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 andUnited States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary inParis ,Interparfums SA , which is also a publicly traded company as 27% ofInterparfums 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 76%, 80% and 81% of net sales for 2019, 2018 and 2017, respectively. We have built a portfolio of prestige brands, which includeBoucheron , Coach, Jimmy Choo,Karl Lagerfeld , Kate Spade New York, Lanvin, Montblanc,Paul Smith , Repetto, Rochas, S.T. Dupont andVan Cleef & Arpels , whose products are distributed in over 120 countries around the world. Through ourUnited States operations, we also market fragrance and fragrance related products.United States operations represented 24%, 20% and 19% of net sales in 2019, 2018 and 2017, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of theAbercrombie & Fitch, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, MCM and Oscar de la Renta brands. 33
With respect to the Company's largest brands, we own the Lanvin brand name for our class of trade, and license the Montblanc, Jimmy Choo, Coach and GUESS brand names. As a percentage of net sales, product sales for the Company's largest brands were as follows: Year Ended December 31, 2019 2018 2017 Montblanc 22 % 19 % 21 % Jimmy Choo 16 % 17 % 18 % Coach 14 % 15 % 10 %
GUESS (license commenced
8 % 10 % 11 % 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 inFrance as well as through our own distribution subsidiaries inItaly ,Spain andthe 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 by 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 strongU.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 inU.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weakU.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. We are also carefully monitoring currency trends in theUnited Kingdom as a result of the volatility created from theUnited Kingdom's exit from theEuropean 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. 34 Recent Important Events
InNovember 2019 , we extended our license for both theAbercrombie & Fitch and Hollister brands untilDecember 31, 2022 , and added automatic renewals unless terminated on 3 years' notice. MCM
InSeptember 2019 , we entered into an exclusive, 10-year worldwide license agreement with German luxury fashion house MCM for the creation, development and distribution of fragrances under the MCM brand. Our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. Oscar de la Renta InSeptember 2019 , we extended our license throughDecember 31, 2031 , and added an additional five-year extension option throughDecember 31, 2036 . The original license agreement, signed inOctober 2013 , would have expired onDecember 31, 2025 . Kate Spade New York InJune 2019 , we entered into an exclusive 11-year worldwide license agreement with Kate Spade New York for the creation, development and distribution of fragrances under the Kate Spade brand. Our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.
Discussion of Critical Accounting Policies
We make estimates and assumptions in the preparation of our financial statements in conformity with accounting principles generally accepted inthe United States of America . Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations. These accounting policies generally require our management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management of the Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Board of Directors. 35 Sales Returns Generally, we do not permit customers to return their unsold products. However, forU.S. based customers, we allow returns if properly requested, authorized and approved. We regularly review and revise, as deemed necessary, our estimate of reserves for future sales returns based primarily upon historic trends and relevant current data, including information provided by retailers regarding their inventory levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The types of known or anticipated events that we consider include, but are not limited to, the financial condition of our customers, store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products. We record our estimate of potential sales returns as a reduction of sales and cost of sales with corresponding entries to accrued expenses, to record the refund liability, and inventory, for the right to recover goods from the customer. Returned products are valued based upon their estimated realizable value. The physical condition and marketability of returned products are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as economic conditions, inventory levels or competitive conditions differ from our expectations. Long-Lived Assets We evaluate indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 7.94%. The cash flow projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment charge is recorded. We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable. However, if future actual results do not meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results of operations.
