UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(MARK ONE)
| ☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2023. |
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)
| Delaware | 13-3275609 | |
| (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 Code) |
| (212) 983-2640 |
| (Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $.001 par value per share | IPAR | The 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 filer ☒ | Accelerated filer ☐ |
| Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
| Emerging Growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At November 7, 2023, there were shares of common stock, par value $.001 per share, outstanding.
Explanatory Note
Inter Parfums, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, which was originally filed with the Securities and Exchange Commission on November 7, 2023 (the “Original Filing”). This Amendment is being filed to correct one line item in the Consolidated Statements of Changes in Equity, “Noncontrolling interest, end of period” as at September 30, 2023 from $697,321 to $186,558. The Company believes, although it is uncertain, that the incorrect number was caused by either a glitch in the software used in connection with the preparation of, or conversion into, the Original Filing, or third-party operator error.
Other than as expressly set forth herein, this Amendment does not, and does not purport to, amend, update or restate the information in Original Filing or reflect any events that have occurred after the Original Filing was made. Information not affected by this Amendment remains unchanged and reflects the disclosures made at the time as of which the Original Filing was made. No changes other than as set forth above have been made to the financial statements of the Company as contained in the Original Filing. Accordingly, this Amendment should be read together with the Original Filing and the other filings of the Company with the SEC.
INTER PARFUMS, INC. AND SUBSIDIARIES
INDEX
INTER PARFUMS, INC. AND SUBSIDIARIES
Part I. Financial Information
| Item 1. | Financial Statements |
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2022, included in our annual report filed on Form 10-K.
The results of operations for the nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the entire fiscal year.
Page 1
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
(Unaudited)
| ASSETS | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 79,764 | $ | 104,713 | ||||
| Short-term investments | 103,745 | 150,833 | ||||||
| Accounts receivable, net | 288,085 | 197,584 | ||||||
| Inventories | 364,270 | 289,984 | ||||||
| Receivables, other | 13,645 | 28,803 | ||||||
| Other current assets | 26,847 | 15,650 | ||||||
| Income taxes receivable | 498 | 157 | ||||||
| Total current assets | 876,854 | 787,724 | ||||||
| Property, equipment and leasehold improvements, net | 163,002 | 166,722 | ||||||
| Right-of-use assets, net | 29,359 | 27,964 | ||||||
| Trademarks, licenses and other intangible assets, net | 286,697 | 290,853 | ||||||
| Deferred tax assets | 16,063 | 11,159 | ||||||
| Other assets | 22,422 | 24,120 | ||||||
| Total assets | $ | 1,394,397 | $ | 1,308,542 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Loans payable - banks | $ | 4,501 | $ | — | ||||
| Current portion of long-term debt | 41,768 | 28,547 | ||||||
| Current portion of lease liabilities | 5,687 | 5,296 | ||||||
| Accounts payable – trade | 87,161 | 88,388 | ||||||
| Accrued expenses | 200,065 | 213,621 | ||||||
| Income taxes payable | 23,913 | 8,715 | ||||||
| Total current liabilities | 363,095 | 344,567 | ||||||
| Long–term debt, less current portion | 128,983 | 151,494 | ||||||
| Lease liabilities, less current portion | 25,452 | 24,335 | ||||||
| Equity: | ||||||||
| Inter Parfums, Inc. shareholders’ equity: | ||||||||
| Preferred stock, $ par; authorized shares; issued | — | — | ||||||
Common stock, $ par; authorized shares; outstanding and shares at September 30, 2023 and December 31, 2022, respectively | 32 | 32 | ||||||
| Additional paid-in capital | 95,752 | 90,186 | ||||||
| Retained earnings | 703,091 | 620,095 | ||||||
| Accumulated other comprehensive loss | (59,802 | ) | (56,056 | ) | ||||
| Treasury stock, at cost, and shares at September 30, 2023 and December 31, 2022, respectively | (48,764 | ) | (37,475 | ) | ||||
| Total Inter Parfums, Inc. shareholders’ equity | 690,309 | 616,782 | ||||||
| Noncontrolling interest | 186,558 | 171,364 | ||||||
| Total equity | 876,867 | 788,146 | ||||||
| Total liabilities and equity | $ | 1,394,397 | $ | 1,308,542 | ||||
See notes to consolidated financial statements.
Page 2
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | 367,969 | $ | 280,462 | $ | 988,936 | $ | 775,865 | ||||||||
| Cost of sales | 132,962 | 98,562 | 362,568 | 281,525 | ||||||||||||
| Gross margin | 235,007 | 181,900 | 626,368 | 494,340 | ||||||||||||
| Selling, general and administrative expenses | 147,805 | 117,424 | 393,866 | 323,249 | ||||||||||||
| Income from operations | 87,202 | 64,476 | 232,502 | 171,091 | ||||||||||||
| Other expenses (income): | ||||||||||||||||
| Interest expense | 2,397 | 682 | 7,030 | 2,589 | ||||||||||||
| (Gain) loss on foreign currency | (669 | ) | 273 | (656 | ) | (2,245 | ) | |||||||||
| Interest and investment income | (1,062 | ) | (3,343 | ) | (8,421 | ) | (2,341 | ) | ||||||||
| Other (income) expense | (77 | ) | 346 | (125 | ) | (98 | ) | |||||||||
| Nonoperating expense (income) | 589 | (2,042 | ) | (2,172 | ) | (2,095 | ) | |||||||||
| Income before income taxes | 86,613 | 66,518 | 234,674 | 173,186 | ||||||||||||
| Income taxes | 20,493 | 13,221 | 55,128 | 39,078 | ||||||||||||
| Net income | 66,120 | 53,297 | 179,546 | 134,108 | ||||||||||||
| Less: Net income attributable to the noncontrolling interest | 12,906 | 11,874 | 37,312 | 29,769 | ||||||||||||
| Net income attributable to Inter Parfums, Inc. | $ | 53,214 | $ | 41,423 | $ | 142,234 | $ | 104,339 | ||||||||
| Earnings per share: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. common shareholders: | ||||||||||||||||
| Basic | $ | 1.66 | $ | 1.30 | $ | 4.44 | $ | 3.28 | ||||||||
| Diluted | $ | 1.66 | $ | 1.30 | $ | 4.42 | $ | 3.26 | ||||||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | 31,976 | 31,860 | 32,000 | 31,848 | ||||||||||||
| Diluted | 32,124 | 31,968 | 32,149 | 31,977 | ||||||||||||
| Dividends declared per share | $ | 0.625 | $ | 0.50 | $ | 1.875 | $ | 1.50 | ||||||||
See notes to consolidated financial statements.
