Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 78%, 76% and 80% of net sales for 2020, 2019 and 2018, respectively. We have built a portfolio of prestige brands,
which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Moncler, Montblanc, Paul Smith, Repetto,
Rochas, S.T. Dupont and Van Cleef & Arpels , whose products are distributed in over 120 countries around the world.
Through our United States operations, we
also market fragrance and fragrance related products. United States operations represented 22%, 24% and 20% of net sales in 2020,
2019 and 2018, respectively. These fragrance products are 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 own the Lanvin brand name for our class of trade and 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:
Year Ended December 31,
2020
2019
2018
Montblanc
21 %
22 %
19 %
Coach
17 %
14 %
15 %
Jimmy Choo
16 %
16 %
17 %
GUESS (license commenced April 1, 2018)
11 %
10 %
n/a
Lanvin
7 %
8 %
10 %
27
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 Italy, 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 by phasing out underperforming products so we can devote greater resources to those products
with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating
performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which
we take into account in our business planning.
Our business is not capital intensive, and
it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components
from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the
components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them
to one of our distribution centers.
As with any global business, many aspects
of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach
and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow
market share.
Our reported net sales are impacted by changes
in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively
affected by a strong dollar, because over 45% of net sales of our European operations are denominated in U.S. dollars, while almost
all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales
while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management
that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts
to reduce the effects of fluctuating foreign currency exchange rates.
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 have been 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 have been 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 are paramount.
28
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. Beginning in June 2020, retail stores in many jurisdictions around the world began reopening and business has improved
considerably. However, international travel has remained largely curtailed globally due to both government restrictions and consumer
health concerns that continue to adversely impact consumer traffic in most travel retail locations. We anticipate that limited
traffic in reopened stores and the virtual shutdown of international air traffic will continue to have an unfavorable impact our
business.
We faced significant challenges in 2020
and we anticipate that these challenges will continue in 2021 due to uncertain market conditions. Business significantly improved
during the second half of 2020, 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 and introduction of variants
of COVID-19 cases in various parts of the world, including the United States, the United Kingdom and other countries in Europe,
South America and Africa, has caused temporary re-implementation of government restrictions to prevent further spread of the virus.
These 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 2021.
Operationally, we are prepared for increased
demand in the post-COVID-19 environment, with business in Asia, Eastern Europe and North America 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.
Our conservative financial tradition has
enabled us to amass and maintain hefty cash balances and nominal long-term debt levels when this pandemic began. Nonetheless, we
took 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
postponed the launch of several programs originally scheduled for 2020 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 also
took several actions with an eye toward minimizing fixed expenses. While we did not terminate or furlough any employees, we did
institute a hiring freeze and significantly cut bonuses for 2020. We 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, paid particular attention to the management of working capital. As a result
of the above, we did not experience any short-term liquidity problem or incur any significant credit losses.
Recent Important Events
Anna Sui Corp.
In January 2021, we renewed our license
agreement with Anna Sui Corp. for the creation, development and distribution of fragrance products through December 31, 2026, without
any material changes in terms and conditions. Our initial 10-year license agreement with Anna Sui Corp. was signed in 2011. The
renewal agreement also allows for an additional 5-year term through 2031 at the option of the Company.
29
Building Acquisition - Future Headquarters
in Paris
In December 2020, our majority owned Paris-based
subsidiary, Interparfums SA, signed a purchase contract, subject to certain conditions, to acquire an office building complex for
its exclusive use as its future headquarters located in the heart of Paris. In order to maintain our current cash position, it
is expected that approximately 90% of the €125 million ($153 million) purchase price, excluding taxes and related expenses,
will be financed by a bank loan. The transaction is expected to be completed in the spring of this year with the move planned for
the end of 2021 or the beginning of 2022.
This acquisition is a unique opportunity
with benefits to be realized over the long-term. Owning our corporate headquarters in a very prestigious part of Paris, and customizing
the complex for our European operations, will enhance our reputation, provide an exceptional work environment, as well as a welcoming
and productive atmosphere for our suppliers, distributors and licensors.
