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, 2022, included in our annual report filed on Form 10-K.
The
results of operations for the three months ended March 31, 2023, are not necessarily indicative of the results to be expected
for the entire fiscal year.
INTER PARFUMS,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
ASSETS |
| |
March 31, 2023 | | |
December 31, 2022 | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 149,055 | | |
$ | 104,713 | |
Short-term investments | |
| 88,702 | | |
| 150,833 | |
Accounts receivable, net | |
| 241,948 | | |
| 197,584 | |
Inventories | |
| 323,700 | | |
| 289,984 | |
Receivables, other | |
| 27,779 | | |
| 28,803 | |
Other current assets | |
| 20,346 | | |
| 15,650 | |
Income taxes receivable | |
| 71 | | |
| 157 | |
Total current assets | |
| 851,601 | | |
| 787,724 | |
Property, equipment and leasehold improvements, net | |
| 169,036 | | |
| 166,722 | |
Right-of-use assets, net | |
| 26,901 | | |
| 27,964 | |
Trademarks, licenses and other intangible assets, net | |
| 294,300 | | |
| 290,853 | |
Deferred tax assets | |
| 12,543 | | |
| 11,159 | |
Other assets | |
| 25,825 | | |
| 24,120 | |
Total assets | |
$ | 1,380,206 | | |
$ | 1,308,542 | |
| |
| | | |
| | |
LIABILITIES AND EQUITY | |
Current liabilities: | |
| | | |
| | |
Loans payable - banks | |
$ | 18,000 | | |
$ | — | |
Current portion of long-term debt | |
| 29,092 | | |
| 28,547 | |
Current portion of lease liabilities | |
| 5,310 | | |
| 5,296 | |
Accounts payable – trade | |
| 93,053 | | |
| 88,388 | |
Accrued expenses | |
| 190,305 | | |
| 213,621 | |
Income taxes payable | |
| 26,409 | | |
| 8,715 | |
Total current liabilities | |
| 362,169 | | |
| 344,567 | |
| |
| | | |
| | |
Long–term debt, less current portion | |
| 145,128 | | |
| 151,494 | |
| |
| | | |
| | |
Lease liabilities, less current portion | |
| 23,302 | | |
| 24,335 | |
| |
| | | |
| | |
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 32,012,950 and 31,967,300
shares at March 31, 2023 and December 31, 2022, respectively | |
| 32 | | |
| 32 | |
Additional paid-in capital | |
| 95,429 | | |
| 90,186 | |
Retained earnings | |
| 654,440 | | |
| 620,095 | |
Accumulated other comprehensive loss | |
| (48,440 | ) | |
| (56,056 | ) |
Treasury stock, at cost, 9,907,865 and 9,864,805 shares at March 31, 2023 and December 31, 2022, respectively | |
| (43,055 | ) | |
| (37,475 | ) |
Total Inter Parfums, Inc. shareholders’ equity | |
| 658,406 | | |
| 616,782 | |
Noncontrolling interest | |
| 191,201 | | |
| 171,364 | |
Total equity | |
| 849,607 | | |
| 788,146 | |
Total liabilities and equity | |
$ | 1,380,206 | | |
$ | 1,308,542 | |
See
notes to consolidated financial statements.
INTER PARFUMS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands except per share data)
(Unaudited)
| |
|
|
|
|
| |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Net sales | |
$ | 311,723 | | |
$ | 250,678 | |
| |
| | | |
| | |
Cost of sales | |
| 108,766 | | |
| 92,020 | |
| |
| | | |
| | |
Gross margin | |
| 202,957 | | |
| 158,658 | |
| |
| | | |
| | |
Selling, general and administrative expenses | |
| 112,678 | | |
| 97,441 | |
| |
| | | |
| | |
Income from operations | |
| 90,279 | | |
| 61,217 | |
| |
| | | |
| | |
Other expenses (income): | |
| | | |
| | |
Interest expense | |
| 2,357 | | |
| 883 | |
Loss (gain) on foreign currency | |
| 759 | | |
| (2,239 | ) |
Interest and investment (income) loss | |
| (5,382 | ) | |
| 1,466 | |
Other income | |
| (41 | ) | |
| (116 | ) |
| |
| | | |
| | |
Nonoperating Income (Expense) |
|
|
(2,307 |
) |
|
|
(6 |
) |
| |
| | | |
| | |
Income before income taxes | |
| 92,586 | | |
| 61,223 | |
| |
| | | |
| | |
Income taxes | |
| 21,678 | | |
| 14,932 | |
| |
| | | |
| | |
Net income | |
| 70,908 | | |
| 46,291 | |
| |
| | | |
| | |
Less: Net income attributable to the noncontrolling interest | |
| 16,840 | | |
| 10,992 | |
| |
| | | |
| | |
Net income attributable to Inter Parfums, Inc. | |
$ | 54,068 | | |
$ | 35,299 | |
| |
| | | |
| | |
Earnings per share: | |
| | | |
| | |
| |
| | | |
| | |
Net income attributable to Inter Parfums, Inc. common shareholders: | |
| | | |
| | |
Basic | |
$ | 1.69 | | |
$ | 1.11 | |
Diluted | |
$ | 1.68 | | |
$ | 1.10 | |
| |
| | | |
| | |
Weighted average number of shares outstanding: | |
| | | |
| | |
Basic | |
| 32,018 | | |
| 31,840 | |
Diluted | |
| 32,159 | | |
| 32,010 | |
| |
| | | |
| | |
Dividends declared per share | |
$ | 0.625 | | |
$ | 0.50 | |
See
notes to consolidated financial statements.
