INTER PARFUMS INC - Quarter Report: 2021 June (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)

Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 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 August 9, 2021, there were 31,654,958 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

Item 1. Financial Statements

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2020 included in our annual report filed on Form 10-K.

The results of operations for the six months ended June 30, 2021 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 (LOSS)

(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 consolidated financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2020.

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic.

In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate initially issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. In all jurisdictions in which we operate we have been following guidance from authorities and health officials.

The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill 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 in the first six months of 2021, as retail stores reopened and consumers increased online purchasing. While we expect this trend to continue, the introduction of variants of COVID-19 cases 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 has remained curtailed in many jurisdictions due to both governmental restrictions and consumer health concerns. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic may have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of 2021.

Salvatore Ferragamo

In July 2021, we signed a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license will be granted for the production and distribution of Ferragamo brand perfumes. The license is expected to be effective from October 2021 and will last for 10 years with a 5-year optional term, subject to certain conditions.

With reference to the management and coordination of activities related to the license agreement, the Company will operate through a wholly-owned Italian subsidiary to be based in Florence, and all products will be produced in Italy.

French Tax Settlement

The French authorities had considered that the existence of IP Suisse, a wholly-owned subsidiary of Interparfums SA (“IPSA”), does not, in and of itself, constitute a permanent establishment and therefore IPSA should pay French taxes on all or part of the profits of that entity. The French Tax Authority had notified the Company that IP Suisse will be the subject of a tax audit covering the period January 1, 2010 through December 31, 2018. The Company’s exposure in connection with this matter was approximately $5.8 million, net of recovery taxes already paid to the Swiss authorities.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In June 2021, a global settlement agreement was reached with the French Tax Authorities, whereby IPSA agreed to pay €2.5 million (approximately $3.0 million) effectively lowering the Lanvin brand royalty rate charged by IP Suisse for the periods from 2017 through 2020. IPSA also agreed to apply the lower rate in 2021 through 2025 and to transfer the Lanvin brand from IP Suisse to IPSA by December 31, 2025.

Building Acquisition - Future Headquarters in Paris

In April 2021, our majority owned Paris-based subsidiary, IPSA, completed the acquisition of its future headquarters at 10 rue de Solférino in the 7th 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 €125 million (approximately $149 million) purchase price is in line with market value and includes the complete renovation of the site. As of June 30, 2021, €104.1 million of the purchase price, including approximately €2.5 million of acquisition costs, is included in building, equipment and leasehold improvements on the accompanying balance sheet as of June 30, 2021. Approximately €21.6 million (approximately $25.7 million) of cash held in escrow is included in other assets on the accompanying balance sheet as of June 30, 2021. In addition, approximately €14.2 million in value added tax (“VAT”) credit associated with the purchase is included in other receivables on the accompanying balance sheet as of June 30, 2021. As of June 30, 2021, the Company borrowed €14.2 million pursuant to a short-term loan equal to the VAT credit, and in July 2021, the €14.2 million VAT credit was reimbursed by the French Tax Authorities and the loan was repaid.

The acquisition was financed by a 10-year €120 million (approximately $143 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately €80 million of the variable rate debt was swapped for fixed interest rate debt.

Anna Sui Corp.

In January 2021, we renewed our license agreement with Anna Sui Corp. for the creation, development and distribution of fragrance products through December 31, 2026, without any material changes in terms and conditions. Our initial 10-year license agreement with Anna Sui Corp. was signed in 2011. The renewal agreement also allows for an additional 5-year term through 2031 at the option of the Company.

Rochas Fashion

Effective January 1, 2021, we entered into a new license agreement modifying our Rochas fashion business model. The new agreement calls for a reduction in royalties to be received. As a result, we have taken $2.4 million impairment charge on our Rochas fashion trademark in Q1 2021. The new license also contains an option for the licensee to buy-out the Rochas fashion trademarks in June 2025 at its then fair market value.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

5.            Inventories:

Inventories consist of the following:                                                                           

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, cash held in escrow, accounts payable and accrued expenses approximate 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. The fair value of the Company’s long-term debt was estimated based on the current rates offered to companies for debt with the same remaining maturities and is approximately equal to its carrying value.

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.

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. 

