UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE )ONE)

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


for the quarterly period ended September 30, 2019.March 31, 2020.

OR

 Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


for the transition period from ___________to ________.

Commission File No. 0-16469

INTER PARFUMS, INC.

(Exact name of registrant as specified in its charter)

Delaware13-3275609
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

 

551 Fifth Avenue,, New York,, New York10176
(Address of Principal Executive Offices)  (Zip(Zip Code)

(212)983-2640(212) 983-2640
(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.001 par value per shareIPARThe Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YesNo

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). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company," and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act).

Large accelerated FilerAccelerated 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'sissuer’s classes of common stock, as of the latest practicable date.

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.001 par value per shareIPARThe Nasdaq Stock Market

At November 5, 2019,May 11, 2020, there were 31,464,56831,531,958 shares of common stock, par value $.001 per share, outstanding.

 

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

INDEX

 

 Page Number
  
Page NumberPart I. Financial Information1
   
Item 1.Financial Statements1
Part I. Financial Information1
   
 Item 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2020 and December 31, 20192
   
 Consolidated Balance Sheets asStatements of September 30,Income for the Three Months Ended March 31, 2020 and March 31, 2019 and December 31, 201823
   
 Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30,March 31, 2020 and March 31, 2019 and September 30, 201834
   
 Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and September 30, 20184
Consolidated Statements of Changes in Equity for the NineThree Months Ended September 30,March 31, 2020 and March 31, 2019 and September 30, 20185
Consolidated Statements of Cash Flows  for the Nine Months Ended September 30, 2019 and September 30, 20186
Notes to Consolidated Financial Statements7
   
 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and March 31, 20196
Notes to Consolidated Financial Statements7
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations15
   
Item 3.Item 3. Quantitative and Qualitative Disclosures About Market Risk2426
   
Item 4.Item 4. Controls and Procedures2527
   
Part II. Other Information2627
   
Item 1A.

Risk Factors 

27
 Item 6. Exhibits26
Item 6.Exhibits28
   
Signatures2729

i

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Part I. Financial Information

Item 1.Financial Statements

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"(“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, 20182019 included in our annual report filed on Form 10-K.

The results of operations for the ninethree months ended September 30, 2019March 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)

 September 30,
2019
 December 31,
2018
  March 31,
2020
 December 31,
2019
 
ASSETS          
Current assets:          
Cash and cash equivalents $138,457  $193,136  $142,557  $192,417 
Short-term investments  53,244   67,870   61,539   60,714 
Accounts receivable, net  173,839   136,420   133,640   133,010 
Inventories  167,114   160,978   169,477   167,809 
Receivables, other  1,669   2,112   2,936   2,054 
Other current assets  8,544   8,076   21,630   17,123 
Income taxes receivable  481   810   137   169 
        
Total current assets  543,348   569,402   531,916   573,296 
        
Equipment and leasehold improvements, net  11,235   9,839   11,194   11,107 
        
Right-of-use assets, net  29,509   --   27,174   28,359 
Trademarks, licenses and other intangible assets, net  197,323   204,325   196,813   201,983 
Deferred tax assets  12,838   9,299   8,285   8,004 
        
Other assets  6,175   6,302   6,050   6,083 
        
Total assets $800,428  $799,167  $781,432  $828,832 
                
LIABILITIES AND EQUITY                
Current liabilities:                
Current portion of long-term debt $17,449  $23,155  $6,555  $12,326 
Current portion of lease liabilities  5,877   --   4,960   5,356 
Accounts payable – trade  44,477   58,328   46,355   54,098 
Accrued expenses  81,179   92,468   69,343   96,421 
Income taxes payable  10,272   4,396   7,894   5,865 
Dividends payable  8,652   8,630   10,406   10,399 
        
Total current liabilities  167,906   186,977   145,513   184,465 
        
Long–term debt, less current portion  10,606   22,906   9,781   10,734 
        
Lease liabilities, less current portion  25,221   --   23,849   24,635 
Deferred tax liability  3,275   3,538 
        
Equity:                
Inter Parfums, Inc. shareholders' equity:        
Preferred stock, $.001 par; authorized 1,000,000 shares; NaN issued  --   -- 

Common stock, $.001 par; authorized 100,000,000 shares; outstanding 31,464,568 and 31,382,127 shares at September 30, 2019 and December 31, 2018, respectively

  31   31 
Inter Parfums, Inc. shareholders’ equity:        
Preferred stock, $.001 par; authorized 1,000,000 shares; none issued  
   
 
Common stock, $.001 par; authorized 100,000,000 shares; outstanding 31,531,958 and 31,513,018 shares at March 31, 2020 and December 31, 2019, respectively  31   31 
Additional paid-in capital  68,636   69,970   73,618   70,664 
Retained earnings  476,477   448,731   473,947   474,637 
Accumulated other comprehensive loss  (50,408)  (33,650)  (48,097)  (39,853)
Treasury stock, at cost, 9,864,805 shares at September 30, 2019 and December 31, 2018  (37,475)  (37,475)
Total Inter Parfums, Inc. shareholders' equity  457,261   447,607 
Treasury stock, at cost, 9,864,805 shares at March 31, 2020 and December 31, 2019  (37,475)  (37,475)
        
Total Inter Parfums, Inc. shareholders’ equity  462,024   468,004 
        
Noncontrolling interest  136,159   138,139   140,265   140,994 
        
Total equity  593,420   585,746   602,289   608,998 
        
Total liabilities and equity $800,428  $799,167  $781,432  $828,832 

 

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,
 
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2020 2019 
 2019 2018 2019 2018      
              
Net sales $191,227  $177,213  $535,712  $498,347  $144,824  $178,242 
                        
Cost of sales  76,790   68,066   204,459   187,917   55,783   68,401 
                        
Gross margin  114,437   109,147   331,253   310,430   89,041   109,841 
                        
Selling, general and administrative expenses  77,793   74,169   238,860   226,286   71,262   76,552 
                        
Income from operations  36,644   34,978   92,393   84,144   17,779   33,289 
                        
Other expenses (income):                        
Interest expense  384   523   1,214   1,553   1,001   626 
(Gain) loss on foreign currency  121   1,109   818   (185)  (954)  151 
Interest income  (562)  (847)  (2,886)  (3,321)  (1,007)  (1,906)
                        
Other expenses (income)  (57)  785   (854)  (1,953)
  (960)  (1,129)
                        
Income before income taxes  36,701   34,193   93,247   86,097   18,739   34,418 
                        
Income taxes  10,043   9,767   26,012   25,550   5,440   9,440 
                        
Net income  26,658   24,426   67,235   60,547   13,299   24,978 
                        
Less: Net income attributable to the noncontrolling interest  5,810   5,488   15,176   14,801   3,240   6,084 
                        
Net income attributable to Inter Parfums, Inc. $20,848  $18,938  $52,059  $45,746  $10,059  $18,894 
                        
Earnings per share:                
                
Net income attributable to Inter Parfums, Inc. common shareholders:                        
Basic $0.66  $0.60  $1.66  $1.46  $0.32  $0.60 
Diluted $0.66  $0.60  $1.64  $1.45  $0.32  $0.60 
                        
Weighted average number of shares outstanding:                        
Basic  31,452   31,326   31,444   31,297   31,530   31,431 
Diluted  31,676   31,587   31,681   31,502   31,708   31,679 
                        
Dividends declared per share $0.28  $0.21  $0.83  $0.63  $0.33  $0.28 

See notes to consolidated financial statements.