INTER PARFUMS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
thousands)
(Unaudited)
| |
|
|
|
|
| |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Comprehensive income: | |
| | | |
| | |
| |
| | | |
| | |
Net income | |
$ | 70,908 | | |
$ | 46,291 | |
| |
| | | |
| | |
Other comprehensive income: | |
| | | |
| | |
| |
| | | |
| | |
Net derivative instrument gain (loss), net of tax
| |
| (4,166 | ) | |
| 261 | |
| |
| | | |
| | |
Transfer from OCI into earnings
| |
| 1,709 | | |
| 992 | |
| |
| | | |
| | |
Translation adjustments, net of tax | |
| 13,489 | | |
| (12,441 | ) |
| |
| | | |
| | |
Comprehensive income | |
| 81,940 | | |
| 35,103 | |
| |
| | | |
| | |
Comprehensive income attributable to the noncontrolling interests: | |
| | | |
| | |
| |
| | | |
| | |
Net income | |
| 16,840 | | |
| 10,992 | |
| |
| | | |
| | |
Other comprehensive income: | |
| | | |
| | |
| |
| | | |
| | |
Net derivative instrument gain (loss), net of tax
| |
| (206 | ) | |
| 72 | |
| |
| | | |
| | |
Translation adjustments, net of tax | |
| 3,622 | | |
| (3,419 | ) |
| |
| | | |
| | |
Comprehensive income attributable to the noncontrolling interests | |
| 20,256 | | |
| 7,645 | |
| |
| | | |
| | |
Comprehensive income attributable to Inter Parfums, Inc. | |
$ | 61,684 | | |
$ | 27,458 | |
See
notes to consolidated financial statements.
INTER PARFUMS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(In
thousands)
(Unaudited)
| |
|
|
|
|
| |
| |
Three months ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Common stock, beginning and end of period | |
$ | 32 | | |
$ | 32 | |
| |
| - | | |
| - | |
| |
| 32 | | |
| 32 | |
Additional paid-in capital, beginning of period | |
| 90,186 | | |
| 87,132 | |
Shares issued upon exercise of stock options | |
| 4,929 | | |
| 708 | |
Share-based compensation | |
| 314 | | |
| 341 | |
Additional paid-in capital, end of period | |
| 95,429 | | |
| 88,181 | |
| |
| | | |
| | |
Retained earnings, beginning of period | |
| 620,095 | | |
| 560,663 | |
Net income | |
| 54,068 | | |
| 35,299 | |
Dividends | |
| (20,023 | ) | |
| (15,921 | ) |
Share-based compensation | |
| 300 | | |
| 53 | |
Retained earnings, end of period | |
| 654,440 | | |
| 580,094 | |
| |
| | | |
| | |
Accumulated other comprehensive loss, beginning of period | |
| (56,056 | ) | |
| (38,432 | ) |
Foreign currency translation adjustment, net of tax | |
| 9,867 | | |
| (9,022 | ) |
Transfer from other comprehensive income into earnings | |
| 1,709 | | |
| 992 | |
Net derivative instrument gain (loss), net of tax | |
| (3960 | ) | |
| 189 | |
Accumulated other comprehensive loss, end of period | |
| (48,440 | ) | |
| (46,273 | ) |
| |
| - | | |
| - | |
Treasury stock, beginning of period | |
| (37,475 | ) | |
| (37,475 | ) |
Shares repurchased | |
| (5,580 | ) | |
| — | |
Treasury stock, end of period | |
| (43,055 | ) | |
| (37,475 | ) |
| |
| | | |
| | |
Noncontrolling interest, beginning of period | |
| 171,364 | | |
| 166,412 | |
Net income | |
| 16,840 | | |
| 10,992 | |
Foreign currency translation adjustment, net of tax | |
| 3,622 | | |
| (3,419 | ) |
Net derivative instrument gain (loss), net of tax | |
| (206 | ) | |
| 72 | |
Share-based compensation (adjustment) | |
| 54 | | |
| 11 | |
Transfer of subsidiary shares purchased | |
| — | | |
| 54 | |
Dividends | |
| (473 | ) | |
| (440 | ) |
Noncontrolling interest, end of period | |
| 191,201 | | |
| 173,682 | |
| |
| 788,146 | | |
| 738,332 | |
| |
| 70,908 | | |
| 46,291 | |
Total equity | |
$ | 849,607 | | |
$ | 758,241 | |
See
notes to consolidated financial statements.
