UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

( MARK ONE )

(MARK ONE)

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
for the quarterly period ended March 31,June 30, 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 York  10176
(Address of Principal Executive Offices)(Zip   (Zip Code)

(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: Yes  No ☐

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 accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act).

Large accelerated FilerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging Growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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

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

At May 11,August 10, 2020, there were 31,531,95831,532,558 shares of common stock, par value $.001 per share, outstanding.

 

 

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

INDEX

Page
Number
Part I.Financial Information1
Part I. Financial Information1
Item 1.Financial Statements1
Consolidated Balance Sheets as of March 31,June 30, 2020 and December 31, 20192
Consolidated Statements of Income (Loss) for the Three and Six Months Ended March 31,June 30, 2020 and March 31,June 30, 20193
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended   March 31,June 30, 2020 and March 31,June 30, 20194
Consolidated Statements of Changes in Equity for the ThreeSix Months Ended March 31,June 30, 2020 and March 31,June 30, 20195
Consolidated Statements of Cash Flows for the ThreeSix Months Ended   March 31,June 30, 2020 and March 31,June 30, 20196
Notes to Consolidated Financial Statements7
Item 2.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations15
Item 3.Quantitative and Qualitative Disclosures About Market Risk26
Item 4.Controls and Procedures2726
Part II.Other Information27
Item 1A.Risk Factors27
Item 6.Exhibits29
Part II. Other InformationSignatures27
Item 1A.

Risk Factors 

27
Item 6.Exhibits28
Signatures2930

i

 

INTER PARFUMS, INC. AND SUBSIDIARIES

Part I. Financial Information

Item 1.Financial Statements

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2019 included in our annual report filed on Form 10-K.

The results of operations for the threesix months ended March 31,June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year.

Page 1

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share data)

(Unaudited)

 March 31,
2020
 December 31,
2019
  June 30,
2020
  December 31,
2019
 
ASSETS          
Current assets:          
Cash and cash equivalents $142,557  $192,417  $127,463  $192,417 
Short-term investments  61,539   60,714   67,505   60,714 
Accounts receivable, net  133,640   133,010   77,399   133,010 
Inventories  169,477   167,809   194,831   167,809 
Receivables, other  2,936   2,054   919   2,054 
Other current assets  21,630   17,123   18,254   17,123 
Income taxes receivable  137   169   1,231   169 
                
Total current assets  531,916   573,296   487,602   573,296 
                
Equipment and leasehold improvements, net  11,194   11,107   10,742   11,107 
        
Right-of-use assets, net  27,174   28,359   26,284   28,359 
Trademarks, licenses and other intangible assets, net  196,813   201,983   199,680   201,983 
Deferred tax assets  8,285   8,004   8,672   8,004 
                
Other assets  6,050   6,083   20,739   6,083 
                
Total assets $781,432  $828,832  $753,719  $828,832 
                
LIABILITIES AND EQUITY                
Current liabilities:                
Current portion of long-term debt $6,555  $12,326  $5,551  $12,326 
Current portion of lease liabilities  4,960   5,356   4,894   5,356 
Accounts payable – trade  46,355   54,098   33,904   54,098 
Accrued expenses  69,343   96,421   51,789   96,421 
Income taxes payable  7,894   5,865   5,836   5,865 
Dividends payable  10,406   10,399   --   10,399 
                
Total current liabilities  145,513   184,465   101,974   184,465 
                
Long–term debt, less current portion  9,781   10,734   18,858   10,734 
                
Lease liabilities, less current portion  23,849   24,635   23,057   24,635 
                
Equity:                
Inter Parfums, Inc. shareholders’ equity:                
Preferred stock, $.001 par; authorized 1,000,000 shares; none issued  
   
   --   -- 
Common stock, $.001 par; authorized 100,000,000 shares; outstanding 31,531,958 and 31,513,018 shares at March 31, 2020 and December 31, 2019, respectively  31   31 
Common stock, $.001 par; authorized 100,000,000 shares; outstanding 31,532,558 and 31,513,018 shares at June 30, 2020 and December 31, 2019, respectively  32   31 
Additional paid-in capital  73,618   70,664   72,535   70,664 
Retained earnings  473,947   474,637   471,462   474,637 
Accumulated other comprehensive loss  (48,097)  (39,853)  (40,566)  (39,853)
Treasury stock, at cost, 9,864,805 shares at March 31, 2020 and December 31, 2019  (37,475)  (37,475)
Treasury stock, at cost, 9,864,805 shares at June 30, 2020 and December 31, 2019  (37,475)  (37,475)
                
Total Inter Parfums, Inc. shareholders’ equity  462,024   468,004   465,988   468,004 
                
Noncontrolling interest  140,265   140,994   143,842   140,994 
                
Total equity  602,289   608,998   609,830   608,998 
                
Total liabilities and equity $781,432  $828,832  $753,719  $828,832 

 

See notes to consolidated financial statements.

Page 2

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In thousands except per share data)

(Unaudited)

 Three months ended
March 31,
 
 2020 2019  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
      2020  2019  2020  2019 
              
Net sales $144,824  $178,242  $49,506  $166,242  $194,330  $344,484 
                        
Cost of sales  55,783   68,401   22,662   59,268   78,444   127,669 
                        
Gross margin  89,041   109,841   26,844   106,974   115,886   216,815 
                        
Selling, general and administrative expenses  71,262   76,552   32,367   84,514   103,630   161,067 
                        
Income from operations  17,779   33,289 
Income (loss) from operations  (5,523)  22,460   12,256   55,748 
                        
Other expenses (income):                        
Interest expense  1,001   626   361   203   1,362   830 
(Gain) loss on foreign currency  (954)  151   (13)  546   (967)  697 
Interest income  (1,007)  (1,906)  (754)  (419)  (1,761)  (2,325)
                        
  (960)  (1,129)  (406)  330   (1,366)  (798)
                        
Income before income taxes  18,739   34,418 
Income (loss) before income taxes  (5,117)  22,130   13,622   56,546 
                        
Income taxes  5,440   9,440 
Income taxes (benefit)  (2,134)  6,530   3,306   15,969 
                        
Net income  13,299   24,978 
Net income (loss)  (2,983)  15,600   10,316   40,577 
                        
Less: Net income attributable to the noncontrolling interest  3,240   6,084   135   3,282   3,375   9,366 
                        
Net income attributable to Inter Parfums, Inc. $10,059  $18,894 
Net income (loss) attributable to Inter Parfums, Inc. $(3,118) $12,318  $6,941  $31,211 
                        
Net income attributable to Inter Parfums, Inc. common shareholders:        
Earnings (loss) per share:                
                
Net income (loss) attributable to Inter Parfums, Inc. common shareholders:                
Basic $0.32  $0.60  $(0.10) $0.39  $0.22  $0.99 
Diluted $0.32  $0.60  $(0.10) $0.39  $0.22  $0.99 
                        
Weighted average number of shares outstanding:                        
Basic  31,530   31,431   31,532   31,449   31,531   31,440 
Diluted  31,708   31,679   31,532   31,687   31,667   31,683 
                        
Dividends declared per share $0.33  $0.28   --  $0.28  $0.33  $0.55 

See notes to consolidated financial statements.