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 25% of Divabox capital for $14.0
million, through a capital increase. In connection with the acquisition, the Company entered into a $13.4 million term loan, which
has been amended such that the loan was repaid in full in February 2021. As a website of reference for all selective fragrance
brands, Origines-parfums is a key French player in the online beauty market recognized for its customer relationship expertise.
This agreement should enhance the introduction of dedicated fragrance lines and products designed to address a specific consumer
demand for this distribution channel and accelerate our digital development.
Moncler
In June 2020, the Company entered into an
exclusive, 5-year worldwide license agreement with a potential 5-year extension with Moncler for the creation, development and
distribution of fragrances under the Moncler brand. Our rights under this license are subject to certain minimum advertising expenditures
and royalty payments as are customary in our industry. Moncler was founded at Monestier-de-Clermont, Grenoble, France, in 1952
and is currently headquartered in Italy. Over the years, the brand has combined style with constant technological research assisted
by experts in activities linked to the world of the mountain. The Moncler outerwear collections marry the extreme demands of nature
with those of city life. Our first fragrance launch for the Moncler brand is scheduled for the first quarter of 2022.
S.T. Dupont
In January 2021, we renewed our license
agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2022, 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, 2020.
Discussion of Critical Accounting Policies
We make estimates and assumptions in the
preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following
discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial
condition and results of operations. These accounting policies generally require our management’s most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management
of the Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee
of the Board of Directors.
30
Sales Returns
Generally,
we do not permit customers to return their unsold products. However, for U.S. based customers, we allow returns if properly requested,
authorized and approved. We regularly review and revise, as deemed necessary, our estimate of reserves for future sales returns
based primarily upon historic trends and relevant current data, including information provided by retailers regarding their inventory
levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The
types of known or anticipated events that we consider include, but are not limited to, the financial condition of our customers,
store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products.
We record our estimate of potential sales returns as a reduction of sales and cost of sales with corresponding entries to
accrued expenses, to record the refund liability, and inventory, for the right to recover goods from the customer. Returned
products are valued based upon their estimated realizable value. The physical condition and marketability of returned products
are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable values of returned
products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as economic conditions,
inventory levels or competitive conditions differ from our expectations.
Long-Lived Assets
We evaluate indefinite-lived intangible
assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change,
such as an unexpected decline in sales, that would more likely than not indicate that the carrying value of an indefinite-lived
intangible asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires
a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations
are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 6.99%. The cash flow
projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense
levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are
more subjective in nature. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment
charge is recorded.
We believe that the assumptions we have
made in projecting future cash flows for the evaluations described above are reasonable. However, if future actual results do not
meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results
of operations.
At December 31, 2020 indefinite-lived intangible
assets aggregated $132.0 million. The following table presents the impact a change in the following significant assumptions would
have had on the calculated fair value in 2020 assuming all other assumptions remained constant:
$ in millions
Change
Increase (decrease)
to fair value
Weighted average cost of capital
+10 %
$ (11.3 )
Weighted average cost of capital
-10 %
$ 12.5
Future sales levels
+10 %
$ 15.0
Future sales levels
-10 %
$ (15.0 )
Intangible assets subject to amortization
are evaluated for impairment testing whenever events or changes in circumstances indicate that the carrying amount of an amortizable
intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset, the undiscounted
future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset.
If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no impairment
charge is recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangible asset,
an impairment charge would be recorded to reduce the intangible asset to its fair value. The cash flow projections are based upon
a number of assumptions, including future sales levels and future cost of goods and operating expense levels, as well as economic
conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature.
In those cases where we determine that the useful life of long-lived assets should be shortened, we would amortize the net book
value in excess of the salvage value (after testing for impairment as described above), over the revised remaining useful life
of such asset thereby increasing amortization expense. We believe that the assumptions we have made in projecting future cash
flows for the evaluations described above are reasonable.
