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, 2021, 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 70% and 79% of net sales for the nine months ended September 30, 2022 and 2021, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, S.T. Dupont, Rochas and Van Cleef & Arpels , whose products are distributed in over 120 countries around the world. Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 30% and 21% of net sales for the nine months ended September 30, 2022 and 2021, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, Donna Karan, DKNY, Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta and Ungaro brands. Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc , Coach , Jimmy Choo and GUESS brand names. Page 17 INTER PARFUMS, INC. AND SUBSIDIARIES As a percentage of net sales, product sales for the Company’s largest brands were as follows: Nine Months Ended September 30, 2022 2021 Montblanc 19 % 20 % Jimmy Choo 18 % 19 % Coach 15 % 17 % GUESS 11 % 10 % Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We primarily sell directly to retailers in France 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 well diversified and strong brand portfolio with global reach and potential. As part of our strategy, we also plan to continue to make investments behind fast-growing markets and channels to grow market share. Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because almost 50% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. Page 18 INTER PARFUMS, INC. AND SUBSIDIARIES The Russian invasion of Ukraine has negatively impacted our operations in both Russia and Ukraine. Since the invasion, we have been following regulations and sanctions which vary by country. In fiscal 2021, our operations in Ukraine and Russia accounted for approximately 4% of consolidated net sales. Future impacts on our business, including sanctions and counter-sanctions, are difficult to predict due to the high level of uncertainty as to how these developments will evolve. We are monitoring the effects of this conflict, including the risks that may affect our business, and expect that we will adjust our plans accordingly as the situation progresses. We do not expect any material credit losses as most of our receivables on sales to Russia and Ukraine are covered by insurance or are being paid in advance. For the nine months ended September 30, 2022, the activities related to Russia and Ukraine did not have a material impact on our consolidated financial statements. Impact of COVID-19 Pandemic A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and in March 2020, the World Health Organization declared COVID-19 a pandemic. In response, various national, state, and local governments issued decrees prohibiting certain businesses from operating and certain classes of workers from reporting to work. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill and caused a significant unfavorable impact on our results of operations in 2020. Business significantly improved in the second half of 2020 and continued to improve throughout 2021 and thus far in 2022, as retail stores reopened, and consumers increased online purchasing. While we expect this trend to continue, the introduction of variants of COVID-19 in various parts of the world has caused the temporary re-implementation of governmental restrictions to prevent further spread of the virus. In addition, international air travel remains curtailed in many jurisdictions due to both governmental restrictions and consumer health concerns. While COVID-19 has significantly restricted international travel, the travel retail business is beginning to pick up. We remain confident that travel retail will once again be a source of growth over the long-term. Lastly, the improved economy has put significant strains on our supply chain causing disruptions affecting the procurement of components, the ability to transport goods, and related cost increases. These disruptions have come at a time when demand for our product lines has never been stronger or more sustained. We have been addressing this issue since the beginning of 2021, by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. We do not expect the supply chain bottlenecks to begin lifting until the second half of 2023. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic might continue to have adverse effects on our results of our operations, financial position and cash flows through at least the first half of 2023. Page 19 INTER PARFUMS, INC. AND SUBSIDIARIES Recent Important Events Salvatore Ferragamo In October 2021, we closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license was granted for the production and distribution of Ferragamo brand perfumes. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. The license became effective in October 2021 and will last for 10 years with a 5-year optional term, subject to certain conditions. With respect to the management and coordination of activities related to the license agreement, the Company operates through a wholly-owned Italian subsidiary based in Florence, that was acquired from Salvatore Ferragamo on October 1, 2021. The acquisition together with the license agreement was accounted for as an asset acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on October 1, 2021. All amounts have been translated to U.S. dollars at the October 1, 2021 exchange rate. (In thousands) Inventories $ 17,805 Trademarks and licenses 15,880 Other assets 3,033 Assets acquired 36,718 Liabilities assumed (958 ) Total consideration $ 35,760 Emanuel Ungaro In October 2021, we also