INTER PARFUMS INC - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

( MARK ONE )

OR

Commission File No. 0-16469

INTER PARFUMS, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes  ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act).

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At May 6, 2019, there were 31,449,065 shares of common stock, par value $.001 per share, outstanding.

INTER PARFUMS, INC. AND SUBSIDIARIES

INDEX

INTER PARFUMS, INC. AND SUBSIDIARIES

Part I. Financial Information

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, 2018 included in our annual report filed on Form 10-K.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share data)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share data)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The accounting policies we follow are set forth in the notes to our financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2018.

In August 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to improve accounting for hedging activities. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. This ASU is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. We have evaluated the standard and determined that there has been no material impact on our consolidated financial statements.

In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. The standard requires entities to recognize a lease liability to cover lease payments and a lease asset representing its right to use the underlying asset for the lease term. The Company has adopted the standard on January 1, 2019 using the modified retrospective method in the year of adoption with certain transition practical expedients with no restatement of prior period amounts. Upon adoption, the Company recognized right-of-use assets of $31.8 million and lease liabilities of $32.4 million and made no adjustments to retained earnings. Adoption of the new standard did not materially impact our consolidated net income and cash flows.

There are no other recent accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.

Inventories consist of the following:

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.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

In connection with a 2015 brand acquisition, $108 million of the purchase price was paid in cash on the closing date and was financed entirely through a 5-year term loan. As the payment at closing was due in dollars and we had planned to finance it with debt in euro, the Company entered into foreign currency forward contracts to secure the exchange rate for the $108 million purchase price at $1.067 per 1 euro. This derivative was designated and qualified as a cash flow hedge.

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, 2019 and 2018. For the three months ended March 31, 2019 and 2018, interest expense was reduced by a gain of $0.1 million relating to the interest rate swap.

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at March 31, 2019, resulted in a liability and is included in accrued expenses on the accompanying balance sheet.

At March 31, 2019, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $26.5 million, GB £2.1 million and JPY ¥90.0 million which all have maturities of less than one year.

The Company leases its offices and warehouses, vehicles, and certain office equipment, all of which are classified as operating leases. The Company currently has no financing leases and historically has not entered into such 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. Lease expense is recognized by amortizing the amount recorded as an asset on a straight-line basis over the lease term.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, maintenance, 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.

As of March 31, 2019, the weighted average remaining lease term was 7.7 years and the weighted average discount rate used to determine the operating lease liability was 2.9%. For the three months ended March 31, 2019, expense related to operating leases was $1.8 million, operating lease payments included in operating cash flows totaled $1.6 million and noncash additions to operating lease assets totaled $31.8 million.

Maturities of lease liabilities subsequent to March 31, 2019 are as follows:

The Company has additional lease liabilities of $4.2 million which have not yet commenced as of March 31, 2019, and as such, have not been recognized on the Company’s consolidated balance sheet. These leases are expected to commence during the second quarter of 2019 with a terms of five years.

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, 2019 and 2018 aggregated $0.06 million and $0.04 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.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table sets forth information with respect to nonvested options for the three month period ended March 31, 2019:

Share-based payment expense decreased income before income taxes by $0.96 million and $0.51 million for the three months ended March 31, 2019 and 2018, respectively, and decreased net income attributable to Inter Parfums, Inc. by $0.58 million and $0.32 million for the three months ended March 31, 2019 and 2018.

The following table summarizes stock option information as of March 31, 2019:

As of March 31, 2019, the weighted average remaining contractual life of options outstanding is 3.85 years (2.33 years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $23.6 million and $10.3 million, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $4.6 million.

Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the three months ended March 31, 2019 and March 31, 2018 were as follows:

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The weighted average fair values of the options granted by Inter Parfums, Inc. during the three months ended March 31, 2019 and 2018 were $14.83 and $10.72 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, 2019 and 2018 are set forth in the following table:

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 September 2016, Interparfums SA, our 73% owned French subsidiary, approved a plan to grant an aggregate of 15,100 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 September 2019 so long as the individual is employed by Interparfums SA at the time, and in the case of officers and managers, only to the extent that the performance conditions have been met. Once distributed, the shares will be unrestricted and the employees will be permitted to trade their shares.

