UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(MARK ONE)
for the quarterly period ended
OR
for the transition period from ___________to ________.
Commission File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
| ( | ||
| (Registrants telephone number, including area code) |
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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act).
| Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging Growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
At May 11, 2020, there were
INTER PARFUMS, INC. AND SUBSIDIARIES
INDEX
i
INTER PARFUMS, INC. AND SUBSIDIARIES
Part I. Financial Information
| Item 1. | Financial Statements |
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2019 included in our annual report filed on Form 10-K.
The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year.
Page 1
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
(Unaudited)
| March 31, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Receivables, other | ||||||||
| Other current assets | ||||||||
| Income taxes receivable | ||||||||
| Total current assets | ||||||||
| Equipment and leasehold improvements, net | ||||||||
| Right-of-use assets, net | ||||||||
| Trademarks, licenses and other intangible assets, net | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | $ | ||||||
| Current portion of lease liabilities | ||||||||
| Accounts payable – trade | ||||||||
| Accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Dividends payable | ||||||||
| Total current liabilities | ||||||||
| Long–term debt, less current portion | ||||||||
| Lease liabilities, less current portion | ||||||||
| Equity: | ||||||||
| Inter Parfums, Inc. shareholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Total Inter Parfums, Inc. shareholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See notes to consolidated financial statements.
Page 2
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross margin | ||||||||
| Selling, general and administrative expenses | ||||||||
| Income from operations | ||||||||
| Other expenses (income): | ||||||||
| Interest expense | ||||||||
| (Gain) loss on foreign currency | ( | ) | ||||||
| Interest income | ( | ) | ( | ) | ||||
| ( | ) | ( | ) | |||||
| Income before income taxes | ||||||||
| Income taxes | ||||||||
| Net income | ||||||||
| Less: Net income attributable to the noncontrolling interest | ||||||||
| Net income attributable to Inter Parfums, Inc. | $ | $ | ||||||
| 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, | ||||||||
| 2020 | 2019 | |||||||
| Comprehensive income: | ||||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Net derivative instrument gain (loss), net of tax | ( | ) | ||||||
| Transfer from other comprehensive income into earnings | ( | ) | ( | ) | ||||
| Translation adjustments, net of tax | ( | ) | ( | ) | ||||
| Comprehensive income | ||||||||
| Comprehensive income attributable to the noncontrolling interests: | ||||||||
| Net income | ||||||||
| Other comprehensive income: | ||||||||
| 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, | ||||||||
| 2020 | 2019 | |||||||
| Common stock, beginning and end of period | $ | $ | ||||||
| Additional paid-in capital, beginning of period | ||||||||
| Shares issued upon exercise of stock options | ||||||||
| Share-based compensation | ||||||||
| Purchase of subsidiary shares from noncontrolling interest | ( | ) | ||||||
| Transfer of subsidiary shares purchased | ||||||||
| Additional paid-in capital, end of period | ||||||||
| Retained earnings, beginning of period | ||||||||
| Net income | ||||||||
| Dividends | ( | ) | ( | ) | ||||
| Share-based compensation (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 loss, net of tax | ( | ) | ||||||
| Accumulated other comprehensive loss, end of period | ( | ) | ( | ) | ||||
| Treasury stock, beginning and end of period | ( | ) | ( | ) | ||||
| Noncontrolling interest, beginning of period | ||||||||
| Net income | ||||||||
| Foreign currency translation adjustment, net of tax | ( | ) | ( | ) | ||||
| Net derivative instrument loss, net of tax | ( | ) | ||||||
| Share-based compensation (adjustment) | ( | ) | ||||||
| Purchase of subsidiary shares from noncontrolling interest | ( | ) | ||||||
| Transfer of subsidiary shares purchased | ( | ) | ||||||
| Dividends | ( | ) | ||||||
| Noncontrolling interest, end of period | ||||||||
| Total equity | $ | $ | ||||||
See notes to consolidated financial statements.
Page 5
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: |
|
| ||||||
| Depreciation and amortization | ||||||||
| Provision for doubtful accounts | ||||||||
| Lease expense | ||||||||
| Noncash share-based compensation | ||||||||
| Deferred tax benefit | ( | ) | ( | ) | ||||
| Change in fair value of derivatives | ( | ) | ( | ) | ||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Income taxes, net | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of short-term investments | ( | ) | ( | ) | ||||
| Proceeds from sale of short-term investments | — | |||||||
| Purchases of 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 | ( | ) | ( | ) | ||||
| Purchase of subsidiary shares from noncontrolling interest | — | ( | ) | |||||
| Dividends paid to minority interest | ( | ) | — | |||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents - beginning of period | ||||||||
| Cash and cash equivalents - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
See notes to consolidated financial statements.