 

Page 3

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)thousands except per share data)

(Unaudited)

 Three months ended
March 31,
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 2020 2019  2020  2019  2020  2019 
Comprehensive income:              
              
Net income $13,299  $24,978 
Net income (loss) $(2,983) $15,600  $10,316  $40,577 
                        
Other comprehensive income:                        
                        
Net derivative instrument gain (loss), net of tax  257   (59)  (276)  342   (19)  283 
                        
Transfer from other comprehensive income into earnings  (52)  (136)
Transfer from OCI into earnings  --   --   (52)  (136)
                        
Translation adjustments, net of tax  (11,921)  (8,545)  11,087   5,550   (834)  (2,994)
                        
Comprehensive income  1,583   16,238   7,828   21,492   9,411   37,730 
                        
Comprehensive income attributable to the noncontrolling interests:                        
                        
Net income  3,240   6,084   135   3,282   3,375   9,366 
                        
Other comprehensive income:        
Other comprehensive income (loss):                
                        
Net derivative instrument gain (loss), net of tax  57   (52)
Net derivative instrument (loss), net of tax  (76)  91   (19)  39 
                        
Translation adjustments, net of tax  (3,529)  (2,241)  3,356   1,476   (173)  (765)
                        
Comprehensive income (loss) attributable to the noncontrolling interests  (232)  3,791 
Comprehensive income attributable to the noncontrolling interests  3,415   4,849   3,183   8,640 
                        
Comprehensive income attributable to Inter Parfums, Inc. $1,815  $12,447  $4,413  $16,643  $6,228  $29,090 

 

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,
  Six months ended
June 30,
 
 2020 2019  2020  2019 
          
Common stock, beginning and end of period $31  $31 
Common stock, beginning of period $31  $31 
Shares issued upon exercise of stock options  1   -- 
Common stock, end of period  32   31 
                
Additional paid-in capital, beginning of period  70,664   69,970   70,664   69,970 
Shares issued upon exercise of stock options  641   2,251   656   2,281 
Share-based compensation  427   350   855   701 
Purchase of subsidiary shares from noncontrolling interest  
   (468)  --   (4,610)
Transfer of subsidiary shares purchased  1,886   
   360   -- 
Additional paid-in capital, end of period  73,618   72,103   72,535   68,342 
                
Retained earnings, beginning of period  474,637   448,731   474,637   448,731 
Net income  10,059   18,894   6,941   31,211 
Dividends  (10,406)  (8,649)  (10,406)  (17,298)
Share-based compensation (adjustment)  (343)  353 
Share-based compensation  290   1,218 
Retained earnings, end of period  473,947   459,329   471,462   463,862 
                
Accumulated other comprehensive loss, beginning of period  (39,853)  (33,650)  (39,853)  (33,650)
Foreign currency translation adjustment, net of tax  (8,392)  (6,304)  (661)  (2,229)
Transfer from other comprehensive income into earnings  (52)  (136)  (52)  (136)
Net derivative instrument loss, net of tax  200   (7)  --   244 
Accumulated other comprehensive loss, end of period  (48,097)  (40,097)  (40,566)  (35,771)
                
Treasury stock, beginning and end of period  (37,475)  (37,475)  (37,475)  (37,475)
                
Noncontrolling interest, beginning of period  140,994   138,139   140,994   138,139 
Net income  3,240   6,084   3,375   9,366 
Foreign currency translation adjustment, net of tax  (3,529)  (2,241)  (173)  (765)
Net derivative instrument loss, net of tax  57   (52)  (19)  39 
Share-based compensation (adjustment)  (34)  321 
Share-based compensation  128   135 
Purchase of subsidiary shares from noncontrolling interest  
   (376)  --   (1,477)
Transfer of subsidiary shares purchased  (139)  
   (139)  -- 
Dividends  (324)  
   (324)  (9,654)
Noncontrolling interest, end of period  140,265   141,875   143,842   135,783 
                
Total equity $602,289  $595,766  $609,830  $594,772 

 

See notes to consolidated financial statements.

Page 5

 

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 Three months ended
March 31,
  Six months ended
June 30,
 
 2020 2019  2020  2019 
Cash flows from operating activities:          
Net income $13,299  $24,978  $10,316  $40,577 
Adjustments to reconcile net income to
net cash used in operating activities:
  

 

   

 

 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Depreciation and amortization  2,230   2,150   4,456   4,114 
Provision for doubtful accounts  444   38   682   332 
Lease expense  19   196   37   881 
Noncash share-based compensation  124   955 
Deferred tax benefit  (463)  (565)
Share based compensation  1,190   1,905 
Deferred tax (benefit)  (681)  (553)
Change in fair value of derivatives  (170)  (294)  (663)  (701)
Changes in:                
Accounts receivable  (4,545)  (33,385)  54,791   (9,924)
Inventories  (4,702)  (6,698)  (27,076)  (19,689)
Other assets  (3,545)  1,738   37  (1,969)
Accounts payable and accrued expenses  (29,821)  (8,875)  (63,415)  (16,637)
Income taxes, net  2,013   5,156   (961)  2,272 
                
Net cash used in operating activities  (25,117)  (14,606)
Net cash provided by (used in) operating activities  (21,287)  608 
                
Cash flows from investing activities:                
Purchases of short-term investments  (2,342)  (22,366)  (6,878)  (27,743)
Proceeds from sale of short-term investments     17,037   --   28,253 
Purchase of equity investment  

(13,998

)  -- 
Purchases of equipment and leasehold improvements  (1,254)  (964)  (1,571)  (2,932)
Payment for intangible assets acquired  (460)  (53)  (819)  (660)
                
Net cash used in investing activities  (4,056)  (6,346)  (23,266)  (3,082)
                
Cash flows from financing activities:                
Repayment of long-term debt  (6,577)  (5,655)
Proceeds from exercise of options  641   2,251 
Repayments of long-term debt  (12,086)  (11,256)
Proceeds from issuance of long-term debt  13,438   -- 
Proceeds from exercise of stock options  657   2,281 
Purchase of subsidiary shares from noncontrolling interest  --   (6,087)
Dividends paid  (10,399)  (8,630)  (20,805)  (17,279)
Purchase of subsidiary shares from noncontrolling interest     (844)
Dividends paid to minority interest  (324)   
Dividends paid to noncontrolling interest  (324)  (9,654)
                
Net cash used in financing activities  (16,659)  (12,878)  (19,120)  (41,995)
                
Effect of exchange rate changes on cash  (4,028)  (2,924)  (1,281)  (1,877)
                
Net decrease in cash and cash equivalents  (49,860)  (36,754)  (64,954)  (46,346)
                
Cash and cash equivalents - beginning of period  192,417   193,136   192,417   193,136 
                
Cash and cash equivalents - end of period $142,557  $156,382  $127,463  $146,790 
                
Supplemental disclosure of cash flow information:                
Cash paid for:                
Interest $462  $301  $693  $1,156 
Income taxes  3,706   5,185   4,741   12,615 

  

See notes to consolidated financial statements.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1.1.Significant Accounting Policies:

The accounting policies we follow are set forth in the notes to our consolidated financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2019.