INTER PARFUMS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
| |
|
|
|
|
| |
| |
Three months ended March 31, | |
| |
2023 | | |
2022 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 70,908 | | |
$ | 46,291 | |
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 4,115 | | |
| 3,124 | |
Provision for doubtful accounts | |
| 220 | | |
| 1,048 | |
Noncash stock compensation | |
| 633 | | |
| 654 | |
Share of income of equity investment | |
| (41 | ) | |
| (116 | ) |
Noncash lease expense | |
| 1,324 | | |
| 1,881 | |
Deferred tax provision | |
| (1,188 | ) | |
| 135 | |
Change in fair value of derivatives | |
| 1,518 | | |
| (3,803 | ) |
Changes in: | |
| | | |
| | |
Accounts receivable | |
| (42,670 | ) | |
| (50,316 | ) |
Inventories | |
| (29,688 | ) | |
| (31,195 | ) |
Other assets | |
| (5,640 | ) | |
| (2,869 | ) |
Operating lease liabilities | |
| (1,293 | ) | |
| (1,671 | ) |
Accounts payable and accrued expenses | |
| (23,327 | ) | |
| 3,203 | |
Income taxes, net | |
| 17,771 | | |
| 9,690 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (7,358 | ) | |
| (23,944 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of short-term investments | |
| (42,835 | ) | |
| (2,243 | ) |
Proceeds from sale of short-term investments | |
| 107,045 | | |
| 3,982 | |
Purchases of property, equipment and leasehold improvements | |
| (2,415 | ) | |
| (12,895 | ) |
Payment for intangible assets acquired | |
| (151 | ) | |
| (647 | ) |
| |
| | | |
| | |
Net cash provided by (used in) investing activities | |
| 61,644 | | |
| (11,803 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of long-term debt | |
| 17,989 | | |
| — | |
Repayment of long-term debt | |
| (9,397 | ) | |
| (4,379 | ) |
Proceeds from exercise of options | |
| 4,929 | | |
| 708 | |
Dividends paid | |
| (20,023 | ) | |
| (15,921 | ) |
Dividends paid to noncontrolling interest | |
| (473 | ) | |
| (440 | ) |
Purchase of treasury stock | |
| (5,580 | ) | |
| — | |
| |
| | | |
| | |
Net cash used in financing activities | |
| (12,555 | ) | |
| (20,032 | ) |
| |
| | | |
| | |
Effect of exchange rate changes on cash | |
| 2,611 | | |
| (2,486 | ) |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| 44,342 | | |
| (58,265 | ) |
| |
| | | |
| | |
Cash and cash equivalents - beginning of period | |
| 104,713 | | |
| 168,387 | |
| |
| | | |
| | |
Cash and cash equivalents - end of period | |
$ | 149,055 | | |
$ | 110,122 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | 1,563 | | |
$ | 797 | |
Income taxes | |
| 4,816 | | |
| 5,193 | |
See
notes to consolidated financial statements.
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, 2022.
| 2. | Impact
of COVID-19 Pandemic: |
Our business has continued to significantly
improve throughout 2022 and the first quarter of 2023 after the disastrous effects of the COVID-19 Pandemic starting in early 2020,
as retail stores reopened, and consumers increased online purchasing. The introduction of variants of COVID-19 in various parts
of the world continues to cause the temporary re-implementation of governmental restrictions to prevent further spread of the virus.
In addition, international air travel remains curtailed in several jurisdictions due to both governmental restrictions and consumer
health concerns. While COVID-19 had significantly restricted international travel, the travel retail business has picked up. Lastly,
we have experienced 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.
Lacoste
In
December 2022, we closed a transaction agreement with Lacoste, whereby an exclusive and worldwide license was granted for the
production and distribution of Lacoste brand perfumes and cosmetics. Our rights under this license are subject to certain minimum
advertising expenditures and royalty payments as are customary in our industry. The license becomes effective in January 2024
and will last for 15 years.