31
In determining the useful life of our Lanvin
brand names and trademarks, we applied the provisions of ASC topic 350-30-35-3. The only factor that prevented us from determining
that the Lanvin brand names and trademarks were indefinite life intangible assets was Item c. “Any legal, regulatory, or
contractual provisions that may limit the useful life.” The existence of a repurchase option in 2025 may limit the useful
life of the Lanvin brand names and trademarks to the Company. However, this limitation would only take effect if the repurchase
option were to be exercised and the repurchase price was paid. If the repurchase option is not exercised, then the Lanvin brand
names and trademarks are expected to continue to contribute directly to the future cash flows of our Company and their useful life
would be considered to be indefinite.
With respect to the application of ASC topic
350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exercised,
and in applying ASC topic 350-30-35-8, we assumed that the repurchase option is exercised. When exercised, Lanvin has an obligation
to pay the exercise price and the Company would be required to convey the Lanvin brand names and trademarks back to Lanvin. The
exercise price to be received (Residual Value) is well in excess of the carrying value of the Lanvin brand names and trademarks,
therefore no amortization is required.
Quantitative Analysis
During the three-year period ended December
31, 2020, we have not made any material changes in our assumptions underlying these critical accounting policies or to the related
significant estimates. The results of our business underlying these assumptions have not differed significantly from our expectations.
While we believe the estimates we have made
are proper and the related results of operations for the period are presented fairly in all material respects, other assumptions
could reasonably be justified that would change the amount of reported net sales, cost of sales, and selling, general and administrative
expenses as they relate to the provisions for anticipated sales returns, allowance for doubtful accounts and inventory obsolescence
reserves. For 2020, had these estimates been changed simultaneously by 5% in either direction, our reported gross profit would
have increased or decreased by approximately $0.5 million and selling, general and administrative expenses would have changed by
approximately $0.2 million. The collective impact of these changes on 2020 operating income, net income attributable to Inter Parfums,
Inc., and net income attributable to Inter Parfums, Inc. per diluted share would be an increase or decrease of approximately $0.7
million, $0.4 million and $0.01, respectively.
Results of Operations
Net Sales
Years ended December 31,
(in millions)
2020
% Change
2019
% Change
2018
European based product sales
$ 422.9
(22 )%
$ 542.1
1 %
$ 537.6
United States based product sales
116.1
(32 )%
171.4
24 %
138.0
Total net sales
$ 539.0
(24 )%
$ 713.5
6 %
$ 675.6
Net sales decreased 24% in 2020 to $539.0
million, as compared to $713.5 million in 2019. At comparable foreign currency exchange rates, net sales decreased 26%. Net sales
increased 6% in 2019 to $713.5 million, as compared to $675.6 million in 2018. At comparable foreign currency exchange rates, net
sales increased 8%. The average U.S. dollar/euro exchange rates were 1.15 in 2020 and 1.12 in 2019 and 1.18 in 2018.
European based product sales decreased 22%
in 2020 to $422.9 million, as compared to $542.1 million in 2019. At comparable foreign currency exchange rates, European based
product sales decreased 23% in 2020. European based product sales increased 1% in 2019 to $542.1 million, as compared to $537.6
million in 2018. At comparable foreign currency exchange rates, European based product sales increased 4% in 2019.
32
United States based product sales decreased
32% in 2020 to $116.1 million, as compared to $171.4 million in 2019. United States based product sales increased 24% in 2019 to
$171.4 million, as compared to $138.0 million in 2018.
As previously mentioned, 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. However, business began rebounding better than anticipated.
Since the early days of the pandemic, our sales have increased sequentially, thanks to store re-openings and a robust e-commerce
business being conducted by our retail customers. However, international travel has remained largely curtailed globally due to
both government restrictions and consumer health concerns that continue to adversely impact consumer traffic in most travel retail
locations.