The fair value of the grant of €18.56 per share (approximately $22.00 per share) has been determined based on the quoted share price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant. The estimated number of shares to be distributed of 157,324 has been determined taking into account employee turnover and has been adjusted for stock splits. The aggregate cost of the grant of approximately $3.4 million is being recognized as compensation cost by Interparfums SA on a straight-line basis over the requisite three year service period

To avoid dilution of the Company’s ownership of Interparfums SA, all shares to be distributed pursuant to this plan will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. In 2016 and 2018, a total of 150,000 shares had been acquired at an aggregate cost of $3.7 million. During the three months ended March 31, 2019, an additional 7,324 shares were acquired at an aggregate cost of $0.3 million. All share purchases have been classified as equity transactions on the accompanying balance sheet.

In December 2018, Interparfums SA approved an additional 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 and will follow the same guidelines as the September 2016 plan.

The fair value of the grant of €30.20 per share (approximately $34.00 per share) has been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant. The estimated number of shares to be distributed of 135,331 has been determined taking into account employee turnover. The aggregate cost of the grant of approximately $4.9 million will be recognized as compensation cost by

Interparfums SA on a straight-line basis over the requisite three and a half year service period.

INTER PARFUMS, INC. AND SUBSIDIARIES

Similar to the September 2016 plan, in order to avoid dilution of the Company’s ownership of Interparfums SA, all shares to be distributed pursuant to this plan will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. During the three months ended March 31, 2019, the Company acquired 14,276 shares at an aggregate cost of $0.6 million. All share purchases have been classified as equity transactions on the accompanying balance sheet.

For the three months ended March 31, 2019, $0.5 million of compensation cost has been recognized in connection with these plans.

Net income attributable to Inter Parfums, Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net earnings 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:

Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.18 million shares of common stock for both the three months ended March 31, 2019 and 2018.

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. European operations primarily represent the sale of prestige brand name fragrances and United States operations primarily represent the sale of prestige brand name and specialty retail fragrance.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Information on our operations by geographical areas is as follows:

INTER PARFUMS, INC. AND SUBSIDIARIES

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, 2018 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 81% and 87% of net sales for the three months ended March 31, 2019 and 2018, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, Montblanc, Paul Smith, Repetto, Rochas, S.T. Dupont and Van Cleef & Arpels, whose products are distributed in over 100 countries around the world.

Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 19% and 13% of net sales for the three months ended March 31, 2019 and 2018, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, Lily Aldridge and Oscar de la Renta brands.

INTER PARFUMS, INC. AND SUBSIDIARIES

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, Jimmy Choo and Coach brand names and own the Lanvin brand name for our class of trade. As a percentage of net sales, product sales for the Company’s largest brands were as follows:

Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as well as through our own distribution subsidiaries in Spain and the United States.

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers.

As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share.

We believe general economic and other uncertainties exist in select markets in which we do business, and we monitor these uncertainties and other risks that may affect our business.

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. Our Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. We continue to carefully monitor currency trends in the United Kingdom as a result of the volatility created from the United Kingdom’s decision to exit the European Union. We have evaluated our pricing models and we do not expect any significant pricing changes. However, if the devaluation of the British Pound worsens, it may affect future gross profit margins from sales in the territory.

INTER PARFUMS, INC. AND SUBSIDIARIES

Recent Important Events

Lily Aldridge License

In September 2018, Interstellar Brands LLC, a wholly-owned subsidiary of the Company, announced the development of a new fragrance line in collaboration with supermodel Lily Aldridge. The license agreement with Lily Aldridge runs through December 31, 2023, and is subject to royalty payments as are customary in our industry. This deal marks the beginning of a strategic partnership between Interstellar and IMG Models, which manages Lily Aldridge, to develop direct-to-consumer e-commerce fragrance and beauty businesses for IMG Models’ diverse and dynamic client base. Our initial fragrance product launch, a multi-scent collection, is planned for September 2019.