Page 3
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Comprehensive income: | ||||||||||||||||
| Net income | $ | 66,120 | $ | 53,297 | $ | 179,546 | $ | 134,108 | ||||||||
| Other comprehensive income: | ||||||||||||||||
| Net derivative instrument (loss) gain, net of tax | (363 | ) | 1,315 | (4,606 | ) | (173 | ) | |||||||||
| Transfer from OCI into earnings | — | — | 1,709 | 992 | ||||||||||||
| Translation adjustments, net of tax | (15,692 | ) | (32,944 | ) | (2,657 | ) | (79,015 | ) | ||||||||
| Comprehensive income | 50,065 | 21,668 | 173,992 | 55,912 | ||||||||||||
| Comprehensive income attributable to the noncontrolling interests: | ||||||||||||||||
| Net income | 12,906 | 11,874 | 37,312 | 29,769 | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Net derivative instrument (loss) gain, net of tax | (100 | ) | 362 | (327 | ) | (49 | ) | |||||||||
| Translation adjustments, net of tax | (4,892 | ) | (10,012 | ) | (1,481 | ) | (24,174 | ) | ||||||||
| Comprehensive income attributable to the noncontrolling interests | 7,914 | 2,224 | 35,504 | 5,546 | ||||||||||||
| Comprehensive income attributable to Inter Parfums, Inc. | $ | 42,151 | $ | 19,444 | $ | 138,488 | $ | 50,366 | ||||||||
See notes to consolidated financial statements.
Page 4
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Common stock, beginning and end of period | $ | 32 | $ | 32 | ||||
| - | - | |||||||
| 32 | 32 | |||||||
| Additional paid-in capital, beginning of period | 90,186 | 87,132 | ||||||
| Shares issued upon exercise of stock options | 5,523 | 1,816 | ||||||
| Share-based compensation | 935 | 1,017 | ||||||
| Purchase of subsidiary shares | (892 | ) | (4,305 | ) | ||||
| Additional paid-in capital, end of period | 95,752 | 85,660 | ||||||
| Retained earnings, beginning of period | 620,095 | 560,663 | ||||||
| Net income | 142,234 | 104,339 | ||||||
| Dividends | (60,058 | ) | (47,782 | ) | ||||
| Share-based compensation | 820 | 1,664 | ||||||
| Retained earnings, end of period | 703,091 | 618,884 | ||||||
| Accumulated other comprehensive loss, beginning of period | (56,056 | ) | (38,432 | ) | ||||
| Foreign currency translation adjustment, net of tax | (1,176 | ) | (54,841 | ) | ||||
| Transfer from other comprehensive income into earnings | 1,709 | 992 | ||||||
| Net derivative instrument loss, net of tax | (4,279 | ) | (124 | ) | ||||
| Accumulated other comprehensive loss, end of period | (59,802 | ) | (92,405 | ) | ||||
| Treasury stock, beginning of period | (37,475 | ) | (37,475 | ) | ||||
| Shares repurchased | (11,289 | ) | — | |||||
| Treasury stock, end of period | (48,764 | ) | (37,475 | ) | ||||
| Noncontrolling interest, beginning of period | 171,364 | 166,412 | ||||||
| Net income | 37,312 | 29,769 | ||||||
| Foreign currency translation adjustment, net of tax | (1,481 | ) | (24,174 | ) | ||||
| Net derivative instrument loss, net of tax | (327 | ) | (49 | ) | ||||
| Share-based compensation (adjustment) | 133 | (353 | ) | |||||
| Purchase of subsidiary shares | (142 | ) | (152 | ) | ||||
| Transfer of subsidiary shares purchased | — | 55 | ||||||
| Dividends | (20,301 | ) | (16,056 | ) | ||||
| Noncontrolling interest, end of period | 186,558 | 155,452 | ||||||
| 788,146 | 738,332 | |||||||
| 179,546 | 134,108 | |||||||
| Total equity | $ | 876,867 | $ | 730,148 | ||||
See notes to consolidated financial statements.
Page 5
INTER PARFUMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 179,546 | $ | 134,108 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 12,781 | 10,936 | ||||||
| Provision for doubtful accounts | (560 | ) | 2,004 | |||||
| Noncash stock compensation | 1,887 | 2,353 | ||||||
| Share of income of equity investment | (125 | ) | (98 | ) | ||||
| Noncash lease expense | 4,163 | 4,074 | ||||||
| Deferred tax benefit | (5,075 | ) | (3,658 | ) | ||||
| Change in fair value of derivatives | 740 | 1,348 | ||||||
| Changes in: | ||||||||
| Accounts receivable | (96,076 | ) | (89,605 | ) | ||||
| Inventories | (76,786 | ) | (109,377 | ) | ||||
| Other assets | 3,077 | 2,615 | ||||||
| Operating lease liabilities | (4,044 | ) | (3,887 | ) | ||||
| Accounts payable and accrued expenses | (10,919 | ) | 26,406 | |||||
| Income taxes, net | 15,669 | 14,606 | ||||||
| Net cash provided by (used in) operating activities | 24,278 | (8,175 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of short-term investments | (145,427 | ) | (2,862 | ) | ||||
| Proceeds from sale of short-term investments | 192,568 | 5,346 | ||||||
| Purchases of property, equipment and leasehold improvements | (4,574 | ) | (32,615 | ) | ||||
| Payment for intangible assets acquired | (2,063 | ) | (3,757 | ) | ||||
| Net cash provided by (used in) investing activities | 40,504 | (33,888 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loans payable, bank | 4,501 | — | ||||||
| Proceeds from issuance of long-term debt | 13,680 | — | ||||||
| Repayment of long-term debt | (22,527 | ) | (14,210 | ) | ||||
| Proceeds from exercise of options | 5,523 | 1,816 | ||||||
| Purchase of subsidiary shares from noncontrolling interest | — | (4,402 | ) | |||||
| Dividends paid | (60,058 | ) | (47,782 | ) | ||||
| Dividends paid to noncontrolling interest | (20,301 | ) | (16,056 | ) | ||||
| Purchase of treasury stock | (11,289 | ) | — | |||||
| Net cash used in financing activities | (90,471 | ) | (80,634 | ) | ||||
| Effect of exchange rate changes on cash | 740 | (4,413 | ) | |||||
| Net decrease in cash and cash equivalents | (24,949 | ) | (127,110 | ) | ||||
| Cash and cash equivalents - beginning of period | 104,713 | 168,387 | ||||||
| Cash and cash equivalents - end of period | $ | 79,764 | $ | 41,227 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 4,659 | $ | 2,091 | ||||
| Income taxes | 44,693 | 27,718 | ||||||
See notes to consolidated financial statements.