Dunhill
In
April 2022, we announced that the Dunhill fragrance license will expire on September 30, 2023 and will not be renewed. The Company
will continue to produce and sell Dunhill fragrances until the license expires and will maintain the right to sell-off remaining
Dunhill fragrance inventory for a limited time as is customary in the fragrance 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 gained 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.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Rochas
Fashion
Effective
January 1, 2021, we entered into a new license agreement modifying our Rochas fashion business model. The new agreement calls
for a reduction in royalties to be received. As a result, in the first quarter of 2021, we took a $2.4 million impairment charge
on our Rochas fashion trademark. In the fourth quarter of 2022, we again took a $6.8 million impairment charge on the Rochas fashion
trademark after an independent expert concluded that the valuation of the trademark was $11.3 million. The new license also contains
an option for the licensee to buy-out the Rochas fashion trademarks in June 2025 at its then fair market value.
Land
and Building Acquisition - New Headquarters in Paris
In
April 2021, Interparfums SA, our 72% owned French subsidiary, completed the acquisition of its new 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 included the complete renovation of the site. As of March 31, 2023, $151 million of the purchase price, including
approximately $4.5 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying
balance sheet. The purchase price has been allocated approximately $62.3 million to land and $88.7 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 $1.8 million
of cash held in escrow is also included in property, equipment and leasehold improvements on the accompanying balance sheet as
of March 31, 2023.
The
acquisition was financed by a 10-year €120 million (approximately $130.5 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. The swap effectively exchanges the variable interest rate to a fixed rate of approximately 1.1%.
| 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.
Inventories
consist of the following:
(In thousands) | |
March 31, 2023 | | |
December 31,
2022 | |
Raw materials and component parts | |
$ | 155,013 | | |
$ | 146,772 | |
Finished goods | |
| 168,687 | | |
| 143,212 | |
| |
| | | |
| | |
Inventories | |
$ | 323,700 | | |
$ | 289,984 | |
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
| 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, 2023 |
|
|
|
|
|
|
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 |
|
$ |
88,702 |
|
|
$ |
681 |
|
|
$ |
87,210 |
|
|
$ |
811 |
|
Interest rate swaps |
|
|
6,429 |
|
|
|
|
|
|
|
6,429 |
|
|
|
|
|
Foreign currency forward exchange contracts not accounted for using hedge accounting |
|
|
1,539 |
|
|
|
— |
|
|
|
1,539 |
|
|
|
— |
|
Foreign currency forward exchange contracts accounted for using hedge accounting |
|
|
339 |
|
|
$ |
— |
|
|
|
339 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
97,010 |
|
|
$ |
681 |
|
|
$ |
95,517 |
|
|
$ |
811 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
|
|
|
Fair Value Measurements at December 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 | |
$ | 150,833 | | |
$ | 19,861 | | |
$ | 130,174 | | |
$ | 798 | |
Interest rate swaps | |
| 6,758 | | |
| — | | |
| 6,758 | | |
| — | |
Foreign currency forward exchange contracts accounted for using hedge accounting | |
| 1,189 | | |
| — | | |
| 1,189 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 158,780 | | |
$ | 19,861 | | |
$ | 138,122 | | |
$ | 798 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Foreign currency forward exchange contracts not accounted for using hedge accounting | |
| 68 | | |
| — | | |
| 68 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Total liabilities | |
$ | 68 | | |
$ | — | | |
$ | 68 | | |
$ | — | |
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.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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.
In December 2022, to finance the acquisition
of the Lacoste trademark, the Company entered into a €50 million ($54.4 million) 4-year term loan with a variable interest
rate. This variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum. This swap is a hedged
derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in other comprehensive income.
In
connection with the April 2021 acquisition of the office building complex in Paris, €120 million (approximately $130.5 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 fixed rate of approximately 1.1%. 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 three months ended March 31, 2023 and 2022.
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, 2023, resulted in a net asset and is included in other current assets on the accompanying balance
sheet.
At
March 31, 2023, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S.
$37 million which all have maturities of less than one year.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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, 2023, the weighted average remaining lease term was 5.5 years and the weighted average discount rate used to determine
the operating lease liability was 2.6%. Rental expense related to operating leases was $1.4 million and $1.8 million for the three
months ended March 31, 2023 and 2022, respectively. Operating lease payments included in operating cash flows totaled $1.3
million and $1.7 million for the three months ended March 31, 2023 and 2022, respectively, and there were no noncash additions
to operating lease assets for the three months ended March 31, 2023 and 2022.