Graff License

In April 2018, the Company entered into an exclusive, 8-year worldwide license agreement with London-based Graff for the creation, development and distribution of fragrances under the Graff brand. Our rights under such license agreement are subject to certain advertising expenditures and royalty payments as are customary in our industry. Initial product development includes a multi-scent collection planned for a late 2019 or early 2020 launch. Additionally, we are exploring opportunities for luxury travel amenities, including five star hotels.

GUESS License

In February 2018, the Company entered into an exclusive, 15-year worldwide license agreement with GUESS?, Inc. for the creation, development and distribution of fragrances under the GUESS brand. This license took effect on April 1, 2018, and our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. In 2018, our sales efforts were focused on existing fragrances; in 2019, we plan to add several flankers to existing product and in 2020, an entirely new fragrance line is scheduled for launch.

Discussion of Critical Accounting Policies

Information regarding our critical accounting policies can be found in our 2018 Annual Report on Form 10-K filed with the SEC.

INTER PARFUMS, INC. AND SUBSIDIARIES 

Results of Operations

Three Months Ended March 31, 2019 as Compared to the Three Months Ended March 31, 2018

Net sales for the three months ended March 31, 2019 increased 3.8% to $178.2 million, as compared to $171.8 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 7.4%. For the 2019 first quarter, the average U.S. dollar/euro exchange rate was 1.14 as compared to 1.23 in the first quarter of 2018.

European based product sales decreased 3.8% to $143.7 million for the three months ended March 31, 2019, as compared to $149.5 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales were relatively unchanged. The launch of Montblanc Explorer was the catalyst behind the brand’s 9.9% sales gain and is expected to continue to contribute to sales growth in the second quarter. For Jimmy Choo, the 25.7% increase in comparable quarter sales reflects the recent launch of the Jimmy Choo Floral line and the continued popularity of the brand’s entire suite of fragrances, including Jimmy Choo Man Blue and Jimmy Choo Fever, which debuted last year in April and September, respectively. Coach, our third largest brand, saw a 22.3% drop in net sales, but factoring in last year’s 242.1% increase in first quarter brand sales, fueled in part by the launch of Coach Floral, the current quarter decline is understandable. Our distributors are awaiting the imminent release of Lanvin’s A Girl in Capri, which is expected to reverse the 18.9% decrease in first quarter Lanvin brand sales. While we have brand extensions and flankers unveiling for most of our European brands throughout the year, the next major launch is planned for the fall, and that is a new men’s fragrance pillar for Jimmy Choo.

United States based product sales increased 54.8% to $34.5 million for the three months ended March 31, 2019, as compared to $22.3 million for the corresponding period of the prior year. The inclusion of GUESS legacy scents was far and away the primary contributor to the 54.8% increase in first quarter net sales, as GUESS brand sales began during the second quarter of 2018. While Anna Sui fragrance sales approximated those of last year’s first quarter, Oscar de la Renta enjoyed an increase in sales due in part to the introduction of Bella Rosa, building upon last year’s launch of Bella Blanca. We have several major launches ahead of us, including Authentic by Abercrombie & Fitch and Mermaid by Anna Sui, plus brand extensions for the GUESS 1981 and Seductive collections. Finally, our new initiatives are progressing, with initial Lily Aldridge fragrances making their e-commerce debut later this year, and our ultra-deluxe Graff scents unveiling late this year or early next year.

INTER PARFUMS, INC. AND SUBSIDIARIES

Sustained growth in the major markets of North America, Western Europe and Middle East was the result of increased product sales from the Montblanc, Jimmy Choo and Boucheron brands. The decrease in Asia is primarily the result of the decline in Lanvin brand sales.