2.2.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 haveinitially 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,More recently, those governments have set guidelines in allowing businesses to reopen and employees to return to offices. Beginning in March 2020, we have implemented travel restrictions and we are following social distancing practices. Our teams were set up to work from home and carry on business as efficiently as possible. In the U.S. and France,all jurisdictions in which we operate we are endeavoring to followfollowing guidance from authorities and health officials in allowing our teams to gradually return to our offices, 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 offices and distribution centers as the health and safety of our employees areis paramount. Our teams are set up

The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and now work from home and carry on business as efficiently as possible. Those decrees however, have resulted in a shutdown of international air travel brought our sales to 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.

virtual standstill. The duration and intensity of this global health emergency and its related disruptions are uncertain. WeSince March 2020, retail stores in several jurisdictions around the world began reopening and business is slowly picking up. However, we anticipate that retail store closings,limited traffic in reopened stores and the slowdown inshutdown of international air traffic potential supply chain disruptionshave 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. WeWhile we expect a larger net sales declinebusiness with many of our retail partners to improve considerably in the second quarterhalf of 2020, as many retail storeswe do not see a resurgence anytime soon in our major markets may remain closed for the entire period.connection with travel retail. 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 couldwill continue to have a material adverse effect on theour results of our operations, financial position and cash flows through at least the end of this year.

Page 7

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

3.Recent Agreements:

Origines-parfums

In June 2020, the Company, through its 73% owned French subsidiary, Interparfums SA, and Divabox SAS (“Divabox”), owner of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to which we acquired 25% of Divabox capital for €12.5 million ($14 million), through a capital increase. The difference between the purchase price and the fair value of net assets acquired of €7.9 million has been allocated to goodwill, pending final purchase price allocation, and the entire purchase price is included in other assets on the accompanying balance sheet as of andJune 30, 2020. In connection with the acquisition, the Company entered into a €12 million ($13.4 million), three-year term loan payable in three equal annual installments bearing interest at 0.85% above the EURIBOR 3-month rate. The loan requires the maintenance of certain financial covenants, tested annually, including a maximum leverage ratio.

Moncler

In June 2020, the Company entered into an exclusive, 5-year worldwide license agreement with a potential 5-year extension with Moncler for the year endingcreation, development and distribution of fragrances under the Moncler brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

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, 2020.2020, 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.

4.3.Recent Accounting Pronouncements:

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as updated in 2019 and 2020, which require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The new rules eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The new rules are effective for the Company in the first quarter of 2020 and there was no material impact on our consolidated financial statements.

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

5.Inventories:

Inventories consist of the following:

(In thousands) June 30,
2020
  December 31, 2019 
       
Raw materials and component parts $78,954  $71,895 
Finished goods  115,877   95,914 
         
  $194,831  $167,809 

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INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

4.6.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:

The following tables present our financial assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

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

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INTER PARFUMS, INC. AND SUBSIDIARIES

      Fair Value Measurements at June 30, 2020 
     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 $67,505  $     —  $67,505  $     — 
Foreign currency forward exchange contracts not accounted for using hedge accounting  770      770    
                 
  $68,275  $  $68,275  $ 

     Fair Value Measurements at December 31, 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 $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  $ 

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’s indebtedness approximate current market rates. The fair value of the Company’s long-term debt was estimated based on the current rates offered to companies for debt with the same remaining maturities and is approximately equal to its carrying value.

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

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

7.6.Derivative Financial Instruments:

The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income statement. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no longer occur, then any gains or losses accumulated in other comprehensive income are reclassified to current-period earnings. 

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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 threesix month periods ended March 31,June 30, 2020 and 2019. For the three months ended March 31, 2020 and 2019, interest expense was reduced by a gain of $0.02 and $0.05 million 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 March 31,June 30, 2020 resulted in an asset and is included in other current assets on the accompanying balance sheet.

At March 31,June 30, 2020, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $40.0 million, GB £1.0 million and JPY ¥170.0$2.7 million which all have maturities of less than one year.

8.7.Leases:

The Company leases its offices and warehouses, vehicles, and certain office equipment, substantially all of which are classified as operating leases. The Company currently has no material financing leases. The Company determines if an arrangement is a lease at inception. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term.

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

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of March 31,June 30, 2020, the weighted average remaining lease term was 6.36.1 years and the weighted average discount rate used to determine the operating lease liability was 2.8%2.6%. Rental expense related to operating leases was $1.8$1.5 million and $3.3 million for boththe three and six months ended June 30, 2020, respectively, as compared to $1.1 million and $2.9 million for the corresponding periods ending March 31, 2020 and 2019.of the prior year. Operating lease payments included in operating cash flows totaled $1.6$3.0 million and $3.2 million for both threethe six months ended March 31,June 30, 2020 and 2019, and noncashrespectively. Noncash additions to operating lease assets totaled $0.7$1.0 million and $31.8$35.0 million for the threesix months ended March 31,June 30, 2020 and 2019, respectively.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9.8.Share-BasedShare Based Payments:

The Company maintains a stock option programprograms for key employees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the granting of both nonqualified and incentive options. Options granted under the plans typically have a six-year term and vest over a four to five-year period. The fair value of shares vested duringfor the threesix months ended March 31,June 30, 2020 and 2019 aggregated $0.08 million and $0.06$0.07 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 threesix month period ended March 31,June 30, 2020:

 Number of
Shares
 Weighted Average
Grant-Date
Fair Value
  Number of Shares Weighted Average Grant Date Fair Value 
Nonvested options – beginning of period  514,210  $12.36   514,210  $12.36 
Nonvested options granted  9,000  $12.16   9,000  $12.16 
Nonvested options vested or forfeited  (10,180) $10.10   (13,680) $10.53 
Nonvested options – end of period  513,030  $12.40   509,530  $12.40 

Share-basedShare based payment expense decreased income before income taxes by $0.12$1.07 million and $0.96$1.19 million for the three and six months ended March 31,June 30, 2020, respectively, as compared to $0.95 million and 2019, respectively, and$1.9 million for the corresponding periods of the prior year. Share based payment expense decreased net income attributable to Inter Parfums, Inc. by $0.18$0.67 million and $0.58$0.86 million for the three and six months ended March 31,June 30, 2020, respectively, as compared to $0.56 million and 2019.$1.14 million for the corresponding periods of the prior year.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

