INTERPARFUMS INC 10-Q

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, 2020 included in our annual report filed on Form 10-K. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year. Page 1 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data) (Unaudited) March 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 143,313 $ 169,681 Short-term investments 150,545 126,627 Accounts receivable, net 149,940 124,057 Inventories 148,685 158,822 Receivables, other 1,650 1,815 Other current assets 18,579 16,912 Income taxes receivable 404 2,806 Total current assets 613,116 600,720 Equipment and leasehold improvements, net 18,865 19,580 Right-of-use assets, net 22,807 24,734 Trademarks, licenses and other intangible assets, net 202,247 214,108 Deferred tax assets 7,669 8,041 Other assets 23,011 22,962 Total assets $ 887,715 $ 890,145 LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt $ 1,071 $ 14,570 Current portion of lease liabilities 4,983 5,133 Accounts payable – trade 44,680 35,576 Accrued expenses 88,600 95,629 Income taxes payable 12,774 5,297 Total current liabilities 152,108 156,205 Long–term debt, less current portion 9,173 10,136 Lease liabilities, less current portion 19,771 21,354 Equity: Inter Parfums, Inc. shareholders’ equity: Preferred stock, $ .001 par; authorized 1,000,000 shares; none issued -- -- Common stock, $ .001 par; authorized 100,000,000 shares; outstanding 31,652,038 and 31,608,588 shares at March 31, 2021 and December 31, 2020, respectively 32 32 Additional paid-in capital 77,566 75,708 Retained earnings 523,600 503,567 Accumulated other comprehensive loss ( 23,611 ) ( 5,997 ) Treasury stock, at cost, 9,864,805 shares at March 31, 2021 and December 31, 2020 ( 37,475 ) ( 37,475 ) Total Inter Parfums, Inc. shareholders’ equity 540,112 535,835 Noncontrolling interest 166,551 166,615 Total equity 706,663 702,450 Total liabilities and equity $ 887,715 $ 890,145 See notes to consolidated financial statements. Page 2 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited) Three months ended March 31, 2021 2020 Net sales $ 198,528 $ 144,824 Cost of sales 73,280 55,783 Gross margin 125,248 89,041 Selling, general and administrative expenses 74,896 71,262 Impairment loss 2,393 -- Income from operations 47,959 17,779 Other expenses (income): Interest expense 377 1,001 Gain on foreign currency ( 1,866 ) ( 954 ) Interest income ( 386 ) ( 1,007 ) Other income ( 192 ) -- ( 2,067 ) ( 960 ) Income before income taxes 50,026 18,739 Income taxes 13,400 5,440 Net income 36,626 13,299 Less: Net income attributable to the noncontrolling interest 8,964 3,240 Net income attributable to Inter Parfums, Inc. $ 27,662 $ 10,059 Net income attributable to Inter Parfums, Inc. common shareholders: Basic $ 0.87 $ 0.32 Diluted $ 0.87 $ 0.32 Weighted average number of shares outstanding: Basic 31,631 31,530 Diluted 31,772 31,708 Dividends declared per share $ 0.25 $ 0.33 See notes to consolidated financial statements. Page 3 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three months ended March 31, 2021 2020 Comprehensive income: Net income $ 36,626 $ 13,299 Other comprehensive income: Net derivative instrument gain (loss), net of tax ( 600 ) 257 Transfer from other comprehensive income into earnings -- ( 52 ) Translation adjustments, net of tax ( 26,119 ) ( 11,921 ) Comprehensive income 9,907 1,583 Comprehensive income attributable to the noncontrolling interests: Net income 8,964 3,240 Other comprehensive income: Net derivative instrument gain (loss), net of tax ( 164 ) 57 Translation adjustments, net of tax ( 8,941 ) ( 3,529 ) Comprehensive loss attributable to the noncontrolling interests ( 141 ) ( 232 ) Comprehensive income attributable to Inter Parfums, Inc. $ 10,048 $ 1,815 See notes to consolidated financial statements. Page 4 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands) (Unaudited) Three months ended March 31, 2021 2020 Common stock, beginning and end of period $ 32 $ 31 Additional paid-in capital, beginning of period 75,708 70,664 Shares issued upon exercise of stock options 1,467 641 Share-based compensation 391 427 Transfer of subsidiary shares purchased -- 1,886 Additional paid-in capital, end of period 77,566 73,618 Retained earnings, beginning of period 503,567 474,637 Net income 27,662 10,059 Dividends ( 7,913 ) ( 10,406 ) Share-based compensation (adjustment) 284 ( 343 ) Retained earnings, end of period 523,600 473,947 Accumulated other comprehensive loss, beginning of period ( 5,997 ) ( 39,853 ) Foreign currency translation adjustment, net of tax ( 17,178 ) ( 8,392 ) Transfer from other comprehensive income into earnings -- ( 52 ) Net derivative instrument gain (loss), net of tax ( 436 ) 200 Accumulated other comprehensive loss, end of period ( 23,611 ) ( 48,097 ) Treasury stock, beginning and end of period ( 37,475 ) ( 37,475 ) Noncontrolling interest, beginning of period 166,615 140,994 Net income 8,964 3,240 Foreign currency translation adjustment, net of tax ( 8,941 ) ( 3,529 ) Net derivative instrument gain (loss), net of tax ( 164 ) 57 Share-based compensation (adjustment) ( 22 ) ( 34 ) Transfer of subsidiary shares purchased 99 ( 139 ) Dividends -- ( 324 ) Noncontrolling interest, end of period 166,551 140,265 Total equity $ 706,663 $ 602,289 See notes to consolidated financial statements. Page 5 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three months ended March 31, 2021 2020 Cash flows from operating activities: Net income $ 36,626 $ 13,299 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,529 2,230 Provision for doubtful accounts 1,354 444 Noncash stock compensation 732 124 Share of income of equity investment ( 192 ) -- Impairment loss 2,393 -- Lease expense 236 19 Deferred tax provision (benefit) 58 ( 463 ) Change in fair value of derivatives 1,699 ( 170 ) Changes in: Accounts receivable ( 32,566 ) ( 4,545 ) Inventories 4,951 ( 4,702 ) Other assets ( 3,819 ) ( 3,545 ) Accounts payable and accrued expenses 8,102 ( 29,821 ) Income taxes, net 10,413 2,013 Net cash provided by (used in) operating activities 32,516 ( 25,117 ) Cash flows from investing activities: Purchases of short-term investments ( 30,367 ) ( 2,342 ) Purchases of equipment and leasehold improvements ( 1,205 ) ( 1,254 ) Payment for intangible assets acquired ( 302 ) ( 460 ) Net cash used in investing activities ( 31,874 ) ( 4,056 ) Cash flows from financing activities: Repayment of long-term debt ( 14,324 ) ( 6,577 ) Proceeds from exercise of options 1,467 641 Dividends paid ( 7,913 ) ( 10,399 ) Dividends paid to noncontrolling interest -- ( 324 ) Net cash used in financing activities ( 20,770 ) ( 16,659 ) Effect of exchange rate changes on cash ( 6,240 ) ( 4,028 ) Net decrease in cash and cash equivalents ( 26,368 ) ( 49,860 ) Cash and cash equivalents - beginning of period 169,681 133,417 Cash and cash equivalents - end of period $ 143,313 $ 83,557 Supplemental disclosure of cash flow information: Cash paid for: Interest $ 375 $ 462 Income taxes 2,861 3,706 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, 2020. 2. Impact of COVID-19 Pandemic: A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic disrupted our business operations and caused a significant unfavorable impact on our results of operations in 2020. 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. 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 implementing additional cleaning and sanitization routines at our offices and distribution centers. 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. Business significantly improved during the second half of 2020 and into the first quarter of 2021 as retail stores reopened and consumers increased their on-line purchasing and we expect this trend to continue. However, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns. In addition, the recent resurgence and introduction of variants of COVID-19 cases in various parts of the world have caused the temporary re-implementation of government restrictions to prevent further spread of the virus in certain jurisdictions. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic may have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of 2021. 3. Recent Agreements: Building Acquisition - Future Headquarters in Paris In April 2021, our majority owned Paris-based subsidiary, Interparfums SA, completed the acquisition of its future headquarters at 10 rue de Solférino in the 7th arrondissement of Paris from the property developer, Apsys. This is an office complex combining three buildings connected by two inner courtyards, which consists of approximately 40,000 total sq. ft. The € 125 million (approximately $ 149 million) purchase price for this building, is in line with market values, includes the complete renovation of the site and is financed by a 10 -year € 120 million (approximately $ 143 million) bank loan to take advantage of low current interest rates. Page 7 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. 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, we have taken $ 2.4 million impairment charge on our Rochas fashion trademark. 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. 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. 5. Inventories: Inventories consist of the following: (In thousands) March 31, 2021 December 31, 2020 Raw materials and component parts $ 62,446 $ 66,492 Finished goods 86,239 92,330 $ 148,685 $ 158,822 Page 8 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 March 31, 2021 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 $ 150,545 $ — $ 150,545 $ — Liabilities: Foreign currency forward exchange contracts accounted for using hedge accounting $ 597 $ — $ 597 $ — Foreign currency forward exchange contracts not accounted for using hedge accounting 815 — 815 — $ 1,412 $ — $ 1,412 $ — Fair Value Measurements at December 31, 2020 Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Assets: Short-term investments $ 126,627 $ — $ 126,627 $ — Foreign currency forward exchange contracts not accounted for using hedge accounting 253 — 253 — $ 126,880 $ — $ 126,880 $ — The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, accounts payable and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans payable approximates fair value as the interest rates on the Company’s indebtedness approximate current market rates. 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. Page 9 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. Gains and losses in derivatives designated as hedges are accumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial for both three month periods ended March 31, 2021 and 2020. All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of foreign currency forward exchange contracts at March 31, 2021, resulted in a liability and is included in accrued expenses on the accompanying balance sheet. At March 31, 2021, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $ 78.5 million and GB £ 2.7 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. Page 10 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of March 31, 2021, the weighted average remaining lease term was 5.1 years and the weighted average discount rate used to determine the operating lease liability was 3.1 %. Rental expense related to operating leases was $ 1.4 million and $ 1.8 million for the periods ending March 31, 2021 and 2020, respectively. Operating lease payments included in operating cash flows totaled $ 1.5 million and $ 1.6 million for the three months ended March 31, 2021 and 2020, respectively, and noncash additions to operating lease assets totaled $ 0.0 million and $ 0.7 million for the three months ended March 31, 2021 and 2020, 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 four to five-year period. The fair value of shares vested during the three months ended March 31, 2021 and 2020 aggregated $ 0.09 million and $ 0.08 million, respectively. Compensation cost, net of forfeitures, is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated based on historic trends. It is generally our policy to issue new shares upon exercise of stock options. The following table sets forth information with respect to nonvested options for the three month period ended March 31, 2021: Number of Shares Weighted Average Grant-Date Fair Value Nonvested options – beginning of period 353,790 $ 12.96 Nonvested options granted 9,000 $ 11.35 Nonvested options vested or forfeited ( 27,830 ) $ 12.96 Nonvested options – end of period 334,960 $ 12.91 Share-based payment expense decreased income before income taxes by $ 0.73 million and $ 0.12 million for the three months ended March 31, 2021 and 2020, respectively, and decreased net income attributable to Inter Parfums, Inc. by $ 0.49 million and $ 0.18 million for the three months ended March 31, 2021 and 2020. The following table summarizes stock option information as of March 31, 2021: Shares Weighted Average Exercise Price Outstanding at January 1, 2021 713,210 $ 52.74 Options granted 9,000 62.18 Options forfeited ( 28,320 ) 61.30 Options exercised ( 43,450 ) 33.77 Outstanding at March 31, 2021 650,440 $ 53.76 Options exercisable 315,480 $ 44.75 Options available for future grants 559,440 Page 11 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of March 31, 2021, the weighted average remaining contractual life of options outstanding is 3.19 years ( 2.49 years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $ 11.5 million and $ 8.3 million, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $ 4.1 million. Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the three months ended March 31, 2021 and March 31, 2020 were as follows: (In thousands) March 31, 2021 March 31, 2020 Cash proceeds from stock options exercised $ 1,467 $ 641 Tax benefits 200 -- Intrinsic value of stock options exercised 1,457 733 The weighted average fair values of the options granted by Inter Parfums, Inc. during the three months ended March 31, 2021 and 2020 were $ 11.35 and $ 12.16 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value of options granted. The assumptions used in the Black-Scholes pricing model for the periods ended March 31, 2021 and 2020 are set forth in the following table: March 31, 2021 March 31, 2020 Weighted average expected stock-price volatility 25 % 25 % Weighted average expected option life 5 years 5 years Weighted average risk-free interest rate 0.4 % 1.4 % Weighted average dividend yield 1.6 % 2.5 % Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects the assumption that the dividend payout as authorized by the Board of Directors would increase as the earnings of the Company and its stock price continue to increase. In December 2018, Interparfums SA, our 73 % owned French subsidiary, approved a plan to grant an aggregate of 26,600 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The shares, subject to adjustment for stock splits, will be distributed in June 2022. In order to avoid dilution of the Company’s ownership of Interparfums SA, all shares to be distributed pursuant to the plan will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA in prior years. In March 2020, due to the potential impact on future net sales and operating results resulting from the COVID-19 pandemic, the estimated number of shares to be distributed, after forfeited shares, was reduced from 142,571 to 82,162. As the Company had already purchased shares in contemplation of the higher anticipated distribution, shares purchased in excess of the reduced anticipated distribution were transferred to treasury shares at Interparfums SA level. Page 12 INTER PARFUMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The fair value of the grant had been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant. The original cost of the grant was approximately $4.4 million, and the March 2020 revaluation resulted in a reduction of the cost, to approximately $2.5 million. In June 2020, the performance conditions were modified effecting 96 employees. As of March 31, 2021, the number of shares to be distributed, after forfeited shares, increased to 158,707 . The increase in shares anticipated to be distributed were transferred from treasury shares at the Interparfums SA level. The original cost of the grant was approximately $ 4.4 million, and the modification resulted in a revised cost of approximately $ 4.6 million. 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. The reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows: Three months ended March 31, (In thousands, except per share data) 2021 2020 Numerator: Net income attributable to Inter Parfums, Inc. $ 27,662 $ 10,059 Denominator: Weighted average shares 31,631 31,530 Effect of dilutive securities: Stock options 141 178 Denominator for diluted earnings per share 31,772 31,708 Earnings per share: Net income attributable to Inter Parfums, Inc. common shareholders: Basic $ 0.87 $ 0.32 Diluted 0.87 0.32 Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.35 and 0.37 million shares of common stock for the three months ended March 31, 2021 and 2020, respectively. Page 13 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 March 31, 2021 2020 Net sales: United States $ 39,196 $ 31,618 Europe 159,766 114,123 Eliminations ( 434 ) ( 917 ) $ 198,528 $ 144,824 Net income attributable to Inter Parfums, Inc.: United States $ 4,187 $ 1,606 Europe 23,475 8,453 $ 27,662 $ 10,059 March 31, December 31, 2021 2020 Total Assets: United States $ 140,875 $ 141,316 Europe 759,473 758,812 Eliminations of investment in subsidiary ( 12,633 ) ( 9,983 ) $ 887,715 $ 890,145 12. Reclassifications: Certain prior year’s amounts in the accompanying consolidated statements of cash flows have been reclassified to conform to current period presentation. Page 14 INTER PARFUMS, INC. AND SUBSIDIARIES