Page 6
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 1. | Significant Accounting Policies: |
The accounting policies we follow are set forth in the notes to our consolidated financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2019.
| 2. | Impact of COVID-19 Pandemic: |
A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and caused a significant unfavorable impact on our results of operations.
In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate, have issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. As of the date of this filing, we have implemented travel restrictions, and we are following social distancing practices. In the U.S. and France, we are endeavoring to follow guidance from authorities and health officials including, but not limited to, requiring our personnel to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitization routines at our distribution centers as the health and safety of our employees are paramount. Our teams are set up and now work from home and carry on business as efficiently as possible. Those decrees however, have resulted in a shutdown of a majority of retail stores selling fragrance products, a slowdown in air traffic, effecting our travel retail business, and supply chain disruption. Additionally, our distribution facilities have also experienced a short-term suspension of operations for COVID-19 employee health concerns.
The duration and intensity of this global health emergency and its related disruptions are uncertain. We anticipate that retail store closings, the slowdown in air traffic, potential supply chain disruptions and short-term suspensions of activities in our distribution centers will continue to unfavorably impact our business. We also anticipate significant challenges for the remainder of 2020 due to uncertain market conditions. We expect a larger net sales decline in the second quarter of 2020, as many retail stores in our major markets may remain closed for the entire period. In addition, the COVID-19 pandemic has led to high levels of unemployment and deteriorating economic conditions in many of the countries where our products are sold, forcing many consumers to limit discretionary purchases. We believe it is possible that the impact of the COVID-19 pandemic could have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ending December 31, 2020.
| 3. | Recent Accounting Pronouncements: |
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as updated in 2019 and 2020, which require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The new rules eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The new rules are effective for the Company in the first quarter of 2020 and there was no material impact on our consolidated financial statements.
There are no other recent accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.
Page 7
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 4. | Inventories: |
Inventories consist of the following:
| (In thousands) | March 31, 2020 | December 31, 2019 | ||||||
| Raw materials and component parts | $ | $ | ||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| 5. | 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, 2020 | ||||||||||||||||
| 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 accounted for using hedge accounting | ||||||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swap | $ | $ | $ | $ | ||||||||||||
Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| Fair Value Measurements at December 31, 2019 | ||||||||||||||||
| 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 accounted for using hedge accounting | ||||||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swap | $ | $ | $ | $ | ||||||||||||
The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, accounts payable and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans payable approximates fair value as the interest rates on the Company’s indebtedness approximate current market rates.
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.
| 6. | 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 9
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with a 2015 brand
acquisition, $
Gains and losses in derivatives
designated as hedges are accumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as
hedges are included in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial
for both three month periods ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, interest expense
was reduced by a gain of $
All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at March 31, 2020, resulted in an asset and is included in other current assets on the accompanying balance sheet.
At March 31, 2020, we had foreign
currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $
| 7. | 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, 2020, the weighted
average remaining lease term was
Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 8. | 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 period. The fair value of shares vested during the three months ended March 31, 2020 and 2019 aggregated
$
The following table sets forth information with respect to nonvested options for the three month period ended March 31, 2020:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Nonvested options – beginning of period | $ | |||||||
| Nonvested options granted | $ | |||||||
| Nonvested options vested or forfeited | ( | ) | $ | |||||
| Nonvested options – end of period | $ | |||||||
Share-based payment expense decreased
income before income taxes by $
Page 11
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes stock option information as of March 31, 2020:
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2020 | $ | |||||||
| Options granted | ||||||||
| Options forfeited | ( | ) | ||||||
| Options exercised | ( | ) | ||||||
| Outstanding at March 31, 2020 | ||||||||
| Options exercisable | $ | |||||||
| Options available for future grants | ||||||||
As of March 31, 2020, the weighted
average remaining contractual life of options outstanding is
Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the three months ended March 31, 2020 and March 31, 2019 were as follows:
| (In thousands) | March 31, 2020 | March 31, 2019 | ||||||
| Cash proceeds from stock options exercised | $ | $ | ||||||
| Tax benefits | — | |||||||
| Intrinsic value of stock options exercised | ||||||||
The weighted average fair values
of the options granted by Inter Parfums, Inc. during the three months ended March 31, 2020 and 2019 were $
| March 31, 2020 | March 31, 2019 | |||||||
| Weighted average expected stock-price volatility | % | % | ||||||
| Weighted average expected option life | ||||||||
| Weighted average risk-free interest rate | % | % | ||||||
| Weighted average dividend yield | % | % | ||||||
Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield 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.