Page 6
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 1. | Significant Accounting Policies: |
The accounting policies we follow are set forth in the notes to our consolidated financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2022.
| 2. | Impact of COVID-19 Pandemic: |
Our business has continued to significantly improve throughout 2022 and the first three quarters of 2023 after the disastrous effects of the COVID-19 Pandemic starting in early 2020, as retail stores reopened, and consumers increased online purchasing. While the COVID-19 Pandemic had significantly restricted international travel, the travel retail business has picked up. Lastly, we experienced significant strains on our supply chain causing disruptions affecting the procurement of components, the ability to transport goods, and related cost increases. These disruptions came at a time when demand for our product lines has never been stronger or more sustained. We have addressed this issue since the beginning of 2021, by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. The supply chain bottlenecks have been improving and while lead times remain longer than pre-COVID, we do not expect significant disruptions going forward.
| 3. | Recent Agreements: |
Roberto Cavalli
In July 2023, we closed a transaction agreement with Roberto Cavalli, whereby an exclusive and worldwide license was granted for the production and distribution of Roberto Cavalli brand perfumes and fragrance related products. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. The license became effective in July 2023 and will last for 6.5 years.
Lacoste
In December 2022, we closed a transaction agreement with Lacoste, whereby an exclusive and worldwide license was granted for the production and distribution of Lacoste brand perfumes and cosmetics. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. The license becomes effective in January 2024 and will last for 15 years.
Dunhill
The Dunhill fragrance license has expired on September 30, 2023 and will not be renewed. The Company has now entered the twelve month sell-off period during which it will maintain the right to sell-off remaining Dunhill fragrance inventory, which is customary in the fragrance industry. All usable components have been converted to finished goods, and any remaining components will be destroyed.
Donna Karan and DKNY
In September 2021, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance related products under the Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. With this agreement, we have gained several well-established and valuable fragrance franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious, as well as a significant loyal consumer base around the world. In connection with the grant of license, we issued 65,342 shares of Inter Parfums, Inc. common stock to the licensor valued at $5.0 million. The exclusive license became effective July 1, 2022, and we are planning to launch new fragrances under these brands in 2024.
Page 7
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Rochas Fashion
Effective January 1, 2021, we entered into a new license agreement modifying our Rochas fashion business model. The new agreement calls for a reduction in royalties to be received. As a result, in the first quarter of 2021, we took a $2.4 million impairment charge on our Rochas fashion trademark. In the fourth quarter of 2022, we again took a $6.8 million impairment charge on the Rochas fashion trademark after an independent expert concluded that the valuation of the trademark was $11.3 million. The new license also contains an option for the licensee to buy-out the Rochas fashion trademarks in June 2025 at its then fair market value.
Land and Building Acquisition - Headquarters in Paris
In April 2021, Interparfums SA, our 72% owned French Subsidiary, completed the acquisition of its headquarters at 10 rue de Solférino in the 7th arrondissement of Paris from the property developer. This is an office complex combining three buildings connected by two inner courtyards, and consists of approximately 40,000 total sq. ft.
The purchase price included the complete renovation of the site. As of September 30, 2023, $148.1 million of the purchase price, including approximately $3 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying balance sheet. The purchase price has been allocated approximately $60.7 million to land and $87.4 million to the building. The building, which was delivered on February 28, 2022, includes the building structure, development of the property, façade waterproofing, general and technical installations and interior fittings that will be depreciated over a range of 7 to 50 years. The Company has elected to depreciate the building cost based on the useful lives of its components. Approximately $1.2 million of cash held in escrow is also included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2023.
The acquisition was financed by a 10-year €120 million (approximately $127.1 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately €80 million of the variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum. The swap effectively exchanges the variable interest rate to a fixed rate of approximately 1.1%.
| 4. | Recent Accounting Pronouncements: |
There are no recent accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.
Page 8
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 5. | Inventories: |
Inventories consist of the following:
| (In thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Raw materials and component parts | $ | 151,344 | $ | 146,772 | ||||
| Finished goods | 212,926 | 143,212 | ||||||
| Inventories | $ | 364,270 | $ | 289,984 | ||||
| 6. | Fair Value Measurement: |
The following tables present our financial assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
| Fair Value Measurements at September 30, 2023 | ||||||||||||||||
| Quoted Prices in | Significant Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Short-term investments | $ | 103,745 | $ | 10,177 | $ | 92,776 | $ | 792 | ||||||||
| Interest rate swaps | 6,274 | — | 6,274 | — | ||||||||||||
| Total asset | $ | 110,019 | $ | 10,177 | $ | 99,050 | $ | 792 | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | $ | 791 | $ | — | $ | 791 | $ | — | ||||||||
| Foreign currency forward exchange contracts accounted for using hedge accounting | 489 | — | 489 | — | ||||||||||||
| Total liabilities | $ | 1,280 | $ | — | $ | 1,280 | $ | — | ||||||||
Page 9
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| Fair Value Measurements at December 31, 2022 | ||||||||||||||||
| Quoted Prices in | Significant Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Short-term investments | $ | 150,833 | $ | 19,861 | $ | 130,174 | $ | 798 | ||||||||
| Interest rate swaps | 6,758 | — | 6,758 | — | ||||||||||||
| Foreign currency forward exchange contracts accounted for using hedge accounting | 1,189 | — | 1,189 | — | ||||||||||||
| Total asset | $ | 158,780 | $ | 19,861 | $ | 138,121 | $ | 798 | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign currency forward exchange contracts not accounted for using hedge accounting | 68 | — | 68 | — | ||||||||||||
| Total liabilities | $ | 68 | $ | — | $ | 68 | $ | — | ||||||||
The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, cash held in escrow, accounts payable and accrued expenses approximate fair value due to the short terms to maturity of these instruments.