Page 3

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands except per share data)thousands)

(Unaudited)

           
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
  Three months ended
March 31,
 
 2019 2018 2019 2018  2020 2019 
Comprehensive income:              
              
Net income $26,658  $24,426  $67,235  $60,547  $13,299  $24,978 
                        
Other comprehensive income:                        
                        
Net derivative instrument (loss), net of tax  (406)  (6)  (123)  (49)
Net derivative instrument gain (loss), net of tax  257   (59)
                        
Transfer from OCI into earnings  --   (17)  (136)  4 
Transfer from other comprehensive income into earnings  (52)  (136)
                        
Translation adjustments, net of tax  (20,277)  (2,964)  (23,271)  (17,287)  (11,921)  (8,545)
                        
Comprehensive income  5,975   21,439   43,705   43,215   1,583   16,238 
                        
Comprehensive income (loss) attributable to the noncontrolling interests:                
Comprehensive income attributable to the noncontrolling interests:        
                        
Net income  5,810   5,488   15,176   14,801   3,240   6,084 
                        
Other comprehensive income (loss):                
Other comprehensive income:        
                        
Net derivative instrument (loss), net of tax  (109)  (6)  (70)  (12)
Net derivative instrument gain (loss), net of tax  57   (52)
                        
Translation adjustments, net of tax  (5,938)  (704)  (6,702)  (4,729)  (3,529)  (2,241)
                        
Comprehensive income (loss) attributable to the noncontrolling interests  (237)  4,778   8,404   10,060   (232)  3,791 
                        
Comprehensive income attributable to Inter Parfums, Inc. $6,212  $16,661  $35,301  $33,155  $1,815  $12,447 

 

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 $31  $31 
         
Additional paid-in capital, beginning of period  70,664   69,970 
Shares issued upon exercise of stock options  641   2,251 
Share-based compensation  427   350 
Purchase of subsidiary shares from noncontrolling interest  
   (468)
Transfer of subsidiary shares purchased  1,886   
 
Additional paid-in capital, end of period  73,618   72,103 
         
Retained earnings, beginning of period  474,637   448,731 
Net income  10,059   18,894 
Dividends  (10,406)  (8,649)
Share-based compensation (adjustment)  (343)  353 
Retained earnings, end of period  473,947   459,329 
         
Accumulated other comprehensive loss, beginning of period  (39,853)  (33,650)
Foreign currency translation adjustment, net of tax  (8,392)  (6,304)
Transfer from other comprehensive income into earnings  (52)  (136)
Net derivative instrument loss, net of tax  200   (7)
Accumulated other comprehensive loss, end of period  (48,097)  (40,097)
         
Treasury stock, beginning and end of period  (37,475)  (37,475)
         
Noncontrolling interest, beginning of period  140,994   138,139 
Net income  3,240   6,084 
Foreign currency translation adjustment, net of tax  (3,529)  (2,241)
Net derivative instrument loss, net of tax  57   (52)
Share-based compensation (adjustment)  (34)  321 
Purchase of subsidiary shares from noncontrolling interest  
   (376)
Transfer of subsidiary shares purchased  (139)  
 
Dividends  (324)  
 
Noncontrolling interest, end of period  140,265   141,875 
         
Total equity $602,289  $595,766 

Common stock

Additional paid in-capital

Retained earnings

Accumulate other comprehensive loss

Treasury stock

Noncontrolling interest 

  Nine months ended
September 30,
 
  2019  2018 
       
Common stock, beginning and end of period $31  $31 
Shares issued upon exercise of stock options  -   - 
Share based compensation  -   - 
Purchase of subsidiary shares from noncontrolling interest  -  -
Net income  -    -  
Dividends  -      
Foreign currency translation adjustment, net of tax  -    -  
Transfer from other comprehensive income into earnings  -    -  
Net derivative instrument (loss), net of tax  -    -  
Common stock, beginning and end of period  31    31  
         
Additional paid-in capital, beginning of period  69,970   66,004 
Shares issued upon exercise of stock options  2,781   2,384 
Share based compensation  1,052   849 
Purchase of subsidiary shares from noncontrolling interest  (5,167)  (572)
Additional paid-in capital, end of period  68,636   68,665 
         
Retained earnings, beginning of period  448,731   422,570 
Net income  52,059   45,746 
Dividends  (25,950)  (19,726)
Share based compensation  1,637   495 
Retained earnings, end of period  476,477   449,085 
         
Accumulated other comprehensive loss, beginning of period  (33,650)  (17,832)
Foreign currency translation adjustment, net of tax  (16,569)  (12,558)
Transfer from other comprehensive income into earnings  (136)  4 
Net derivative instrument (loss), net of tax  (53)  (37)
Accumulated other comprehensive loss, end of period  (50,408)  (30,423)
         
Treasury stock, beginning and end of period  (37,475  )  (37,475 
Net income  -    -  
Treasury stock, beginning and end of period  (37,475)  (37,475)
         
Noncontrolling interest, beginning of period  138,139   137,339 
Net income  15,176   14,801 
Foreign currency translation adjustment, net of tax  (6,702)  (4,729)
Net derivative instrument (loss), net of tax  (70)  (12)
Share based compensation  190   262 
Purchase of subsidiary shares from noncontrolling interest  (920)  (236)
Dividends  (9,654)  (8,706)
Noncontrolling interest, end of period  136,159   138,719 
         
Total equity  585,746   - 
Net income  67,235    60,547  
Total equity $593,420  $588,602 

 

See notes to consolidated financial statements.