36
At
$ in millions Change Increase (decrease) to fair value
Weighted average cost of capital +10 % $ (14.9 ) Weighted average cost of capital -10 % $
15.0 Future sales levels +10 % $ 13.3 Future sales levels -10 % $ (13.3 ) Intangible assets subject to amortization are evaluated for impairment testing whenever events or changes in circumstances indicate that the carrying amount of an amortizable intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no impairment charge is recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangible asset, an impairment charge would be recorded to reduce the intangible asset to its fair value. The cash flow projections are based upon a number of assumptions, including future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. In those cases where we determine that the useful life of long-lived assets should be shortened, we would amortize the net book value in excess of the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby increasing amortization expense. We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable. In determining the useful life of our Lanvin brand names and trademarks, we applied the provisions of ASC topic 350-30-35-3. The only factor that prevented us from determining that the Lanvin brand names and trademarks were indefinite life intangible assets was Item c. "Any legal, regulatory, or contractual provisions that may limit the useful life." The existence of a repurchase option in 2025 may limit the useful life of the Lanvin brand names and trademarks to the Company. However, this limitation would only take effect if the repurchase option were to be exercised and the repurchase price was paid. If the repurchase option is not exercised, then the Lanvin brand names and trademarks are expected to continue to contribute directly to the future cash flows of our Company and their useful life would be considered to be indefinite. With respect to the application of ASC topic 350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exercised, and in applying ASC topic 350-30-35-8, we assumed that the repurchase option is exercised. When exercised, Lanvin has an obligation to pay the exercise price and the Company would be required to convey the Lanvin brand names and trademarks back to Lanvin. The exercise price to be received (Residual Value) is well in excess of the carrying value of the Lanvin brand names and trademarks, therefore no amortization is required. Quantitative Analysis
During the three-year period ended
While we believe the estimates we have made are proper and the related results of operations for the period are presented fairly in all material respects, other assumptions could reasonably be justified that would change the amount of reported net sales, cost of sales, and selling, general and administrative expenses as they relate to the provisions for anticipated sales returns, allowance for doubtful accounts and inventory obsolescence reserves. For 2019, had these estimates been changed simultaneously by 5% in either direction, our reported gross profit would have increased or decreased by approximately$0.5 million and selling, general and administrative expenses would have changed by approximately$0.1 million . The collective impact of these changes on 2019 operating income, net income attributable toInter Parfums, Inc. , and net income attributable toInter Parfums, Inc. per diluted share would be an increase or decrease of approximately$0.5 million ,$0.2 million and$0.01 , respectively. 37 Results of Operations Net Sales Years ended December 31, (in millions) 2019 % Change 2018 % Change 2017 European based product sales$ 542.1 1 %$ 537.6 13 %$ 476.5
United States based product sales 171.4 24 % 138.0
20 % 114.8 Total net sales$ 713.5 6 %$ 675.6 14 %$ 591.3 Net sales increased 6% in 2019 to$713.5 million , as compared to$675.6 million in 2018. At comparable foreign currency exchange rates, net sales increased 8%. Net sales increased 14% in 2018 to$675.6 million , as compared to$591.3 million in 2017. At comparable foreign currency exchange rates, net sales increased 13%. The averageU.S. dollar/euro exchange rates were 1.12 in 2019 and 1.18 in 2018 and 1.13 in 2017. European based product sales increased 1% in 2019 to$542.1 million , as compared to$537.6 million in 2018. At comparable foreign currency exchange rates, European based product sales increased 4% in 2019. European based product sales increased 13% in 2018 to$537.6 million , as compared to$476.5 million in 2017. At comparable foreign currency exchange rates, European based product sales increased 11% in 2018. European based product sales came in as expected in 2019 despite fighting a stronger dollar throughout the year. Our largest brand, Montblanc, grew full year sales by 23% with the excellent performance of the new Montblanc Explorer scent as well as the continued strength of the brand's Legend fragrance family. In constant dollars, Jimmy Choo brand sales were up slightly. However, due to the strengthening of the dollar brand sales for our second largest brand were down nominally in actual dollars. Coach brand sales were also down slightly in 2019 in actual dollars but ahead of 2018 in constant dollars. Of note, Coach brand sales in 2018 were 73.3% ahead of the prior year. Two of our mid-sized brands,Karl Lagerfeld andVan Cleef & Arpels , achieved year-over-year sales growth of 5.0% and 6.8%, respectively. European based product sales in 2018 were stronger than our original expectations even though no new fragrance families were launched that year. Top line growth was primarily attributed to established scents and brand extensions for our largest brands. Coach brand sales accounted for much of the 2018 upside surprise with brand sales increasing 73.3% in 2018 to$99.7 million , as compared to$57.5 million in 2017, making it our portfolio's third largest brand. The other largest brands in our European operations portfolio performed as expected with Montblanc, Jimmy Choo and Lanvin, achieving year-over-year sales growth of 1%, 8%, and 7%, respectively. 38
