INTERPARFUMS INC 10-Q

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Information Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and “Risk Factors” in Inter Parfums’ annual report on Form 10-K for the fiscal year ended December 31, 2019 and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report. Overview We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 80% and 77% of net sales for the nine months ended September 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 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 20% and 23% of net sales for the nine months ended September 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. Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc, Coach, Jimmy Choo and GUESS brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows: Page 15 INTER PARFUMS, INC. AND SUBSIDIARIES Nine Months Ended September 30, 2020 2019 Montblanc. 22 % 23 % Coach. 18 % 14 % Jimmy Choo. 16 % 17 % GUESS. 11 % 9 % Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as well as through our own distribution subsidiaries in Spain and the United States. We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning. Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers. As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share. Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because over 40% 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. Page 16 INTER PARFUMS, INC. AND SUBSIDIARIES 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 initially issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. More recently, those governments have set guidelines in allowing businesses to reopen and employees to return to offices. Beginning in March 2020, we 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 all jurisdictions in which we operate we are following guidance from authorities and health officials in allowing our teams to gradually return to our offices, including, requiring 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. The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill. The duration and intensity of this global health emergency and its related disruptions are uncertain. Since March 2020, retail stores in many jurisdictions around the world began reopening and business has improved considerably. However, we anticipate that limited traffic in reopened stores and the virtual shutdown of international air traffic has and will continue to have an unfavorable impact our business. We have faced significant challenges in 2020 and we anticipate that these challenges will continue for at least the remainder of 2020 due to uncertain market conditions. Business has significantly improved during the three months ended September 30, 2020, as compared to the prior quarter as retail stores began reopening and consumers have increased their on-line purchasing. We expect this trend to continue, however, we do not see a resurgence anytime soon in travel retail as air traffic continues to suffer due in part to governmental restrictions on international air travel. In addition, the recent resurgence of COVID-19 cases in various parts of the world, including the United Kingdom, Ireland and other countries in Europe, has caused the re-implementation of government restrictions to prevent further spread of the virus. These restrictions include the temporary closure of businesses deemed "non-essential", travel bans and restrictions, social distancing and quarantines. Lastly, the COVID-19 pandemic has led to high levels of unemployment and deteriorating economic conditions in many countries where our products are sold, forcing many consumers to limit discretionary purchases. We believe that the impact of the COVID-19 pandemic will continue to have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of this year and into 2021. Operationally, we are prepared for increased demand in the post-COVID-19 environment, with business in Asia and North America already showing signs of a comeback. We have geared up to rapidly fill the distribution channels as the crisis subsides. 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. Page 17 INTER PARFUMS, INC. AND SUBSIDIARIES Our conservative financial tradition has enabled us to amass and maintain hefty cash balances and nominal long-term debt. As of September 30, 2020, we had $204 million in cash, cash equivalents and short-term investments, and only $19.4 million of long-term debt. We also have $49 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 typically accounts for over two-thirds, has 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 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 for 2020. We have also temporarily suspended our quarterly cash dividend. These actions have had a favorable impact on the Company’s fixed expenditures and cash flow. Furthermore, 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 $14 million, through a capital increase. In connection with the acquisition, the Company entered into a $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. Page 18 INTER PARFUMS, INC. AND SUBSIDIARIES 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. 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 Nine Months Ended September 30, 2020 as Compared to the Three and Nine Months Ended September 30, 2019 Net Sales Three months ended September 30, Nine months ended September 30, (In millions) 2020 2019 % Change 2020 2019 % Change (in millions) European based brand product sales $ 129.7 $ 143.6 (9.6 )% $ 283.3 $ 412.9 (31.4 )% United States based product sales 30.9 47.6 (35.1 )% 71.7 122.8 (41.6 )% Total net sales $ 160.6 $ 191.2 (16.0 )% $ 355.0 $ 535.7 (33.7 )% Net sales for the three months ended September 30, 2020 decreased 16.0% to $160.6 million, as compared to $191.