Page 5

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

      
 Nine months ended
September 30,
  Three months ended
March 31,
 
 2019 2018  2020 2019 
Cash flows from operating activities:          
Net income $67,235  $60,547  $13,299  $24,978 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Adjustments to reconcile net income to
net cash used in operating activities:
  

 

   

 

 
Depreciation and amortization  6,329   8,274   2,230   2,150 
Provision for doubtful accounts  748   483   444   38 
Lease expense  1,046   --   19   196 
Share based compensation  2,735   1,567 
Deferred tax (benefit)  (4,183)  (1,785)
Noncash share-based compensation  124   955 
Deferred tax benefit  (463)  (565)
Change in fair value of derivatives  (1,377)  (16)  (170)  (294)
Changes in:                
Accounts receivable  (43,657)  (51,894)  (4,545)  (33,385)
Inventories  (12,222)  (28,513)  (4,702)  (6,698)
Other assets  (1,447)  53   (3,545)  1,738 
Accounts payable and accrued expenses  (15,973)  (5,154)  (29,821)  (8,875)
Income taxes, net  7,469   12,684   2,013   5,156 
                
Net cash provided by (used in) operating activities  6,703   (3,754)
Net cash used in operating activities  (25,117)  (14,606)
                
Cash flows from investing activities:                
Purchases of short-term investments  (27,694)  (10,018)  (2,342)  (22,366)
Proceeds from sale of short-term investments  39,355   --      17,037 
Purchases of equipment and leasehold improvements  (4,727)  (2,873)  (1,254)  (964)
Payment for intangible assets acquired  (5,519)  (8,259)  (460)  (53)
                
Net cash provided by (used in) investing activities  1,415   (21,150)
Net cash used in investing activities  (4,056)  (6,346)
                
Cash flows from financing activities:                
Repayments of long-term debt  (16,795)  (17,881)
Proceeds from exercise of stock options  2,781   2,384 
Repayment of long-term debt  (6,577)  (5,655)
Proceeds from exercise of options  641   2,251 
Dividends paid  (10,399)  (8,630)
Purchase of subsidiary shares from noncontrolling interest  (6,087)  (808)     (844)
Dividends paid  (25,928)  (19,707)
Dividends paid to noncontrolling interest  (9,654)  (8,706)
Dividends paid to minority interest  (324)   
                
Net cash (used in) financing activities  (55,683)  (44,718)
Net cash used in financing activities  (16,659)  (12,878)
                
Effect of exchange rate changes on cash  (7,114)  (5,168)  (4,028)  (2,924)
                
Net decrease in cash and cash equivalents  (54,679)  (74,790)  (49,860)  (36,754)
                
Cash and cash equivalents - beginning of period  193,136   208,343   192,417   193,136 
                
Cash and cash equivalents - end of period $138,457  $133,553  $142,557  $156,382 
                
Supplemental disclosure of cash flow information:                
Cash paid for:                
Interest $1,391  $1,220  $462  $301 
Income taxes  20,888   18,792   3,706   5,185 

 

See notes to consolidated financial statements.

Page 6

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

1.Significant Accounting Policies: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, 2018. 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:Pronouncements:

In August 2017,June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Accounting Standards Board ("FASB") issuedInstruments,” 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 Accounting Standards Update ("ASU") to improve accounting for hedging activities.entity’s current estimate of all expected credit losses. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity's risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. This ASU isnew rules are effective for annualthe Company in the first quarter of 2020 and interim periods beginning after December 15, 2018 and early adoption is permitted. We have evaluated the standard and determined that there has beenwas no material impact on our consolidated financial statements.

In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. The standard requires entities to recognize a lease liability to cover lease payments and a lease asset representing its right to use the underlying asset for the lease term. The Company has adopted the standard on January 1, 2019 using the modified retrospective method in the year of adoption with certain transition practical expedients with no restatement of prior period amounts. Upon adoption, the Company recognized right-of-use assets of $31.8 million and lease liabilities of $32.4 million and made no adjustments to retained earnings. Adoption of the new standard did not materially impact our consolidated net income and cash flows.

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

 

3.Inventories:

Inventories consist of the following:

Schedule of inventories      
(In thousands) September 30,
2019
  December 31,
2018
 
       
Raw materials and component parts $67,836  $67,508 
Finished goods  99,278   93,470 
         
 Inventories $167,114  $160,978 

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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 $63,181  $71,895 
Finished goods  106,296   95,914 
         
  $169,477  $167,809 

5.Fair Value Measurement: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.

Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]

Significant Other Observable Inputs (Level 2) [Member]

Significant Unobservable Inputs (Level 3) [Member]

Fair Value, Measurements, Recurring [Member]

Schedule of fair value, assets measured on recurring basis               
     Fair Value Measurements at
September 30, 2019
 
     Quoted Prices in
Active Markets for
Identical Assets
  Significant Other
Observable
Inputs
  Significant
Unobservable
Inputs
 
  Total  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Short-term investments $53,244  $    $53,244  $ 
Foreign currency forward exchange contracts accounted for using hedge accounting                
Total Assets                
Liabilities:                
Interest rate swap $65  $  $65  $     
Foreign currency forward exchange contracts accounted for using hedge accounting  147      147     
Foreign currency forward exchange contracts not accounted for using hedge accounting  1,183      1,183    
 Total Liabilities $1,395  $  $1,395  $ 

 

    Fair Value Measurements at March 31, 2020 
             Quoted Prices in Significant Other Significant 
   Fair Value Measurements at
December 31, 2018
    Active Markets for Observable Unobservable 
   Quoted Prices in
Active Markets for
Identical Assets
 Significant Other
Observable
Inputs
 Significant
Unobservable
Inputs
    Identical Assets Inputs Inputs 
 Total (Level 1) (Level 2) (Level 3)  Total  (Level 1)  (Level 2)  (Level 3) 
Assets:                  
Short-term investments $67,870  $  $67,870  $      $61,539  $
  $61,539  $
 
Foreign currency forward exchange contracts accounted for using hedge accounting  179      179      131   
 
   131   
 
 
Total Assets $68,049  $  $68,049  $ 
Foreign currency forward exchange contracts not accounted for using hedge accounting  140   
   140   
 
                
 $61,810  $
  $61,810  $
 
Liabilities:                                
Foreign currency forward exchange contracts not accounted for using hedge accounting $45  $  $45  $ 
Interest rate swap  207      207     $8  $
  $8  $
 
Total Liabilities $252  $  $252  $ 

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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 $60,714  $
  $60,714  $
 
Foreign currency forward exchange contracts accounted for using hedge accounting  16   
 
   16   
 
 
Foreign currency forward exchange contracts not accounted for using hedge accounting  112   
   112   
 
                 
  $60,842  $
  $60,842  $
 
Liabilities:                
Interest rate swap $30  $
  $30  $
 

The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, and accounts payable and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans payable approximates fair value as the interest rates on the Company'sCompany’s indebtedness approximate current market rates. The fair value of the Company's long-term debt was estimated based on the current rates offered to companies for debt with the same remaining maturities and is approximately equal to its carrying value.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Foreign currency forward exchange contracts are valued based on quotations from financial institutions and the value of interest rate swaps are the discounted net present value of the swaps using third party quotes obtained from financial institutions.