For our European operations, fourth quarter
2020 sales increased 8% over fourth quarter 2019, a significant improvement compared to the third quarter decline of 10% and the
second quarter decline of 69%. Although we postponed our planned new product launches for Jimmy Choo and Kate Spade New York from
2020 to 2021, sales benefitted from the favorable turnaround in several of our markets, notably Asia, Middle East and North America.
Among our largest brands, comparable full year Montblanc and Jimmy Choo brand sales both declined 27%, which is also 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 brand sales were just 4% below 2019’s as Coach brand sales benefitted from the debut of Coach Dreams
earlier in 2020.
European based product sales came in as
expected in 2019 despite fighting a stronger dollar throughout the year. Our largest brand, Montblanc, grew full year sales by
23% with the excellent performance of the new Montblanc Explorer scent as well as the continued strength of the brand’s
Legend fragrance family. In constant dollars, Jimmy Choo brand sales were up slightly. However, due to the strengthening
of the dollar, Jimmy Choo brand sales were down nominally in actual dollars. Coach brand sales were also down slightly in 2019
in actual dollars but ahead of 2018 in constant dollars.
Our United States based operations also
saw a significant improvement in sales as 2020 progressed. After the 75% decline in comparable second quarter 2020 product sales,
the decline narrowed to 35% in the third quarter of 2020 and 9% in the fourth quarter of 2020. Although there has been dramatic
improvement in our U.S. operations, sales have been hampered by the lack of new product launches this year. Notably, our largest
U.S. brand, GUESS, saw its sales decline 18% as its Bella Vita blockbuster launch was rescheduled until 2021. We also postponed
the launch of Anna Sui Sky, which together with the virtual shutdown of travel retail in Asia, resulted in a 47% decline
in 2020 Anna Sui brand sales.
United States based product sales increased
24% in 2019 to $171.4 million, as compared to $138.0 million in 2018. GUESS brand fragrances had an extraordinary year due to the
addition of two brand extensions, 1981 Los Angeles and Seductive Noir , the continued popularity of legacy scents,
and the success of our international distribution and marketing programs. Also contributing to the top line growth by U.S. operations
were Abercrombie & Fitch and Hollister, both of which achieved significant sales growth spurred by the launch of the Authentic
fragrance duo for Abercrombie & Fitch, and brand extensions for the Wave and Festival fragrance families for
Hollister. Oscar de la Renta fragrance sales rose slightly, supported by legacy scents and our growing Bella fragrance family.
We maintain confidence in our future as
we plan to strengthen advertising and promotional investments supporting all portfolio brands, accelerate brand development and
build upon the strength of our worldwide distribution network. Our 2021 new product pipeline is abundant, with new entrants for
our European operations that include women’s scents for the Jimmy Choo, Kate Spade, and Rochas brands. For U.S. operations,
we have fragrance duos unveiling for the Abercrombie & Fitch and Hollister brands, and women’s scents debuting for the
Anna Sui, GUESS, MCM, and Oscar de la Renta brands, plus broader distribution of Anna Sui Sky throughout Asia is also planned.
Lastly, we hope to benefit from our strong
financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. However, we cannot
assure you that any new license or acquisition agreements will be consummated.
33
Net Sales to
Customers by Region
Years
ended December 31,
2020
2019
2018
(in millions)
North America
$ 193.5
$ 235.5
$ 210.5
Western Europe
147.1
185.5
180.9
Asia
79.7
110.9
113.4
Middle East
46.8
72.6
59.3
Eastern Europe
33.1
55.2
52.8
Central and South America
32.5
46.2
51.7
Other
6.3
7.6
7.0
$ 539.0
$ 713.5
$ 675.6
The impact of the COVID-19 pandemic broadly
impacted all regions in 2020, with the steepest declines in the Middle East and Eastern Europe. Travel retail accounted for much
of the decline in the Asian market. This is in contrast to 2019, where virtually all regions registered growth for the year with
only Central and South America declining. Asia, which appears to be down slightly in 2019, is actually up in constant dollars.
The strongest gains were achieved by the Middle East, North America and Eastern Europe, which increased sales by 22%, 12% and 5%,
respectively.