  Shares  Weighted Average Exercise
Price
 
       
Outstanding at January 1, 2020  815,800  $49.89 
Options granted  9,000   69.11 
Options forfeited  (5,740)  56.10 
Options exercised  (19,540)  33.64 
         
Outstanding at June 30, 2020  799,520  $50.45 
         
Options exercisable  289,990  $35.31 
Options available for future grants  570,435     

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  Shares  Weighted Average Exercise Price 
       
Outstanding at January 1, 2020  815,800  $49.89 
Options granted  9,000   69.11 
Options forfeited  (2,140)  57.03 
Options exercised  (18,940)  33.82 
         
Outstanding at March 31, 2020  803,720   
$ 50. 46
 
         
Options exercisable  290,690  $35.09 
Options available for future grants  566,835   
 
 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of March 31,June 30, 2020, the weighted average remaining contractual life of options outstanding is 3.783.53 years (2.38(2.13 years for options exercisable);, the aggregate intrinsic value of options outstanding and options exercisable is $5.3$6.1 million and $3.9$4.3 million, respectively;respectively, and unrecognized compensation cost related to stock options outstanding aggregated $5.6$5.2 million.

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

(In thousands) March 31,
2020
 March 31,
2019
  June 30,
2020
  June 30,
2019
 
          
Cash proceeds from stock options exercised $641  $2,251  $657  $2,281 
Tax benefits     300   --   300 
Intrinsic value of stock options exercised  733   2,226   740   2,267 

The weighted average fair values of the options granted by Inter Parfums, Inc. during the threesix months ended March 31,June 30, 2020 and 2019 were $12.16 and $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 March 31,June 30, 2020 and 2019 are set forth in the following table:

 March 31,
2020
 March 31,
2019
  June 30,
2020
  June 30,
2019
 
          
Weighted average expected stock-price volatility  25%  27%  25%  27%
Weighted average expected option life  5 years   5 years   5 years   5 years 
Weighted average risk-free interest rate  1.4%  2.5%  1.4%  2.5%
Weighted average dividend yield  2.5%  2.0%  2.5%  2.0%

Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects the assumption that the dividend payout as authorized by the Board of Directors would increase as the earnings of the Company and its stock price continue to increase.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In December 2018, Interparfums SA, our 73% owned French subsidiary, approved a plan to grant an aggregate of 26,600 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The shares, subject to adjustment for stock splits, willare expected to be distributed in June 2022. In order to avoid dilution of the Company’s ownership of Interparfums SA, all shares to be distributed pursuant to the plan will be pre-existing shares of Interparfums SA purchased in the open market by Interparfums SA in prior years.

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 had been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant. The original cost of the grant was approximately $4.4 million, and the March 2020 revaluation resulted in a reduction of the cost, to approximately $2.5 million. As a result, a $0.3 million reduction of cost, net, was recorded for the three months ended March 31, 2020.

 

In June 2020, the performance conditions were modified effecting 96 employees and resulting in an increase in the estimated number of shares to be distributed, after forfeited shares, to 125,341. The increase in shares anticipated to be distributed were transferred from treasury shares at the Interparfums SA level.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The original cost of the grant was approximately $4.4 million, and the June 2020 modification resulted in a revised cost of approximately $3.8 million.

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

Net income attributable to Inter Parfums, Inc. per common share (“basic EPS”) is computed by dividing net earningsincome attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net earningsincome attributable to Inter Parfums, Inc. per share assuming dilution (“diluted EPS”), is computed using the weighted average number of shares outstanding, plus the incremental shares outstanding assuming the exercise of dilutive stock options using the treasury stock method.

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

 Three months ended  Three months ended Six months ended 
(In thousands, except per share data) March 31, 
(In thousands) June 30,  June 30, 
 2020  2019  2020  2019  2020  2019 
Numerator:              
Net income attributable to Inter Parfums, Inc. $10,059  $18,894 
Net income (loss) attributable to Inter Parfums, Inc. $(3,118) $12,318  $6,941  $31,211 
Denominator:                        
Weighted average shares  31,530   31,431   31,532   31,449   31,531   31,440 
Effect of dilutive securities:                        
Stock options  178   248      238   136   243 
Denominator for diluted earnings per share  31,708   31,679   31,532   31,687   31,667   31,683 
                        
Earnings per share:                        
Net income attributable to Inter Parfums, Inc.        
common shareholders:        
Net income (loss) attributable to Inter Parfums, Inc. common shareholders: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic $0.32  $0.60  $(0.10) $0.39  $0.22  $0.99 
Diluted  0.32   0.60   (0.10)  0.39   0.22   0.99 

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Not included in the above computations isare the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.370.80 and 0.59 million shares of common stock for both the three and six months ended June 30, 2020, as compared to 0.18 million shares of common stock for the three and six months ended March 31, 2020 and 2019, respectively.June 30, 2019.

11.10.Segment and Geographic Areas:

The Company manufactures and distributes one product line, fragrances and fragrance related products. The Company manages its business in two segments, European based operations and United States based operations. The European assets are located, and operations are primarily conducted, in France. Both European operations primarily represent the sale of prestige brand name fragrances and United States operations primarily represent the sale of prestige brand name and specialty retail fragrance.fragrances.

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INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Information on our operations by geographical areas is as follows:

(In thousands) Three months ended
March 31,
  Three months ended
June 30,
  Six months ended
June 30,
 
 2020 2019  2020  2019  2020  2019 
Net sales:              
United States $31,618  $35,616  $10,226  $40,730  $41,844  $76,346 
Europe  114,123   143,767   39,424   125,659   153,547   269,426 
Eliminations  (917)  (1,141)  (144)  (147)  (1,061)  (1,288)
 $144,824  $178,242                 
         $49,506  $166,242  $194,330  $344,484 
Net income attributable to Inter Parfums, Inc.:        
                
Net income (loss) attributable to Inter Parfums, Inc.:                
United States $1,606  $2,887  $(3,523) $3,786  $(1,917) $6,673 
Europe  8,453   16,007   405   8,532   8,858   24,538 
 $10,059  $18,894                 
 $(3,118) $12,318  $6,941  $31,211 

 June 30, December 31, 
 March 31,
2020
 December 31,
2019
  2020  2019 
Total Assets:             
United States $148,547  $166,180  $134,903  $166,180 
Europe  646,984   670,657   642,393   670,657 
Eliminations of investment in subsidiary  (14,099)  (8,005)
Eliminations  (23,577)  (8,005)
 $781,432  $828,832         
 $753,719  $828,832 

12.11.Recent Agreements:

S.T. Dupont

In January 2020, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2020, without any material changes in terms and conditions. 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 accompanying consolidated balance sheet and statements of cash flows have been reclassified to conform to current period presentation.