Page 12
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In December 2018, Interparfums
SA, our
In March 2020, due to the
potential impact on future net sales and operating results resulting from the COVID-19 pandemic, the estimated number of
shares to be distributed, after forfeited shares, was reduced from
The fair value of the grant
had been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of
grant. The original cost of the grant was approximately $
| 9. | 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 earnings attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net earnings 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, except per share data) | March 31, | |||||||
| 2020 | 2019 | |||||||
| Numerator: | ||||||||
| Net income attributable to Inter Parfums, Inc. | $ | $ | ||||||
| Denominator: | ||||||||
| Weighted average shares | ||||||||
| Effect of dilutive securities: | ||||||||
| Stock options | ||||||||
| Denominator for diluted earnings per share | ||||||||
| Earnings per share: | ||||||||
| Net income attributable to Inter Parfums, Inc. | ||||||||
| common shareholders: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | ||||||||
Page 13
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Not included in the above computations
is the effect of antidilutive potential common shares which consist of outstanding options to purchase
| 10. | 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. European operations primarily represent the sale of prestige brand name fragrances and United States operations primarily represent the sale of prestige brand name and specialty retail fragrance.
Information on our operations by geographical areas is as follows:
| (In thousands) | Three months ended March 31, | |||||||
| 2020 | 2019 | |||||||
| Net sales: | ||||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| Eliminations | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Net income attributable to Inter Parfums, Inc.: | ||||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| $ | $ | |||||||
| March 31, 2020 | December 31, 2019 | |||||||
| Total Assets: | ||||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| Eliminations of investment in subsidiary | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| 11. | Recent Agreements: |
S.T. Dupont
In January 2020, we renewed our
license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31,
2020, without any material changes in terms and conditions.
| 12. | Reclassifications: |
Certain prior year’s amounts in the accompanying consolidated balance sheet and statements of cash flows have been reclassified to conform to current period presentation.
Page 14
| Item 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Information
Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and "Risk Factors" in Inter Parfums' annual report on Form 10-K for the fiscal year ended December 31, 2019 and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report.
Overview
We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.
We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 79% and 81% of net sales for the three months ended March 31, 2020 and 2019, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Montblanc, Paul Smith, Repetto, Rochas, S.T. Dupont 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 21% and 19% of net sales for the three months ended March 31, 2020 and 2019, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, MCM and Oscar de la Renta brands.
Page 15
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, Jimmy Choo, Coach and GUESS brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Montblanc. | 21 | % | 26 | % | ||||
| Coach. | 20 | % | 17 | % | ||||
| Jimmy Choo. | 15 | % | 12 | % | ||||
| GUESS. | 11 | % | 9 | % | ||||
Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as well as through our own distribution subsidiaries in Spain and the United States.
We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.
Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers.
As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share.
Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because over 45% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates.
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Impact of COVID-19 Pandemic and the Resulting Changes to our 2020 Financial Outlook
A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and caused a significant unfavorable impact on our results of operations.
In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate have issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. As of the date of this filing, we have implemented travel restrictions; and we are following social distancing practices. In the U.S. and France, we are endeavoring to follow guidance from authorities and health officials including, but not limited to, requiring our personnel to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitization routines at our distribution centers as the health and safety of our employees is paramount. Our teams are set up and now work from home and carry on business as efficiently as possible. Those decrees however, have resulted in a shutdown of a majority of retail stores selling fragrance products, a slowdown in air traffic, effecting our travel retail business, and supply chain disruption. Additionally, our distribution facilities have also experienced a short-term suspension of operations for COVID-19 employee health concerns.
The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and the slowdown of air travel brought our sales to a virtual standstill. Customer orders were cancelled and shipping activities were minimal. As a result, we estimate that approximately $34 million ($28 million for our European operations and $6 million for our U.S operations) in sales were lost in the three months ended March 31, 2020 as compared to our initial expectations. Furthermore, due to the sudden nature of the shutdown, advertising and promotional programs in the period were well underway and could not be curtailed in time. As a result, advertising and promotional expenses aggregated $28.5 million or 19.7% of net sales for the three months ended March 31, 2020, as compared to $27.3 million or 15.4% for the corresponding period of the prior year.