Gross Margins
Years
ended December 31,
2020
2019
2018
(in millions)
Net sales
$ 539.0
$ 713.5
$ 675.6
Cost of sales
208.3
267.6
248.0
Gross margin
$ 330.7
$ 445.9
$ 427.6
Gross margin, as a percent of net sales
61.4 %
62.5 %
63.3 %
As a percentage of net sales, gross profit
margin was 61.4%, 62.5%, and 63.3% in 2020, 2019 and 2018, respectively. For European based operations, gross profit margin as
a percentage of net sales was 64.0%, 65.7% and 66.3% in 2020, 2019 and 2018, respectively. We carefully monitor movements in foreign
currency exchange rates as over 45% of our European based operations net sales is 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 margin while a weak
U.S. dollar has a negative effect. The average dollar/euro exchange rate was 1.15 in 2020, as compared to 1.12 in 2019, and the
weaker dollar in 2020 resulted in a small decline in our gross margin in 2020. Gross margin in 2020 also 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.
The stronger dollar in 2019 resulted in
a benefit to our gross margin in 2019, however, our new Montblanc Explorer product line has a greater than typical cost
of sales, which more than offset the benefit of the stronger dollar.
For United States operations, gross profit
margin was 51.8%, 52.5% and 51.4% in 2020, 2019 and 2018, respectively. With a decline in sales in 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 year as a percentage of sales. In 2019, sales growth for our United States operations primarily came from increased sales
of higher margin prestige products under licenses.
34
Costs relating to purchase with purchase
and gift with purchase promotions are reflected in cost of sales, and aggregated $26.4 million, $38.9 million and $36.4 million
in 2020, 2019 and 2018, respectively, and represented 4.9%, 5.5% and 5.4% of net sales, respectively.
Generally, we do not bill customers for
shipping and handling costs and such costs, which aggregated $5.0 million, $7.7 million and $7.1 million in 2020, 2019 and 2018,
respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our
Company’s gross margins may not be comparable to other companies, which may include these expenses as a component of cost
of goods sold.
Selling, General & Administrative
Expenses
Years
ended December 31,
2020
2019
2018
(in millions)
Selling, general & administrative expenses
$ 260.6
$ 341.2
$ 332.8
Selling, general & administrative expenses as a percent of net sales
48.4 %
47.8 %
49.3 %
Selling, general and administrative expenses
decreased 23.6% in 2020 as compared to 2019, and increased 2.5% in 2019 as compared to 2018. As a percentage of sales, selling,
general and administrative expenses were 48.4%, 47.8% and 49.3% in 2020, 2019 and 2018, respectively. For European operations,
selling, general and administrative expenses declined 23.5% in 2020 and 1.0% in 2019, as compared to the corresponding prior year
period and represented 49.8%, 50.8% and 51.7% of sales in 2020, 2019 and 2018, respectively. As discussed in more detail below,
the fluctuations which are in line with the fluctuations in sales for European operations, are primarily from variations in promotion
and advertising expenditures.
Our operating cost structure, of which variable
costs typically account for over two-thirds, has enabled us to minimize the impact of reduced net sales on our bottom line. Due
to the effects of the COVID-19 pandemic, a substantial portion of the reduction in selling, general and administrative expenses
in 2020 were attributable to the postponement of advertising and promotional expenses to 2021, as substantially all major new product
launches were postponed until 2021. In addition, we also undertook several actions with an eye toward minimizing fixed expenses.
While we have maintained a full staff, we had instituted a hiring freeze and significantly cut bonuses for 2020.
For United States operations, selling, general
and administrative expenses decreased 24.1% in 2020 and increased 20.2 % in 2019, as compared to the corresponding prior year period
and represented 43.1%, 38.5% and 39.8% of sales in 2020, 2019 and 2018, respectively. 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. The 2019 increase, which is in line with the increase in sales, and is the result of
royalties and promotional and advertising expenses required under our license agreements.
Promotion and advertising included in selling,
general and administrative expenses aggregated $91.7 million, $144.6 million and $139.7 million in 2020, 2019 and 2018, respectively.