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 three months ended March
31, 2023 and 2022 aggregated $0.09 million and $0.10 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 three months ended March 31, 2023:
| |
Number of Shares | | |
Weighted Average
Grant-Date Fair Value | |
Nonvested options – beginning of period | |
| 168,730 | | |
$ | 16.31 | |
Nonvested options granted | |
| — | | |
| — | |
Nonvested options vested or forfeited | |
| (23,080 | ) | |
$ | 13.58 | |
Nonvested options – end of period | |
| 145,650 | | |
$ | 16.74 | |
Share-based
payment expense decreased income before income taxes by $0.63 million and $0.65 million for the three months ended March 31, 2023
and 2022, respectively, and decreased income attributable to Inter Parfums, Inc. by $0.43 million and $0.44 million for the three
months ended March 31, 2023 and 2022, respectively.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
following table summarizes stock option information as of March 31, 2023:
| |
Shares | | |
Weighted Average
Exercise Price | |
| |
| | |
| |
Outstanding at January 1, 2023 | |
| 441,580 | | |
$ | 67.30 | |
Options forfeited | |
| (15,480 | ) | |
| 70.48 | |
Options exercised | |
| (88,710 | ) | |
| 55.57 | |
| |
| | | |
| | |
Outstanding at March 31, 2023 | |
| 337,390 | | |
$ | 70.24 | |
| |
| | | |
| | |
Options exercisable | |
| 191,740 | | |
$ | 61.38 | |
Options available for future grants | |
| 574,455 | | |
| | |
As
of March 31, 2023, the weighted average remaining contractual life of options outstanding is 3.56 years (1.75 years for options
exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $24.3 million and $15.5 million,
respectively; and unrecognized compensation cost related to stock options outstanding aggregated $2.4 million.
Cash
proceeds, tax benefits and intrinsic value related to stock options exercised during the three months ended March 31, 2023 and
2022 were as follows:
(In thousands) | |
March 31, 2023 | | |
March 31, 2022 | |
| |
| | |
| |
Cash proceeds from stock options exercised | |
$ | 4,929 | | |
$ | 708 | |
Tax benefits | |
| 780 | | |
| 75 | |
Intrinsic value of stock options exercised | |
| 5,403 | | |
| 635 | |
There
were no options granted during the three months ended March 31, 2023 and March 31, 2022.
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 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.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
fair value of the grant had been determined based on the quoted stock price of Interparfums SA shares as reported by the Euronext
on the date of grant. The estimated number of shares to be distributed of 85,107 has been determined taking into account employee
turnover. The aggregate cost of the grant of approximately $4.1 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 year ended December 31, 2022, the Company acquired 63,281 shares at an aggregate cost of $3.0 million.
In the first quarter of 2023, the Company initiated a small share repurchase program, and over the course the course of the first quarter of 2023,
the Company repurchased 43,060
shares at a cost of $5.58
million. These shares are classified as treasury shares on the accompanying balance sheet. The Company plans to continue
repurchasing shares throughout 2023.
All
share purchases and issuances have been classified as equity transactions on the accompanying balance sheet.
| 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 | |
(In thousands) | |
March 31, | |
| |
2023 | | |
2022 | |
Numerator: | |
| | |
| |
Net income attributable to Inter Parfums, Inc. | |
$ | 54,068 | | |
$ | 35,299 | |
Denominator: | |
| | | |
| | |
Weighted average shares | |
| 32,018 | | |
| 31,840 | |
Effect of dilutive securities: | |
| | | |
| | |
Stock options | |
| 141 | | |
| 170 | |
Denominator for diluted earnings per share | |
| 32,159 | | |
| 32,010 | |
| |
| | | |
| | |
Earnings per share: | |
| | | |
| | |
Net income attributable to Inter Parfums, Inc. common shareholders: | |
| | | |
| | |
Basic | |
$ | 1.69 | | |
$ | 1.11 | |
Diluted | |
| 1.68 | | |
| 1.10 | |
There
were no antidilutive potential common shares outstanding for the three months ended March 31, 2023 and March 31, 2022.