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In connection with the April 2021 acquisition of the office building complex in Paris, €120 million (approximately $143 million) of the purchase price was financed through a 10-year term loan. The Company entered into interest rate swap contracts related to €80 million of the loan, effectively exchanging the variable interest rate to a fixed rate of approximately 1.1%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income

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 the six months ended June 30, 2021 and 2020.

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps as of June 30, 2021, 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 June 30, 2021, resulted in a liability and is included in accrued expenses on the accompanying balance sheet.

At June 30, 2021, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $61.5 million, GB £3.6 million  and JPY ¥50.0 million, which all have maturities of less than one year.

8.            Leases:

The Company leases its offices and warehouses, vehicles, and certain office equipment, substantially all of which are classified as operating leases. The Company currently has no material financing leases. The Company determines if an arrangement is a lease at inception. Operating lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term.

In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and options to extend or terminate, depending on the lease. Renewal, termination or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised. The Company generally uses its incremental borrowing rate based on information available at the lease commencement date for the location in which the lease is held in determining the present value of lease payments.

As of June 30, 2021, the weighted average remaining lease term was 5.5 years and the weighted average discount rate used to determine the operating lease liability was 2.1%. Rental expense related to operating leases was $3.1 million and $4.9 million for the three and six months ended June 30, 2021, respectively, as compared to $1.5 million and $3.3 million for the corresponding periods of the prior year. Operating lease payments included in operating cash flows totaled $4.6 million and $3.0 million for the six months ended June 30, 2021 and 2020, respectively, and noncash additions to operating lease assets totaled $13.8 million and $1.0 million for the six months ended June 30, 2021 and 2020, respectively.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In connection with the preparation of our consolidated financial statements for the three months ended June 30, 2021, we identified an error relating to the recognition of certain leases under ASC 842. The error impacted the lease right-of-use assets and lease liabilities, both of which were understated by approximately €14.0 million ($16.6 million) as of June 30, 2020. There was no income statement impact resulting from this correction. We concluded the impact on the interim financial statements was immaterial and corrected the balances as of June 30, 2021.

Maturities of lease liabilities subsequent to June 30, 2021, are as follows:

(In thousands)

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 six months ended June 30, 2021 and 2020 aggregated $0.09 million and $0.08 million, respectively. Compensation cost, net of forfeitures, is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated based on historic trends. It is generally our policy to issue new shares upon exercise of stock options.

The following table sets forth information with respect to nonvested options for the six months ended June 30, 2021:

Share-based payment expense decreased income before income taxes by $1.45 million and $0.72 million for the three and six months ended June 30, 2021, respectively, as compared to $1.07 million and $1.19 million for the corresponding periods of the prior year. Share-based payment expense decreased income attributable to Inter Parfums, Inc. by $0.94 million and $0.46 million for the three and six months ended June 30, 2021, respectively, as compared to $0.67 million and $0.86 million for the corresponding periods of the prior year.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes stock option information as of June 30, 2021:

As of June 30, 2021, the weighted average remaining contractual life of options outstanding is 2.93 years (2.23 years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $11.5 million and $8.3 million, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $3.7 million.

Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the six months ended June 30, 2021 and June 30, 2020 were as follows:

The weighted average fair values of the options granted by Inter Parfums, Inc. during the six months ended June 30, 2021 and 2020 were $11.35 and $12.16 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value of options granted. The assumptions used in the Black-Scholes pricing model for the periods ended June 30, 2021 and 2020 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.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In December 2018, IPSA approved a plan to grant an aggregate of 26,600 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The shares, subject to adjustment for stock splits, will be distributed in June 2022. In order to avoid dilution of the Company’s ownership of IPSA, all shares to be distributed pursuant to the plan will be pre-existing shares of IPSA, purchased in the open market by IPSA in prior years.

The fair value of the grant had been determined based on the quoted stock price of IPSA shares as reported by the NYSE Euronext on the date of grant. In June 2020, the performance conditions were modified effecting 96 employees. As of June 30, 2021, the number of shares to be distributed, after forfeited shares, increased to 173,603 resulting from the modification and stock split. The increase in shares anticipated to be distributed were transferred from treasury shares at the IPSA level. The original cost of the grant was approximately $4.4 million, and the modification resulted in a revised cost of approximately $4.7 million.