Promotion and advertising as a percentage of sales represented 17.0%, 20.3% and 20.7% of net sales in 2020, 2019 and 2018, respectively.
Although promotion and advertising programs were cut in 2020 in response to market conditions, we plan to continue to invest heavily
in promotional spending to support new product launches and to build brand awareness. We anticipated that on a full year basis,
promotion and advertising expenditure will aggregate approximately 21% of 2021 net sales, which is in line with historical averages.
Royalty expense included in selling, general
and administrative expenses aggregated $41.1 million, $53.0 million and $48.9 million in 2020, 2019 and 2018, respectively. Royalty
expense as a percentage of sales represented 7.6%, 7.4% and 7.2% of net sales in 2020, 2019 and 2018, respectively. The increase
in 2020 and 2019, as a percentage of sales, is directly related to new licenses and increased royalty based product sales. 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.
35
Service fees, which are fees paid within
our European operations to third parties relating to the activities of our distribution subsidiaries, aggregated $6.8 million,
$7.5 million and $9.7 million in 2020, 2019 and 2018, respectively. The 2020 decline is the result of lower sales volume and the
2019 decrease is the result of the discontinuation of certain European distribution subsidiaries, and a return to a third party
distribution model in those territories.
Income from Operations
As a result of the
above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations
decreased 33.1% to $70.1 million in 2020 as compared to $104.7 million in 2019, which was an increase of 10.6% from $94.7 million
in 2018. Operating margins aggregated 13.0%, 14.7% and 14.0% for the years ended December 31, 2020, 2019 and 2018, respectively.
Strong cost controls in 2020 enabled us to minimize the impact of the sudden drop in sales resulting from the COVID-19 pandemic.
In 2019, small fluctuations in gross margin were mitigated by small fluctuations in selling, general and administrative expenses.
Other Income and Expenses
Interest expense aggregated $2.0 million,
$2.1 million and $2.6 million in 2020, 2019 and 2018, respectively. Interest expense is primarily related to the financing of brand
and licensing acquisitions. We use the credit lines available to us, as needed, to finance our working capital needs as well as
our financing needs for acquisitions. Long-term debt including current maturities aggregated $24.7 million, $23.1 million and $46.1
million as of December 31, 2020, 2019 and 2018, respectively.
Foreign currency losses aggregated $2.2
million, $1.1 million and $0.3 million in 2020, 2019 and 2018, respectively. We typically enter into foreign currency forward exchange
contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally
to manage risks related to future sales expected to be denominated in a foreign currency. Over 45% of 2020 net sales of our European
operations were denominated in U.S. dollars. The weaker U.S. dollar in the fourth quarter of 2020 accounted for the loss on foreign
currency as receivables denominated in dollars were revalued to year end rates.
Interest income
aggregated $2.9 million, $3.7 million and $4.0 million in 2020, 2019 and 2018, respectively. Cash and cash equivalents and
short-term investments are primarily invested in certificates of deposit with varying maturities.
Other income, which aggregated $0.5 million,
represents our share of the income of Divabox for the year ended December 31, 2020.
Income Taxes
In December 2017, the U.S. government passed
the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including,
but not limited to reducing the U.S. federal corporate tax rate from 35% to 21% beginning in 2018, and requiring companies to pay
a one-time transition tax on certain unremitted earnings of foreign subsidiaries.
The Tax Act also established new tax laws
that took effect in 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above;
(ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a provision designed to tax
global intangible low-taxed income (“GILTI”); and (iv) a provision that allows a domestic corporation an immediate
deduction for a portion of its foreign derived intangible income (“FDII”).
The Company estimated of the effect of GILTI
and has determined that it has no tax liability related to GILTI as of December 31, 2020, 2019 and 2018. The Company also estimated
the effect of FDII and recorded a tax benefit of $0.3 million, $0.9 million and $0.6 million as of December 31, 2020, 2019 and
2018, respectively.
Our effective income tax rate was 28.0%,
27.7% and 27.3% in 2020, 2019 and 2018, respectively.
36
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.
In addition,
pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is expected to be cut
from approximately 33% to 25% over a three-year period which began in 2020. Due to economic and political conditions, tax
rates in the U.S. and various foreign jurisdictions have been and may be subject to significant change. Other than as
discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we
operate.
Net Income and Earnings per Share
Year ended December 31,
2020
2019
2018
(In thousands except share and per share data)
Net income attributable to European operations
$ 41,814
$ 56,343
$ 56,469
Net income attributable to United States operations
8,154
19,727
13,246
Net income
49,968
76,070
69,715
Less: Net income attributable to the noncontrolling interest
11,749
15,821
15,922
Net income attributable to Inter Parfums, Inc.
$ 38,219
$ 60,249
$ 53,793
Net income attributable to Inter Parfums, Inc. common shareholders:
Basic
$ 1.21
$ 1.92
$ 1.72
Diluted
1.21
1.90
1.71
Weighted average number of shares outstanding:
Basic
31,536,659
31,451,093
31,307,991
Diluted
31,654,544
31,688,700
31,522,371
Net income aggregated $50.0 million, $76.1
million and $69.7 million in 2020, 2019 and 2018, respectively. Net income attributable to European operations was $41.8 million,
$56.3 million and $56.5 million in 2020, 2019 and 2018, respectively, while net income attributable to United States operations
was $8.2 million, $19.7 million and $13.2 million in 2020, 2019 and 2018, respectively. The 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 profit margins, selling, general and administrative expenses, most of which, in 2020, was caused by the effects of the COVID-19
pandemic.
The noncontrolling interest arises primarily
from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares
trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is related to the profitability of our European
operations, and aggregated 28.1% of European operations net income in 2020 and 2019 and 28.2% and 2018. Net income attributable
to Inter Parfums, Inc. aggregated $38.2 million, $60.2 million and $53.8 million in 2020, 2019 and 2018, respectively. Net margins
attributable to Inter Parfums, Inc. aggregated 7.1%, 8.4% and 8.0% in 2020, 2019 and 2018, respectively.
37
Liquidity and Capital Resources
Our conservative financial tradition has
enabled us to amass significant cash balances and nominal long-term debt. As of December 31, 2020, we had $296 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 December 31, 2020, long-term debt aggregated only $10.1 million and we also
have $51 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. As discussed above, 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 did not terminate or furlough any employees, we did institute a hiring freeze and significantly cut bonuses for 2020. In 2020,
we 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 paid
particular attention to the management of working capital. As a result of the above, we have not experienced any short-term liquidity
problems.
At December 31, 2020, working capital aggregated
$445 million, and we had a working capital ratio of over 3.8 to 1. Approximately 86% of the Company’s total assets are held
by European operations including approximately $190 million of trademarks, licenses and other intangible assets.
The Company hopes to continue to benefit
from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. Opportunities
for external growth continue to be examined, with the priority of maintaining the quality and homogeneous nature of our portfolio.
However, we cannot assure you that any new license or acquisition agreements will be consummated.
Cash provided by operating activities aggregated
$65.0 million, $76.5 million, and $63.0 million in 2020, 2019 and 2018, respectively. In 2020, working capital items used $1.9
million in cash from operating activities, as compared to $11.7 million in 2019 and $20.9 million in 2018. We anticipated significant
challenges in 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. Although, from a cash flow
perspective, accounts receivable is down approximately 10% from that of the prior year, day’s sales outstanding increased
to 86 days in 2020, as compared to 69 days and 71 days in 2019 and 2018, respectively. In addition to a decline in net sales, the
COVID-19 pandemic put tremendous pressure on many of our customers throughout 2020. We worked closely with our customers and extended
payment terms as necessary. However, we did not incur any material losses in connection with the collection of accounts receivable.