5.6.Derivative Financial Instruments: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 periodcurrent-period earnings. 

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In connection with a 2015 brand acquisition, $108 million of the purchase price was paid in cash on the closing date and was financed entirely through a 5-year term loan. As the payment at closing was due in dollars and we had planned to finance it with debt in euro, the Company entered into foreign currency forward contracts to secure the exchange rate for the $108 million purchase price at $1.067 per 1 euro. This derivative was designated and qualified as a cash flow hedge.

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 ninethree month periods ended September 30, 2019March 31, 2020 and 2018.2019. For the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, interest expense was reduced by a gain of $0.1 million$0.02 and $0.3 $0.05 million respectively, relating to the interest rate swap.

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at September 30, 2019,March 31, 2020, resulted in a liabilityan asset and is included in accrued expensesother current assets on the accompanying balance sheet.

At September 30, 2019,March 31, 2020, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $39.5 $40.0 million, GB £7.3£1.0 million and JPY ¥140.0 ¥170.0 million which all have maturities of less than one year.

 

6.7.Leases: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.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend or terminate, depending on the lease. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date for the location in which the lease is held in determining the present value of lease payments.

As of September 30, 2019,March 31, 2020, the weighted average remaining lease term was 6.66.3 years and the weighted average discount rate used to determine the operating lease liability was 2.9%2.8%. For the three and nine months ended September 30, 2019,Rental expense related to operating leases was $1.7$1.8 million for both periods ending March 31, 2020 and $4.9 million, respectively.2019. Operating lease payments included in operating cash flows totaled $4.5$1.6 million for both three months ended March 31, 2020 and 2019 and noncash additions to operating lease assets totaled $33.9 million.$0.7 million and $31.8 million for the three months ended March 31, 2020 and 2019, respectively.

Maturities of lease liabilities subsequent

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to September 30, 2019 are as follows:

(In thousands)

Schedule of maturities of lease liabilities    
2019 $1,656 
2020  5,747 
2021  5,055 
2022  4,530 
2023  3,903 
Thereafter  13,463 
   34,354 
Less imputed interest (based on 2.7%weighted-average discount rate)  (3,256)
  $31,098 

Consolidated Financial Statements

 

7.8.Share Based Payments:Share-Based Payments:

The Company maintains a stock option programsprogram 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-yearsix-year term and vest over a four to fivefive-year-year period. The fair value of shares vested forduring the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 aggregated $0.07$0.08 million and $0.05$0.06 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 ninethree month period ended September 30, 2019:March 31, 2020:

Schedule of nonvested share activity      
  Number of Shares  Weighted Average Grant Date Fair Value 
Nonvested options – beginning of period  485,360  $10.72 
Nonvested options granted  6,000  $14.83 
Nonvested options vested or forfeited  (29,740) $9.68 
Nonvested options – end of period  461,620  $10.84 

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  Number of
Shares
  Weighted Average
Grant-Date
Fair Value
 
Nonvested options – beginning of period  514,210  $12.36 
Nonvested options granted  9,000  $12.16 
Nonvested options vested or forfeited  (10,180) $10.10 
Nonvested options – end of period  513,030  $12.40 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Share basedShare-based payment expense decreased income before income taxes by $0.8$0.12 million and $2.7$0.96 million for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, as compared to $0.5 million and $1.6 million for the corresponding periods of the prior year. Share based payment expense decreased net income attributable to Inter Parfums, Inc. by $0.5$0.18 million and $1.7$0.58 million for the three and nine months ended September 30, 2019, respectively, as comparedMarch 31, 2020 and 2019.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to $0.3 million and $1.0 million for the corresponding periods of the prior year.Consolidated Financial Statements

The following table summarizes stock option information as of September 30, 2019:March 31, 2020:

Schedule of stock options, activity     
 Shares Weighted Average Exercise Price  Shares Weighted Average Exercise Price 
          
Outstanding at January 1, 2019  776,171  $41.33 
Outstanding at January 1, 2020  815,800  $49.89 
Options granted  6,000   66.46   9,000   69.11 
Options forfeited  (21,450)  44.79   (2,140)  57.03 
Options exercised  (82,441)  33.74   (18,940)  33.82 
                
Outstanding at September 30, 2019  678,280  $42.37 
Outstanding at March 31, 2020  803,720   
$ 50. 46
 
                
Options exercisable  216,660  $30.99   290,690  $35.09 
Options available for future grants  752,255       566,835   
 
 

As of September 30, 2019,March 31, 2020, the weighted average remaining contractual life of options outstanding is 3.413.78 years (1.93 (2.38 years for options exercisable),; the aggregate intrinsic value of options outstanding and options exercisable is $18.7$5.3 million and $8.4$3.9 million, respectively,respectively; and unrecognized compensation cost related to stock options outstanding aggregated $3.9$5.6 million.

Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the ninethree months ended September 30,March 31, 2020 and March 31, 2019 and 2018 were as follows:

Schedule of cash proceeds received from share-based payment awards     
(In thousands) September 30,
2019
 September 30,
2018
  March 31,
2020
 March 31,
2019
 
          
Cash proceeds from stock options exercised $2,781  $2,384  $641  $2,251 
Tax benefits  400   417      300 
Intrinsic value of stock options exercised  2,752   2,307   733   2,226 

The weighted average fair values of the options granted by Inter Parfums, Inc. during the ninethree months ended September 30,March 31, 2020 and 2019 were $12.16 and 2018 were $14.83 and $10.73$14.83 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value of options granted.

The assumptions used in the Black-Scholes pricing model for the periods ended September 30,March 31, 2020 and 2019 and 2018 are set forth in the following table:

Schedule of valuation assumptions in Black-Scholes pricing     
 September 30,
2019
 September 30,
2018
  March 31,
2020
 March 31,
2019
 
          
Weighted average expected stock-price volatility  27%  28%  25%  27%
Weighted average expected option life  5 years   5 years   5 years   5 years 
Weighted average risk-free interest rate  2.5%  2.5%  1.4%  2.5%
Weighted average dividend yield  2.0%  2.0%  2.5%  2.0%

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Expected volatility is estimated based on historic volatility of the Company'sCompany’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 increases.continue to increase.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In September 2016,December 2018, Interparfums SA, our 73% owned French subsidiary, approved a plan to grant an aggregate of 15,100 26,600 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000shares to officers and managers, subject to certain corporate performance conditions. The corporate performance conditions were met and therefore in September 2019, 172,851 shares, adjusted for stock splits, were distributed. The aggregate cost of the grant of approximately $3.9 million was recognized as compensation cost on a straight-line basis over the requisite three-year service period.