Net income attributable to Inter Parfums, Inc. per common share (“basic EPS”) is computed by dividing net income attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net income attributable to Inter Parfums, Inc. per share assuming dilution (“diluted EPS”), is computed using the weighted average number of shares outstanding, plus the incremental shares outstanding assuming the exercise of dilutive stock options using the treasury stock method.

The reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:

Not included in the above computations are the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.18 and 0.26 million shares of common stock for both the three and six months ended June 30, 2021, as compared to 0.80 and 0.59 million shares of common stock for the three and six months ended June 30, 2020, respectively.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company manufactures and distributes one product line, fragrances and fragrance related products. The Company manages its business in two segments, European based operations and United States based operations. The European assets are located, and operations are primarily conducted, in France. Both European operations and United States operations primarily represent the sale of prestige brand name fragrances. Information on our operations by geographical areas is as follows:

The following table summarizes cash and cash equivalents as of June 30, 2021:

Certain prior year’s amounts in the accompanying consolidated statements of cash flows have been reclassified to conform to current period presentation.

INTER PARFUMS, INC. AND SUBSIDIARIES

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, 2020 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 79% of net sales for both the six months ended June 30, 2021 and 2020. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Moncler, Montblanc, Paul Smith, Repetto, Rochas, S.T. Dupont and Van Cleef & Arpels, whose products are distributed in over 120 countries around the world.

Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 21% of net sales for both the six months ended June 30, 2021 and 2020. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, Dunhill, Graff, GUESS, Hollister, MCM 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, Coach, Jimmy Choo and GUESS brand names. 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. 

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 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.

Impact of COVID-19 Pandemic

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States and France. In March 2020, the World Health Organization declared COVID-19 a pandemic.

INTER PARFUMS, INC. AND SUBSIDIARIES

In response to the COVID-19 pandemic various national, state, and local governments where we, our suppliers, and our customers operate initially issued decrees prohibiting certain businesses from continuing to operate and certain classes of workers from reporting to work. In all jurisdictions in which we operate we have been following guidance from authorities and health officials.

The effects of the COVID-19 pandemic on the beauty industry began in early March 2020. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill and caused a significant unfavorable impact on our results of operations in 2020.

Business significantly improved in the second half of 2020 and has continued to improve in the first six months of 2021, as retail stores reopened and consumers increased online purchasing. While we expect this trend to continue, the introduction of variants of COVID-19 cases 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 has remained curtailed in many jurisdictions due to both governmental restrictions and consumer health concerns. Therefore, despite recent business improvement, the impact of the COVID-19 pandemic may have a material adverse effect on our results of our operations, financial position and cash flows through at least the end of 2021. 

Recent Important Events

Salvatore Ferragamo

In July 2021, we signed a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license will be granted for the production and distribution of Ferragamo brand perfumes. The license is expected to be effective from October 2021 and will last for 10 years with a 5-year optional term, subject to certain conditions. 

With reference to the management and coordination of activities related to the license agreement, the Company will operate through a wholly-owned Italian subsidiary to be based in Florence, and all products will be produced in Italy.

French Tax Settlement

The French authorities had considered that the existence of IP Suisse, a wholly-owned subsidiary of IPSA, does not, in and of itself, constitute a permanent establishment and therefore IPSA should pay French taxes on all or part of the profits of that entity. The French Tax Authority had notified the Company that IP Suisse will be the subject of a tax audit covering the period January 1, 2010 through December 31, 2018. The Company’s exposure in connection with this matter was approximately $5.8 million, net of recovery taxes already paid to the Swiss authorities.

In June 2021, a global settlement agreement was reached with the French Tax Authorities, whereby IPSA agreed to pay €2.5 million (approximately $3.0 million) effectively lowering the Lanvin brand royalty rate charged by IP Suisse for the periods from 2017 through 2020. IPSA also agreed to apply the lower rate in 2021 through 2025 and to transfer the Lanvin brand from IP Suisse to IPSA by December 31, 2025.  