entered into a 10-year exclusive global licensing agreement a with a 5-year optional term subject to certain conditions, with Emanuel Ungaro Italia S.r.l, for the creation, development and distribution of fragrances and fragrance related products under the Emanuel Ungaro brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. Donna Karan and DKNY In September 2021, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance related products under the Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. With this agreement, we are gaining several well-established and valuable fragrance franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious , as well as a significant loyal consumer base around the world. In connection with the grant of license, we issued 65,342 shares of Inter Parfums, Inc. common stock valued at $5.0 million to the licensor. The exclusive license became effective July 1, 2022, and we are planning to launch new fragrances under these brands in 2024. Page 20 INTER PARFUMS, INC. AND SUBSIDIARIES Land and Building Acquisition – Future Headquarters in Paris In April 2021, Interparfums SA, our 73% owned French Subsidiary, completed the acquisition of its headquarters at 10 rue de Solférino in the 7 th arrondissement of Paris from the property developer. This is an office complex combining three buildings connected by two inner courtyards, and consists of approximately 40,000 total sq. ft. The purchase price includes the complete renovation of the site and includes the purchase of several apartments in the surrounding area to be used as additional office space . As of September 30, 2022, $135.5 million of the purchase price, including approximately $4.1 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2022. The purchase price has been allocated approximately $55.9 million to land and $79.6 million to the building. The building, which was delivered on February 28, 2022, includes the building structure, development of the property, façade waterproofing, general and technical installations and interior fittings that will be depreciated over a range of 7 to 50 years. The Company has elected to depreciate the building cost based on the useful lives of its components. Approximately $3.4 million of cash held in escrow is included in property, equipment and leasehold improvements on the accompanying balance sheet as of September 30, 2022. The acquisition was financed by a 10-year €120 million (approximately $117 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately €80 million of the variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum. Discussion of Critical Accounting Policies Information regarding our critical accounting policies can be found in our 2021 Annual Report on Form 10-K filed with the SEC. Results of Operations Three and Nine Months Ended September 30, 2022 as Compared to the Three and Nine Months Ended September 30, 2021 Net Sales: (in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change European based product sales $ 198.3 $ 206.1 (4 %) $ 546.7 $ 527.0 4 % United States based product sales 82.2 56.6 45 % 229.2 141.8 62 % $ 280.5 $ 262.7 7 % $ 775.9 $ 668.8 16 % Page 21 INTER PARFUMS, INC. AND SUBSIDIARIES Net sales for the three months ended September 30, 2022, increased 7% from the three months ended September 30, 2021. At comparable foreign currency exchange rates, net sales increased 12% from the third quarter of 2021 of which 9% is related to new brands. The average dollar/euro exchange rate for the current third quarter was 1.01 compared to 1.18 in the third quarter of 2021, while for the nine months ended September 2022 the average dollar/euro exchange rate was 1.06 compared to 1.19 in the nine months ended September 2021. Net sales for the nine months ended September 30, 2022, increased 16% as compared to the nine months ended September 2021. At comparable foreign currency exchange rates, net sales increased 21% from the nine months ended September 2021 of which 8% is related to new brands. Despite supply chain disruptions, inflation, lockdowns, transportation issues, the strength of the dollar, sanctions, the slow recovery of international travel, logistics difficulties in the U.S. caused by a change in shipping software by our local partner in the first half of this year, and the war in Eastern Europe, 2022 is proving to be an exceptionally strong year for us on both sides of the Atlantic. Our U.S. operations growth was substantially due to the incremental sales of Ferragamo, Donna Karan and DKNY. New flankers which launched this year includes Away by Abercrombie & Fitch, and Wave X by Hollister. For the three months ended September 30, 2022, the surge in the dollar masked the gains by our leading brands within our European operations. Montblanc, for example, net sales declined by 6% in dollars but grew 10% in euro. Similarly, Jimmy Choo brand sales rose 12% in dollars and 32% in euro, while Coach sales decreased 12% in dollars and grew 3% in euros. In fact, in total, our European operations generated sales growth of 12% in euro but decreased 4% in dollars. This year, we launched Coach Open Road and Jimmy Choo I Want Choo Forever, along with the continued rollouts of the Moncler duo and Montblanc Legend Red , Jimmy Choo Man Aqua , Lanvin Mon Éclat , Kate Spade Sparkle and Coach Wild Rose . The favorable trends in the first half continued into the third quarter and we look forward to executing our plans for the remainder of the year. Our brands are in high demand in a robust environment for the fragrance industry. We have a number of new product launches in the fourth