United States based product sales increased 24% in 2019 to$171.4 million , as compared to$138.0 million in 2018. GUESS brand fragrances had an extraordinary year due to the addition of two brand extensions, 1981 Los Angeles and Seductive Noir, the continued popularity of legacy scents, and the success of our international distribution and marketing programs. Also contributing to the top line growth byU.S. operations wereAbercrombie & Fitch and Hollister, both of which achieved significant sales growth spurred by the launch of the Authenticfragrance duo forAbercrombie & Fitch, and brand extensions for the Wave and Festival fragrance families for Hollister. Oscar de la Renta fragrance sales rose slightly, supported by legacy scents and our growing Bella fragrance family
United States based product sales increased 20% in 2018 to$138.0 million , as compared to$114.8 million in 2017. The inclusion of legacy GUESS fragrances, which began in the second quarter of 2018, was a major contributor to the increase in net sales. Also factoring into the 2018 increase was the successful launch of brand extensions forAbercrombie & Fitch and Hollister. With the popularity of Anna Sui fragrances throughoutAsia , we enjoyed dramatic increases in Anna Sui brand sales in that region in 2018. We maintain confidence in our future as we continue to strengthen advertising and promotional investments supporting all portfolio brands, accelerate brand development and build upon the strength of our worldwide distribution network. We have a more robust launch schedule in 2020 on both sides of theAtlantic . ForU.S. operations, the most important launch will be our first blockbuster scent for women under the GUESS brand unveiling this spring, domestically, followed in the fall by an international rollout. A new fragrance duo for Hollister, Canyon Escape, is scheduled for a spring launch. We look to Sky by Anna Sui to reinvigorate brand sales when it debuts in the fall of 2020. Our first fragrance collection under the Graff label debuts in Harrod's for a six-month exclusive starting in the spring, followed by select international luxury distribution. For European operations, our new Coach scent for women, Coach Dreams, came to market this winter. We have new women's scents for the Montblanc brand debuting in the spring, and for Kate Spade New York our first scent is coming to market this summer. For Jimmy Choo our new women's fragrance launch should be close to year-end, with much of the sell-in continuing into 2021. In addition, as always, we will strengthen fragrance families with brand extensions as well as limited edition and holiday programs throughout the year. Lastly, we hope to benefit from our strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. However, we cannot assure you that any new license or acquisition agreements will be consummated.
Years ended December 31, 2019 2018 2017 (in millions) North America$ 234.2 $ 210.1 $ 176.9 Western Europe 185.5 180.9 165.4 Asia 106.3 109.0 88.0 Middle East 72.6 59.3 50.5 Eastern Europe 55.3 52.8 49.4 Central and South America 46.2 51.7 51.2 Other 13.4 11.8 9.9$ 713.5 $ 675.6 $ 591.3 39 Virtually all regions registered growth for the year endedDecember 31, 2019 , as compared to 2018 with Central andSouth America being the only decline. EvenAsia , which appears to be down slightly in 2019, is actually up in constant dollars. The strongest gains were achieved by theMiddle East ,North America andEastern Europe , which increased sales by 22%, 11% and 5%, respectively. For the year endedDecember 31, 2018 , as compared to 2017, the strongest gains were achieved byAsia ,North America and theMiddle East , which increased sales by 24%, 19% and 17%, respectively. Gross Margins Years ended December 31, 2019 2018 2017 (in millions) Net sales$ 713.5 $ 675.6 $ 591.3 Cost of sales 267.6 248.0 215.0 Gross margin$ 445.9 $ 427.6 $ 376.3
Gross margin, as a percent of net sales 62.5 % 63.3 % 63.6 %
As a percentage of net sales, gross profit margin was 62.5%, 63.3%, and 63.6% in 2019, 2018 and 2017, respectively. For European based operations, gross profit margin as a percentage of net sales was 65.7%, 66.3% and 67.1% in 2019, 2018 and 2017, respectively. We carefully monitor movements in foreign currency exchange rates as over 45% of our European based operations net sales is denominated inU.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strongU.S. dollar has a positive effect on our gross margin while a weakU.S. dollar has a negative effect. The average dollar/euro exchange rate was 1.12 in 2019, as compared to 1.18 in 2018. The stronger dollar in 2019 resulted in a benefit to our gross margin in 2019, however, our new Montblanc Explorer product line has a greater than typical cost of sales, which more than offset the benefit of the stronger dollar. The small fluctuation in gross margin as a percentage of sales for our European operations in 2018, as compared to 2017, is primarily the effect of exchange rate changes as the average dollar/euro exchange rate was 1.18 in 2018, as compared to 1.13 in 2017. ForUnited States operations, gross profit margin was 52.5%, 51.4% and 49.3% in 2019, 2018 and 2017, respectively. Sales growth for ourUnited States operations has primarily come from increased sales of higher margin prestige products
under licenses.