In December 2018, Interparfums SA approved an additional 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 shares, subject to adjustment for stock splits, will be distributed in June 2022 and will follow2022. In order to avoid dilution of the same guidelines as the September 2016 plan.

Company’s ownership of Interparfums SA, Subsidiary [Member]all shares to be distributed pursuant to the plan will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA in prior years.

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 142,571 to 82,162. As the Company had already purchased shares in contemplation of the higher anticipated distribution, shares purchased in excess of the reduced anticipated distribution were transferred to treasury shares at Interparfums SA level. Employee turnover was also taken into account in the calculation.

The fair value of the grant hashad been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant. The estimated number of shares to be distributed of 142,379 has been determined taking into account employee turnover. The aggregateoriginal cost of the grant ofwas approximately $4.4$4.4 million, will be recognized as compensation cost onand the March 2020 revaluation resulted in a straight-line basis over the requisite three and a half year service period.

Similar to the September 2016 plan, in order to avoid dilutionreduction of the Company's ownershipcost, to approximately $2.5 million. As a result, a $0.3 million reduction of Interparfums SA, all shares distributed or to be distributed pursuant to these plans will be pre-existing shares of Interparfums SA, purchased incost, net, was recorded for the open market by Interparfums SA. During the ninethree months ended September 30, 2019, the Company acquired 131,613 shares at an aggregate cost of $5.8 million.

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

March 31, 2020.

 

8.

9.
Net Income Attributable to Inter Parfums, Inc. Common Shareholders:Shareholders:

Net income attributable to Inter Parfums, Inc. per common share ("(“basic EPS"EPS”) is computed by dividing net incomeearnings attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net incomeearnings attributable to Inter Parfums, Inc. per share assuming dilution ("(“diluted EPS"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.

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

The reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:

Schedule of earnings per share, basic and diluted                
  Three months ended  Nine months ended 
 September 30,  September 30, 
(In thousands) 2019  2018  2019  2018 
Numerator:            
Net income attributable to Inter Parfums, Inc. $20,848  $18,938  $52,059  $45,746 
Denominator:                
Weighted average shares  31,452   31,326   31,444   31,297 
Effect of dilutive securities:                
Stock options  224   261   237   205 
Denominator for diluted earnings per share  31,676   31,587   31,681   31,502 
                 
Earnings per share:                
Net income attributable to Inter Parfums, Inc. common shareholders:                
Basic $0.66  $0.60  $1.66  $1.46 
Diluted  0.66   0.60   1.64   1.45 

  Three months ended 
(In thousands, except per share data) March 31, 
  2020  2019 
Numerator:      
Net income attributable to Inter Parfums, Inc. $10,059  $18,894 
Denominator:        
Weighted average shares  31,530   31,431 
Effect of dilutive securities:        
Stock options  178   248 
Denominator for diluted earnings per share  31,708   31,679 
         
Earnings per share:        
Net income attributable to Inter Parfums, Inc.        
common shareholders:        
Basic $0.32  $0.60 
Diluted  0.32   0.60 

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Not included in the above computations areis the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.18million shares of common stock for both the three0.37 and nine months ended September 30, 2019, as compared to .120.18 million shares of common stock for the nine months ended September 30, 2018. For the three months ended September 30, 2018 there were no antidilutive potential common shares. 

March 31, 2020 and 2019, respectively.

 

9.10.Segment and Geographic Areas: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 primarily represent the sale of prestige brand name fragrances and United States operations primarily represent the sale of prestige brand name fragrances.and specialty retail fragrance.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Information on our operations by geographical areas is as follows:

United States [Member]

(In thousands) Three months ended
March 31,
 
  2020  2019 
Net sales:      
United States $31,618  $35,616 
Europe  114,123   143,767 
Eliminations  (917)  (1,141)
  $144,824  $178,242 
         
Net income attributable to Inter Parfums, Inc.:        
United States $1,606  $2,887 
Europe  8,453   16,007 
  $10,059  $18,894 

Europe [Member]

  March 31,
2020
  December 31,
2019
 
Total Assets:        
United States $148,547  $166,180 
Europe  646,984   670,657 
Eliminations of investment in subsidiary  (14,099)  (8,005)
  $781,432  $828,832 

Eliminations [Member]

Schedule of information on operations by geographical areas              
 Three months ended
September 30,
  Nine months ended
September 30,
 
(In thousands) 2019  2018  2019  2018 
Net sales:            
United States $48,331  $40,189  $124,677  $97,841 
Europe  143,637   137,800   413,063   402,952 
Eliminations  (741)  (776)  (2,028)  (2,446)
                 
  $191,227  $177,213  $535,712  $498,347 
                 
Net income attributable to Inter Parfums, Inc.:                
United States $5,802  $4,686  $12,475  $7,164 
Europe  15,046   14,252   39,594   38,582 
                 
  $20,848  $18,938  $52,059  $45,746 

  September 30,  December 31, 
  2019  2018 
Total Assets:      
United States $165,861  $133,406 
Europe  649,664   686,123 
Eliminations of investment in subsidiary  (15,097)  (20,362)
         
  $800,428  $799,167 

10.11.Recent Agreements:Agreements:

Oscar de la Renta:S.T. Dupont

In September 2019, the Company and Oscar de la Renta entered into an amended license agreement extending their partnership 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, the Company entered into an exclusive, 11-year worldwideJanuary 2020, we renewed our license agreement with Kate Spade New YorkS.T. Dupont for the creation, development and distribution of fragrances underfragrance 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.

12.Reclassifications:

Certain prior year’s amounts in the Kate Spade brand. This license takes effect on January 1, 2020,accompanying consolidated balance sheet and our rights under such license are subjectstatements of cash flows have been reclassified to certain minimum advertising expenditures and royalty payments as are customary in our industry.conform to current period presentation.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Item 2:MANAGEMENT'SMANAGEMENT’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“Forward Looking Statements"Statements” and "Risk Factors" in Inter Parfums' annual report on Form 10-K for the fiscal year ended December 31, 20182019 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 77%79% and 81% of net sales for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, 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 Repetto, Rochas and Van Cleef & Arpels, whose products are distributed in over 120 countries around the world.

Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 23%21% and 19% of net sales for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, Lily AldridgeMCM and Oscar de la Renta brands.

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INTER PARFUMS, INC. AND SUBSIDIARIES

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'sCompany’s largest brands, exceeding 10% of net sales, we own the Lanvin brand name for our class of trade, and license the Montblanc, Jimmy Choo, Coach and CoachGUESS brand names. As a percentage of net sales, product sales for thesethe Company’s largest brands were as follows:

 

Nine Months Ended

September 30,

  Three Months Ended
March 31,
 
 2019  2018  2020  2019 
          
Montblanc.  23%  20%  21%  26%
Coach.  20%  17%
Jimmy Choo.  17%  17%  15%  12%
Coach.  14%  14%
Lanvin.  8%  11%
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. Our Company addressesWe address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. Weinstruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. We are also carefully monitoring currency trends in the United Kingdom as a result of the volatility created from the United Kingdom's decision to exit the European Union. We have evaluated our pricing models and we do not expect any significant pricing changes. However, if the devaluation of the British pound worsens, it may affect future gross profit margins from sales in that territory.