quarter of the year, including Cosmic Sky for Anna Sui, Ferragamo AMO Oriental Wood and Signorina Limited Edition for U.S. operations. In addition, during the fourth quarter of the year, we will continue the distribution of existing Donna Karan and DKNY fragrances. For European operations, Kate Spade Cherie and a new member of the Collection Extraordinaire by Van Cleef & Arpels will debut. In sum, 2022 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds. Page 22 INTER PARFUMS, INC. AND SUBSIDIARIES Net Sales to Customers by Region Nine months ended September 30, (In millions) 2022 2021 North America $ 284.7 $ 273.4 Western Europe 196.3 146.8 Asia 120.2 97.8 Middle East 66.3 46.8 Central and South America 56.2 43.8 Eastern Europe 45.6 54.0 Other 6.6 6.2 $ 775.9 $ 668.8 Our U.S. distribution subsidiary for European based products had encountered shipping related issues following a change in the distribution software by its logistics partner in the first half of 2022. Although those issues have been resolved, U.S. sales of European brands were negatively impacted. As a result, sales in our largest market, North America, rose only 4% as compared to Western Europe and Asia where comparable sales increased 34% and 23%, respectively. Our sales in the Middle East, and Central and South America, were also robust, up 41% and 28%, respectively. Only sales in Eastern Europe declined owing to the war in Ukraine. Gross Profit margin Three months ended Nine months ended September 30, September 30, (in millions) 2022 2021 2022 2021 European operations Net sales $ 198.2 $ 206.1 $ 546.7 $ 527.0 Cost of sales 60.5 68.7 176.1 177.4 Gross margin $ 137.7 $ 137.4 $ 370.6 $ 349.6 Gross margin as a % of net sales 69.5 % 66.6 % 67.8 % 66.3 % United States operations Net sales $ 82.2 $ 56.6 $ 229.1 $ 141.8 Cost of sales 38.0 26.6 105.4 66.4 Gross margin $ 44.2 $ 30.0 $ 123.7 $ 75.4 Gross margin as a % of net sales 53.8 % 53.1 % 54.0 % 53.2 % For European based operations, gross profit margin as a percentage of net sales was 69.5% and 67.8% for the three and nine months ended September 30, 2022, respectively, as compared to 66.6% and 66.3% for the corresponding periods of the prior year. We carefully monitor movements in foreign currency exchange rates as almost 50% 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 1.01 in the 2022 third quarter compared to 1.18 in the third quarter of 2021. The margin gains in 2022 are primarily the result of the stronger U.S. dollar. Our pricing actions as well as favorable mix, resulting from less giftset sales compared to the prior year, also added to our gross margin gains, however, increased transportation and component costs offset much of those benefits. As previously mentioned, supply chain disruptions affecting the procurement of components, the ability to transport goods, and related cost increases have and are expected to continue to have a negative impact on sales and gross margin. We have been addressing these issues and have implemented processes to mitigate the potential impact. Page 23 INTER PARFUMS, INC. AND SUBSIDIARIES For United States operations, gross profit margin was 53.8% and 54.0% for the three and nine months ended September 30, 2022, respectively, as compared to 53.1% and 53.2% for the corresponding periods of the prior year. The increase in sales for the nine months ended September 30, 2022, as compared to the corresponding period of the prior year, allowed us to better absorb fixed expenses such as depreciation and point of sale expenses, and we also benefited from favorable giftset mix. Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $5.5 million and $11.0 million for the three and nine months ended September 30, 2022, respectively, as compared to $3.3 million and $7.1 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 Nine months ended, September 30, September 30, (In millions) 2022 2021 2022 2021 European Operations Selling, general and administrative expenses $ 83.4 $ 79.9 $ 231.2 $ 210.2 Selling, general and administrative expenses as a percent of net sales 42.1 % 38.8 % 42.3 % 39.9 % United States Operations Selling, general and administrative expenses $ 34.0 $ 19.9 $ 92.1 $ 52.2 Selling, general and administrative expenses as a percent of net sales 41.4 % 35.1 % 40.2 % 36.8 % For European operations, selling, general and administrative expenses increased 4.4% and 10.0% for the three and nine months ended September 30, 2022, as compared to the corresponding period of the prior year, and represented 42.1% and 42.3% of net sales for the three and nine months ended September 30, 2022, respectively, as compared to 38.8% and 39.9% for the three and nine months ended September 30, 2021, respectively. For United States operations, selling, general and administrative expenses increased 71.1% and 76.5% for the three and nine months ended September 30, 2022, as compared to the corresponding period of the prior year, and represented 41.4% and 40.2% of net sales for the three and nine months ended September 30, 2022, respectively, as compared to 35.1% and 36.8% for the three and nine months ended September 30, 2021, respectively. As discussed in more detail below, the increased selling, general and administrative expenses as a percent of net sales are primarily the result of increases in promotion and advertising expenditures. Additionally, as the US based operations have been growing, expenses related to salaries and benefits has grown more rapidly as we build the organization to support the growth. Promotion and advertising included in selling, general and administrative expenses aggregated $44.8 million and $124.9 million for the three and nine months ended September 30, 2022, respectively, as compared to $40.3 million and $95.3 million for the corresponding periods of the prior year. Promotion and advertising represented 16.0% and 16.1% of net sales for the three and nine months ended September 30, 2022, respectively, as compared to 15.3% and 14.2% for the corresponding periods of the prior year. Throughout 2021, sales rebounded far more rapidly than originally anticipated causing us to play catchup with promotional and adverting programs throughout the year. Promotion and advertising are integral parts of our industry, and we continue to invest heavily to support new product launches and to build brand awareness. We believe that our promotion and advertising efforts have had a beneficial effect on online net sales. All of our brands have benefitted from newly launched and enhanced e-commerce sites in existing markets in collaboration with our retail customers on their e-commerce sites. We also continue to develop and implement omnichannel concepts and compelling content to deliver an integrated consumer experience. We anticipate that on a full year basis, promotion and advertising expenditures will aggregate approximately 21% of net sales, which is in line with pre-COVID historical averages. Page 24 INTER PARFUMS, INC. AND SUBSIDIARIES Royalty expense included in selling, general and administrative expenses aggregated $23.1 million and $61.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $20.5 million and $52.0 million for the corresponding periods of the prior year. Royalty expense represented 8.3% and 7.9 % of net sales for the three and nine months ended September 30, 2022, as compared to 7.8% of net sales for both the corresponding periods of the prior year. Royalty expense as a percentage of net sales increased in 2022 as the mix of sales with a royalty basis has increased year over year. Income from Operations As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, our operating margins aggregated 23.0% and 22.1% for the three and nine months ended September 30, 2022, respectively, as compared to 25.7% and 24.0% for the corresponding periods of the prior year. Other Income and Expense Traditionally, interest expense was primarily related to the financing of brand and licensing acquisitions. However, in April 2021, we completed the acquisition of the headquarters of Interparfums SA. The acquisition was financed by a 10-year €120 million (approximately $117 million) bank loan which bears interest at one-month Euribor plus 0.75%. Also in 2021, approximately €80 million of the variable rate debt was swapped for variable rate debt with a maximum interest rate of 2%. We enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Gains and losses on foreign currency transactions have not been significant. Almost 50% of net sales of our European operations are denominated in U.S. dollars. Interest and investment income for the three months ended September 30, 2022, includes a gain of $2.3 million, as compared to a loss of $0.1 million for the corresponding period of the prior year, resulting from the interest rate swap. For the nine months ended September 30, 2022, the Company recognized a gain of $6.4 million related to the interest rate swap which was largely offset by losses of $5.3 million on marketable equity securities during the same period. Page 25 INTER PARFUMS, INC. AND SUBSIDIARIES Income Taxes Our consolidated effective tax rate was 23% for the nine months ended September 30, 2022, as compared to 28% for the corresponding periods of the prior year. The effective tax rate for European operations was 25% for the nine months ended September 30, 2022, as compared to 30% for the corresponding period of the prior year. As previously disclosed, a global settlement agreement was reached with the French Tax Authorities in June 2021, whereby Interparfums SA agreed to pay €2.5 million (approximately $3.0 million) relating to activities between Interparfums SA and its wholly owned subsidiary, Inter Parfums (Suisse) Sarl. The balance of the decline is primarily the result of a decrease in the French corporate income tax rate from 28% to 25%. Our effective tax rate for U.S. operations was 11% for the nine months ended September 30, 2022, as compared to 17% for the corresponding period of the prior year. Our effective tax rate differs from the 21% statutory rate due to state, local and foreign taxes, offset by benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income. Additionally, in the third quarter our U.S. operations recognized a one-time tax benefit of $2.5 million associated with the 2021 Salvatore Ferragamo acquisition. At the time of the acquisition, we had not recognized deferred tax benefits as there were uncertainties concerning its potential recoverability; however, as of September 30, 2022, the recoverability is deemed likely. The lower effective tax rate in 2021 is primarily a result of discrete tax items related to benefits received from the exercise of stock options. 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 26 INTER PARFUMS, INC. AND SUBSIDIARIES Net Income Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 (In thousands) Net income European operations $ 42,417 $ 41,455 $ 106,722 $ 96,822 Net income United States operations 10,880 8,372 27,386 18,667 Net income 53,297 49,827 134,108 115,489 Less: Net income attributable to the noncontrolling interest 11,874 11,511 29,769 26,854 Net income attributable to Inter Parfums, Inc. $ 41,423 $ 38,316 $ 104,339 $ 88,635 Net income attributable to European operations was $42.4 million and $106.7 million for the three and nine months ended September 30, 2022, respectively, as compared to $41.5 million and $96.8 million for the corresponding period of the prior year. Net income attributable to United States operations was $10.9 million and $27.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $8.4 million and $18.7 million for the corresponding period of the prior year. 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 margin, and selling, general and administrative expenses. 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. Net income attributable to the noncontrolling interest is directly related to the profitability of our European operations and aggregated 28% of European operations net income for all periods presented. Net margins attributable to Inter Parfums, Inc. for the nine months ended September 30, 2022 and 2021 aggregated 13.4% and 13.3%, respectively. Liquidity and Capital Resources Our conservative financial tradition has enabled us to amass significant cash balances. As of September 30, 2022, we had $177 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, 2022, short-term investments include approximately $16.2 million of marketable equity securities. As of September 30, 2022, working capital aggregated $459 million and we had a working capital ratio of 2.9 to 1. Approximately 77% of the Company’s total assets are held by European operations, and approximately $146 million of trademarks, licenses and other intangible assets are also held by European operations. Page 27 INTER PARFUMS, INC. AND SUBSIDIARIES The Company is party to a number of license and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various dates through 2033. In connection with certain of these license agreements, the Company is subject to minimum annual advertising commitments, minimum annual royalties and other commitments. See Item 8. Financial Statements and Supplementary Data – Note 12 – Commitments in our 2021 annual report on Form 10-K. Future advertising commitments are estimated based on planned future sales for the license terms that were in effect at December 31, 2021, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations. The Company hopes to continue to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. As we recently reported, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance related products under the Donna Karan and DKNY brands. This license took effect on July 1, 2022. 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 $8.2 million for the nine months ended September 30, 2022, as compared to cash provided by operating activities of $101.3 million for the corresponding period of the prior year. For the nine months ended September 30, 2022, working capital items used $159.2 million in cash from operating activities, as compared to $36.8 million in the 2021 period. Although from a cash flow perspective accounts receivable is up 56% from year end 2021, the balance is reasonable based on 2022 record sales levels and reflects a combination of high volumes of shipments towards the end of the third quarter as well as some payment schedules extended going into the holiday season resulting in day’s sales outstanding increasing to 80 days, up from 70 days in the corresponding period of the prior year. While the day’s sales outstanding has increased, we are still seeing strong collection activity and do not anticipate any issues with collections of accounts receivable. From a cash flow perspective, inventory levels as of September 30, 2022, increased 55% from year end 2021. As of December 31, 2021, although inventories include product needed to support new launches, the overall balance was lower than historic levels due primarily to supply chain disruptions. We have been addressing this issue by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. We believe that our inventory levels are reasonable to support our projected sales and new product pipeline while not exceeding reasonable levels and creating excess and obsolete liabilities. Cash flows used in investing activities in 2022 reflect purchases and sales of short-term investments. These investments include certificates of deposit with maturities greater than three months. Approximately $41 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. Our business is not capital intensive as we do not own any manufacturing facilities. On a full year basis, we typically spend approximately $5.0 million on tools and molds, depending on our new product development calendar. During the nine months ended September 30, 2022, approximately $23.7 million was added to property costs relating to our new Paris corporate headquarters. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers. Page 28 INTER PARFUMS, INC. AND SUBSIDIARIES Our short-term financing requirements are expected to be met by available cash on hand at September 30, 2022, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2022 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $26 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding pursuant to these facilities as of both September 30, 2022 and 2021. In February 2021, our Board of Directors authorized an annual dividend of $1.00, payable quarterly. In February 2022, our Board authorized a 100% increase in the annual dividend to $2.00 per share. The next quarterly cash dividend of $0.50 per share is payable on December 30, 2022, to shareholders of record on December 15, 2022. 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, 2022.