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales declined 18.3%. For the three months ended September 30, 2020 and 2019, the average dollar/euro exchange rate was 1.17 and 1.11, respectively. Net sales for the nine months ended September 30, 2020 decreased 33.7% to $355.0 million, as compared to $535.7 million for the corresponding period of the prior year. European based product sales decreased 9.6% and 31.4% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year. United States based product sales decreased 35.1% and 41.6% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year. As 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 decline in sales across all brands and geographic markets. However, business is rebounding better than anticipated. Since the early days of the pandemic, our sales have increased sequentially each and every month, thanks to store re-openings and a robust e-commerce business being conducted by our retail customers. Page 19 INTER PARFUMS, INC. AND SUBSIDIARIES For our European operations, the third quarter rate of decline in sales slowed to 9.6% from 68.6% in the second quarter. In general, sales benefitted from the favorable turnaround of several of our markets, notably Asia and North America. Among our largest brands, comparable quarter Montblanc and Jimmy Choo brand sales declined 11.3% and 31.0%, respectively, which is better understood in the context of the high bars set in 2019 with the rollout of Montblanc’s Explorer and Jimmy Choo’s Urban Hero . Coach and Lanvin fragrance sales were actually ahead of last year’s third quarter by 7.9% and 1.8%, respectively. Coach brand sales continued to benefit from the debut of Coach Dreams earlier this year, while favorable sales trends in Lanvin’s key markets, Asia and Eastern Europe, were key sales catalysts. As compared to the second quarter, there has also been dramatic improvement by our U.S. operations, even though sales have been hampered by the lack of new product launches this year. Notably, our largest U.S. brand, GUESS, had its Bella Vita blockbuster launch rescheduled until next year. We also postponed the major launch of Anna Sui Sky . The 2021 new product pipeline is especially rich, and therefore we anticipate considerable sales gains over the current year. 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 little sign of a turnaround is travel retail. We do not see a resurgence anytime soon in travel retail as air traffic continues to suffer due in part to governmental restrictions on international travel. Net Sales to Customers by Region Nine months ended September 30, (In millions) 2020 2019 North America $ 114.0 $ 164.1 Western Europe 106.4 138.9 Asia 57.0 88.9 Middle East 30.4 57.8 Central and South America 23.4 37.9 Eastern Europe 19.4 41.2 Other 4.4 6.9 $ 355.0 $ 535.7 The impact of the COVID-19 pandemic has broadly impacted all regions, with the steepest declines in the Middle East, Eastern Europe and Asia. Travel retail accounted for much of the decline in the Asian market. Gross margin Three months ended September 30, Nine months ended September 30, (In millions) 2020 2019 2020 2019 Net sales $ 160.6 $ 191.2 $ 355.0 $ 535.7 Cost of sales 63.4 76.8 141.9 204.4 Gross margin $ 97.2 $ 114.4 $ 213.1 $ 331.3 Gross margin as a percent of net sales 60.5 % 59.8 % 60.0 % 61.8 % Gross profit margin was 60.5% and 60.0% for the three and nine months ended September 30, 2020, respectively, as compared to 59.8% and 61.8% as for the three and nine months ended September 30, 2019, respectively. For European operations, gross profit margin was 62.4% and 62.3% for the three and nine months ended September 30, 2020, respectively, as compared to 62.8% and 64.7% for the corresponding periods of the prior year. Page 20 INTER PARFUMS, INC. AND SUBSIDIARIES We carefully monitor movements in foreign currency exchange rates as over 40% 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 weaker dollar in the third quarter of 2020 resulted in a nominal decline in our gross margin. Gross margin for the nine months ended September 30, 2020 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 52.5% and 51.2% for the three and nine months ended September 30, 2020, respectively, as compared to 51.0% and 52.3% for the corresponding periods of the prior year. Although gross margin improved during the third quarter of 2020, as compared to the corresponding period of the prior year due primarily to product mix, for the nine months ended September 30, 2020, 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 as a percentage of sales. Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $1.6 million and $3.8 million for the three and nine month periods ended September 30, 2020, respectively, as compared to $2.4 million and $5.9 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 September 30, Nine months ended September 30, (In millions) 2020 2019 2020 2019 Selling, general and administrative expenses $ 65.8 $ 77.8 $ 169.5 $ 238.9 Selling, general and administrative expenses as a percent of net sales 41.0 % 40.7 % 47.7 % 44.6 % Selling, general and administrative expenses decreased 15.4% and 29.1% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year. As a percentage of sales, selling, general and administrative expenses were 41.0% and 47.7% for the three and nine months ended September 30, 2020, respectively, as compared to 40.7% and 44.6% for the three and nine months ended September 30, 2019, respectively. For European operations net sales decreased 9.6% and 31.4% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our European operations decreased 11.4% and 29.4% for the same periods, respectively. In addition, selling, general and administrative expenses of our European operations represented 41.3% and 47.3% of net sales for the three and nine months ended September 30, 2020, respectively, as compared to 42.1% and 46.0% for the three and nine months ended September 30, 2019, respectively. Page 21 INTER PARFUMS, INC. AND SUBSIDIARIES U.S. operations net sales decreased 35.1% and 41.6% for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our U.S. operations decreased 29.2% and 27.7% for the three and nine months ended September 30, 2020, as compared to the corresponding periods of the prior year, and represented 39.7% and 49.5% of net sales for the three and nine months ended September 30, 2020, respectively, as compared to 36.3% and 40.0% 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 net sales. We had significant promotional programs planned for 2020. At the time of initial retail store closings, certain advertising and promotional programs were well underway and could not be halted. Since then 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 $17.6 million and $51.9 million for the three and nine months ended September 30, 2020, respectively, as compared to $28.7 million and $92.5 million for the corresponding periods of the prior year. Promotion and advertising represented 10.9% and 14.6% of net sales for the three and nine months ended September 30, 2020, respectively, as compared to 15.0% and 17.3% for the 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. Royalty expense included in selling, general and administrative expenses aggregated $11.7 million and $26.3 million for the three and nine months ended September 30, 2020, respectively, as compared to $14.1 million and $39.2 million for the corresponding periods of the prior year. Royalty expense represented 7.3% and 7.4% of net sales for the three and nine months ended September 30, 2020, as compared to 7.4% and 7.3% of net sales for the corresponding periods of the prior year. As a result of the COVID-19 pandemic we reached agreements with most of our licensors to waive or significantly reduce minimum guaranteed royalties for 