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INTER PARFUMS, INC. AND SUBSIDIARIESImpact 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, the Company and Oscar de la Renta entered into an amendedwe extended our license agreement extending their partnership 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, the Companywe 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. This license takes effect on January 1, 2020, and ourOur rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

 

Lily Aldridge License

In September 2018, Interstellar Brands LLC, a wholly-owned subsidiary of the Company, announced the development of a new fragrance line in collaboration with supermodel Lily Aldridge. The license agreement with Lily Aldridge runs through December 31, 2023, and is subject to royalty payments as are customary in our industry. This deal marks the beginning of a strategic partnership between Interstellar and IMG Models, which manages Lily Aldridge, to develop direct-to-consumer e-commerce fragrance and beauty businesses for IMG Models' diverse and dynamic client base.

Graff License

In April 2018, the Company entered into an exclusive, 8-year worldwide license agreement with London-based Graff for the creation, development and distribution of fragrances under the Graff brand. Our rights under such license agreement are subject to certain advertising expenditures and royalty payments as are customary in our industry. Initial product development includes a multi-scent collection planned for an early 2020 launch. Additionally, we are exploring opportunities for luxury travel amenities, including five star hotels.

GUESS License

In February 2018, the Company entered into an exclusive, 15-year worldwide license agreement with GUESS?, Inc. for the creation, development and distribution of fragrances under the GUESS brand. This license took effect on April 1, 2018, and our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. In 2018, our sales efforts were focused on existing fragrances; in 2019, we added several flankers to existing product lines and in 2020, an entirely new fragrance line is scheduled for launch.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Discussion of Critical Accounting Policies

 

Information regarding our critical accounting policies can be found in our 20182019 Annual Report on Form 10-K filed with the SEC.

Results of Operations

 

Three and Nine Months Ended September 30, 2019March 31, 2020 as Compared to the Three and Nine Months Ended September 30, 2018March 31, 2019

Net Sales

 

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 

 Three months ended
September 30,
  Nine months ended
September 30,
 
(In millions) 2019  2018  % Change  2019  2018  % Change 
  (in millions) 
       
European based brand product sales $143.6  $137.8   4.2% $412.9  $402.8   2.5%
United States based product sales  47.6   39.4   20.7%  122.8   95.5   28.6%
Total net sales $191.2  $177.2   7.9% $535.7  $498.3   7.5%

Net sales for the three months ended September 30, 2019 increased 7.9%March 31, 2020 declined 18.7% to $191.2$144.8 million, as compared to $177.2$178.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales for that same period increased 9.7%declined 17.8%. Net sales forFor the nine months ended September 30, 2019 increased 7.5% to $535.7 million,2020 first quarter, the average U.S. dollar/euro exchange rate was 1.10 as compared to $498.31.14 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 that same period increased 10.2%.

European based productour 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 increased 4.2%for the 2019 first quarter established a high benchmark in 2020. Net sales for the Montblanc and 2.5%Jimmy Choo brands declined 33.4% and 28.3% for the three and nine months ended September 30, 2019,March 31, 2020, respectively, as compared to the corresponding periods of the prior year. Montblanc, our largest brand, continued to perform exceptionally well, with comparable period sales growth of 32.2% and 22.0% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. These results are attributable to the brand's newest scent, Montblanc Explorer, which launched in January 2019 and is performing exceptionally well in the United States and Western Europe. We also see continued strong performance of the brand's founding line Montblanc Legend. In July 2019, we launched Jimmy Choo Urban Hero, our newest men's scent for the Jimmy Choo brand. Initial reactions were very positive and brand sales are up 10.1% and 4.5% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. Despite the strength of the dollar and the high bar set in 2018 when Coach brand sales rose 104%, the popularity of the Coach fragrance portfolio, enabled us to increase sales just over 1% for the nine months ended September 30, 2019, as compared to the corresponding period of the prior year. The April

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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 A Girl in Capri, boosted Lanvin brand salesseveral programs originally scheduled for this year until 2021 and offset much of the decline in sales of the brand's established scents. However, the Lanvin brand continuesmoved related advertising and promotion expenses to face difficult markets in Asia and South America and2021 as a result, Lanvin brand sales are down 15.4%well. That includes our planned launches for the nineKate 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 September 30, 2019, asMarch 31, 2020, respectively, compared to the corresponding period of the prior year.

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INTER PARFUMS, INC. AND SUBSIDIARIES

United States based product In North America and Western Europe, where shelter in place and store closings were implemented later, sales increased 20.7%declined 1% and 28.6%11% for the three and nine months ended September 30, 2019,March 31, 2020, respectively, as compared to the corresponding periodsperiod of the prior year. The increase in net sales is primarily the result of the exceptional strength of GUESS brand scents. The recent debuts of 1981 Los Angeles and Seductive Noir have further enhanced the brand's established fragrance franchise. The Abercrombie & Fitch brand also continues to perform well as a result of the global rollout of their newest duo scent, Authentic. In addition, Hollister fragrances generated gains enhanced by the launch of the Wave limited edition duo, plus our first Festival line extension, Festival Nite. The Anna Sui and Oscar de la Renta brands continue to perform well in 2019, while Dunhill is expected to regain some of its lost momentum with the recent global launch of Century Blue.

Net Sales to Customers by Region Nine months ended
September 30,
 
(In millions) 2019  2018 
       
North America $164.1  $144.1 
Western Europe  138.9   132.5 
Asia  86.2   85.8 
Middle East  57.8   46.1 
Eastern Europe  41.2   39.6 
Central and South America  37.9   42.0 
Other  9.6   8.2 
  $535.7  $498.3 
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%

Sustained growth in the major markets of North America, Western Europe and Middle East was the result of increased product sales from the Montblanc, Jimmy Choo and Coach brands.

Gross margin Three months ended
September 30,
  Nine months ended
September 30,
 
(In millions) 2019  2018  2019  2018 
             
Net sales $191.2  $177.2  $535.7  $498.3 
Cost of sales  76.8   68.1   204.4   187.9 
                 
Gross margin $114.4  $109.1  $331.3  $310.4 
Gross margin as a percent of net sales  59.8%  61.6%  61.8%  62.3%

Gross profit margin was 59.8% and 61.8%61.5% of net sales for the three and nine months ended September 30, 2019, respectively,March 31, 2020, as compared to 61.6% and 62.3% for the corresponding periodsperiod of the prior year.