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Item 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Information

Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will"“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and "would"“would” or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and "Risk Factors"“Risk Factors” in Inter Parfums'Parfums’ annual report on Form 10-K for the fiscal year ended December 31, 2019 and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report.

Overview

We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.

We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 79% and 81%78% of net sales for the threesix months ended March 31,June 30, 2020 and 2019, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Moncler, Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas S.T. Dupont and Van Cleef & Arpels, whose products are distributed in over 120 countries around the world.

Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 21% and 19%22% of net sales for the threesix months ended March 31,June 30, 2020 and 2019, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, MCM and Oscar de la Renta brands.

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Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc, Coach, Jimmy Choo Coach and GUESS brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:

 Three Months Ended
March 31,
  

Six Months Ended

June 30,

 
 2020  2019  2020 2019 
          
Montblanc.  21%  26%  21%  24%
Coach.  20%  17%  19%  14%
Jimmy Choo.  15%  12%  15%  15%
GUESS.  11%  9%
Guess.  11%  8%

Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as well as through our own distribution subsidiaries in Spain and the United States.

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers.

As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share. 

Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because over 45% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates.

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Impact of COVID-19 Pandemic and the Resulting Changes to our 2020 Financial Outlook

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has disrupted our business operations and caused a significant unfavorable impact on our results of operations.

In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate haveinitially 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,More recently, those governments have set guidelines in allowing businesses to reopen and employees to return to offices. Beginning in March, 2020, we have implemented travel restrictions;restrictions and we are following social distancing practices. Our teams were set up to work from home and carry on business as efficiently as possible. In the U.S. and France,all jurisdictions in which we operate we are endeavoring to followfollowing guidance from authorities and health officials in allowing our teams to gradually return to our offices, 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 offices and 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 slowdowna shutdown of international 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. WeSince March 2020, retail stores in several jurisdictions around the world began reopening and business is slowly picking up. However, we anticipate that the initial retail store closings and the slowdown inshutdown of international air traffic potential supply chain disruptionshas 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. WeWhile we expect a larger net sales declinebusiness with many of our retail partners to improve considerably in the second quarterhalf of 2020, as many retail storeswe do not see a resurgence anytime soon in our major markets may remain closed for the entire period.connection with travel retail. 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 couldwill continue to have a material adverse effect on theour results of our operations, financial position and cash flows asthrough at least the end of and for the year ended December 31, 2020.this year. 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 and many parts of Europe 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 and maintain hefty cash balances and nominal long-term debt. As of March 31,June 30, 2020 we had $204$195 million in cash, cash equivalents and short-term investments, and only $9.8$18.9 million of long-term debt. We also have $47$48 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 historicallytypically 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.2020. We have also temporarily suspended our quarterly cash dividend. While these actions are expected to have a favorable impact on the Company’s fixed expenditures and cash flow, our cash and credit management teams, together with our executive management teams are paying particular attention to the management of working capital. As a result of the above, we do not anticipate any short-term liquidity problems, nor do we anticipate any material credit losses.

Recent Important Events

Origines-Parfums

In June 2020, the Company, through its 73% owned subsidiary, Interparfums SA, and Divabox SAS (“Divabox”), owner of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to which we acquired a 25% of Divabox capital for €12.5 million ($14 million), through a capital increase. In connection with the acquisition, the Company entered into a €12 million ($13.4 million), three-year term loan payable in three equal annual installments plus interest. As a website of reference for all selective fragrance brands, Origines-parfums is a key French player in the online beauty market recognized for its customer relationship expertise. This agreement should enhance the introduction of dedicated fragrance lines and products designed to address a specific consumer demand for this distribution channel and accelerate our digital development.

Moncler

In June 2020, the Company entered into an exclusive, 5-year worldwide license agreement with a potential 5-year extension with Moncler for the creation, development and distribution of fragrances under the Moncler brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. Moncler was founded at Monestier-de-Clermont, Grenoble, France, in 1952 and is currently headquartered in Italy. Over the years the brand has combined style with constant technological research assisted by experts in activities linked to the world of the mountain. The Moncler outerwear collections marry the extreme demands of nature with those of city life. Our first fragrance launch for the Moncler brand is scheduled for the first quarter of 2022.

S.T. Dupont

In January 2020, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2020, without any material changes in terms and conditions. Our initial 11-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended through December 31, 2019. The agreement will be extended annually in September of each year upon mutual consent.

Abercrombie & Fitch and Hollister

In November 2019, we extended our license for both the Abercrombie & Fitch and Hollister brands until December 31, 2022, and added automatic renewals unless terminated on 3 years’ notice.

MCM

In September 2019, we entered into an exclusive, 10-year worldwide license agreement with German luxury fashion house MCM for the creation, development and distribution of fragrances under the MCM brand. Our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

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Oscar de la Renta

In September 2019, we extended our license through December 31, 2031, and added an additional five-year extension option through December 31, 2036. The original license agreement, signed in October 2013, would have expired on December 31, 2025.

Kate Spade New York

In June 2019, we entered into an exclusive 11-year worldwide license agreement with Kate Spade New York for the creation, development and distribution of fragrances under the Kate Spade brand. Our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

 

Discussion of Critical Accounting Policies

Information regarding our critical accounting policies can be found in our 2019 Annual Report on Form 10-K filed with the SEC.

Results of Operations

 

Three and Six Months Ended March 31,June 30, 2020 as Compared to the Three and Six Months Ended March 31,June 30, 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 

(In millions) Three months ended June 30,  Six months ended  June 30, 
  2020  2019  % Change  2020  2019  % Change 
  (in millions) 
                   
European based brand product sales $39.4  $125.6   (68.6)% $153.5  $269.3   (43.0)%
United States based product sales  10.1   40.6   (75.2)%  40.8   75.2   (45.7)%
Total net sales $49.5  $166.2   (70.2)% $194.3  $344.5   (43.6)%

Net sales for the three months ended March 31,June 30, 2020 declined 18.7%decreased 70.2% to $144.8$49.5 million, as compared to $178.2$166.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales declined 17.8%69.8%. For the three months ended June 30, 2020 first quarter,and 2019, the average U.S. dollar/euro exchange rate was 1.10 and 1.12, respectively. Net sales for the six months ended June 30, 2020 decreased 43.6% to $194.3 million, as compared to 1.14 in the first quarter of 2019.

European based product sales decreased 20.6% to $114.1 million for the three months ended March 31, 2020, as compared to $143.7$344.5 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net

European based product sales declined 19.5%. The successful launch of Coach Dreams early in the year spurred the 35.9% increase in Coach brand sales. Comparable quarter sales declined for our other major brands following the closure of virtually all points of sale throughout the world due to the global COVID-19 pandemic. In addition, for certain major brands like Montblancdecreased 68.6% and Jimmy Choo, the 9.9% and 25.7% respective increases in brand sales for the 2019 first quarter established a high benchmark in 2020. Net sales for the Montblanc and Jimmy Choo brands declined 33.4% and 28.3%43.0% for the three and six months ended March 31,June 30, 2020, respectively, as compared to the corresponding periodperiods of the prior year. United States based product sales decreased 75.2% and 45.7% for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods of the prior year.

As we expected, the impact of the COVID-19 pandemic, most notably store closures in many countries where our products are sold, was the primary reason for the steep decline in our second quarter sales across all brands and geographic markets. In May and June, as stores gradually began to reopen in certain markets, our sales began to improve from the dismal April levels. We expect that this trend will continue as more stores reopen and customers feel more confident about in-store shopping. However, we recognize that there will continue to be significant challenges for the remainder of 2020 and possibly into early 2021. In particular, the one market which shows no sign of a turnaround any time soon is travel retail.

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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.

Net Sales to Customers by Region Six months ended June 30, 
(In millions) 2020  2019 
       
North America $59.2  $96.9 
Western Europe  57.8   87.5 
Asia  28.6   61.9 
Middle East  19.0   44.6 
Central and South America  14.2   26.1 
Eastern Europe  9.4   21.5 
Other  6.1   6.0 
  $194.3  $344.5 

We anticipate that the effectsThe impact of the COVID-19 pandemic will continue to unfavorably impact our business. We also anticipate significant challenges forhas broadly impacted all regions, with the remainder of 2020 due to uncertain market conditions. We expect a larger net sales decline in the second quarter of 2020, as many retail stores in our major markets may remain closed for the entire period. In that regard, we have postponed the launch of several programs originally scheduled for this year until 2021 and moved related advertising and promotion expenses to 2021 as well. That includes our planned launches for the Kate Spade New York, Jimmy Choo, Anna Sui and GUESS brands.

Net Sales to Customers by Region Three months ended
March 31,
 
(in millions) 2020  2019 
       
North America $46.5  $47.2 
Western Europe  41.5   46.8 
Asia  20.6   32.8 
Middle East  14.4   25.5 
Central and South America  10.9   13.3 
Eastern Europe  7.1   9.0 
Other  3.8   3.6 
  $144.8  $178.2 

With respect to performances by region, shelter in place measures and store closings decreed by various governments weighed on net sales. The impact was most severesteepest declines in the Middle East, Eastern Europe and Asia, where net sales declined 44% and 37%Asia. Travel retail accounted for the three months ended March 31, 2020, respectively, compared to the corresponding periodmuch of the prior year. In North America and Western Europe, where shelterdecline in place and store closings were implemented later, sales declined 1% and 11% for the three months ended March 31, 2020, respectively, compared to the corresponding period of the prior year.Asian market.

Gross Profit Margin Three months ended
March 31,
 
(in millions) 2020  2019 
Gross profit margin Three months ended
June 30,
  Six months ended
June 30,
 
(In millions) 2020  2019  2020  2019 
              
Net sales $144.8  $178.2  $49.5  $166.2  $194.3  $344.5 
Cost of sales  55.8   68.4   22.7   59.2   78.4   127.7 
                
Gross margin $89.0  $109.8  $26.8  $107.0  $115.9  $216.8 
        
Gross margin as a % of net sales  61.5%  61.6%
Gross margin as a percent of net sales  54%  64%  60%  63%

Gross profit margin was 61.5% of net sales54% and 60% for the three and six months ended March 31,June 30, 2020, respectively, as compared to 61.6%64% and 63% as for the corresponding period of the prior year.three and six months ended June 30, 2019, respectively. For European operations, gross profit margin was 63.9%57% and 63.2% in62% for the first quartersthree and six months ended June 30, 2020, respectively, as compared to 68% and 66% for the corresponding periods of 2020 and 2019, respectively. the prior year.

We carefully monitor movements in foreign currency exchange rates as over 45% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross profit margin while a weak U.S. dollar has a negative effect. The stronger dollar in 2020 resulted in a small benefit to our gross margin during the three and six months ended March 31,June 30, 2020. However, this benefit was offset by lower gross margins due to product mix, and includes a charge of approximately $2.0 million relating to the assumption of a return liability for products sold by the former licensee of a brand license entered into in 2019.

For U.S. operations, gross profit margin was 43% and 50% for the three and six months ended June 30, 2020, respectively, as compared to 52% and 53% for the corresponding periods of the prior year. As a consequence of the 75% decline in net sales, certain expenses such as depreciation of tools and molds together with the distribution of point of sale materials, exaggerated the decline in gross margin for the periods.

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For U.S. operations, gross profit margin was 52.6% and 55.1% in the first quarters of 2020 and 2019, respectively. The decline in gross profit margin is primarily the result of product sales mix. Anna Sui products, which are primarily sold in Asia and generate some of our highest gross margins, were down significantly in the first quarter of 2020, as compared to the corresponding period of the prior year.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $1.6$0.6 million and $2.2 million for both the three monthsand six month periods ended March 31,June 30, 2020, respectively, as compared to $1.9 million and 2019,$3.5 million for the corresponding periods of the prior year, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross profit may not be comparable to other companies, which may include these expenses as a component of cost of goods sold.

Selling, general and administrative expenses Three months ended
June 30,
  Six months ended
June 30,
 
(In millions) 2020  2019  2020  2019 
             
Selling, general and administrative expenses $32.4  $84.5  $103.6  $161.1 
Selling, general and administrative expenses as a percent of net sales  65%  51%  53%  47%

Selling, General and Administrative Expenses Three months ended
March 31,
 
(in millions) 2020  2019 
       
Selling, general and administrative expenses $71.3  $76.5 
Selling, general and administrative expenses as a % of net sales  49.2%  42.9%

Selling, general and administrative expenses decreased 6.9%62% and 36% for the three and six months ended March 31,June 30, 2020, respectively, as compared to the corresponding periodperiods of the prior year. However, as a percentage of sales, selling, general and administrative expenses were 49.2%65% and 42.9%53% for the three and six months ended March 31,June 30, 2020, respectively, as compared to 51% and 47% for the three and six months ended June 30, 2019, respectively. For European operations with sales down 20.6%,decreased 69% and 43% for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses declined 6.4% in 2020, as compared to 2019of our European operations decreased 66% and represented 50.1% of sales in 2020, as compared to 42.5% of sales in 2019. For U.S. operations, with sales down 10.9%,38% for the same periods, respectively. In addition, selling, general and administrative expenses of our European operations represented 59% and 52% of net sales for the three and six months ended June 30, 2020, respectively, as compared to 54% and 48% for the three and six months ended June 30, 2019, respectively.

For U.S. operations sales decreased 8.8% in75% and 46% for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods of the prior year. At the same time, selling, general and administrative expenses of our U.S. operations decreased 44% and 27% for the three and six months ended June 30, 2020, as compared to 2019the corresponding periods of the prior year, and represented 45.8%91% and 44.7%57% of net sales for the three and six months ended June 30, 2020, respectively, as compared to 40% and 42% for the corresponding periods of the prior year. Our U.S. operations are significantly smaller than those of our European operations and carry higher fixed costs that could not be leveraged as efficiently as those of our European operations with the decline in 2020 and 2019, respectively.sales.