The carrying amount of loans payable approximates fair value as the interest rates on the Company’s indebtedness approximate current market rates. The fair value of the Company’s long-term debt was estimated based on the current rates offered to companies for debt with the same remaining maturities and is approximately equal to its carrying value.
Foreign currency forward exchange contracts are valued based on quotations from financial institutions and the value of interest rate swaps are the discounted net present value of the swaps using third party quotes from financial institutions.
| 7. | Derivative Financial Instruments: |
The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income statement. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued, and gains and losses accumulated in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no longer occur, then any gains or losses accumulated in other comprehensive income are reclassified to current-period earnings.
Page 10
INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In December 2022, to finance the acquisition of the Lacoste trademark, the Company entered into a €50 million (approximately $53 million) 4-year term loan with a variable interest rate. This variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum. This swap is a hedged derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in other comprehensive income.
In connection with the April 2021 acquisition of the office building complex in Paris, €120 million (approximately $127.1 million) of the purchase price was financed through a 10-year term loan. The Company entered into interest rate swap contracts related to €80 million of the loan, effectively exchanging the variable interest rate to a fixed rate of approximately 1.1%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.
Gains and losses in derivatives designated as hedges are accumulated in other comprehensive income and gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial for the three and nine months ended September 30, 2023 and 2022.
All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps is included in other assets on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at September 30, 2023 resulted in a net asset and is included in other current assets on the accompanying balance sheet.
At September 30, 2023, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $58.0 million and GB £2.0 million which all have maturities of less than one year.
| 8. | Leases: |
The Company leases its offices and warehouses, vehicles, and certain office equipment, substantially all of which are classified as operating leases. The Company currently has no material financing leases. The Company determines if an arrangement is a lease at inception. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term.
In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend or terminate, depending on the lease. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date for the location in which the lease is held in determining the present value of lease payments.
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INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2023, the weighted average remaining lease term was 5.4 years and the weighted average discount rate used to determine the operating lease liability was 3.0%. Rental expense related to operating leases was $1.5 million and $4.5 million for the three and nine months ended September 30, 2023, respectively, as compared to $1.2 million and $4.3 million for the corresponding periods of the prior year. Operating lease payments included in operating cash flows totaled $4.0 million and $3.9 million for the nine months ended September 30, 2023 and 2022, respectively, and noncash additions to operating lease assets totaled $5.7 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively.
| 9. | Share-Based Payments: |
The Company maintains a stock option program for key employees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the granting of both nonqualified and incentive options. Options granted under the plans typically have a six-year term and vest over a to -year period. The fair value of shares vested during the nine months ended September 30, 2023 and 2022 aggregated $ and $, respectively. Compensation cost, net of forfeitures, is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated based on historic trends. It is generally our policy to issue new shares upon exercise of stock options.
Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Nonvested options – beginning of period | 168,730 | $ | 16.31 | |||||
| Nonvested options granted | — | — | ||||||
| Nonvested options vested or forfeited | (27,625 | ) | $ | 13.91 | ||||
| Nonvested options – end of period | 141,105 | $ | 16.78 | |||||
Share-based payment expense decreased income before income taxes by $0.62 million and $1.89 million for the three and nine months ended September 30, 2023, respectively, as compared to $0.47 million and $2.35 million for the corresponding periods of the prior year. Share-based payment expense decreased income attributable to Inter Parfums, Inc. by $ and $ for the three and nine months ended September 30, 2023, respectively, as compared to $ and $ for the corresponding periods of the prior year.
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding at January 1, 2023 | 441,580 | $ | 67.30 | |||||
| Options forfeited | (20,025 | ) | 72.22 | |||||
| Options exercised | (98,565 | ) | 56.03 | |||||
| Outstanding at September 30, 2023 | 322,990 | $ | 70.43 | |||||
| Options exercisable | 181,885 | $ | 61.44 | |||||
| Options available for future grants | 579,000 | |||||||
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INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2023, the weighted average remaining contractual life of options outstanding is years ( years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $ and $, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $ million.
| (In thousands) | September 30, 2023 | September 30, 2022 | ||||||
| Cash proceeds from stock options exercised | $ | 5,523 | $ | 1,816 | ||||
| Tax benefits | 900 | 320 | ||||||
| Intrinsic value of stock options exercised | 6,135 | 2,105 | ||||||
There were options granted during the nine months ended September 30, 2023 and September 30, 2022.
Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects the assumption that the dividend payout as authorized by the Board of Directors would increase as the earnings of the Company and its stock price continues to increase.
In December 2018, Interparfums SA approved a plan to grant an aggregate of shares of its stock to employees with no performance condition requirement, and an aggregate of shares to officers and managers, subject to certain corporate performance conditions. The corporate performance conditions were met and therefore in June 2022, shares, adjusted for stock splits, were distributed. The aggregate cost of the grant of approximately $4.8 million was recognized as compensation cost on a straight-line basis over the requisite three-year service period.
In March 2022, Interparfums SA approved an additional plan to grant an aggregate of shares to all Interparfums SA employees and corporate officers having more than six months of employment at grant date, subject to certain corporate performance conditions. The shares, subject to adjustment for stock splits, will be distributed in June 2025 and will follow the same guidelines as the December 2018 plan.
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 estimated number of shares to be distributed of has been determined taking into account employee turnover. The aggregate cost of the grant of approximately $4.2 million will be recognized as compensation cost on a straight-line basis over the requisite three and a quarter year service period.