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:
Information on the Company’s operations by segments is as follows:
(In thousands) | |
Three months ended March 31, | |
| |
2023 | | |
2022 | |
Net sales: | |
| | | |
| | |
United States | |
$ | 81,454 | | |
$ | 68,502 | |
Europe | |
| 230,269 | | |
| 182,182 | |
Eliminations | |
| — | | |
| (6 | ) |
| |
| | | |
| | |
| |
$ | 311,723 | | |
$ | 250,678 | |
| |
| | | |
| | |
Net income attributable to Inter Parfums, Inc.: | |
| | | |
| | |
United States | |
$ | 10,343 | | |
$ | 6,514 | |
Europe | |
| 43,725 | | |
| 28,785 | |
| |
| | | |
| | |
| |
$ | 54,068 | | |
$ | 35,299 | |
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Total Assets: | |
| | | |
| | |
United States | |
$ | 288,927 | | |
$ | 278,090 | |
Europe | |
| 1,110,902 | | |
| 1,052,004 | |
Eliminations | |
| (19,623 | ) | |
| (21,522 | ) |
| |
$ | 1,380,206 | | |
$ | 1,308,542 | |
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, 2022, 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 72% owned subsidiary in Paris, Interparfums SA, which
is also a publicly traded company as 28% of Interparfums SA shares trade on the NYSE Euronext.
We
produce and distribute through our European operations, fragrance products primarily under license agreements with brand owners,
and European based fragrance product sales represented approximately 74% and 73% of net sales for the three months ended March
31, 2023 and 2022, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo,
Karl Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, Rochas and Van Cleef & Arpels, whose products
are distributed in over 120 countries around the world. In addition, our exclusive and worldwide license for the production and
distribution of Lacoste brand perfumes and cosmetics becomes effective in January 2024.
Through
our United States operations, we also market fragrance and fragrance related products. United States operations represented 26%
and 27% of net sales for the three months ended March 31, 2023 and 2022, 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.
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, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Montblanc | |
| 20 | % | |
| 19 | % |
Jimmy Choo | |
| 20 | % | |
| 15 | % |
Coach | |
| 15 | % | |
| 15 | % |
GUESS | |
| 9 | % | |
| 11 | % |
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 above 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.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Impact
of COVID-19 Pandemic
Please
see our discussion of the Impact of the COVID-19 Pandemic, which is incorporated by reference to note 2 to the Consolidated Financial
Statements contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
Recent
Important Events
Please
see our discussion of Recent Important Events, which is incorporated by reference to note 3 to the Consolidated Financial Statements
contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
Discussion
of Critical Accounting Policies
Information
regarding our critical accounting policies can be found in our 2022 Annual Report on Form 10-K filed with the SEC.
Results
of Operations
Three
Months Ended March 31, 2023 as Compared to the Three Months Ended March 31, 2022
Net
Sales:
| |
Three months ended March 31, | |
(in millions) | |
2023 | | |
2022 | | |
% Change | |
| |
| |
European based product sales | |
$ | 230.3 | | |
$ | 182.2 | | |
| 26.4 | % |
United States based product sales | |
| 81.4 | | |
| 68.5 | | |
| 18.9 | % |
| |
$ | 311.7 | | |
$ | 250.7 | | |
| 24.4 | % |
Net
sales for the three months ended March 31, 2023 increased 24% from March 31, 2022. At comparable foreign currency exchange rates,
net sales increased 29% from the first quarter of 2022. The average dollar/euro exchange rate for the current first quarter was
1.07 compared to 1.12 in the first quarter of 2022.
The
current first quarter was exceptionally strong for both European and United States based operations, as net sales increased 26%
and 19%, respectively, as compared to the corresponding period of the prior year.
For
European based operations, our largest brands, Jimmy Choo, Montblanc and Coach sales rose 63%, 28% and 24%, respectively,
as compared to the corresponding period of the prior year. Our U.S. operations also had a strong start growing 19% off a high
2022 base when first quarter sales had expanded 77%. This increase was driven by the addition and extension of Donna Karan and
DKNY to our portfolio and double-digit growth for Ferragamo and Oscar de la Renta, following successful brand extensions.
INTER PARFUMS,
INC. AND SUBSIDIARIES
During
the first quarter of 2023, we debuted Jimmy Choo Rose Passion and Montblanc Signature Absolue, which contributed
to the double digit brand sales gains. Many of our mid-sized brands, including Boucheron, Ferragamo, Karl Lagerfeld, and Oscar
de la Renta, also achieved double digit sales gains. Additionally, we introduced brand extensions within established lines for
Abercrombie & Fitch, and MCM. After the challenging lockdowns, the progressive reopening of China buoyed the Ferragamo and
Anna Sui brands.