The duration and intensity of this global health emergency and its related disruptions are uncertain. We anticipate that retail store closings, the slowdown in air traffic, potential supply chain disruptions and short-term suspensions of activities in our distribution centers will continue to unfavorably impact our business. We also anticipate significant challenges for the remainder of 2020 due to uncertain market conditions. We expect a larger net sales decline in the second quarter of 2020, as many retail stores in our major markets may remain closed for the entire period. In addition, the COVID-19 pandemic has led to high levels of unemployment and deteriorating economic conditions in many of the countries where our products are sold, forcing many consumers to limit discretionary purchases. We believe it is possible that the impact of the COVID-19 pandemic could have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ended December 31, 2020. Accordingly, we have withdrawn our 2020 guidance on net sales and earnings and cannot issue new guidance until we gain greater visibility.
Operationally, we are preparing for increased demand in the post-COVID-19 environment, with business in Asia already showing signs of a comeback. We have seen a resumption of more normalized sales levels in South Korea and China, with internet sales especially strong. We are gearing up to be prepared to rapidly fill the distribution channels once the crisis is behind us. In that regard, we have maintained reasonable inventory levels of components and finished goods, and we are gaining local market intelligence from our distributors and production capacity data from our suppliers. We do not anticipate any material impairment of trademarks, licenses and other intangible assets.
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Our conservative financial tradition has enabled us to amass hefty cash balances and nominal long-term debt. As of March 31, 2020 we had $204 million in cash, cash equivalents and short-term investments, only $9.8 million of long-term debt. We also have $47 million available in untapped credit facilities. Nonetheless, we have taken several actions to minimize expenses and protect cash flow. Our operating cost structure, of which variable costs historically accounts for over two-thirds of net sales, should enable us to minimize the impact of reduced net sales on our bottom line. In that regard, we have postponed the launch of several programs originally scheduled for this year until 2021 and moved related advertising and promotion expenses to 2021 as well. That includes our planned launches for the Kate Spade New York, Jimmy Choo, Anna Sui and GUESS brands. We have also taken several actions with an eye toward minimizing fixed expenses. While we have not terminated or furloughed any employees, we have instituted a hiring freeze and plan on significantly cutting bonuses and other expenses for 2020 in an effort to keep fixed expenses under $25 million per quarter. We have also temporarily suspended our quarterly cash dividend. While these actions are expected to have a favorable impact on the Company’s fixed expenditures and cash flow, our cash and credit management teams, together with our executive management teams are paying particular attention to the management of working capital. As a result of the above, we do not anticipate any short-term liquidity problems, nor do we anticipate any material credit losses.
Recent Important Events
S.T. Dupont
In January 2020, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2020, without any material changes in terms and conditions. Our initial 11-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended through December 31, 2019. The agreement will be extended annually in September of each year upon mutual consent.
Abercrombie & Fitch and Hollister
In November 2019, we extended our license for both the Abercrombie & Fitch and Hollister brands until December 31, 2022, and added automatic renewals unless terminated on 3 years’ notice.
MCM
In September 2019, we entered into an exclusive, 10-year worldwide license agreement with German luxury fashion house MCM for the creation, development and distribution of fragrances under the MCM brand. Our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.
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Oscar de la Renta
In September 2019, we extended our license through December 31, 2031, and added an additional five-year extension option through December 31, 2036. The original license agreement, signed in October 2013, would have expired on December 31, 2025.
Kate Spade New York
In June 2019, we entered into an exclusive 11-year worldwide license agreement with Kate Spade New York for the creation, development and distribution of fragrances under the Kate Spade brand. Our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.
Discussion of Critical Accounting Policies
Information regarding our critical accounting policies can be found in our 2019 Annual Report on Form 10-K filed with the SEC.
Results of Operations
Three Months Ended March 31, 2020 as Compared to the Three Months Ended March 31, 2019
| Net Sales | Three months ended March 31, | |||||||||||
| (in millions) | 2020 | % Change | 2019 | |||||||||
| European based product sales | $ | 114.1 | (20.6 | )% | $ | 143.7 | ||||||
| United States based product sales | 30.7 | (10.9 | )% | 34.5 | ||||||||
| Total net sales | $ | 144.8 | (18.7 | )% | $ | 178.2 | ||||||
Net sales for the three months ended March 31, 2020 declined 18.7% to $144.8 million, as compared to $178.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales declined 17.8%. For the 2020 first quarter, the average U.S. dollar/euro exchange rate was 1.10 as compared to 1.14 in the first quarter of 2019.