Gross profit margin was 61.6% of net sales for the three months ended March 31, 2019, as compared to 61.5% for the corresponding period of the prior year. For European operations, gross profit margin was 63.2% and 63.0% in the first quarters of 2019 and 2018, respectively. We carefully monitor movements in foreign currency exchange rates as over 45% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross profit margin while a weak U.S. dollar has a negative effect. The stronger dollar in 2019 resulted in a benefit to our gross margin during the three months ended March 31, 2019. However, our new Montblanc Explorer product line, which was designed by some of the most highly sought after designers, has a greater than typical cost of sales, which offset much of the benefit of the stronger dollar.

For U.S. operations, gross profit margin was 55.1% and 51.4% in the first quarters of 2019 and 2018, respectively. Sales growth for our United States operations has primarily come from increased sales of higher margin prestige products under license.

Generally, we do not bill customers for shipping and handling costs and such costs, which aggregated $1.6 million for both the three months ended March 31, 2019 and 2018, 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.

INTER PARFUMS, INC. AND SUBSIDIARIES

Selling, general and administrative expenses increased 1.8% for the three months ended March 31, 2019, as compared to the corresponding period of the prior year. However, as a percentage of sales, selling, general and administrative expenses were 42.9% and 43.8% for the three months ended March 31, 2019 and 2018, respectively. For European operations, with sales down 3.8%, selling, general and administrative expenses declined 4.4% in 2019, as compared to 2018 and represented 42.5% of sales in 2019, as compared to 42.8% of sales in 2018. For U.S. operations, with sales up 54.8%, selling, general and administrative expenses increased 36.5% in 2019, as compared to 2018 and represented 44.7% and 50.8% of sales in 2019 and 2018, respectively. Improved quarterly sales comparisons are expected to provide further leverage of our selling, general and administrative expenses.

Promotion and advertising included in selling, general and administrative expenses aggregated approximately $27.4 million (15.4% of net sales) for the 2019 period, as compared to $26.9 million (15.6% of net sales) for the 2018 period. We continue to invest heavily in promotional spending to support new product launches and building brand awareness. We have significant promotion and advertising programs underway for 2019, and anticipate that on a full year basis, promotion and advertising expenditure will aggregate approximately 21% of 2019 net sales, which is in line with that of the past two years.

Royalty expense included in selling, general and administrative expenses aggregated $13.0 million for the 2019 period, as compared to $11.8 million in 2018 and represented 7.3% and 6.9% of net sales in 2019 and 2018, respectively. The increase in 2019, as a percentage of sales, is directly related to new licenses and increased royalty based product sales.

As a result of the above analysis regarding sales, margins and selling, general and administrative expenses, income from operations increased 9.5% to $33.3 million for the three months ended March 31, 2019, as compared to $30.4 million for the corresponding period of the prior year. Operating margins were 18.7% of net sales in the current period as compared to 17.7% for the corresponding period of the prior year.

Other Income and Expense

Interest expense aggregated $0.6 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively. Interest expense is primarily related to the financing of brand and licensing acquisitions and in 2019, is incurred in connection with lease liabilities. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions.

Foreign currency losses aggregated $0.2 million for both the three months ended March 31, 2019 and 2018. 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 net sales of our European operations are denominated in U.S. dollars.

INTER PARFUMS, INC. AND SUBSIDIARIES

Interest income aggregated $1.9 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

Income Taxes

Our effective tax rate was 27.4% and 30.5% for the three months ended March 31, 2019 and 2018, respectively. Pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is to be cut from 33% to 25% over a five-year period beginning in 2018. Our effective tax rate for European operations was 29% and 31% for the three months ended March 31, 2019 and 2018, respectively.

In December 2017, the U.S. government passed the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes 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. The Tax Act also established a new provision designed to tax global intangible low-taxed income (“GILTI”) as well as a provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

The decrease in our effective rate for the 2019 period is also related to increased profits from our United States subsidiaries for the three months ended March 31, 2019, as compared to the corresponding period of the prior year.

Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate.