Inter Parfums(IPAR) - 2022 Q1 - Quarterly Report

Part I. Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis for Inter Parfums, Inc Item 1. Financial Statements This section presents Inter Parfums, Inc.'s unaudited consolidated financial statements, including balance sheets, income statements, and cash flow statements, with detailed notes on accounting policies, COVID-19 impact, recent agreements, and segment information Consolidated Balance Sheets Total assets increased to $1,162,208 thousand by March 31, 2022, driven by higher accounts receivable and inventories, while cash decreased and total equity rose | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | :-------------------- | | Total Assets | $1,162,208 | $1,145,364 | +$16,844 | | Total Current Assets | $734,467 | $709,715 | +$24,752 | | Cash and cash equivalents | $110,122 | $159,613 | -$49,491 | | Accounts receivable, net | $206,258 | $159,281 | +$46,977 | | Inventories | $227,108 | $198,914 | +$28,194 | | Total Liabilities | $403,967 | $407,032 | -$3,065 | | Total Equity | $758,241 | $738,332 | +$19,909 | Consolidated Statements of Income Net sales increased 26.3% to $250,678 thousand in Q1 2022, driving a 27.6% rise in net income to $35,299 thousand and diluted EPS to $1.10 | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | YoY Change (%) | | :--------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------------- | | Net sales | $250,678 | $198,528 | +$52,150 | +26.3% | | Cost of sales | $92,020 | $73,280 | +$18,740 | +25.6% | | Gross margin | $158,658 | $125,248 | +$33,410 | +26.7% | | Income from operations | $61,217 | $47,959 | +$13,258 | +27.6% | | Net income attributable to Inter Parfums, Inc. | $35,299 | $27,662 | +$7,637 | +27.6% | | Basic EPS | $1.11 | $0.87 | +$0.24 | +27.6% | | Diluted EPS | $1.10 | $0.87 | +$0.23 | +26.4% | | Dividends declared per share | $0.50 | $0.25 | +$0.25 | +100.0% | Consolidated Statements of Comprehensive Income Comprehensive income significantly increased to $35,103 thousand in Q1 2022, driven by higher net income and reduced negative translation adjustments | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income | $46,291 | $36,626 | | Net derivative instrument gain (loss), net of tax | $261 | $(600) | | Translation adjustments, net of tax | $(12,441) | $(26,119) | | Comprehensive income | $35,103 | $9,907 | | Comprehensive income attributable to Inter Parfums, Inc. | $27,458 | $10,048 | Consolidated Statements of Changes in Equity Total equity increased to $758,241 thousand by March 31, 2022, primarily due to increased retained earnings from net income | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | | :------------------------------------ | :------------------------------ | :------------------------------ | | Common stock, end of period | $32 | $32 | | Additional paid-in capital, end of period | $88,181 | $77,566 | | Retained earnings, end of period | $580,094 | $523,600 | | Accumulated other comprehensive loss, end of period | $(46,273) | $(23,611) | | Noncontrolling interest, end of period | $173,682 | $166,551 | | Total equity | $758,241 | $706,663 | Consolidated Statements of Cash Flows Net cash and cash equivalents decreased by $58,265 thousand in Q1 2022, primarily due to cash used in operating, investing, and financing activities | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by (used in) operating activities | $(23,944) | $32,516 | | Net cash used in investing activities | $(11,803) | $(31,874) | | Net cash used in financing activities | $(20,032) | $ (20,770) | | Effect of exchange rate changes on cash | $(2,486) | $(6,240) | | Net decrease in cash and cash equivalents | $(58,265) | $(26,368) | | Cash and cash equivalents - end of period | $110,122 | $143,313 | Notes to Consolidated Financial Statements Detailed notes explain accounting policies, COVID-19 impact, recent agreements, inventory, fair value, derivatives, leases, share-based payments, EPS, and segment information 1. Significant Accounting Policies Significant accounting policies align with those detailed in the Form 10-K for the year ended December 31, 2021 - The accounting policies followed are set forth in the notes to the consolidated financial statements included in the Form 10-K for the year ended December 31, 2021[30] 2. Impact of COVID-19 Pandemic Business improved in 2021 and early 2022, but COVID-19 variants, travel restrictions, and supply chain disruptions continue to pose material risks through 2022 - 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[33] - Introduction of COVID-19 variants and curtailed international air travel continue to pose challenges[33] - Supply chain disruptions, affecting component procurement, goods transport, and cost increases, are expected to persist until later in 2022[33] 3. Recent Agreements New licensing agreements for Salvatore Ferragamo, Emanuel Ungaro, and Donna Karan/DKNY, plus the acquisition of the Paris headquarters, mark recent strategic developments - Salvatore Ferragamo: Exclusive worldwide license for Ferragamo brand perfumes, effective October 2021 for 10 years (plus 5-year option) Acquisition of a wholly-owned Italian subsidiary from Salvatore Ferragamo on October 1, 2021, accounted for as an asset acquisition with total consideration of $35,760 thousand[34][35][38] - Emanuel Ungaro: 10-year exclusive global licensing agreement (plus 5-year option) for fragrances under the Emanuel Ungaro brand, entered in October 2021[39] - Donna Karan and DKNY: Long-term global licensing agreement for fragrances under Donna Karan and DKNY brands, entered in September 2021, effective July 1, 2022 Issued 65,342 shares of common stock valued at $5.0 million to the licensor New fragrances planned for 2023[40] - Land and Building Acquisition - Future Headquarters in Paris: Interparfums SA acquired its future Paris headquarters in April 2021 As of March 31, 2022, $138.4 million of the purchase price is included in property, equipment and leasehold improvements, financed by a 10-year €120 million bank loan[41][44][45] 4. Recent Accounting Pronouncements No recent accounting pronouncements are expected to materially impact the consolidated financial statements - No recent accounting pronouncements issued but not yet adopted would have a material effect on consolidated financial statements[46] 5. Inventories Total inventories increased to $227,108 thousand by March 31, 2022, reflecting growth in both raw materials and finished goods | Inventory Type | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :------------------------------ | :------------------------------- | | Raw materials and component parts | $114,308 | $111,312 | | Finished goods | $112,800 | $87,602 | | Total Inventories | $227,108 | $198,914 | 6. Fair Value Measurement Financial assets and liabilities, including short-term investments and foreign currency contracts, are measured at fair value using Level 1 and Level 2 inputs | Asset/Liability (March 31, 2022) | Total (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :-------------------------------------------------------------------------------- | :------------------- | :--------------------- | :--------------------- | :--------------------- | | Short-term investments | $155,114 | $20,650 | $134,464 | $— | | Foreign currency forward exchange contracts not accounted for using hedge accounting | $1,476 | $— | $1,476 | $— | | Foreign currency forward exchange contracts accounted for using hedge accounting | $1,596 | $— | $1,596 | $— | | Interest rate swaps | $(2,579) | $— | $(2,579) | $— | - The carrying amount of cash and cash equivalents, short-term investments, accounts receivable, other receivables, cash held in escrow, accounts payable, and accrued expenses approximate fair value due to short maturities[52] 7. Derivative Financial Instruments The company uses foreign currency forward exchange contracts and interest rate swaps to manage foreign currency and interest rate risks, with hedging gains/losses in OCI - Uses foreign currency forward exchange contracts to hedge exposure related to foreign currency denominated receivables and future sales[55] - Entered into interest rate swap contracts for €80 million of a €120 million loan, effectively fixing the variable interest rate at approximately 1.1%[57] - At March 31, 2022, had foreign currency forward exchange contracts totaling approximately U.S. $153.0 million, GB £1.0 million, and JPY ¥150.0 million, all with maturities less than one year[60] 8. Leases Operating leases for offices, warehouses, and equipment had a weighted average remaining term of 6.7 years and a discount rate of 2.6% as of March 31, 2022 - Weighted average remaining lease term: 6.7 years (as of March 31, 2022)[63] - Weighted average discount rate: 2.6% (as of March 31, 2022)[63] - Rental expense for operating leases: $1.8 million (Q1 2022) vs $1.4 million (Q1 2021)[63] 9. Share-Based Payments Share-based payment expense decreased to $0.65 million in Q1 2022, with no new stock options granted during the period - Share-based payment expense decreased income before income taxes by $0.65 million (Q1 2022) and $0.73 million (Q1 2021)[67] - No stock options were granted during the three months ended March 31, 2022[71] - As of March 31, 2022, 510,295 options were outstanding with a weighted average exercise price of $57.69[68] 10. Net Income Attributable to Inter Parfums, Inc. Common Shareholders Basic EPS rose to $1.11 and diluted EPS to $1.10 in Q1 2022, reflecting increased net income and the impact of dilutive stock options | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income attributable to Inter Parfums, Inc. | $35,299 | $27,662 | | Weighted average shares (Basic) | 31,840 | 31,631 | | Weighted average shares (Diluted) | 32,010 | 31,772 | | Basic EPS | $1.11 | $0.87 | | Diluted EPS | $1.10 | $0.87 | 11. Segment and Geographic Areas European operations contributed 73% of Q1 2022 net sales, with significant growth across all regions, especially North America, Western Europe, and Asia | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | YoY Change (%) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :------------- | | Net Sales by Segment: | | | | | United States | $68,502 | $39,196 | +74.8% | | Europe | $182,182 | $159,766 | +14.0% | | Net Sales by Region: | | | | | North America | $81,500 | $72,600 | +12.3% | | Western Europe | $63,600 | $45,200 | +40.7% | | Asia | $42,500 | $30,100 | +41.2% | | Middle East | $24,100 | $18,900 | +27.5% | | Central and South America | $18,300 | $13,300 | +37.6% | | Eastern Europe | $18,000 | $15,900 | +13.2% | - European operations represented approximately 73% of net sales in Q1 2022 (80% in Q1 2021)[85] - United States operations represented 27% of net sales in Q1 2022 (20% in Q1 2021)[86] 12. Reclassifications Prior year cash flow statement amounts were reclassified to align with current period presentation - Prior year amounts in consolidated statements of cash flows reclassified for current period presentation[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews the company's fragrance business, segments, growth strategies, COVID-19 impact, recent agreements, and analyzes Q1 2022 financial results and liquidity Overview Inter Parfums operates in the fragrance business through European-based (73% of Q1 2022 net sales) and U.S.-based (27%) segments, focusing on licensed brands and new product introductions - Operates in the fragrance business, manufacturing, marketing, and distributing fragrances and related products[84] - Manages business in two segments: European-based operations (73% owned subsidiary IPSA in Paris) and United States-based operations[84] - European operations sales represented approximately 73% of net sales for Q1 2022, primarily under license agreements[85] - United States operations sales represented 27% of net sales for Q1 2022, also primarily under license or other agreements[86] - Growth strategies include adding new brands (licenses or acquisitions) and introducing new products with advertising and merchandising support[90] - The company does not own manufacturing facilities; it acts as a general contractor, sourcing components and using third-party fillers for manufacturing[91] | Brand | Three Months Ended March 31, 2022 (% of net sales) | Three Months Ended March 31, 2021 (% of net sales) | | :---------- | :----------------------------------------------- | :----------------------------------------------- | | Montblanc | 19% | 20% | | Jimmy Choo | 15% | 18% | | Coach | 15% | 16% | | GUESS | 11% | 10% | - A strong U.S. dollar negatively impacts net sales but positively affects earnings for European operations, as almost 50% of European sales are USD-denominated while costs are in Euro[93] - The Russian invasion of Ukraine negatively impacted operations in those regions, which accounted for approximately 4% of consolidated net sales in fiscal 2021[94] Impact of COVID-19 Pandemic Business improved in 2021 and early 2022, but COVID-19 variants, travel restrictions, and supply chain disruptions are expected to materially impact results through 2022 - Business improved in H2 2020, 2021, and early 2022 due to retail reopenings and increased online purchasing[99] - Challenges persist from COVID-19 variants, curtailed international air travel, and supply chain disruptions (procurement, transport, cost increases)[99] - Company is addressing supply chain issues by ordering in advance, increasing inventory, and diversifying suppliers[99] - Material adverse effects on operations, financial position, and cash flows are expected through at least the end of 2022[99] Recent Important Events New licensing agreements for Salvatore Ferragamo, Emanuel Ungaro, and Donna Karan/DKNY, plus the acquisition of the Paris headquarters, mark recent strategic developments - Salvatore Ferragamo: Exclusive worldwide license for 10 years (plus 5-year option) for Ferragamo brand perfumes, effective October 2021 Acquired a wholly-owned Italian subsidiary[100][101] - Emanuel Ungaro: 10-year exclusive global licensing agreement (plus 5-year option) for Emanuel Ungaro fragrances, entered October 2021[106] - Donna Karan and DKNY: Long-term global licensing agreement for Donna Karan and DKNY fragrances, entered September 2021, effective July 1, 2022 Issued $5.0 million in common stock to the licensor[107] - Land and Building Acquisition - Future Headquarters in Paris: Interparfums SA acquired its future Paris headquarters in April 2021 for $138.4 million, financed by a €120 million bank loan[108][109][112] Discussion of Critical Accounting Policies Critical accounting policies are detailed in the 2021 Annual Report on Form 10-K - Critical accounting policies are detailed in the 2021 Annual Report on Form 10-K[113] Results of Operations (Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021) Q1 2022 saw 26.3% net sales growth, improved gross margins, increased SG&A due to promotion, stable operating margins, and significantly higher net income Net Sales Net sales grew 26.3% to $250.7 million in Q1 2022, with European sales up 14.0% and U.S. sales up 76.7%, driven by new launches and key brands | Segment | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | % Change | | :------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :------- | | European based product sales | $182.2 | $159.7 | 14.0% | | United States based product sales | $68.5 | $38.8 | 76.7% | | Total Net Sales | $250.7 | $198.5 | 26.3% | - At comparable foreign currency exchange rates, net sales increased 30% from Q1 2021[114] - Largest European brands (Montblanc, Jimmy Choo, Coach) grew Q1 2022 sales by 22%, 7%, and 22% respectively GUESS was the most significant contributor for U.S. operations, up 36%[116] - New product launches (Montblanc Legend Red, new Coach signature scent, Coach Dreams Sunset extensions, GUESS Uomo) and incremental sales from newer brands (MCM, Moncler, Ferragamo, Ungaro) contributed to growth[117] - Sales in North America rose 12%, Western Europe and Asia/Pacific both increased 41%, Middle East up 27%, Central and South America up 38%, and Eastern Europe up 13%[121] Gross Profit margin Consolidated gross profit margin improved to 63.3% in Q1 2022, with European operations benefiting from a stronger U.S. dollar and U.S. operations from higher sales | Segment | Gross Margin % (Q1 2022) | Gross Margin % (Q1 2021) | | :-------------------- | :----------------------- | :----------------------- | | European operations | 66.8% | 65.5% | | United States operations | 53.9% | 53.2% | - Stronger U.S. dollar (average 1.12 vs 1.20 in Q1 2021) positively affected European gross margin[122] - Increased sales in U.S. operations allowed for better absorption of fixed expenses[125] - Supply chain disruptions are expected to continue to negatively impact sales and gross margin[126] Selling, general and administrative expenses SG&A expenses increased for both European (16.2%) and U.S. (83.7%) operations in Q1 2022, driven by higher promotion and advertising expenditures | Segment | SG&A Expenses (Q1 2022, in millions) | SG&A Expenses (Q1 2021, in millions) | % Change | SG&A % of Net Sales (Q1 2022) | SG&A % of Net Sales (Q1 2021) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :------- | :------------------------------ | :------------------------------ | | European Operations | $69.0 | $59.4 | 16.2% | 37.9% | 37.2% | | United States Operations | $28.4 | $15.5 | 83.7% | 41.5% | 39.9% | - Promotion and advertising expenditures: $34.2 million (Q1 2022) vs $21.8 million (Q1 2021), representing 13.6% and 11.0% of net sales, respectively[129] - Anticipates full-year promotion and advertising expenditures to aggregate approximately 21% of net sales, in line with pre-COVID historical averages[129] - Royalty expense: $19.4 million (Q1 2022) vs $15.4 million (Q1 2021), representing 7.7% of net sales for both periods[132] Income from Operations Operating margins remained stable at 24.4% in Q1 2022, reflecting balanced impacts from sales growth, gross margin, and SG&A - Operating margins: 24.4% (Q1 2022) vs 24.2% (Q1 2021)[133] Other Income and Expense Interest expense rose due to Paris headquarters financing, and Q1 2022 investment income/loss included $3.4 million in marketable equity security losses - Interest expense primarily related to the 10-year €120 million bank loan for the Paris headquarters acquisition[134] - Interest and investment (income) loss for Q1 2022 included approximately $3.4 million of losses on marketable equity securities[136] Income Taxes Consolidated effective tax rate decreased to 24.4% in Q1 2022 due to a lower French corporate income tax rate, while the U.S. rate increased | Metric | Q1 2022 | Q1 2021 | | :-------------------------- | :------ | :------ | | Consolidated effective tax rate | 24.4% | 26.8% | | European operations tax rate | 25% | 28% | | U.S. operations tax rate | 20.7% | 17.0% | - Decline in European tax rate due to decrease in French corporate income tax rate[137] - U.S. tax rate differs from statutory 21% due to stock option exercise benefits and foreign derived intangible income deductions, offset by state/local taxes[140] Net Income Net income attributable to Inter Parfums, Inc. increased to $35.3 million in Q1 2022, with strong contributions from both European and U.S. operations | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income attributable to European operations | $39,776 | $32,439 | | Net income attributable to United States operations | $6,515 | $4,187 | | Net income attributable to Inter Parfums, Inc. | $35,299 | $27,662 | - Net margins attributable to Inter Parfums, Inc. aggregated 14.1% (Q1 2022) and 13.9% (Q1 2021)[143] Liquidity and Capital Resources As of March 31, 2022, the company held $265 million in cash and investments, with $484 million working capital, but Q1 2022 saw $23.9 million cash used in operations - Cash, cash equivalents, and short-term investments: $265 million as of March 31, 2022[144] - Working capital: $484 million; working capital ratio: 2.9 to 1 as of March 31, 2022[145] - Cash used in operating activities: $23.9 million (Q1 2022) compared to cash provided of $32.5 million (Q1 2021)[150] - Increase in accounts receivable (32% from year-end 2021) and inventories (16% from year-end 2021) contributed to cash usage in Q1 2022[150] - Day's sales outstanding (DSO) was 75 days in Q1 2022, up slightly from 71 days in Q1 2021[150] - The Board authorized a 100% increase in the annual dividend to $2.00 per share in February 2022[156] - Short-term financing requirements are expected to be met by available cash and credit facilities ($20.0 million unsecured revolving line of credit and approximately $28 million in international credit lines)[155][157] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages financial exposures using derivative instruments to mitigate foreign exchange and interest rate risks, avoiding speculative trading General Financial exposures are managed through a controlled risk program, primarily using derivative instruments like foreign currency forwards and interest rate swaps, not for trading - Manages financial exposures through a controlled risk management program[158] - Primarily uses derivative financial instruments (foreign currency forward exchange contracts, interest rate swaps)[158] - Does not engage in trading of foreign currency forward exchange contracts or interest rate swaps[158] Foreign Exchange Risk Management Foreign currency forward exchange contracts hedge receivables and future sales to minimize exchange rate impact on Interparfums SA's cash flows, with maturities under one year - Enters into foreign currency forward exchange contracts to hedge exposure related to foreign currency denominated receivables and future sales[159] - Purpose is to minimize the effect of foreign exchange rate movements on Interparfums SA's cash flows (functional currency: euro)[159] - At March 31, 2022, had foreign currency contracts of approximately U.S. $153.0 million, GB £1.0 million, and JPY ¥150 million, all with maturities less than one year[164] Interest Rate Risk Management Interest rate risk is mitigated by monitoring rates and strategically swapping between fixed and floating rate debt - Mitigates interest rate risk by monitoring rates and swapping fixed/floating rate debt as appropriate[165] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2022, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures CEO and CFO affirmed the effectiveness of disclosure controls and procedures as of March 31, 2022 - CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022[166] Changes in Internal Control Over Financial Reporting No material changes occurred in internal control over financial reporting during Q1 2022 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[167] Part II. Other Information This section includes exhibits and signatures related to the Form 10-Q filing Item 6. Exhibits This section lists Form 10-Q exhibits, including CEO and CFO certifications under Rule 13a-14(a) and Section 906, and interactive data files - Includes Certifications required by Rule 13a-14(a) of Chief Executive Officer (Exhibit 31.1) and Chief Financial Officer (Exhibit 31.2)[171] - Includes Certifications required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer (Exhibit 32.1) and Chief Financial Officer (Exhibit 32.2)[171] - Includes Interactive data files (Exhibit 101)[171] Signatures The report was signed by Russell Greenberg, Executive Vice President and Chief Financial Officer, on May 10, 2022 - Report signed by Russell Greenberg, Executive Vice President and Chief Financial Officer, on May 10, 2022[173][174]