European based product sales decreased 20.6% to $114.1 million for the three months ended March 31, 2020, as compared to $143.7 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales declined 19.5%. The successful launch of Coach Dreams early in the year spurred the 35.9% increase in Coach brand sales. Comparable quarter sales declined for our other major brands following the closure of virtually all points of sale throughout the world due to the global COVID-19 pandemic. In addition, for certain major brands like Montblanc and Jimmy Choo, the 9.9% and 25.7% respective increases in brand sales for the 2019 first quarter established a high benchmark in 2020. Net sales for the Montblanc and Jimmy Choo brands declined 33.4% and 28.3% for the three months ended March 31, 2020, respectively, as compared to the corresponding period of the prior year.
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United States based product sales decreased 10.9% to $30.7 million for the three months ended March 31, 2020, as compared to $34.5 million for the corresponding period of the prior year. As with our European operations, comparable quarter sales declined for most brands within our U.S. operations following the closure of virtually all points of sale throughout the world due to the global COVID-19 pandemic. Offsetting the decline, GUESS legacy scents and brand extensions launched in 2019 drove a 28.9% increase in GUESS brand sales for the period.
We anticipate that the effects of the COVID-19 pandemic will continue to unfavorably impact our business. We also anticipate significant challenges for the remainder of 2020 due to uncertain market conditions. We expect a larger net sales decline in the second quarter of 2020, as many retail stores in our major markets may remain closed for the entire period. In that regard, we have postponed the launch of several programs originally scheduled for this year until 2021 and moved related advertising and promotion expenses to 2021 as well. That includes our planned launches for the Kate Spade New York, Jimmy Choo, Anna Sui and GUESS brands.
| Net Sales to Customers by Region | Three
months ended March 31, | |||||||
| (in millions) | 2020 | 2019 | ||||||
| North America | $ | 46.5 | $ | 47.2 | ||||
| Western Europe | 41.5 | 46.8 | ||||||
| Asia | 20.6 | 32.8 | ||||||
| Middle East | 14.4 | 25.5 | ||||||
| Central and South America | 10.9 | 13.3 | ||||||
| Eastern Europe | 7.1 | 9.0 | ||||||
| Other | 3.8 | 3.6 | ||||||
| $ | 144.8 | $ | 178.2 | |||||
With respect to performances by region, shelter in place measures and store closings decreed by various governments weighed on net sales. The impact was most severe in the Middle East and Asia, where net sales declined 44% and 37% for the three months ended March 31, 2020, respectively, compared to the corresponding period of the prior year. In North America and Western Europe, where shelter in place and store closings were implemented later, sales declined 1% and 11% for the three months ended March 31, 2020, respectively, compared to the corresponding period of the prior year.
| Gross Profit Margin | Three
months ended March 31, | |||||||
| (in millions) | 2020 | 2019 | ||||||
| Net sales | $ | 144.8 | $ | 178.2 | ||||
| Cost of sales | 55.8 | 68.4 | ||||||
| Gross margin | $ | 89.0 | $ | 109.8 | ||||
| Gross margin as a % of net sales | 61.5 | % | 61.6 | % | ||||
Gross profit margin was 61.5% of net sales for the three months ended March 31, 2020, as compared to 61.6% for the corresponding period of the prior year. For European operations, gross profit margin was 63.9% and 63.2% in the first quarters of 2020 and 2019, respectively. We carefully monitor movements in foreign currency exchange rates as over 45% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross profit margin while a weak U.S. dollar has a negative effect. The stronger dollar in 2020 resulted in a benefit to our gross margin during the three months ended March 31, 2020.
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For U.S. operations, gross profit margin was 52.6% and 55.1% in the first quarters of 2020 and 2019, respectively. The decline in gross profit margin is primarily the result of product sales mix. Anna Sui products, which are primarily sold in Asia and generate some of our highest gross margins, were down significantly in the first quarter of 2020, as compared to the corresponding period of the prior year.