Costs relating to purchase with purchase and gift with purchase promotions are reflected in cost of sales, and aggregated$38.9 million ,$36.4 million and$33.8 million in 2019, 2018 and 2017, respectively, and represented 5.5%, 5.4% and 5.7% of net sales, respectively. Generally, we do not bill customers for shipping and handling costs and such costs, which aggregated$7.7 million ,$7.1 million and$5.9 million in 2019, 2018 and 2017, respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company's gross margins may not be comparable to other companies, which may include these expenses as a component of cost of goods sold. 40
Selling, General & Administrative Expenses
Years ended December 31, 2019 2018 2017 (in millions) Selling, general & administrative expenses$ 341.2 $ 332.8 $ 295.5 Selling, general & administrative expenses as a percent of net sales 47.8 % 49.3 % 50.0 % Although selling, general and administrative expenses increased 2.5% in 2019 as compared to 2018 and increased 12.6% in 2018 as compared to 2017, as a percentage of sales, selling, general and administrative expenses exhibited a steady decrease, and were 47.8%, 49.3% and 50.0% in 2019, 2018 and 2017, respectively. For European operations, selling, general and administrative expenses declined 1.0% in 2019 and increased 10.5% in 2018, as compared to the corresponding prior year period and represented 50.8%, 51.7% and 52.8% of sales in 2019, 2018 and 2017, respectively. As discussed in more detail below, the fluctuations which are in line with the fluctuations in sales for European operations, are primarily from variations in promotion and advertising expenditures. ForUnited States operations, selling, general and administrative expenses increased 20.2% in 2019 and 25.0% in 2018, as compared to the corresponding prior year period and represented 38.5%, 39.8% and 38.2% of sales in 2019, 2018 and 2017, respectively. The increase, which is also in line with the increase in sales, is the result of royalties and promotional and advertising expenses required under our license agreements. Promotion and advertising included in selling, general and administrative expenses aggregated$144.6 million ,$139.7 million and$123.7 million in 2019, 2018 and 2017, respectively. Promotion and advertising as a percentage of sales represented 20.3%, 20.7% and 20.9% of net sales in 2019, 2018 and 2017, respectively. We continue to invest heavily in promotional spending to support new product launches and to build brand awareness. We anticipated that on a full year basis, promotion and advertising expenditure would aggregate approximately 21% of 2019 net sales, which was in line with prior year's annual promotion and advertising expenditures as a percentage of sales. The slight decline in promotion and advertising expense as a percentage of sales in 2019 is the result of minor fluctuations in launch schedules. Royalty expense included in selling, general and administrative expenses aggregated$53.0 million ,$48.9 million and$39.6 million in 2019, 2018 and 2017, respectively. Royalty expense as a percentage of sales represented 7.4%, 7.2% and 6.7% of net sales in 2019, 2018 and 2017, respectively. The increase in 2019 and 2018, as a percentage of sales, is directly related to new licenses and increased royalty based product sales. Service fees, which are fees paid within our European operations to third parties relating to the activities of our distribution subsidiaries, aggregated$7.5 million ,$9.7 million and$11.7 million in 2019, 2018 and 2017, respectively. The 2019 and 2018 decrease is primarily the result of the discontinuation of certain European distribution subsidiaries, and a return to a third party distribution model in those territories. 41 Impairment Loss The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Product sales of some of our mass market product lines have been declining for many years. In 2017, the Company set in motion a plan to discontinue several of these product lines over the next few years. As a result, the Company recorded an impairment loss of$2.1 million in 2017. Income from Operations As a result of the above analysis regarding net sales, gross profit margins, selling, general and administrative expenses and impairment loss, income from operations increased 10.6% to$104.7 million in 2019 as compared to$94.7 million in 2018, which was an increase of 20.5% from$78.6 million in 2017. Operating margins aggregated 14.7%, 14.0% and 13.3% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. In summary, small fluctuations in gross margin were mitigated by small fluctuations in selling, general and administrative expenses, primarily promotion and advertising expenditures. Overall the Company has been able to increase sales with a steady increase
in its operating margin. Other Income and Expenses
Interest expense aggregated$2.1 million ,$2.6 million and$2.0 million in 2019, 2018 and 2017, respectively. Interest expense is primarily related to the financing of brand and licensing acquisitions. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions. Long-term debt including current maturities aggregated$23.1 million ,$46.1 million and$60.6 million as ofDecember 31, 2019 , 2018 and 2017, respectively. Foreign currency losses aggregated$1.1 million ,$0.3 million and$1.5 million in 2019, 2018 and 2017, respectively. 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 2019 net sales of our European operations were denominated inU.S. dollars.
Interest and dividend income aggregated
Income Taxes InDecember 2017 , theU.S. government passed the Tax Cuts and Jobs Act ("the Tax Act"). The Tax Act made broad and complex changes to theU.S. tax code, including, but not limited to reducing theU.S. federal corporate tax rate from 35% to 21% beginning in 2018, and requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries. 42 The Tax Act also established new tax laws that took effect in 2018, including, but not limited to: (i) the reduction of theU.S. federal corporate tax rate discussed above; (ii) a general elimination ofU.S. federal income taxes on dividends from foreign subsidiaries; (iii) a provision designed to tax global intangible low-taxed income ("GILTI"); and (iv) a provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income ("FDII").The Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") 118, which provides a measurement period that was not to extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance withSAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for a certain income tax effect of the Tax Act was incomplete, but it was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements. In connection with its initial analysis of the impact of the Tax Act, the Company recorded a tax expense of$1.1 million for the year endedDecember 31, 2017 . This estimate consists of no expense for the one-time transition tax, and an expense of$1.1 million related to revaluation of deferred tax assets and liabilities caused by the lower corporate tax rate. There were no material differences between the Company's 2017 estimates and the final calculated amounts.
The Company has estimated of the effect of GILTI and has determined that it has
no tax liability related to GILTI as of
The Tax Act also contains a provision that allows a domestic corporation an
immediate deduction for a portion of its foreign derived intangible income
("FDII"). The Company estimated the effect of FDII and recorded a tax benefit of
Our effective income tax rate was 27.7%, 27.3% and 29.2% in 2019, 2018 and 2017, respectively. The French government had introduced a 3% tax on dividends or deemed dividends for entities subject to French corporate income tax in 2012. In 2017, the French Constitutional Court released a decision declaring that the 3% tax on dividends or deemed dividends is unconstitutional. As a result of that decision, the Company filed a claim for refund of approximately$3.9 million for these taxes paid since 2015 including accrued interest of approximately$0.4 million . The Company recorded the refund claim as ofDecember 31, 2017 and received the entire refund in 2018.
Excluding the 2017 adjustment to deferred tax benefit as a result of the Tax Act and the 2017 claim for refund, our effective tax rate for 2017 was 32.4%.
43 The French authorities are considering that the existence of IP Suisse, a wholly-owned subsidiary ofInterparfums SA , does not, in and of itself, constitute a permanent establishment and thereforeInterparfums, SA should pay French taxes on all or part of the profits of that entity.The French Tax Authority recently notified the Company that IP Suisse will be the subject of a tax audit covering the periodJanuary 1, 2010 throughDecember 31, 2018 . No claim or assessment for any taxes or penalties has been made at this time. The Company disagrees and is prepared to vigorously defend its position. Consequently, no provision has been made in the accompanying financial statements as we believe it is more likely than not that our position will be sustained based on its technical merits. Although we believe that we have sufficient arguments to support our position, there exists a risk that the French authorities may prevail. The Company's exposure in connection with this matter is approximately$5.8 million , net of recover taxes already paid to the Swiss authorities, and excluding interest. Lastly, pursuant to an action plan released by the French Prime Minister, the French corporate income tax rate is expected to be cut from approximately 33% to 25% over a three-year period which began in 2020. 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
Year ended December 31, 2019 2018 2017 (In thousands
except share and per share data)