2020. As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations was $31.4 million for the three months ended September 30, 2020, as compared to $36.6 million for the corresponding period of the prior year. Income from operations was $43.6 million for the nine months ended September 30, 2020, as compared to $92.4 million for the corresponding period of the prior year. For the nine months ended September 30, 2020, our operating margin was 12.3%, as compared to 17.2% for the corresponding period of the prior year. Other Income and Expense Interest expense aggregated $0.1 million and $1.5 million for the three and nine months ended September 30, 2020, respectively, as compared to $0.4 million and $1.2 million for the corresponding periods of the prior year. Interest expense is primarily related to the financing of brand 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. Page 22 INTER PARFUMS, INC. AND SUBSIDIARIES Foreign currency gains (losses) aggregated $(0.9) million and $0.1 million for the three and nine months ended September 30, 2020, respectively, as compared to losses of $0.1 million and $0.8 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. Over 40% of net sales of our European operations are denominated in U.S. dollars. Interest income aggregated $0.4 million and $2.2 million for the three and nine months ended September 30, 2020, respectively, as compared to $0.6 million and $2.9 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 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 28% for the nine months ended September 30, 2020, as compared to 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. As a result of the true-up of our 2019 tax accrual estimates for U.S. operations, income taxes resulted in a nominal benefit for the nine months ended September 30, 2020, as compared to an expense of 16.6% for the corresponding period of the prior year. Our effective tax rate for U.S. operations typically 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. 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 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 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 recovery taxes already paid to the Swiss authorities and excluding interest. Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate. Page 23 INTER PARFUMS, INC. AND SUBSIDIARIES Net Income and Earnings per Share Three Months Ended September 30, Nine Months Ended September 30, (In thousands except per share data) 2020 2019 2020 2019 Net income European operations $ 18,943 $ 20,856 $ 31,175 $ 54,760 Net income U.S. operations 2,909 5,802 993 12,475 Net income 21,852 26,658 32,168 67,235 Less: Net income attributable to the noncontrolling interest 5,314 5,810 8,688 15,176 Net income attributable to Inter Parfums, Inc. $ 16,538 $ 20,848 $ 23,480 $ 52,059 Earnings per share: Net income attributable to Inter Parfums, Inc. common shareholders: Basic $ 0.52 $ 0.66 $ 0.74 $ 1.66 Diluted $ 0.52 $ 0.66 $ 0.74 $ 1.64 Weighted average number of shares outstanding: Basic 31,533 31,452 31,531 31,444 Diluted 31,619 31,676 31,651 31,681 Net income was $21.9 million and $32.2 million for the three and nine months ended September 30, 2020, as compared to $26.7 million and $67.2 million for the corresponding periods of the prior year. The reasons for significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin, and selling, general and administrative expenses, most of which was caused by the effects of the COVID-19 pandemic. The noncontrolling interest arises 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 subsidiary in Spain. Net income attributable to the noncontrolling interest aggregated 28% of European operations’ net income for all periods presented. Liquidity and Capital Resources Our conservative financial tradition has enabled us to amass significant cash balances and nominal long-term debt. As of September 30, 2020, we had $204 million in cash, cash equivalents and short-term investments, most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments. As of September 30, 2020, long-term debt aggregated only $19.4 million and we also have $49 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 in a typical year account for over two-thirds, has 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 programs 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 have had 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. Page 24 INTER PARFUMS, INC. AND SUBSIDIARIES As of September 30, 2020, we had a working capital ratio of 4.5 to 1. Approximately 86% of the Company’s total assets are held by European operations, and approximately $182 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 are 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 $20.2 million for the nine months ended September 30, 2020, as compared to cash provided by operating activities of $6.7 million for the corresponding period of the prior year. For the nine months ended September 30, 2020, working capital items used $62.4 million in cash from operating activities, as compared to $65.8 million in the 2019 period. We anticipate significant challenges for the remainder of 2020 due to uncertain market conditions promulgated by the COVID-19 pandemic. Since March 2020, retail stores in several jurisdictions around the world began reopening and business is rebounding better than expected. Accounts receivables are up considerably from June 2020. However, the September 30, 2020 balance is reasonable considering the upturn in third quarter 2020 net sales and collection activity remains strong as day’s sales outstanding was 78 days, as compared to 84 days for the corresponding period of the prior year. Inventory levels are up approximately 3% from year end and reflect levels needed to support current net sales expectations and new product launches. Cash flows used in investing activities in 2020 reflect purchases of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. Approximately $59 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 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 June 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 $14 million through a capital increase. In connection with the acquisition, the Company entered into a $13.4 million, three-year term loan payable in three equal annual installments plus interest. Page 25 INTER PARFUMS, INC. AND SUBSIDIARIES Our short-term financing requirements are expected to be met by available cash on hand at September 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 $29 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both September 30, 2020 and September 30, 2019. 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 expects to 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 nine months ended September 30, 2020.