| Coach | 15% | 16% | ||||||
| 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 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 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.
The Russian invasion of Ukraine has negatively impacted our operations in both Russia and Ukraine. Since the invasion of Ukraine by Russia, 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 three months ended March 31, 2022, the activities related to Russia and Ukraine did not have a material impact on our consolidated financial statements.
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INTER PARFUMS, INC. AND SUBSIDIARIES
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 in the near-term, we continue to believe that global travel retail will once again be a growth opportunity for 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 later in 2022. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic may have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of 2022.
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.
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INTER PARFUMS, INC. AND SUBSIDIARIES
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 is effective July 1, 2022, and we are planning to launch new fragrances under these brands in 2023.
Land and Building Acquisition - Future Headquarters in Paris
In April 2021, Interparfums SA, our 73% owned French Subsidiary, completed the acquisition of its future 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. As of March 31, 2022, $138.4 million of the purchase price, including approximately $3.4 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying balance sheet as of March 31, 2022. The purchase price has been allocated approximately $63.6 million to land and $74.8 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 $5.4 million of cash held in escrow is included in property, equipment and leasehold improvements on the accompanying balance sheet as of March 31, 2022.
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INTER PARFUMS, INC. AND SUBSIDIARIES
The acquisition was financed by a 10-year €120 million (approximately $133 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 Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021
Net Sales:
| Three months ended March 31, | ||||||||||||
| (in millions) | 2022 | 2021 | % Change | |||||||||
| European based product sales | $ | 182.2 | $ | 159.7 | 14.0 | % | ||||||
| United States based product sales | 68.5 | 38.8 | 76.7 | % | ||||||||
| $ | 250.7 | $ | 198.5 | 26.3 | % | |||||||
Net sales for the three months ended March 31, 2022, increased 26% from March 31, 2021. At comparable foreign currency exchange rates, net sales increased 30% from the first quarter of 2021. The average dollar/euro exchange rate for the current first quarter was 1.12 compared to 1.20 in the first quarter of 2021.
The current first quarter was exceptionally strong for both European and United States based operations, as net sales increased 14% and 77%, respectively, as compared to the corresponding period of the prior year. Although the results are exceptional, the strength of the U.S. dollar versus the euro muted the reported sales achieved by European brands. In addition, our U.S. distribution subsidiary for European based products encountered shipping related issues following a change in the distribution software by its logistics partner. Although those issues are now largely resolved, U.S. sales of European brands were negatively impacted in the first quarter.
For European based operations, our largest brands, Montblanc, Jimmy Choo and Coach grew first quarter 2022 sales by 22%, 7% and 22%, respectively, as compared to the corresponding period of the prior year. For U.S. operations, GUESS was the most significant contributor with first quarter 2022 brand sales 36% ahead of last year’s first quarter.
During the first quarter of 2022, we debuted Montblanc Legend Red, a new Coach signature scent and Coach Dreams Sunset extensions, and GUESS Uomo which contributed to the double digit brand sales gains. Many of our mid-sized brands, including Abercrombie Fitch, Kate Spade, Oscar de la Renta, and Van Cleef Arpels, also achieved double digit sales gains. The increase in first quarter sales also reflects incremental sales generated by MCM and Moncler, two newer brands whose initial products debuted in the second and fourth quarters of 2021, respectively. Similarly, initial sales of Ferragamo and Ungaro legacy scents contributed to the first quarter sales increase.
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The first quarter started on a strong note and we look forward 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 large number of brand extensions across many of our brands launching throughout the year plus Boucheron Singulier and Coach Open Road, entirely new men’s pillars, in the second half. Our new Paris headquarters are now staffed and operational as is our new Italian subsidiary. Plus, in July Donna Karan and DKNY fragrances will join our brand portfolio. In sum, 2022 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds, most notably limited travel retail business and supply chain disruptions.
| Net Sales to Customers by Region | Three months ended March 31, | |||||||
| (In millions) | 2022 | 2021 | ||||||
| North America | $ | 81.5 | $ | 72.6 | ||||
| Western Europe | 63.6 | 45.2 | ||||||
| Asia | 42.5 | 30.1 | ||||||
| Middle East | 24.1 | 18.9 | ||||||
| Central and South America | 18.3 | 13.3 | ||||||
| Eastern Europe | 18.0 | 15.9 | ||||||
| Other | 2.7 | 2.5 | ||||||
| $ | 250.7 | $ | 198.5 | |||||
First quarter sales in our largest market, North America, rose 12%, followed by Western Europe and Asia/Pacific where comparable quarter sales in both regions increased 41%. Our sales in the Middle East, Central and South America, and Eastern Europe were also robust, up 27%, 38% and 13%, respectively. Additionally, our travel retail business is beginning to show signs of renewed life.
| Gross Profit margin | Three months ended March 31, | |||||||
| (in millions) | 2022 | 2021 | ||||||
| European operations | ||||||||
| Net sales | $ | 182.2 | $ | 159.8 | ||||
| Cost of sales | 60.5 | 55.2 | ||||||
| Gross margin | $ | 121.7 | $ | 104.6 | ||||
| Gross margin as a % of net sales | 66.8 | % | 65.5 | % | ||||
| United States operations | ||||||||
| Net sales | $ | 68.5 | $ | 38.8 | ||||
| Cost of sales | 31.6 | 18.2 | ||||||
| Gross margin | $ | 36.9 | $ | 20.6 | ||||
| Gross margin as a % of net sales | 53.9 | % | 53.2 | % | ||||
For European based operations, gross profit margin as a percentage of net sales was 66.8% and 65.5% in the first quarters of 2022 and 2021, respectively. 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 1.12 in the 2022 first quarter compared to 1.20 in the first quarter of 2021. The margin gains in 2022 is primarily the result of the stronger U.S. dollar in 2022.
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For United States operations, gross profit margin was 53.9% and 53.2% in the first quarters of 2022 and 2021, respectively. The significant increase in sales in the first quarter of 2022 allowed us to better absorb fixed expenses such as depreciation and point of sale expenses, as compared to the corresponding period of the prior year.
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. While we have been addressing these issues and have implemented processes to mitigate the impact, prolonged disruption could have a material negative effect on our sales and gross margin.
Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $2.7 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively, 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 March 31, | |||||||
| (In millions) | 2022 | 2021 | ||||||
| European Operations | ||||||||
| Selling, general and administrative expenses | $ | 69.0 | $ | 59.4 | ||||
| Selling, general and administrative expenses as a percent of net sales | 37.9 | % | 37.2 | % | ||||
| United States Operations | ||||||||
| Selling, general and administrative expenses | $ | 28.4 | $ | 15.5 | ||||
| Selling, general and administrative expenses as a percent of net sales | 41.5 | % | 39.9 | % | ||||
For European operations, selling, general and administrative expenses increased 16.2% in the 2022 first quarter, as compared to the corresponding period of the prior year, and represented 37.9% and 37.2% of net sales in the 2022 and 2021 periods, respectively. For United States operations, selling, general and administrative expenses increased 83.7% in the 2022 first quarter, as compared to the corresponding period of the prior year, and represented 41.5% and 39.9% of net sales in the 2022 and 2021 periods, 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.
Promotion and advertising included in selling, general and administrative expenses aggregated $34.2 million and $21.8 million in the first quarters of 2022 and 2021, respectively, and represented 13.6% and 11.0% of net sales in the 2022 and 2021 periods, respectively. 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, future promotion and advertising expenditures will aggregate approximately 21% of net sales, which is in line with pre-COVID historical averages.
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Royalty expense included in selling, general and administrative expenses aggregated $19.4 million for the three months ended March 31, 2022, as compared to $15.4 million for the corresponding periods of the prior year. Royalty expense represented 7.7% of net sales for both the three months ended March 31, 2022 and 2021.
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 24.4% and 24.2% for the three months ended March 31, 2022 and 2021, respectively.
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 $133 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 fixed interest rate debt.
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) loss represents interest earned on cash and cash equivalents and short-term investments. As of March 31, 2022, short-term investments include approximately $20.7 million of marketable equity securities of other companies in the luxury goods sector. Interest and investment (income) loss for the three months ended March 31, 2022, includes approximately $3.4 million of losses on such marketable equity securities.
Income Taxes
Our consolidated effective tax rate was 24.4% and 26.8% for the three months ended March 31, 2022 and 2021, respectively.
The effective tax rate for European operations was 25% and 28% for the three months ended March 31, 2022 and 2021, respectively. The decline is primarily the result of a decrease in the French corporate income tax rate.
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INTER PARFUMS, INC. AND SUBSIDIARIES
Our effective tax rate for U.S. operations was 20.7% for the three months ended March 31, 2022, as compared to 17.0% for the corresponding period of the prior year. Our effective tax rate 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 lower effective tax rate in 2021 is 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.
Net Income
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Net income attributable to European operations | $ | 39,776 | $ | 32,439 | ||||
| Net income attributable to United States operations | 6,515 | 4,187 | ||||||
| Net income | 46,291 | 36,626 | ||||||
| Less: Net income attributable to the noncontrolling interest | 10,992 | 8,964 | ||||||
| Net income attributable to Inter Parfums, Inc. | $ | 35,299 | $ | 27,662 | ||||
Net income attributable to European operations was $39.8 million and $32.4 million for the three months ended March 31, 2022 and 2021, respectively, while net income attributable to United States operations was $6.5 million and $4.2 million for the three months ended March 31, 2022 and 2021, respectively. The 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.
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 27.6% of European operations net income for both the three months ended March 31, 2022 and 2021. Net margins attributable to Inter Parfums, Inc. as of March 31, 2022 and 2021 aggregated 14.1% and 13.9%, respectively.
Liquidity and Capital Resources
Our conservative financial tradition has enabled us to amass significant cash balances. As of March 31, 2022, we had $265 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 March 31, 2022, short-term investments include approximately $20.7 million of marketable equity securities.
As of March 31, 2022, working capital aggregated $484 million and we had a working capital ratio of 2.9 to 1. Approximately 82% of the Company’s total assets are held by European operations, and approximately $167 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 is expected to take 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 $23.9 million for the three months ended March 31, 2022, as compared to cash provided by operating activities of $32.5 million for the corresponding period of the prior year. For the three months ended March 31, 2022, working capital items used $73.2 million in cash from operating activities, as compared to $14.4 million in the 2021 period. Although from a cash flow perspective accounts receivable is up 32% from year end 2021, the balance is reasonable based on first quarter 2022 record sales levels and reflects reasonable collection activity as day’s sales outstanding was 75 days, up slightly from 71 days in the corresponding period of the prior year. From a cash flow perspective, inventory levels as of March 31, 2022, increased 16% from year end 2021. Although inventories include product needed to support new product launches, the overall balance is lower than historic levels due primarily to supply chain disruptions. 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.
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 $47 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 three months ended March 31, 2022, approximately $4.9 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 March 31, 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 $28 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 March 31, 2022 and 2021.
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. In February 2021, our Board of Directors authorized a reinstatement of 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 June 30, 2022, to shareholders of record on June 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 three months ended March 31, 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 March 31, 2022, we had foreign currency contracts in the form of forward exchange contracts of approximately U.S. $153.0 million and GB £1.0 million and JPY ¥150 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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INTER PARFUMS, INC. AND SUBSIDIARIES
Item 6. Exhibits.
The following documents are filed herewith:
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 10th day of May 2022.
| INTER PARFUMS, INC. | |||
| By: | /s/ Russell Greenberg | ||
| Executive Vice President and Chief Financial Officer |
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