Similar to the December 2018 plan, in order to avoid dilution of the Company’s ownership of Interparfums SA, all shares distributed or to be distributed pursuant to these plans will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. As of September 30, 2023 the Company acquired shares at an aggregate cost of $4.1 million.
All share purchases and issuances have been classified as equity transactions on the accompanying balance sheet.
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INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 10. | Net Income Attributable to Inter Parfums, Inc. Common Shareholders: |
Net income attributable to Inter Parfums, Inc. per common share (“basic EPS”) is computed by dividing net income attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net income attributable to Inter Parfums, Inc. per share assuming dilution (“diluted EPS”), is computed using the weighted average number of shares outstanding, plus the incremental shares outstanding assuming the exercise of dilutive stock options using the treasury stock method.
| Three months ended | Nine months ended | |||||||||||||||
| (In thousands) | September 30, | September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. | $ | 53,214 | $ | 41,423 | $ | 142,234 | $ | 104,339 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average shares | 31,976 | 31,860 | 32,000 | 31,848 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | 148 | 108 | 149 | 129 | ||||||||||||
| Denominator for diluted earnings per share | 32,124 | 31,968 | 32,149 | 31,977 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Net income attributable to Inter Parfums, Inc. common shareholders: | | | | | | | | | | | | | | | | |
| Basic | $ | 1.66 | $ | 1.30 | $ | 4.44 | $ | 3.28 | ||||||||
| Diluted | 1.66 | 1.30 | 4.42 | 3.26 | ||||||||||||
There were antidilutive potential common shares outstanding for the three and nine months ended September 30, 2023. Not included in the above computations are the effect of antidilutive potential common shares which consist of outstanding options to purchase shares of common stock for both the three and nine months ended September 30, 2022, respectively.
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INTER PARFUMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 11. | Segment and Geographic Areas: |
The Company manufactures and distributes one product line, fragrances and fragrance related products. The Company manages its business in two segments, European based operations and United States based operations. The European assets are located, and operations are primarily conducted, in France. Both European operations and United States operations primarily represent the sale of prestige brand name fragrances.
Information on our operations by geographical areas is as follows:
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales: | ||||||||||||||||
| United States | $ | 134,469 | $ | 82,183 | $ | 327,359 | $ | 229,129 | ||||||||
| Europe | 233,500 | 198,318 | 661,577 | 546,787 | ||||||||||||
| Eliminations | — | (39 | ) | — | (51 | ) | ||||||||||
| $ | 367,969 | $ | 280,462 | $ | 988,936 | $ | 775,865 | |||||||||
| Net income attributable to Inter Parfums, Inc.: | ||||||||||||||||
| United States | $ | 20,157 | $ | 10,881 | $ | 46,067 | $ | 27,386 | ||||||||
| Europe | 33,057 | 30,542 | 96,167 | 76,953 | ||||||||||||
| $ | 53,214 | $ | 41,423 | $ | 142,234 | $ | 104,339 | |||||||||
| September 30, | December 31, | |||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Total Assets: | ||||||||||||||||
| United States | $ | 340,375 | $ | 278,090 | ||||||||||||
| Europe | 1,083,843 | 1,052,004 | ||||||||||||||
| Eliminations | (29,821 | ) | (21,552 | ) | ||||||||||||
| $ | 1,394,397 | $ | 1,308,542 | |||||||||||||
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INTER PARFUMS, INC. AND SUBSIDIARIES
| Item 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Information
Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases, you can identify forward-looking statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and “Risk Factors” in Inter Parfums’ annual report on Form 10-K for the fiscal year ended December 31, 2022, and the reports Inter Parfums files from time to time with the Securities and Exchange Commission (“SEC”). Inter Parfums does not intend to and undertakes no duty to update the information contained in this report.
Overview
We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 28% of Interparfums SA shares trade on the NYSE Euronext.
We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 67% and 70% of net sales for the nine months ended September 30, 2023 and 2022, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, S.T. Dupont, Rochas and Van Cleef & Arpels, whose products are distributed in over 120 countries around the world. In addition, our exclusive and worldwide license for the production and distribution of Lacoste brand perfumes and cosmetics becomes effective in January 2024.
Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 33% and 30% of net sales for the nine months ended September 30, 2023 and 2022, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, Donna Karan, DKNY, Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta, Roberto Cavalli and Ungaro brands.
Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc, Coach, Jimmy Choo, GUESS, Donna Karan/DKNY and Ferragamo brand names. This diversified portfolio of top brands represented 74% of total sales for the first 9 months of 2023 up from 69% in 2022.
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As a percentage of net sales, product sales for the Company’s largest brands were as follows:
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Montblanc | 18 | % | 19 | % | ||||
| Jimmy Choo | 17 | % | 18 | % | ||||
| Coach | 15 | % | 15 | % | ||||
| GUESS | 11 | % | 11 | % | ||||
| Donna Karan/DKNY | 7 | % | 1 | % | ||||
| Ferragamo | 5 | % | 5 | % | ||||
Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We primarily sell directly to retailers in France, the United States, and Italy.
We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, through new licenses, other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.
Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third-party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers.
As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share.
Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because almost 50% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates.
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INTER PARFUMS, INC. AND SUBSIDIARIES
Impact of COVID-19 Pandemic
Please see our discussion of the Impact of the COVID-19 Pandemic, which is incorporated by reference to note 2 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023.
Recent Important Events
Please see our discussion of Recent Important Events, which is incorporated by reference to note 3 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023.
Discussion of Critical Accounting Policies
Information regarding our critical accounting policies can be found in our 2022 Annual Report on Form 10-K filed with the SEC.