As
expected, the implementation of our enterprise resource planning software weighed on our quarterly results, impacting GUESS disproportionately,
which was flat off a high base in 2022, but we have strong orders that we will be fulfilling during the second quarter. However,
overall our first quarter started the year on a strong note, 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 large number of brand extensions
across many of our brands launching throughout the year, plus Montblanc Explorer Platinum, Coach Green and Coach
Love, later in the year. In sum, 2023 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) | |
2023 | | |
2022 | |
| |
| | |
| |
North America | |
$ | 111.2 | | |
$ | 81.5 | |
Western Europe | |
| 77.2 | | |
| 63.6 | |
Asia | |
| 46.0 | | |
| 42.5 | |
Middle East | |
| 25.4 | | |
| 24.1 | |
Central and South America | |
| 26.2 | | |
| 18.3 | |
Eastern Europe | |
| 22.5 | | |
| 18.0 | |
Other | |
| 3.1 | | |
| 2.7 | |
| |
$ | 311.7 | | |
$ | 250.7 | |
First quarter sales in our largest market, North America, rose 36%, followed by Western Europe and Asia/Pacific
where comparable quarter sales in both regions increased 21% and 8%, respectively. Our sales in Central and South America, Eastern
Europe and the Middle East were also robust, up 43%, 25% and 5%, respectively. Additionally, our travel retail business is beginning
to show signs of renewed life.
Gross Profit margin | |
Three months ended March 31, | |
(in millions) | |
2023 | | |
2022 | |
| |
| | |
| |
European operations | |
| | | |
| | |
Net sales | |
$ | 230.3 | | |
$ | 182.2 | |
Cost of sales | |
| 74.3 | | |
| 60.5 | |
Gross margin | |
$ | 156.0 | | |
$ | 121.7 | |
Gross margin as a % of net sales | |
| 67.8 | % | |
| 66.8 | % |
| |
| | | |
| | |
United States operations | |
| | | |
| | |
Net sales | |
$ | 81,4 | | |
$ | 68.5 | |
Cost of sales | |
| 34.5 | | |
| 31.6 | |
Gross margin | |
$ | 46.9 | | |
$ | 36.9 | |
Gross margin as a % of net sales | |
| 57.6 | % | |
| 53.9 | % |
INTER PARFUMS,
INC. AND SUBSIDIARIES
For
European based operations, gross profit margin as a percentage of net sales was 67.8% and 66.8% in the first quarters of 2023
and 2022, respectively as we have benefited from our pricing actions and favorable exchange rate. We carefully monitor movements
in foreign currency exchange rates as more than 50% of our European based operations net sales are denominated in U.S. dollars, while
most of our costs are incurred in euro. From a gross 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 1.07 in the 2023 first quarter
as compared to 1.12 in the first quarter of 2022.
For United States operations, gross profit margin
was 57.6% and 53.9% in the first quarters of 2023 and 2022, respectively. The significant margin expansion stems from a number
of factors. Firstly, for the most part, the price increases we took early 2023 weren’t offset by a higher cost of goods given
our inventory coverage and FIFO accounting. Secondly, we are seeing favorable brand and channel mix, as a higher portion of our
sales are being sold directly to retailers as opposed to third-party distributors. Lastly, the significant increase in sales in
the first quarter of 2023 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 $3.9 million and $2.7 million for the
three months ended March 31, 2023 and 2022, 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) | |
2023 | | |
2022 | |
| |
| | |
| |
European Operations | |
| | | |
| | |
Selling, general and administrative expenses | |
$ | 77.3 | | |
$ | 69.0 | |
Selling, general and administrative expenses as a percent of net sales | |
| 33.6 | % | |
| 37.9 | % |
| |
| | | |
| | |
United States Operations | |
| | | |
| | |
Selling, general and administrative expenses | |
$ | 35.4 | | |
$ | 28.4 | |
Selling, general and administrative expenses as a percent of net sales | |
| 43.5 | % | |
| 41.5 | % |
For
European operations, selling, general and administrative expenses increased 12.0% in the 2023 first quarter, as compared to the
corresponding period of the prior year, and represented 33.6% and 37.9% of net sales in the 2023 and 2022 periods, respectively.
For United States operations, selling, general and administrative expenses increased 24.7% in the 2023 first quarter, as compared
to the corresponding period of the prior year, and represented 43.5% and 41.5% of net sales in the 2023 and 2022 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 as well as the annualization impact of the structural investments
in our US operations that we made throughout 2022 in order to support the new licenses of $4.0 million.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Promotion
and advertising included in selling, general and administrative expenses aggregated $35.2 million and $34.2 million in the first
quarters of 2023 and 2022, respectively, and represented 11.3% and 13.6% of net sales in the 2023 and 2022 periods, respectively.
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.
Royalty
expense included in selling, general and administrative expenses aggregated $24.1 million for the three months ended March 31,
2023, as compared to $19.4 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, 2023 and 2022.
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 29.0% and 24.4% for the three months ended March 31, 2023 and 2022, 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
$130.5 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%. The swap effectively exchanges the variable interest rate to a fixed rate of approximately 1.1%.