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INTER PARFUMS, INC. AND SUBSIDIARIES

For European operations, gross profit margin was 62.8%63.9% and 64.7%63.2% in the first quarters of net sales for the three2020 and nine months ended September 30, 2019, respectively, as compared to 64.9% and 65.1%, for the corresponding periods of the prior year.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 average dollar/euro exchange rates for the three and nine months ended September 30, 2019 was 1.11 and 1.12, respectively, as compared to 1.16 and 1.20 for the corresponding periods of the prior year. The stronger dollar in 20192020 resulted in a benefit to our gross margin during the three and nine months ended September 30, 2019. However, our new Montblanc Explorer product line, which was designed by some of the most highly sought after designers, has a greater than typical cost of sales, which offset much of the benefit of the stronger dollar.March 31, 2020.

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For U.S. operations, gross profit margin was 51.0%52.6% and 52.3% for55.1% in the threefirst quarters of 2020 and nine months ended September 30, 2019, respectively, as compared to 49.9% and 50.4% for the corresponding periods of the prior year. Sales growth for our United States operationsrespectively. The decline in gross profit margin is primarily the result of increasedproduct sales mix. Anna Sui products, which are primarily sold in Asia and generate some of higher margin prestige products under licenses. In addition, for the three months ended September 30, 2019, increased tariffs enacted by the United States had a small negative impact on our highest gross margins, and we do not anticipate any material negative impactwere down significantly in the foreseeable future.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 $2.4 million and $5.9$1.6 million for both the three months ended March 31, 2020 and nine month periods ended September 30, 2019, respectively, as compared to $1.8 million and $5.3 million for the corresponding periods of the prior year, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company'sCompany’s gross profit may not be comparable to other companies which may include these expenses as a component of cost of goods sold.

Selling, general and administrative expenses Three months ended
September 30,
  Nine months ended
September 30,
 
(In millions) 2019  2018  2019  2018 
             
Selling, general and administrative expenses $77.8  $74.2  $238.9  $226.3 
Selling, general and administrative expenses as a percent of net sales  40.7%  41.9%  44.6%  45.4%

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 increased 4.9% and 5.6%decreased 6.9% for the three and nine months ended September 30, 2019, respectively,March 31, 2020, as compared to the corresponding periodsperiod of the prior year. For European operations netHowever, as a percentage of sales, increased 4.2% and 2.5% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of ourwere 49.2% and 42.9% for the three months ended March 31, 2020 and 2019, respectively. For European operations, increased 0.3% and 1.4% for those same corresponding periods. As a result,with sales down 20.6%, selling, general and administrative expenses of our European operations represented 42.1% and 46.0% of net sales for the three and nine months ended September 30, 2019, respectively,declined 6.4% in 2020, as compared to 43.8%2019 and 46.5% for the corresponding periodsrepresented 50.1% of the prior year.

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INTER PARFUMS, INC. AND SUBSIDIARIES

sales in 2020, as compared to 42.5% of sales in 2019. For U.S. operations, netwith sales increased 20.7% and 28.6% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. At the same time,down 10.9%, selling, general and administrative expenses of our U.S. operations increased 25.0% and 25.6% for the three and nine months ended September 30, 2019,decreased 8.8% in 2020, as compared to the corresponding periods of the prior year2019 and as a result, represented 36.3%45.8% and 40.0% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 35.1% and 40.9% for the corresponding periods of the prior year. The increase in selling, general and administrative expenses as a percentage44.7% of sales withinin 2020 and 2019, respectively. At the time of retail store closings our U.S. operations is directly associated with increased sales of licensed products.

advertising and promotional programs were well underway. Promotion and advertising included in selling, general and administrative expenses aggregated $28.7approximately $28.5 million and $92.5 million(19.7% of net sales) for the three and nine months ended September 30, 2019, respectively,2020 period, as compared to $27.9$27.4 million and $87.2 million(15.4% of net sales) for the corresponding periods of2019 period. In addition, our entire operational budgets in Europe and the prior year. Promotion and advertising represented 17.3% and 15.0% of netUnited States for this period were based on our originally projected sales forlevels.

Once the three and nine months ended September 30, 2019, respectively, as compared to 17.5% and 15.7% for the corresponding periods of the prior year. We continue toCOVID-19 pandemic recedes, we will once again invest heavily in promotional spending to support new product launches and to build brand awareness. We havehad significant promotion and advertising programs underwayplanned for 2019,2020. However, we have postponed the launch of several programs originally scheduled for this year until 2021 and, anticipate that on a full year basis,where possible, we also moved those related advertising and promotion and advertising expenditure will aggregate approximately 21% of 2019 net sales, which is in line with that of the past two years.expenses to 2021 as well.

Royalty expense which is included in selling, general and administrative expenses aggregated $14.1 million and $39.2$11.3 million for the three and nine months ended September 30, 2019, respectively,2020 period, as compared to $13.0 million in 2019 and $35.5 million for the corresponding periods of the prior year. Royalty expense represented 7.4%7.8% and 7.3% of net sales for the threein 2020 and nine months ended September 30, 2019, as compared to 7.3% and 7.1% of net sales for the corresponding periods of the prior year.respectively. The increase in 2020, as a percentage of sales, is directly related to new licenses and increased royalty based product sales.

As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations increased 4.8%decreased 46.6% to $36.6$17.8 million for the three months ended September 30, 2019,March 31, 2020, as compared to $35.0 million for the corresponding period of the prior year. Income from operations increased 9.8% to $92.4 million for the nine months ended September 30, 2019, as compared to $84.1$33.3 million for the corresponding period of the prior year. Operating margins were 19.2% and 17.2%12.3% of net sales forin the three and nine months ended September 30, 2019, respectively,current period as compared to 19.7% and 16.9%18.7% for the corresponding periodsperiod of the prior year.

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Other Income and Expense

Interest expense aggregated $0.4$1.0 million and $1.2$0.6 million for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, as compared to $0.5 million and $1.6 million for the corresponding periods of the prior year.respectively. Interest expense is primarily related to the financing of brand and licensing acquisitions. We also use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions.

 

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INTER PARFUMS, INC. AND SUBSIDIARIES

Foreign currency gain or (loss)gains (losses) aggregated ($0.1)$1.0 million and ($0.8)$(0.2) million for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, as compared to ($1.1) million and $0.2 million for the corresponding periods of the prior year.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 $0.6$1.0 million and $2.9$1.9 million for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, as compared to $0.8 million and $3.3 million for the corresponding periods of the prior year.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 27.4%29.0% and 27.9%27.4% for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, as comparedrespectively. Pursuant to 28.6% and 29.7% foran action plan released by the corresponding periods ofFrench Prime Minister, the prior year.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 30.0%30% and 29% for both the three and nine months ended September 30,March 31, 2020 and 2019, respectively, as compared to 31.0% for both the three and nine months ended September 30, 2018. The lower effective tax rate for European operations in 2019 is the result of higher profits from their U.S. subsidiary, which are taxed at a lower corporate tax rate.respectively.

Our effective tax rate for U.S. operations was 15.8% and 16.6%20.9% for the three and nine months ended September 30, 2019, respectively,March 31, 2020, as compared to 15.7% and 17.5%12.1% for the three and nine months ended September 30, 2018.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 and earnings per share

 Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
(In thousands except per share data) 2019  2018  2019  2018 
             
Net income European operations $20,856  $19,740  $54,760  $53,383 
Net income U.S. operations  5,802   4,686   12,475   7,164 
                 
Net income  26,658   24,426   67,235   60,547 
Less: Net income attributable to the noncontrolling interest  5,810   5,488   15,176   14,801 
                 
Net income attributable to Inter Parfums, Inc. $20,848  $18,938  $52,059  $45,746 
Earnings per share:                
                 
Net income attributable to Inter Parfums, Inc. common shareholders:                
   Basic $0.66  $0.60  $1.66  $1.46 
   Diluted $0.66  $0.60  $1.64  $1.45 
                 
Weighted average number of shares outstanding:                
  Basic  31,452   31,326   31,444   31,297 
 Diluted  31,676   31,587   31,681   31,502 

Net income increased 9.1%decreased 46.8% to $26.7$13.3 million for the three months ended September 30, 2019,March 31, 2020, as compared to $24.4$25.0 million for the corresponding period of the prior year. Net income increased 11.0% to $67.2 million for the nine months ended September 30, 2019, as compared to $60.5 million for the corresponding period of the prior year. The primary 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. As discussed, slightly lower gross profit margins as a percentageexpenses, most of sales within our European operations were offsetwhich was caused by lower selling, general and administrative expenses as a percentage of sales. For United States operations, in summary, net sales for the nine months ended September 30, 2019 increased 28.6%, gross margin increased 33.6% and selling, general and administrative expenses increased 25.6%, all as compared to the corresponding periodeffects of the prior year.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'sSA’s 51% owned distribution subsidiarysubsidiaries in Spain. Net income attributable to the noncontrolling interest aggregated 28% of European operations'operations net income for all periods presented.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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INTER PARFUMS, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

The Company'sOur conservative financial position remains strong. At September 30, 2019, working capital aggregated $375 milliontradition has enabled us to amass hefty cash balances and nominal long-term debt. As of March 31, 2020 we had a working capital ratio of over 3.2 to 1. Cash and$204 million in cash, cash equivalents and short-term investments, aggregated $192 million, 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. Approximately 81%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 Company'sabove, 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 continue to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. Opportunities for external growth 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 provided by (used in)used in operating activities aggregated $6.7$25.1 million and ($3.8)$14.6 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. For the ninethree months ended September 30, 2019,March 31, 2020, working capital items used $65.8$40.6 million in cash from operating activities, as compared to $72.8$42.1 million in the 20182019 period. As usual, the most significant usage for both periods relates to the increase in accounts receivables as of September as compared to that of the prior December year end. This is expected and reflects the seasonality in our business whereby sales in the third quarter are higher than that of any other quarter of the year. Although as set forth on the cash flow statement, accounts receivable shows a 32% increaseis up 3.4% from 2018 year end, the September 30, 2019 ending balance is reasonable based on thirdfirst quarter 20192020 sales levels, and reflects continued strong collection activity as day'sday’s sales outstanding is relatively unchanged at 84 days, as compared to 85 days for both the corresponding period of the prior year. We continue to monitor collection activities activelythree months ended March 31, 2020 and adjust customer credit limits as needed.2019. Inventory levels are up approximately 8%relatively unchanged from year end and reflect levelsincludes inventory anticipated to be needed to support sales expectations and ourfor 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 20192020 reflect the purchases within our European operations,and sales of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. Approximately $63At 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.

Page 24

Our business is not capital intensive as we do not own any manufacturing facilities. However, onOn 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. Payments for licenses, trademarks and other intangible assets primarily represent upfront entry fees incurred

In 2018, in connection with new or extendeda license agreements.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 September 30, 2019, cash generated by operationsMarch 31, 2020, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 20192020 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 September 30, 2019March 31, 2020 and September 30, 2018.

Page 23

INTER PARFUMS, INC. AND SUBSIDIARIES2019.

 

Purchase of subsidiary shares from noncontrolling interest represents the purchase of treasury shares of Interparfums SA, which have been or are expected to be issued to Interparfums SA employees pursuant to its 2016 and 2018 Free Share Plans. In September 2019, all shares of Interparfums SA that were to be issued pursuant to the 2016 Free Share Plan were issued to Interparfums SA employees.Plan.

In October 2018,2019, the Board of Directors authorized a 31% increase in the annual dividend to $1.10 per share and in October 2019, the Board authorized a further 20% increase in the annual dividend to $1.32 per share. The nextIn 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 of $0.33 per sharewhen the business environment is payable on January 15, 2020 to shareholders of record on December 31, 2019. Dividends paid also include dividends paid once per year to the noncontrolling shareholders of Interparfums SA, which aggregated $9.7 million and $8.7 million for the nine months ended September 30, 2019 and 2018, respectively. The annual cash dividends are not expected to have any significant impact on our financial position.more favorable.

We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, providingso that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs.

Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the nine monthsthree month period ended September 30, 2019.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.

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INTER PARFUMS, INC. AND SUBSIDIARIES

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 September 30, 2019,March 31, 2020, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $39.5$40.0 million, and GB £7.3£1.0 million and JPY ¥140.0¥170.0 million which bothall 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"“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.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Part II. Other Information

Items 1. Legal Proceedings, 1A. Risk Factors, 2. Unregistered Sales of Equity Securities and Use of Proceeds, 3. Defaults Upon Senior Securities, 4. Mine Safety Disclosures and 5. Other Information, are omitted as they are either not applicable or have been included in Part I.

Item 1A. Risk Factors

Item 6. Exhibits.

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 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 30 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 31 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 32Certification 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 33 Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer 105

 

      
101 Interactive data files  Interactive data files  

Page 2628

 

 

INTER PARFUMS, INC. AND SUBSIDIARIESSIGNATURES

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 5th11th day of November 2019.May 2020.

INTER PARFUMS, INC.
By:/s/ Russell Greenberg
Executive Vice President and
Chief Financial Officer

 

 

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29

 

50.46 P4Y P5Y false --12-31 Q1 0000822663