Results of Operations
Three and Nine Months Ended September 30, 2023 as Compared to the Three and Nine Months Ended September 30, 2022
Net Sales:
| (in millions) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | |||||||||||||||||||
| European based product sales | $ | 233.5 | $ | 198.3 | 18 | % | $ | 661.5 | $ | 546.7 | 21 | % | ||||||||||||
| United States based product sales | 134.5 | 82.2 | 64 | % | 327.4 | 229.2 | 43 | % | ||||||||||||||||
| $ | 368.0 | $ | 280.5 | 31 | % | $ | 988.9 | $ | 775.9 | 27 | % | |||||||||||||
Net sales for the three months ended September 30, 2023, increased 31% from the three months ended September 30, 2022. At comparable foreign currency exchange rates, net sales increased 27% from the third quarter of 2022 of which 7% is related to new brands. The average dollar/euro exchange rate for the current third quarter was 1.09 compared to 1.01 in the third quarter of 2022, while for the nine months ended September 2023 the average dollar/euro exchange rate was 1.08 compared to 1.06 in the nine months ended September 2022. Net sales for the nine months ended September 30, 2023, increased 27% as compared to the nine months ended September 2022. At comparable foreign currency exchange rates, net sales increased 26% from the nine months ended September 2022 of which 7% is related to new brands.
Continuing the trend from the first half of 2023, the current third quarter was exceptionally strong for both European and United States based operations, as net sales increased 18% and 64%, respectively, as compared to the corresponding period of the prior year. As previously disclosed, the third quarter growth rate is favorably impacted by a lower base in 2022 where more gift sets were shipped in the fourth quarter due to supply chain disruptions. We currently expect this phasing to adversely impact our fourth quarter growth rates.
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INTER PARFUMS, INC. AND SUBSIDIARIES
For European based operations, our largest brands, Coach, Montblanc, and Jimmy Choo sales rose 32%, 20% and 6%, respectively, as compared to the corresponding period of the prior year. Continuing the growth trend of the first half of 2023, third quarter sales by our United States operations grew substantially, up 64%, largely from the continued success of GUESS fragrances which performed exceedingly well during the quarter across all geographies and was up 59% from the third quarter of 2022. This was driven by the continued growth in sales of the Seductive line within GUESS. Of note, the significant growth in the quarter builds upon the 45% sales increase we reported for the third quarter of 2022. We also had strong sales of Ferragamo fragrances, which we have enriched with sister scents for the Signorina and Storie di Seta collections. During the quarter, we initiated Phase 1 of the Abercrombie & Fitch Fierce distribution roll-out. We began with introductory distribution of this iconic fragrance in select markets and expect the majority of the Phase 1 distribution to roll-out during the fourth quarter. The increase was also driven by the addition and extension of Donna Karan and DKNY to our portfolio. They have climbed to become our second largest United States based brand in just one year under our expertise.
The favorable trends in the first half of the year continued into the third quarter and we look forward to executing our plans for the remainder of the year. Our brands are in high demand in a robust environment for the fragrance industry. We have a large number of brand extensions across many of our brands launching in the fourth quarter of the year, including Guess Bella Vita Paradiso. In sum, 2023 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds, most notably the somewhat limited travel retail business in Asia and supply chain disruptions that have largely abated.
| Net Sales to Customers by Region | Nine months ended September 30, | |||||||
| (In millions) | 2023 | 2022 | ||||||
| North America | $ | 370.1 | $ | 284.7 | ||||
| Western Europe | 242.8 | 196.3 | ||||||
| Asia | 138.1 | 120.2 | ||||||
| Middle East | 82.6 | 66.3 | ||||||
| Eastern Europe | 75.4 | 45.6 | ||||||
| Central and South America | 71.7 | 56.2 | ||||||
| Other | 8.2 | 6.6 | ||||||
| $ | 988.9 | $ | 775.9 | |||||
In the first three quarters of 2023, sales in our largest market, North America, rose 30%, followed by Western Europe and Asia where comparable three quarter year sales in both regions increased 24% and 15%, respectively. Our sales in Eastern Europe, Central and South America and the Middle East were also robust, up 65%, 28% and 25%, respectively. Additionally, our travel retail business is continuing to show signs of renewed life.
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INTER PARFUMS, INC. AND SUBSIDIARIES
| Three months ended | Nine months ended | |||||||||||||||
| Gross Profit margin | September 30, | September 30, | ||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| European operations | ||||||||||||||||
| Net sales | $ | 233.5 | $ | 198.2 | $ | 661.5 | $ | 546.7 | ||||||||
| Cost of sales | 73.3 | 60.5 | 220.6 | 176.1 | ||||||||||||
| Gross margin | $ | 160.2 | $ | 137.7 | $ | 440.9 | $ | 370.6 | ||||||||
| Gross margin as a % of net sales | 68.6 | % | 69.5 | % | 66.6 | % | 67.8 | % | ||||||||
| United States operations | ||||||||||||||||
| Net sales | $ | 134.5 | $ | 82.2 | $ | 327.4 | $ | 229.1 | ||||||||
| Cost of sales | 59.7 | 38.0 | 141.9 | 105.4 | ||||||||||||
| Gross margin | $ | 74.8 | $ | 44.2 | $ | 185.5 | $ | 123.7 | ||||||||
| Gross margin as a % of net sales | 55.6 | % | 53.8 | % | 56.7 | % | 54.0 | % | ||||||||
The Company’s gross margin percentage was 63.9% and 63.3% for the three and nine months ended September 30, 2023 as compared to 64.9% and 63.7% for the three and nine months ended September 30, 2022, respectively. This decrease in gross margin percentage was largely driven by unfavorable segment mix as well as certain one time expenses related to inventory as discussed further below. Overall, the Company’s pricing actions have broadly compensated for cost inflation impacts.
For European based operations, gross profit margin as a percentage of net sales was 68.6% and 66.6% for the three and nine months ended September 30, 2023, respectively, as compared to 69.5% and 67.8% for the corresponding periods of the prior year. As previously disclosed, a key driver in the decrease in gross profit margin for European based operations in 2023 was due to an increase in inventory reserves in the second quarter of 2023 related to certain underperforming brands. As the Company experienced long lead times in obtaining and building inventory during the COVID-19 Pandemic, high levels of inventory investments were required to protect service levels. Excluding these one-time adjustments, gross margin as a percentage of sales for European based operations would be in line with the prior period, driven by increases in pricing and product mix, offset by cost inflation.
For United States operations, gross profit margin was 55.6% and 56.7% for the three and nine months ended September 30, 2023, respectively, as compared to 53.8% and 54.0% for the corresponding periods of the prior year. The significant margin expansion stems from a number of factors. Firstly, for the most part, the price increases we took in early 2023 weren’t fully offset by a higher cost of goods given our cost containment efforts. Secondly, we are seeing favorable brand and channel mix, as a larger portion of our higher priced fragrances are being sold directly to retailers as opposed to third-party distributors. Lastly, the significant increase in sales in the first three quarters of 2023 allowed us to better absorb fixed expenses such as depreciation and point of sale expenses, as compared to the corresponding period of the prior year.
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INTER PARFUMS, INC. AND SUBSIDIARIES
Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $3.9 million and $11.4 million for the three and nine months ended September 30, 2023, respectively, as compared to $5.5 million and $11.0 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 that of other companies, which may include these expenses as a component of cost of goods sold.
| Three months ended | Nine months ended, | |||||||||||||||
| Selling, general and administrative expenses | September 30, | September 30, | ||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| European Operations | ||||||||||||||||
| Selling, general and administrative expenses | $ | 98.7 | $ | 83.4 | $ | 265.2 | $ | 231.2 | ||||||||
| Selling, general and administrative expenses as a percent of net sales | 42.3 | % | 42.1 | % | 40.1 | % | 42.3 | % | ||||||||
| United States Operations | ||||||||||||||||
| Selling, general and administrative expenses | $ | 49.1 | $ | 34.0 | $ | 128.7 | $ | 92.1 | ||||||||
| Selling, general and administrative expenses as a percent of net sales | 36.5 | % | 41.4 | % | 39.3 | % | 40.2 | % | ||||||||
The Company has seen selling, general and administrative expenses decrease as a percentage of net sales to 40.2% and 39.8% for the three and nine months ended September 30, 2023 as compared to 41.9% and 41.7% for the three and nine months ended September 30, 2022, respectively. This decrease of selling, general and administrative expenses as a percentage of net sales was largely driven by sales growth for the three and nine month periods allowing to better absorb certain fixed operating costs, and favorable segment mix.
For European operations, selling, general and administrative expenses increased 18% and 15% for the three and nine months ended September 30, 2023, as compared to the corresponding period of the prior year, and represented 42.3% and 40.1% of net sales for the three and nine months ended September 30, 2023, respectively, as compared to 42.1% and 42.3% for the three and nine months ended September 30, 2022, respectively. For United States operations, selling, general and administrative expenses increased 44% and 40% for the three and nine months ended September 30, 2023, as compared to the corresponding period of the prior year, and represented 36.5% and 39.3% of net sales for the three and nine months ended September 30, 2023, respectively, as compared to 41.4% and 40.2% for the three and nine months ended September 30, 2022, respectively. As discussed in more detail below, the decreased selling, general and administrative expenses as a percentage of net sales are primarily the result of high sales growth offset in part by increases in promotion and advertising expenditures as well as the annualization impact of the structural investments of $9.0 million in our United States operations that we made throughout 2022 in order to support the new licenses for the first three quarters of 2023.
Promotion and advertising included in selling, general and administrative expenses aggregated $62.8 million and $152.6 million for the three and nine months ended September 30, 2023, respectively, as compared to $44.8 million and $124.9 million for the corresponding periods of the prior year. Promotion and advertising represented 17.1% and 15.4% of net sales for the three and nine months ended September 30, 2023, respectively, as compared to 16.0% and 16.1% for the corresponding periods of the prior year. Promotion and advertising are integral parts of our industry, and we continue to invest heavily to support new product launches and to build brand awareness. We believe that our promotion and advertising efforts have had a beneficial effect on sales. All of our brands have benefited from newly launched and enhanced e-commerce sites in existing markets in collaboration with our retail customers on their e-commerce sites. We also continue to develop and implement omnichannel concepts and compelling content to deliver an integrated consumer experience. Long term, we anticipate that on a full year basis, promotion and advertising expenditures should aggregate approximately 21% of net sales, which is in line with pre-COVID historical averages.
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Royalty expense included in selling, general and administrative expenses aggregated $29.1 million and $77.2 million for the three and nine months ended September 30, 2023, respectively, as compared to $23.1 million and $61.4 million for the corresponding periods of the prior year. Royalty expense represented 7.9% and 7.8% of net sales for the three and nine months ended September 30, 2023, as compared to 8.3% and 7.9% of net sales for the corresponding periods of the prior year, due to changes in brand mix.
Income from Operations
As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, our operating margins aggregated 23.7% and 23.5% for the three and nine months ended September 30, 2023, respectively, as compared to 23.0% and 22.1% for the corresponding periods of the prior year.
Other Income and Expense
Traditionally, interest expense was primarily related to the financing of brand and licensing acquisitions. The increase in interest expense related to prior year acquisitions is the main driver of the increase in other income and expense during 2023. As previously disclosed, in April 2021 we completed the acquisition of the headquarters of Interparfums SA. The acquisition was financed by a 10-year €120 million (approximately $127.1 million) bank loan which bears interest at one-month Euribor plus 0.75%. Also in 2021, approximately €80 million of the variable rate debt was swapped for variable rate debt with a maximum interest rate of 2%. The swap effectively exchanges the variable interest rate to a fixed rate of approximately 1.1%.
We enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Gains and losses on foreign currency transactions have not been significant. Almost 50% of net sales of our European operations are denominated in U.S. dollars.
Interest and investment income represents interest earned on cash and cash equivalents and short-term investments. As of September 30, 2023, short-term investments include approximately $8.8 million of marketable equity securities of other companies in the luxury goods sector. In the first quarter of 2023, the Company sold marketable securities which generated a gain of $3.1 million. The Company purchased additional marketable securities in the second and third quarter of 2023, which generated unrealized losses of $0.5 million in the three months ended September 30, 2023. Interest and investment income for the three months ended September 30, 2022, includes a gain of $2.3 million, resulting from the interest rate swap. For the nine months ended September 30, 2022, the Company recognized a gain of $6.4 million related to the interest rate swap which was largely offset by losses of $5.3 million on marketable equity securities during the same period.