Although inventories also declined approximately 12% from that of the prior year, the decline in sales and the postponement of
certain new product launches had a significant effect on inventory days on hand, which grew to 277 days in 2020, as compared to
224 days in 2019 and 223 days in 2018, respectively. With the upturn in sales in the second half of 2020 expected to continue into
2021 and our aggressive product launch schedule for 2021, we believe our inventory levels are needed to support net sales expectations.
Cash flows used
in investing activities reflect the purchase and sales of short-term investments. These investments are primarily
certificates of deposit and other contracts with maturities greater than three months. At December 31, 2020, approximately
$60 million of 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 spent approximately $3.8 million on capital expenditures including
tools and molds needed to support our new product development calendar. Capital expenditures also include amounts for office fixtures,
computer equipment and industrial equipment needed at our distribution centers.
38
In December 2020, our majority owned Paris-based
subsidiary, Interparfums SA, signed a purchase contract, subject to certain conditions, to acquire an office building complex for
its exclusive use as its future headquarters located in the heart of Paris. In order to maintain our current cash position, it
is expected that approximately 90% of the €125 million ($153 million) purchase price, excluding taxes and related expenses,
will be financed by a bank loan. The transaction is expected to be completed in the spring of this year with the move planned for
the end of 2021 or the beginning of 2022. A €6.25 million ($7.7 million) deposit was paid upon signing the purchase contract.
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 term loan, which has been amended such that the loan was repaid in full in February 2021.
Payments for licenses, trademarks and other
intangible assets primarily represent upfront entry fees incurred in connection with new license agreements.
Our short-term financing requirements are
expected to be met by available cash on hand at December 31, 2020, cash generated by operations and short-term credit lines provided
by domestic and foreign banks. The principal credit facilities for 2021 consist of a $20.0 million unsecured revolving line of
credit provided by a domestic commercial bank and approximately $30.7 million in credit lines provided by a consortium of international
financial institutions. There were no balances due from short-term borrowings as of December 31, 2020 and 2019.
Purchase of subsidiary shares from noncontrolling
interest primarily represents the purchase of treasury shares of Interparfums SA, which are expected to be issued to Interparfums
SA employees pursuant to its Free Share Plan.
In October 2018, our Board authorized a
31% increase in the annual dividend to $1.10 per share and in October 2019, our Board authorized a further 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. In February 2021, our Board of Directors authorized
a reinstatement of an annual dividend of $1.00, payable quarterly. The next quarterly cash dividend of $0.25 per share is payable
on March 31, 2021 to shareholders of record on March 15, 2021. Dividends paid, including dividends paid once per year to noncontrolling
stockholders of Interparfums SA, aggregated $21.1 million, $44.2 million and $35.0 million for the years ended December 31, 2020,
2019 and 2018, respectively. The cash dividends to be paid in 2021 are not expected to have any significant impact on our financial
position.
We believe that funds provided by or used
in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with
sufficient resources to meet all present and reasonably foreseeable future operating needs.
Inflation rates in the U.S. and foreign
countries in which we operate did not have a significant impact on operating results for the year ended December 31, 2020.
Contractual Obligations
The following table
summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations ($ in thousands):
Payments due by period
Contractual Obligations
Total
Less than 1 year
Years 2-3
Years 4-5
More than 5 years
Long-Term Debt
$ 24,706
$ 14,569
$ 2,142
$ 2,142
$ 5,853
Lease Liabilities
$ 26,487
$ 5,568
$ 9,186
$ 6,856
$ 4,877
Purchase Obligations (1)
$ 1,398,964
$ 165,506
$ 330,849
$ 316,267
$ 586,342
Total
$ 1,450,157
$ 185,643
$ 342,177
$ 325,265
$ 597,072
(1) Consists of purchase commitments for advertising and
promotional items, minimum royalty guarantees, including fixed or minimum obligations, and estimates of such obligations subject
to variable price provisions. Future advertising commitments were estimated based on planned future sales for the license terms
that were in effect at December 31, 2020, without consideration for potential renewal periods and do not reflect the fact that
our distributors share our advertising obligations.
39