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. Above 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. In the first quarter of 2023, the Company sold these marketable securities which generated a gain of $3.1 million.
Interest and investment (income) loss for the three months ended March 31, 2023, includes approximately $3.4 million of losses
on such marketable equity securities.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Income
Taxes
Our
consolidated effective tax rate was 23.4% and 24.4% for the three months ended March 31, 2023 and 2022, respectively.
The
effective tax rate for European operations was 25% for both the three months ended March 31, 2023 and 2022.
Our
effective tax rate for U.S. operations was 12.7% for the three months ended March 31, 2023, as compared to 20.7% 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.
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, | |
| |
2023 | | |
2022 | |
| |
(In thousands) | |
| |
| | |
| |
Net income attributable to European operations | |
$ | 60,565 | | |
$ | 39,776 | |
Net income attributable to United States operations | |
| 10,343 | | |
| 6,515 | |
Net income | |
| 70,908 | | |
| 46,291 | |
Less: Net income attributable to the noncontrolling interest | |
| 16,840 | | |
| 10,992 | |
Net income attributable to Inter Parfums, Inc. | |
$ | 54,068 | | |
$ | 35,299 | |
Net
income attributable to European operations was $60.6 million and $39.8 million for the three months ended March 31, 2023 and 2022,
respectively, while net income attributable to United States operations was $10.3 million and $6.5 million for the three months
ended March 31, 2023 and 2022, respectively. The significant fluctuations in net income for both European operations and United
States operations are directly related to the previous discussions pertaining to changes in sales, gross margin, and selling,
general and administrative expenses.
The
noncontrolling interest arises from our 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company
as 28% 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 27.8% and 27.6% of European operations net income for the
three months ended March 31, 2023 and 2022, respectively. Net margins attributable to Inter Parfums, Inc. as of March 31, 2023
and 2022 aggregated 17.3% and 14.1%, respectively.
INTER PARFUMS,
INC. AND SUBSIDIARIES
Liquidity
and Capital Resources
Our
conservative financial tradition has enabled us to amass significant cash balances. As of March 31, 2023, we had $238 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, 2023, short-term investments include approximately
$0.7 million of marketable equity securities.
As
of March 31, 2023, working capital aggregated $489 million and we had a working capital ratio of 2.4 to 1. Approximately 80% of
the Company’s total assets are held by European operations, and approximately $253 million of trademarks, licenses and other
intangible assets are also held by European operations.
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 2039. 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 2022 annual report on Form 10-K, which is incorporated
by reference herein. Future advertising commitments are estimated based on planned future sales for the license terms that were
in effect at December 31, 2022, 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. In December 2022, we entered into a long-term global licensing agreement for the creation,
development and distribution of fragrances and fragrance-related products under the Lacoste brand. This new license takes effect
January 2024.
Cash
used in operating activities aggregated $7.4 million and $23.9 million for the three months ended March 31, 2023 and 2022, respectively.
For the three months ended March 31, 2023, working capital items used $84.8 million in cash from operating activities, as compared
to $73.2 million in the 2022 period. Although from a cash flow perspective accounts receivable is up 22% from year end 2022, the
balance is reasonable based on first quarter 2023 record sales levels and reflects reasonable collection activity as day’s
sales outstanding was 69 days, down slightly from 75 days in the corresponding period of the prior year. From a cash flow perspective,
inventory levels as of March 31, 2023, increased 10% from year end 2022. Although inventories include components 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 provided by investing activities in 2023 reflect purchases and sales of short-term investments. These investments include certificates
of deposit with maturities greater than three months. Approximately $40 million of such certificates of deposit contain penalties
where we would forfeit a portion of the interest earned in the event of early withdrawal.
INTER PARFUMS,
INC. AND SUBSIDIARIES
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. Capital expenditures also include amounts
for office fixtures, computer equipment and industrial equipment needed at our distribution centers.
Our
short-term financing requirements are expected to be met by available cash on hand at March 31, 2023, and short-term credit lines
provided by domestic and foreign banks. The principal credit facilities for 2023 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 was $18 million of short-term borrowings outstanding pursuant to these facilities
as of March 31, 2023 and no short-term borrowings outstanding as of March 31, 2022.
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 and in February 2022, our Board authorized a 100% increase in the annual dividend to $2.00 per share. In February
2023 the Board of Directors further increased the annual dividend to $2.50 per share. The next quarterly cash dividend of $0.625
per share is payable on June 30, 2023, to shareholders of record on June 15, 2023.
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, 2023.
INTER PARFUMS,
INC. AND SUBSIDIARIES