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Income Taxes
Our consolidated effective tax rate was 23.5% and 22.6% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate for European operations was 25% for each of the nine months ended September 30, 2023 and 2022. Our effective tax rate for U.S. operations was 19% for the nine months ended September 30, 2023, as compared to 11% for the corresponding period of the prior year. Our effective tax rate differs from the 21% statutory rate due to benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income, slightly offset by state and local taxes. Additionally, in the third quarter of 2022 our U.S. operations recognized a one-time tax benefit of $2.5 million associated with the 2021 Salvatore Ferragamo acquisition. At the time of the acquisition, we had not recognized deferred tax benefits as there were uncertainties concerning its potential recoverability; however, as of September 30, 2022, the recoverability was deemed likely. Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate.
Net Income
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Net income European operations | $ | 45,965 | $ | 42,417 | $ | 133,480 | $ | 106,722 | ||||||||
| Net income United States operations | 20,155 | 10,880 | 46,066 | 27,386 | ||||||||||||
| Net income | 66,120 | 53,297 | 179,546 | 134,108 | ||||||||||||
| Less: Net income attributable to the noncontrolling interest | 12,906 | 11,874 | 37,312 | 29,769 | ||||||||||||
| Net income attributable to Inter Parfums, Inc. | $ | 53,214 | $ | 41,423 | $ | 142,234 | $ | 104,339 | ||||||||
Net income attributable to Inter Parfums, Inc. was $53.2 million and $142.2 million for the three and nine months ended September 30, 2023, respectively, as compared to $41.4 million and $104.3 million for the corresponding period of the prior year. Net income attributable to European operations was $46.0 million and $133.5 million for the three and nine months ended September 30, 2023, respectively, as compared to $42.4 million and $106.7 million for the corresponding period of the prior year. Net income attributable to United States operations was $20.2 million and $46.1 million for the three and nine months ended September 30, 2023, respectively, as compared to $10.9 million and $27.4 million for the corresponding period of the prior year. The significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin, and selling, general and administrative expenses.
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The noncontrolling interest arises from our 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 28% of Interparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is directly related to the profitability of our European operations and aggregated 28% of European operations net income for all periods presented. Net margins attributable to Inter Parfums, Inc. for the nine months ended September 30, 2023 and 2022 aggregated 14.4% and 13.4%, respectively.
Liquidity and Capital Resources
Our conservative financial tradition has enabled us to amass significant cash balances. As of September 30, 2023, we had $183.5 million in cash, cash equivalents and short-term investments, most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments. As of September 30, 2023 short-term investments include approximately $10.2 million of marketable equity securities.
As of September 30, 2023, working capital aggregated $514 million and we had a working capital ratio of 2.4 to 1. Approximately 78% of the Company’s total assets are held by European operations, and approximately $245 million of trademarks, licenses and other intangible assets are also held by European operations.
The Company is party to a number of license and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various dates through 2039. In connection with most of these license agreements, the Company is subject to minimum annual advertising commitments, minimum annual royalties and other commitments. See Item 8. Financial Statements and Supplementary Data – Note 12 – Commitments in our 2022 annual report on Form 10-K which is incorporated by reference herein. Future advertising commitments are estimated based on planned future sales for the license terms that were in effect at December 31, 2022, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations.
The Company hopes to continue to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. In July 2023, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance-related products under the Roberto Cavalli brand. This license took effect in July 2023, and we target to start shipping products in January 2024. In December 2022, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance-related products under the Lacoste brand. This new license takes effect January 2024.
Cash provided by operating activities aggregated $24.3 million for the nine months ended September 30, 2023, as compared to cash used in operating activities of $8.2 million for the corresponding period of the prior year. For the nine months ended September 30, 2023, working capital items used $169.1 million in cash from operating activities, as compared to $159.2 million in the 2022 period. Although from a cash flow perspective accounts receivable is up 48.6% from year end 2022, the balance is reasonable based on 2023 record sales levels and reflects a combination of high volumes of shipments towards the end of the third quarter as well as some payment schedules extended going into the holiday season. Strong collection activity resulted in day’s sales outstanding decreasing to 72 days, down from 80 days in the corresponding period of the prior year. From a cash flow perspective, inventory levels as of September 30, 2023, increased 26% from year end 2022 in support of our overall sales growth. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold.
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Cash flows provided by investing activities in 2023 reflect purchases and sales of short-term investments. These investments include certificates of deposit with maturities greater than three months. Approximately $2 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal.
Our business is not capital intensive as we do not own any manufacturing facilities. On a full year basis, we typically spend approximately $5.0 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers.
Our short-term financing requirements are expected to be met by available cash on hand at September 30, 2023, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2023 consist of a $25 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $8 million in credit lines provided by a consortium of international financial institutions. There was $4.5 million of short-term borrowings outstanding pursuant to these facilities as of September 30, 2023 and no short-term borrowings outstanding as of September 30, 2022.
In February 2022, our Board authorized a 100% increase in the annual dividend to $2.00 per share. In February 2023, the Board of Directors further increased the annual dividend to $2.50 per share. The next quarterly cash dividend of $0.625 per share is payable on December 31, 2023, to shareholders of record on December 15, 2023.
We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs.
Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the nine months ended September 30, 2023.
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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, 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 September 30, 2023, we had foreign currency contracts in the form of forward exchange contracts of approximately U.S. $58.0 million and GB £2.0 million with maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.
Interest Rate Risk Management
We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt.
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| Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based on their review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item (c).
In December 2022, our Board of Directors authorized a share repurchase program for our outstanding common stock. For 2023 the maximum number of shares to be repurchased is 166,060, and the balance available for repurchase under this plan for 2023 is 81,000 shares. Over the course of the first nine months of 2023, the Company repurchased 85,060 shares at a cost of $11.3 million. These shares are classified as treasury shares on the accompanying balance sheet. The Company plans to continue repurchasing shares throughout 2023 under this plan. There were no repurchases of shares during the three months ended September 30, 2023.
Items 1. Legal Proceedings, 1A. Risk Factors, 3. Defaults Upon Senior Securities, 4. Mine Safety Disclosures and 5. Other Information, are omitted as they are either not applicable or have been included in Part I.
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| Item 6. | Exhibits. |
The following documents are filed herewith:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 9th day of November 2023.
| INTER PARFUMS, INC. | ||
| By: | /s/ Michel Atwood | |
| Chief Financial Officer | ||
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