We had significant promotional programs planned for 2020. At the time of initial retail store closings, ourcertain advertising and promotional programs were well underway.underway and could not be halted. Since that time we have severely curtailed our promotional activities. We postponed the launch of several programs originally scheduled for this year until 2021 along with related advertising and promotion programs. Promotion and advertising included in selling, general and administrative expenses aggregated approximately $28.5$5.8 million (19.7% of net sales)and $34.4 million for the three and six months ended June 30, 2020, period,respectively, as compared to $27.4$36.4 million (15.4%and $63.8 million for the corresponding periods of the prior year. Promotion and advertising represented 11.8% and 17.7% of net sales)sales for the 2019 period. In addition, our entire operational budgets in Europethree and six months ended June 30, 2020, respectively, as compared to 21.9% and 18.5% for the United States for this period were based on our originally projected sales levels.

corresponding periods of the prior year. Once the COVID-19 pandemic recedes, we will once again invest heavily in promotional spending to support new product launches and to build brand awareness. We had significant promotion and advertising programs planned for 2020. However, we have postponed the launch of several programs originally scheduled for this year until 2021 and, where possible, we also moved those related advertising and promotion expenses to 2021 as well.

Royalty expense included in selling, general and administrative expenses aggregated $11.3$3.4 million and $14.6 million for the three and six months ended June 30, 2020, period,respectively, as compared to $13.0$12.1 million in 2019 and $25.1 million for the corresponding periods of the prior year. Royalty expense represented 7.8%6.8% and 7.5% of net sales for the three and six months ended June 30, 2020, as compared to 7.3% of net sales in 2020 and 2019, respectively. The increase in 2020, asfor both corresponding periods of the prior year. As a percentageresult of sales, is directly relatedthe COVID-19 pandemic we reached agreements with most of our licensors to increased royalty based product sales.waive or significantly reduce any minimum guaranteed royalties for 2020.

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As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations decreased 46.6% to $17.8we incurred an operating loss of $5.5 million for the three months ended March 31,June 30, 2020, as compared to $33.3an operating profit of $22.5 million for the corresponding period of the prior year. Operating margins were 12.3% of net sales inIncome from operations was $12.3 million for the current periodsix months ended June 30, 2020, as compared to 18.7%$55.7 million for the corresponding period of the prior year. For the six months ended June 30, 2020, our operating margin was 6.3%, as compared to 16.2% for the corresponding period of the prior year.

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Other Income and Expense

Interest expense aggregated $1.0$0.4 million and $0.6$1.4 million for the three and six months ended March 31,June 30, 2020, respectively, as compared to $0.2 million and 2019, respectively.$0.8 million for the corresponding periods of the prior year. 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.

Foreign currency gains (losses) aggregated $1.0 millionzero and $(0.2)$1.0 million for the three and six months ended March 31,June 30, 2020, respectively, as compared to losses of $0.5 million and 2019, respectively.$0.7 million for the corresponding periods of the prior year. 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. OverApproximately 45% of net sales of our European operations are denominated in U.S. dollars.

Interest income aggregated $1.0$0.8 million and $1.9$1.8 million for the three and six months ended March 31,June 30, 2020, respectively, as compared to $0.4 million and 2019, respectively.$2.3 million for the corresponding periods of the prior year. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

Income Taxes

Our effective tax rate was 29.0% and 27.4% for the three months ended March 31, 2020 and 2019, respectively. Pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is expected to be cut from 33% to 25% over a three-year period beginning in 2020. Our effective tax rate for European operations was 30% and 29%26% for the threesix months ended March 31, 2020 and 2019, respectively.

Our effective tax rate for U.S. operations was 20.9% for the three months ended March 31,June 30, 2020, as compared to 12.1%30% for the corresponding period of the prior year. The decrease is the result of favorable tax rates in other jurisdictions where our European operations conduct business such as Singapore, Switzerland and the United States.

Our effective tax rate for U.S. operations resulted in a benefit of 33.8% for the six months ended June 30, 2020, as compared to an expense of 17.3% for the corresponding period of the prior year. Due to the loss incurred in 2020, for federal tax purposes, we will be able to carry back the loss to 2015 when the federal income tax rate was 35%. Our effective tax rate in 2019 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.

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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 recoverrecovery 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

Net income decreased 46.8% to $13.3

(In thousands except per share data) Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2020  2019  2020  2019 
             
Net income European operations $539  $11,814  $12,232  $33,904 
Net income (loss) U.S. operations  (3,522)  3,786   (1,916)  6,673 
                 
Net income (loss)  (2,983)  15,600   10,316   40,577 
Less: Net income attributable to the noncontrolling interest  135   3,282   3,375   9,366 
                 
Net income (loss) attributable to Inter Parfums, Inc. $(3,118) $12,318  $6,941  $31,211 
                 
Earnings (loss) per share:                
                 
Net income (loss) attributable to Inter Parfums, Inc. common shareholders:                
Basic ($0.10) $0.39  $0.22  $0.99 
Diluted ($0.10) $0.39  $0.22  $0.99 
                 
Weighted average number of shares outstanding:                
Basic  31,532   31,449   31,531   31,440 
Diluted  31,533   31,687   31,667   31,683 

We incurred a net loss of $3.0 million for the three months ended March 31,June 30, 2020, as compared to $25.0a profit of $15.6 million for the corresponding period of the prior year. Net income was $10.3 million for the six months ended June 30, 2020, as compared to $40.6 million for the corresponding period of the prior year. The reasons for significant fluctuations in net income (loss) for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin, and selling, general and administrative expenses, most of which was caused by the effects of the COVID-19 pandemic and effective tax rates.

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The noncontrolling interest arises primarily from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. The noncontrolling interest is also affected by the profitability of Interparfums SA’s 51% owned distribution subsidiariessubsidiary in Spain. Net income attributable to the noncontrolling interest aggregated 28%25% and 27% of European operationsoperations’ net income for both the three and six months ended March 31,June 30, 2020, and 2019. Net income attributable to Inter Parfums, Inc. decreased 47% to $10.1 million,respectively, as compared to $18.9 million27% for the corresponding periodperiods of the prior year.

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Liquidity and Capital Resources

Our conservative financial tradition has enabled us to amass hefty cash balances and nominal long-term debt. As of March 31,June 30, 2020 we had $204$195 million in cash, cash equivalents and short-term investments, most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments held by our European operations.investments. As of March 31,June 30, 2020 long-term debt aggregated only $9.8$18.9 million and we also have $47$48 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 accountsin a typical year account for over two-thirds, should enablehas enabled 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 expensesprograms to 2021 as well. We have also taken several actions with an eye toward minimizing fixed expenses. While we have not terminated or furloughed any employees, we have instituted a hiring freeze and plan on significantly cutting bonuses for 2020. We have also temporarily suspended our quarterly cash dividend. While these actions are expected to have a favorable impact on the Company’s fixed expenditures and cash flow, our cash and credit management teams, together with our executive management teams are paying particular attention to the management of working capital. As a result of the above, we have not had nor do we not anticipate any short-term liquidity problems.

As of March 31,June 30, 2020, we had a working capital ratio of 3.74.8 to 1. Approximately 82%85% of the Company’s total assets are held by European operations, and approximately $171$175 million of trademarks, licenses and other intangible assets are also 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 beare regularly examined, with the priority of maintaining the quality and homogeneous nature of our portfolio. However, we cannot assure you that any new license or acquisition agreements will be consummated.

Cash used in operating activities aggregated $25.1 million and $14.6$21.3 million for the threesix months ended March 31,June 30, 2020, and 2019, respectively.as compared to cash provided by operating activities of $0.6 million for the corresponding period of the prior year. For the threesix months ended March 31,June 30, 2020, working capital items used $40.6$36.6 million in cash from operating activities, as compared to $42.1$45.9 million in the 2019 period. Although accounts receivable is up 3.4% from year end, the balance is reasonable based on first quarter 2020 sales levels, and reflects continued strong collection activity as day’s sales outstanding is 85 days for both the three months endedAs mentioned in our March 31, 2020 and 2019. Inventory levels are relatively unchanged from year end and includes inventoryquarterly report on Form 10-Q, we anticipated to be needed to support for 2020 new product launches. As previously mentioned, we anticipate significant challenges for the remainder of 2020 due to uncertain market conditions.conditions promulgated by the COVID-19 pandemic. We expect a largerexpected the significant net sales decline in the second quarter of 2020, as many retail stores in many of our major markets maywere expected to remain closed for the entire period. As a result,Since March 2020, retail stores in several jurisdictions around the world began reopening and business is slowly picking up. It was also anticipated that inventory levels are expectedwould increase as certain purchase commitments needed to rise considerably. Ourbe honored. As previously mentioned, our cash and credit management teams, together with our executive management teams are payingcontinuing to pay particular attention to the management of working capital.

Cash flows used in investing activities in 2020 reflect the purchases and sales of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. At March 31, 2020, approximately $60Approximately $62 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal.

�� 

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Our business is not capital intensive as we do not own any manufacturing facilities. On a full year basis, we expect to spend approximately $4.0 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers.

In 2018, inJune 2020, the Company and Divabox, owner of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to which we acquired 25% of Divabox capital for €12.5 million ($14 million), through a capital increase. In connection with a license agreement, we agreed to pay $15.0 million in equal annual installments of $1.1 million including interest imputed at 4.1%. In 2015, in connection with a brandthe acquisition, wethe Company entered into a 5-year€12.0 million ($13.4 million), three-year term loan payable in three equal quarterlyannual installments of €5.0 million (approximately $5.7 million) plus interest. In order to reduce exposure to rising variable interest rates, we entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%.

Our short-term financing requirements are expected to be met by available cash on hand at March 31,June 30, 2020, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2020 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $27.0$28 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both March 31,June 30, 2020 and June 30, 2019.

Purchase of subsidiary shares from noncontrolling interest represents the purchase of treasury shares of Interparfums SA, which are expected to be issued to Interparfums SA employees pursuant to its Free Share Plan.

In October 2019, the Board of Directors authorized a 20% increase in the annual dividend to $1.32 per share. In April 2020, as a result of the uncertainties raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspension of the quarterly cash dividend. The Board also indicated that it will revisit this issue with an eye towards reinstitution of the dividend when the business environment is more favorable.

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

Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the three month periodsix months ended March 31,June 30, 2020.

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Item 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

We address certain financial exposures through a controlled program of risk management that primarily consists of the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts in order to reduce the effects of fluctuating foreign currency exchange rates. We do not engage in the trading of foreign currency forward exchange contracts or interest rate swaps.

Foreign Exchange Risk Management

We periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and to manage risks related to future sales expected to be denominated in a currency other than our functional currency. We enter into these exchange contracts for periods consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the receivables and cash flows of Interparfums SA, our French subsidiary, whose functional currency is the euro. All foreign currency contracts are denominated in currencies of major industrial countries and are with large financial institutions, which are rated as strong investment grade.

All derivative instruments are required to be reflected as either assets or liabilities in the balance sheet measured at fair value. Generally, increases or decreases in fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative is designated and qualifies as a cash flow hedge, then the changes in fair value of the derivative instrument will be recorded in other comprehensive income.

Before entering into a derivative transaction for hedging purposes, we determine that the change in the value of the derivative will effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement.

At March 31,June 30, 2020, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $40.0$2.7 million GB £1.0 million and JPY ¥170.0 million which all havewith maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.

Interest Rate Risk Management

We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt. We entered into an interest rate swap in June 2015 on €100 million of debt, effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

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Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based on their review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our Company'sCompany’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'sCompany’s internal control over financial reporting.

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Part II. Other Information

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated and supplemented below, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K may not be the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

The COVID-19 pandemic has had, and we expect will continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.

The public health crisis caused by the COVID-19 pandemic and the measures being taken by governments, businesses, including us, our suppliers, our distributors, retailers and the public, to limit COVID-19'sCOVID-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 thethis second quarter of 2020. IfHowever, if the COVID-19 pandemic intensifies its negative impacts on our sales could be more prolonged and may become more severe.

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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, in all jurisdictions in which we operate we are following guidance as well as requirements from authorities and health officials in allowing our teams to gradually return to our offices, including, related governmental guidance or directives,requiring personnel to wear masks and other protective clothing as appropriate, and implementing additional cleaning and sanitization routines at our offices and distribution centers. However, 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 remainssuch guidance and restrictions remain 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.

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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

Item 6. Exhibits.

The following documents are filed herewith:

Exhibit No.  Description Page Number
     
10.173.1 Lease for Interparfums SA Distribution Center - English translation  32
  (confidential information in this exhibit was omitted)  
     
31.1 Certifications required by Rule 13a-14(a) of Chief Executive Officer 

 102

     
31.2 Certifications required by Rule 13a-14(a) of Chief Financial Officer and Principal Accounting Officer 

 103

     
32.1Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer

 104

     
32.2 Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer 105

 

     
101 Interactive data files  

Exhibit No. Description Page Number
     
31.1 Certifications required by Rule 13a-14(a) of Chief Executive Officer 31

     
31.2 Certifications required by Rule 13a-14(a) of Chief Financial Officer and Principal Accounting Officer 32

     
32.1 Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer 33

     
32.2 Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer 34

     
101 Interactive data files  

Page 2829

 

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 11th10th day of MayAugust 2020.

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

Page 2930

 

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