Generally, we do not bill customers for shipping and handling costs and such costs, which aggregated $1.6 million for both the three months ended March 31, 2020 and 2019, 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) | 2020 | 2019 | ||||||
| Selling, general and administrative expenses | $ | 71.3 | $ | 76.5 | ||||
| Selling, general and administrative expenses as a % of net sales | 49.2 | % | 42.9 | % | ||||
Selling, general and administrative expenses decreased 6.9% for the three months ended March 31, 2020, as compared to the corresponding period of the prior year. However, as a percentage of sales, selling, general and administrative expenses were 49.2% and 42.9% for the three months ended March 31, 2020 and 2019, respectively. For European operations, with sales down 20.6%, selling, general and administrative expenses declined 6.4% in 2020, as compared to 2019 and represented 50.1% of sales in 2020, as compared to 42.5% of sales in 2019. For U.S. operations, with sales down 10.9%, selling, general and administrative expenses decreased 8.8% in 2020, as compared to 2019 and represented 45.8% and 44.7% of sales in 2020 and 2019, respectively. At the time of retail store closings our advertising and promotional programs were well underway. Promotion and advertising included in selling, general and administrative expenses aggregated approximately $28.5 million (19.7% of net sales) for the 2020 period, as compared to $27.4 million (15.4% of net sales) for the 2019 period. In addition, our entire operational budgets in Europe and the United States for this period were based on our originally projected sales levels.
Once the COVID-19 pandemic recedes, we will once again invest heavily in promotional spending to support new product launches and to build brand awareness. We had significant promotion and advertising programs planned for 2020. However, we have postponed the launch of several programs originally scheduled for this year until 2021 and, where possible, we also moved those related advertising and promotion expenses to 2021 as well.
Royalty expense included in selling, general and administrative expenses aggregated $11.3 million for the 2020 period, as compared to $13.0 million in 2019 and represented 7.8% and 7.3% of net sales in 2020 and 2019, respectively. The increase in 2020, as a percentage of sales, is directly related to increased royalty based product sales.
As a result of the above analysis regarding sales, margins and selling, general and administrative expenses, income from operations decreased 46.6% to $17.8 million for the three months ended March 31, 2020, as compared to $33.3 million for the corresponding period of the prior year. Operating margins were 12.3% of net sales in the current period as compared to 18.7% for the corresponding period of the prior year.
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Other Income and Expense
Interest expense aggregated $1.0 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively. Interest expense is primarily related to the financing of brand and licensing acquisitions. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions.
Foreign currency gains (losses) aggregated $1.0 million and $(0.2) million for the three months ended March 31, 2020 and 2019, respectively. We typically enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Over 45% of net sales of our European operations are denominated in U.S. dollars.
Interest income aggregated $1.0 million and $1.9 million for the three months ended March 31, 2020 and 2019, respectively. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.
Income Taxes
Our effective tax rate was 29.0% and 27.4% for the three months ended March 31, 2020 and 2019, respectively. Pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is expected to be cut from 33% to 25% over a three-year period beginning in 2020. Our effective tax rate for European operations was 30% and 29% for the three months ended March 31, 2020 and 2019, respectively.
Our effective tax rate for U.S. operations was 20.9% for the three months ended March 31, 2020, as compared to 12.1% 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. There was no benefit from the exercise of stock options for the three months ended March 31, 2020 as compared to a benefit of $0.3 million in the 2019 first quarter.
The French authorities are considering that the existence of IP Suisse, a wholly-owned subsidiary of Interparfums SA, does not, in and of itself, constitute a permanent establishment and therefore Interparfums, SA should pay French taxes on all or part of the profits of that entity. The French Tax Authority recently notified the Company that IP Suisse will be the subject of a tax audit covering the period January 1, 2010 through December 31, 2018. No claim or assessment for any taxes or penalties has been made at this time. The Company disagrees and is prepared to vigorously defend its position. Consequently, no provision has been made in the accompanying consolidated financial statements as we believe it is more likely than not that our position will be sustained based on its technical merits. Although we believe that we have sufficient arguments to support our position, there exists a risk that the French authorities may prevail. The Company’s exposure in connection with this matter is approximately $5.8 million, net of recover taxes already paid to the Swiss authorities, and excluding interest.
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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 and Earnings per Share (in thousands except per share data) | Three
months ended March 31, | |||||||
| 2020 | 2019 | |||||||
| Net income attributable to European operations | $ | 11,693 | $ | 22,091 | ||||
| Net income attributable to United States operations | 1,606 | 2,887 | ||||||
| Net income | 13,299 | 24,978 | ||||||
| Less: Net income attributable to the noncontrolling interest | 3,240 | 6,084 | ||||||
| Net income attributable to Inter Parfums, Inc. | $ | 10,059 | $ | 18,894 | ||||
| Net income attributable to Inter Parfums, Inc. common shareholders: | ||||||||
| Basic | $ | 0.32 | $ | 0.60 | ||||
| Diluted | $ | 0.32 | $ | 0.60 | ||||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 31,530 | 31,431 | ||||||
| Diluted | 31,708 | 31,679 | ||||||
Net income decreased 46.8% to $13.3 million for the three months ended March 31, 2020, as compared to $25.0 million for the corresponding period of the prior year. The reasons for significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin, and selling, general and administrative expenses, most of which was caused by the effects of the COVID-19 pandemic and effective tax rates.
The noncontrolling interest arises primarily from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. The noncontrolling interest is also affected by the profitability of Interparfums SA’s 51% owned distribution subsidiaries in Spain. Net income attributable to the noncontrolling interest aggregated 28% of European operations net income for both the three months ended March 31, 2020 and 2019. Net income attributable to Inter Parfums, Inc. decreased 47% to $10.1 million, as compared to $18.9 million for the corresponding period of the prior year.
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Liquidity and Capital Resources
Our conservative financial tradition has enabled us to amass hefty cash balances and nominal long-term debt. As of March 31, 2020 we had $204 million in cash, cash equivalents and short-term investments, most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments held by our European operations. As of March 31, 2020 long-term debt aggregated only $9.8 million and we also have $47 million available in untapped credit facilities. Nonetheless, in response to the COVID-19 pandemic, we have taken several actions to minimize expenses and protect cash flow. Our operating cost structure, of which variable costs accounts for over two-thirds, should enable us to minimize the impact of reduced net sales on our bottom line. In that regard, we have postponed the launch of several programs originally scheduled for this year until 2021 and moved related advertising and promotion expenses to 2021 as well. We have also taken several actions with an eye toward minimizing fixed expenses. While we have not terminated or furloughed any employees, we have instituted a hiring freeze and plan on significantly cutting bonuses for 2020. We have also temporarily suspended our quarterly cash dividend. While these actions are expected to have a favorable impact on the Company’s fixed expenditures and cash flow, our cash and credit management teams, together with our executive management teams are paying particular attention to the management of working capital. As a result of the above, we do not anticipate any short-term liquidity problems.
As of March 31, 2020, we had a working capital ratio of 3.7 to 1. Approximately 82% of the Company’s total assets are held by European operations, and approximately $171 million of trademarks, licenses and other intangible assets are held by European operations.
The Company hopes to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. Opportunities for external growth continue to be examined, with the priority of maintaining the quality and homogeneous nature of our portfolio. However, we cannot assure you that any new license or acquisition agreements will be consummated.
Cash used in operating activities aggregated $25.1 million and $14.6 million for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020, working capital items used $40.6 million in cash from operating activities, as compared to $42.1 million in the 2019 period. Although accounts receivable is up 3.4% from year end, the balance is reasonable based on first quarter 2020 sales levels, and reflects continued strong collection activity as day’s sales outstanding is 85 days for both the three months ended March 31, 2020 and 2019. Inventory levels are relatively unchanged from year end and includes inventory anticipated to be needed to support for 2020 new product launches. As previously mentioned, we anticipate significant challenges for the remainder of 2020 due to uncertain market conditions. We expect a larger net sales decline in the second quarter of 2020, as many retail stores in our major markets may remain closed for the entire period. As a result, inventory levels are expected to rise considerably. Our cash and credit management teams, together with our executive management teams are paying particular attention to the management of working capital.
Cash flows used in investing activities in 2020 reflect the purchases and sales of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. At March 31, 2020, approximately $60 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal.
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Our business is not capital intensive as we do not own any manufacturing facilities. On a full year basis, we expect to spend approximately $4.0 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers.
In 2018, in connection with a license agreement, we agreed to pay $15.0 million in equal annual installments of $1.1 million including interest imputed at 4.1%. In 2015, in connection with a brand acquisition, we entered into a 5-year term loan payable in equal quarterly installments of €5.0 million (approximately $5.7 million) plus interest. In order to reduce exposure to rising variable interest rates, we entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%.
Our short-term financing requirements are expected to be met by available cash on hand at March 31, 2020, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2020 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank, and approximately $27.0 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both March 31, 2020 and 2019.
Purchase of subsidiary shares from noncontrolling interest represents the purchase of treasury shares of Interparfums SA, which are expected to be issued to Interparfums SA employees pursuant to its Free Share Plan.
In October 2019, the Board of Directors authorized a 20% increase in the annual dividend to $1.32 per share. In April 2020, as a result of the uncertainties raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspension of the quarterly cash dividend. The Board also indicated that it will revisit this issue with an eye towards reinstitution of the dividend when the business environment is more favorable.
We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs.
Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the three month period ended March 31, 2020.
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| 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, our French subsidiary, 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.
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, 2020, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $40.0 million, GB £1.0 million and JPY ¥170.0 million which all have 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. We entered into an interest rate swap in June 2015 on €100 million of debt, effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.
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| 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, 2. Unregistered Sales of Equity Securities and Use of Proceeds, 3. Defaults Upon Senior Securities, 4. Mine Safety Disclosures and 5. Other Information, are omitted as they are either not applicable or have been included in Part I.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated and supplemented below, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K may not be the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
The COVID-19 pandemic has had, and we expect will continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.
The public health crisis caused by the COVID-19 pandemic and the measures being taken by governments, businesses, including us, our suppliers, our distributors, retailers and the public, to limit COVID-19's spread, have had and we expect will continue to have, certain negative impacts on our business including, but not limited to, the following:
| ● | We have experienced a decrease in sales of our products in markets around the world that have been affected by the COVID-19 pandemic. In particular, sales of our products have been significantly negatively affected by shelter-in-place regulations and closings of retailers around the world. This negative trend is likely to continue, with the most significant impact expected to occur in the second quarter of 2020. If the COVID-19 pandemic intensifies its negative impacts on our sales could be more prolonged and may become more severe. |
| ● | Deteriorating economic and political conditions in many of our major markets affected by the COVID-19 pandemic, such as increased unemployment, decreases in disposable income, declines in consumer confidence, or economic slowdowns could cause a further decrease in demand for our products. |
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| ● | Due to the closings of a substantial number of retailers that sell our products we have faced, and may continue to face, increasing delays in payment of accounts receivables from our customers. We may have to write-off certain receivables as a result of the COVID-19 pandemic’s damaging impacts on their respective businesses, the extent of which is not presently known. |
| ● | We have faced, and may continue to face, increasing delays in the delivery of components as a result of shipping delays due to, among other things, additional safety requirements imposed by port authorities, closures of or congestion at ports, and capacity constraints of transportation contractors. |
| ● | We may be required to record significant impairment charges with respect to noncurrent assets, including trademarks, licenses and other intangible assets whose fair values may be negatively affected by the effects of the COVID-19 pandemic on our operations. |
| ● | As a result of the COVID-19 pandemic, including related governmental guidance or directives, we have required substantially all of our employees in New York, New Jersey and Paris, to work remotely. We may experience reductions in productivity and disruptions to our business routines while our remote work policy remains in place. |
| ● | Actions we have taken or may take, or decisions on potential actions that we did not take, as a consequence of the COVID-19 pandemic may result in claims or litigation against us. |
| ● | The resumption of normal business operations after the disruptions caused by the COVID-19 pandemic may be delayed or constrained by its lingering effects on consumers, suppliers or third-party distributors. |
COVID-19 pandemic and governmental responses could exacerbate many of our risk factors.
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, could exacerbate many of the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 pandemic and governmental responses could cause a global recession.
The pandemic has significantly increased economic and demand uncertainty. To date the impact of COVID-19 has caused a global economic slowdown, and it is possible that it could cause a global recession. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of any such slowdown or recession. A global recession would exacerbate the risk factors discussed above that could have a material adverse effect on our results of operations, financial condition and cash flows.
| Item 6. | Exhibits |
The following documents are filed herewith:
| Exhibit No. | Description | Page Number | ||
| 10.173.1 | Lease for Interparfums SA Distribution Center - English translation | 32 | ||
| (confidential information in this exhibit was omitted) | ||||
| 31.1 | Certifications required by Rule 13a-14(a) of Chief Executive Officer | 102 | ||
| 31.2 | Certifications required by Rule 13a-14(a) of Chief Financial Officer and Principal Accounting Officer | 103 | ||
| 32.1 | Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer | 104 | ||
| 32.2 | Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer | 105
| ||
| 101 | Interactive data files |
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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 11th day of May 2020.
| INTER PARFUMS, INC. | ||
| By: | /s/ Russell Greenberg | |
| Executive Vice President and | ||
| Chief Financial Officer |
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