 INTER PARFUMS, INC. AND SUBSIDIARIES

Building Acquisition - Future Headquarters in Paris

In April 2021, our majority owned Paris-based subsidiary, IPSA, completed the acquisition of its future headquarters at 10 rue de Solférino in the 7th 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 €125 million (approximately $149 million) purchase price is in line with market value and includes the complete renovation of the site. As of June 30, 2021, €104.1 million of the purchase price, including approximately €2.5 million of acquisition costs is included in building, equipment and leasehold improvements on the accompanying balance sheet as of June 30, 2021. Approximately €21.6 million of cash held in escrow is included in other assets on the accompanying balance sheet as of June 30, 2021. In addition, approximately €14.2 million in VAT credit associated with the purchase is included in other receivables on the accompanying balance sheet as of June 30, 2021. As of June 30, 2021, the Company borrowed an additional €14.2 million pursuant to a short-term loan equal to the VAT credit, and in July 2021, the €14.2 million VAT credit was reimbursed by the French Tax Authorities and the loan was repaid.

The acquisition was financed by a 10-year €120 million (approximately $143 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately €80 million of the variable rate debt was swapped for fixed interest rate debt.  

Anna Sui Corp.

In January 2021, we renewed our license agreement with Anna Sui Corp. for the creation, development and distribution of fragrance products through December 31, 2026, without any material changes in terms and conditions. Our initial 10-year license agreement with Anna Sui Corp. was signed in 2011. The renewal agreement also allows for an additional 5-year term through 2031 at the option of the Company.

Origines-Parfums

In June 2020, the Company and Divabox, owner of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to which we acquired a 25% of Divabox capital for €12.5 million ($14 million), through a reserved capital increase. In connection with the acquisition, the Company entered into a €12 million ($13.4 million), three-year term loan payable in three equal annual installments plus interest. As a website of reference for all selective fragrance brands, Origines-parfums is a key French player in the online beauty market recognized for its customer relationship expertise. This agreement should enhance the introduction of dedicated fragrance lines and products designed to address a specific consumer demand for this distribution channel and accelerate our digital development.

INTER PARFUMS, INC. AND SUBSIDIARIES

Moncler

In June 2020, the Company entered into an exclusive, 5-year worldwide license agreement with a potential 5-year extension with Moncler for the creation, development and distribution of fragrances under the Moncler brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. Moncler was founded at Monestier-de-Clermont, Grenoble, France, in 1952 and is currently headquartered in Italy. Over the years the brand has combined style with constant technological research assisted by experts in activities linked to the world of the mountain. The Moncler outerwear collections marry the extreme demands of nature with those of city life. Our first fragrance launch for the Moncler brand is scheduled for the first quarter of 2022.

Discussion of Critical Accounting Policies

Information regarding our critical accounting policies can be found in our 2020 Annual Report on Form 10-K filed with the SEC.

Results of Operations

Three and Six Months Ended June 30, 2021 as Compared to the Three and Six Months Ended June 30, 2020 and June 30, 2019

Net Sales:

Net Sales:

Net sales for the three months ended June 30, 2021 rose to $207.6 million, a significant increase in relation to the second quarter of 2020, but more importantly up 24.9% from the second quarter of 2019. At comparable foreign currency exchange rates, net sales increased 22.7% compared to the second quarter of 2019. For the three months ended June 30, 2021, 2020 and 2019, the average dollar/euro exchange rate was 1.20, 1.10 and 1.12, respectively. Net sales for the six months ended June 30, 2021 increased to $406.1 million, from $194.3 million in 2020 and $344.5 million in 2019.

INTER PARFUMS, INC. AND SUBSIDIARIES

The second quarter, like the first, far exceeded expectations. Once again, quarterly comparisons with 2019 are far more meaningful than with 2020, due to the impact in 2020 of the COVID-19 pandemic. Among our largest brands within European based operations, Montblanc, Jimmy Choo and Coach brand sales increased 27.3%, 64.9% and 22.4%, respectively, compared to the 2019 second quarter. Year-to-date, Montblanc fragrances have returned to a level comparable to the first half of 2019, the year of the launch of the Montblanc Explorer line, which was enlarged with the rollout of the brand’s Explorer Ultra Blue line in April 2021. Similarly, robust sales of Jimmy Choo’s established lines combined with the highly successful launch of I Want Choo, produced a 38.7% increase in first half brand sales compared to the same period in 2019. Coach fragrance sales rose 33.9% compared to the first half of 2019 due to the continued strength of established women’s and men’s collections and the rollout of Coach Dreams Sunset in the second quarter. In addition, initial sales of our Kate Spade signature collection, which debuted in the first quarter, contributed to the sales growth

Net sales for our U.S. based operations increased 14.2% in the second quarter of 2021, compared to the same period in 2019. The increase was in great part attributable to the GUESS brand, with legacy scents along with the new Bella Vita line driving growth. Contributing to an increase in Abercrombie & Fitch brand sales were shipments of a new pillar, the Away duo, along with continued strong sales of recent additions including the Authentic Night duo. In addition, the launch of Oscar de la Renta’s Alibi contributed to the top line growth

With respect to our recent MCM fragrance launch, sell-through and pending orders are far ahead of our initial projections. Thus far, distribution has been focused in continental Europe exclusively at the 1,900 store Douglas specialty store chain, in the U.S. at MCM stores and high end department stores and in better stores throughout South Korea. The rollout continues; in July 2021, China’s Sephora stores launched the product and in August, sales began in the U.K. We have high expectations for the MCM brand and have developed a robust innovation plan to accelerate and optimize its potential.

Our business has been especially strong in regions where lockdowns have been lifted, stores have reopened and life has returned to near pre-pandemic standards, most notably Eastern Europe, North America and Asia, where our sales rose 251%, 161% and 119%, respectively. On the other hand, Western Europe, where sales increased 53%, has not fully regained its footing and restrictions and closures have again been imposed in connection with the third wave of COVID-19 infections. We’ve also seen business bounce back in Central and South America and the Middle East, growing 102% and 80%, respectively.

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Gross profit margin was 64% and 63% for the three and six months ended June 30, 2021, respectively, as compared to 54% and 60% for the three and six months ended June 30, 2020, respectively. For European operations, gross profit margin was 67% and 66% for the three and six months ended June 30, 2021, respectively, as compared to 57% and 62% 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 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. For the three and six months ended June 30, 2021, the weaker dollar, as compared to the corresponding periods of the prior year had a negative effect on gross margin. However, significantly reduced lower margin giftset sales in 2021 and new product launches with better margins mitigated the negative effect from currency exchange rates in the period. 

For U.S. operations, gross profit margin was 53% for both the three and six months ended June 30, 2021, as compared to 43% and 50% for the corresponding periods of the prior year. With the significant increase in sales in the first half of 2021, we were better able to absorb expenses such as depreciation of tools and molds and the cost of point-of-sale materials, as compared to the corresponding period of the prior year.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $2.0 million and $3.8 million for the three and six months ended June 30, 2021, respectively, as compared to $0.6 million and $2.2 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.

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Selling, general and administrative expenses increased 171% and 57% for the three and six months ended June 30, 2021, respectively, as compared to the corresponding periods of the prior year. However, as a percentage of sales, selling, general and administrative expenses were 42% and 40% for the three and six months ended June 30, 2021, respectively, as compared to 65% and 53% for the three and six months ended June 30, 2020, respectively. For European operations sales increased 309% and 109% for the three and six months ended June 30, 2021, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our European operations increased 205% and 62% for the same periods, respectively. In addition, selling, general and administrative expenses of our European operations represented 44% and 41% of net sales for the three and six months ended June 30, 2021, respectively, as compared to 59% and 52% for the three and six months ended June 30, 2020, respectively.

For U.S. operations sales increased 360% and 109% for the three and six months ended June 30, 2021, respectively, as compared to the corresponding periods of the prior year. At the same time, selling, general and administrative expenses of our U.S. operations increased 84% and 39% for the three and six months ended June 30, 2021, as compared to the corresponding periods of the prior year, and represented 36% and 38% of net sales for the three and six months ended June 30, 2021, respectively, as compared to 91% and 57% for the corresponding periods of the prior year.

In March 2020, at the time of initial retail store closings, certain advertising and promotional programs were well underway and could not be halted. During the second quarter of 2020, we severely curtailed our promotional activities and postponed the launch of several programs originally scheduled for 2020 to 2021 along with their related advertising and promotion programs.

With sales rebounding more quickly than anticipated, we did not have the opportunity, in early 2021, to reinvest in additional promotion and advertising to match our historic levels. Therefore, the decline in selling, general and administrative expenses as a percentage of sales for the six months ended June 30, 2021, as compared to the corresponding period of the prior year was primarily due to lower promotional and advertising expenses as a percentage of sales for the six months ended June 30, 2021.

Promotion and advertising included in selling, general and administrative expenses aggregated $33.2 million and $55.0 million for the three and six months ended June 30, 2021, respectively, as compared to $5.8 million and $34.4 million for the corresponding periods of the prior year. Promotion and advertising represented 16.0% and 13.5% of net sales for the three and six months ended June 30, 2021, respectively, as compared to 11.8% and 17.7% for the corresponding periods of the prior year.

As the COVID-19 pandemic recedes, we plan to invest heavily in promotional spending to support new product launches and to build brand awareness. We have significant promotion and advertising programs planned for 2021 and expect promotion and advertising expense included in selling general and administrative expense to aggregate approximately 21% of net sales for the full year ended December 31, 2021.    

Royalty expense included in selling, general and administrative expenses aggregated $16.2 million and $31.5 million for the three and six months ended June 30, 2021, respectively, as compared to $3.4 million and $14.6 million for the corresponding periods of the prior year. Royalty expense represented 7.8% of net sales for both the three and six months ended June 30, 2021, as compared to 6.8% and 7.5% of net sales for the corresponding periods of the prior year. As a result of the COVID-19 pandemic we reached agreements with most of our licensors to waive or significantly reduce minimum guaranteed royalties for 2020. 

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As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations aggregated $44.7 million for the three months ended June 30, 2021, as compared an operating loss of $5.5 million for the corresponding period of the prior year. Income from operations increased to $92.6 million for the six months ended June 30, 2021, as compared to $12.3 million for the corresponding period of the prior year. For the six months ended June 30, 2021, our operating margin was 22.8%, as compared to 6.3% for the corresponding period of the prior year.

Other Income and Expense

Interest expense aggregated $1.3 million and $1.6 million for the three and six months ended June 30, 2021, respectively, as compared to $0.4 million and $1.4 million for the corresponding periods of the prior year. Interest expense is primarily related to the financing of brand acquisitions and for the three months ended June 30, 2021, includes approximately $0.6 million in interest expense relating to the debt incurred in connection with the acquisition of our new corporate headquarters in France. We also 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 gains (losses) aggregated ($0.3) million and $1.6 million for the three and six months ended June 30, 2021, respectively, as compared to gains of zero and $1.0 million for the corresponding periods of the prior year. 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 50% of net sales of our European operations are denominated in U.S. dollars.

Interest income aggregated $0.8 million and $1.2 million for the three and six months ended June 30, 2021, respectively, as compared to $0.8 million and $1.8 million for the corresponding periods of the prior year. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

Income Taxes

The French authorities had considered that the existence of IP Suisse, a wholly-owned subsidiary of IPSA, does not, in and of itself, constitute a permanent establishment and therefore IPSA should pay French taxes on all or part of the profits of that entity. The French Tax Authority had notified the Company that IP Suisse will be the subject of a tax audit covering the period January 1, 2010 through December 31, 2018. The Company’s exposure in connection with this matter was approximately $5.8 million, net of recovery taxes already paid to the Swiss authorities.

In June 2021, a global settlement agreement was reached with the French Tax Authorities, whereby IPSA agreed to pay €2.5 million (approximately $3.0 million) effectively lowering the Lanvin brand royalty rate charged by IP Suisse for the periods from 2017 through 2020. IPSA also agreed to apply the lower rate in 2021 through 2025 and to transfer the Lanvin brand from IP Suisse to IPSA by December 31, 2025.

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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 three-year period ending 2023. Excluding the global settlement referred to above, our effective tax rate for European operations was 28% for the six months ended June 30, 2021, as compared to 26% for the corresponding period of the prior year. The lower effective rate in 2020 is the result of a higher percentage of income in favorable tax rate jurisdictions where our European operations conduct business such as Singapore, Switzerland and the United States.

Our effective tax rate for U.S. operations was 19% for the six months ended June 30, 2021, as compared to a benefit of 34% for the corresponding period of the prior year. Due to the loss incurred in the six months ended June 30, 2020, for federal tax purposes, we would carry back the loss to 2015 when the federal income tax rate was 35%. Our effective tax rate in 2021 differs from the 21% statutory rate due to benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income, slightly offset by state and local taxes.

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

Net Income and Earnings per Share