Net income attributable to European operations $ 56,343 $ 56,469$ 48,236 Net income attributable toUnited States operations 19,727 13,246 7,017 Net income 76,070 69,715 55,253 Less: Net income attributable to the noncontrolling interest 15,821 15,922 13,659 Net income attributable to Inter Parfums, Inc. $ 60,249 $ 53,793$ 41,594 Net income attributable toInter Parfums, Inc. common shareholders: Basic $ 1.92 $ 1.72$ 1.33 Diluted 1.90 1.71 1.33 Weighted average number of shares outstanding: Basic 31,451,093 31,307,991 31,172,285 Diluted 31,688,700 31,522,371 31,305,101 Net income has continued to increase over the past three years, and aggregated$76.1 million ,$69.7 million and$55.3 million in 2019, 2018 and 2017, respectively. Net income attributable to European operations was$56.3 million ,$56.5 million and$48.2 million in 2019, 2018 and 2017, respectively, while net income attributable toUnited States operations was$19.7 million ,$13.2 million and$7.0 million in 2019, 2018 and 2017, respectively. The fluctuations in net income for European operations are directly related to the previous discussions relating to changes in sales, gross profit margins, selling, general and administrative expenses and the French tax refund. ForUnited States operations the significant fluctuations in net income are also directly related to the previous discussions relating to changes in sales, gross profit margins and selling, general and administrative expenses. In addition, results for 2017 include the effect of the$2.1 million impairment loss. 44
The noncontrolling interest arises primarily from our 73% owned subsidiary inParis ,Interparfums SA , which is also a publicly traded company as 27% ofInterparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is related to the profitability of our European operations, and aggregated 28.1%, 28.2% and 28.3% of European operations net income in 2019, 2018 and 2017, respectively. Net income attributable toInter Parfums, Inc. aggregated$60.2 million ,$53.8 million and$41.6 million in 2019, 2018 and 2017, respectively. Net margins attributable toInter Parfums, Inc. aggregated 8.4%, 8.0% and 7.0% in 2019, 2018 and 2017, respectively.
Liquidity and Capital Resources
The Company's financial position remains strong. AtDecember 31, 2019 , working capital aggregated$389 million , and we had a working capital ratio of over 3 to 1. Cash and cash equivalents and short-term investments aggregated$253 million most of which is held in euro by our European operations and is readily convertible intoU.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments held by our European operations. Approximately 81% of the Company's total assets are held by European operations including approximately$176 million of trademarks, licenses and other intangible assets. The Company hopes to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. Opportunities for external growth continue to be examined, with the priority of maintaining the quality and homogeneous nature of our portfolio. However, we cannot assure you that any new license or acquisition agreements will be consummated. Cash provided by operating activities aggregated$76.5 million ,$63.0 million and$35.9 million in 2019, 2018 and 2017, respectively. In 2019, working capital items used$11.7 million in cash from operating activities, as compared to$20.9 million in 2018 and$32.5 million in 2017. Although accounts receivable is up slightly from that of the prior year, day's sales outstanding improved to 68 days in 2019, as compared to 71 days and 67 days in 2018 and 2017, respectively. Inventory days on hand aggregated 225 days in 2019, as compared to 223 days in 2018 and 189 days in 2017, respectively. The increase in 2018 was primarily the result of the required buildup of inventory for new licenses entered into in 2018 where we do not have a full year of sales. At year-end 2019, higher inventory levels were needed to support our robust new product launch schedule for 2020. In terms of cash flow, inventory levels atDecember 31, 2019 are up only 3.7% from that date of the prior year. Cash flows used in investing activities reflect the purchase and sales of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. AtDecember 31, 2019 , approximately$65 million of certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. 45 Our business is not capital intensive as we do not own any manufacturing facilities. On a full year basis, we spent approximately$5.4 million on capital expenditures including tools and molds needed to support our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers. Payments for licenses, trademarks and other intangible assets primarily represent upfront entry fees incurred in connection with new license agreements. InDecember 2016 , the Company agreed to a buyout of one of its licenses, effectiveDecember 31, 2016 , for a payment aggregating approximately$5.9 million . The Company received the buyout payment inMay 2017 . In 2018, in connection with a new license agreement, we agreed to pay$15.0 million in equal annual installments of$1.1 million including interest imputed at 4.1%. In 2015, in connection with a brand acquisition, we entered into a 5-year term loan payable in equal quarterly installments of €5.0 million (approximately$5.6 million ) plus interest. In order to reduce exposure to rising variable interest rates, we entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. Our short-term financing requirements are expected to be met by available cash on hand atDecember 31, 2019 , cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2020 consist of a$20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately$28.1 million in credit lines provided by a consortium of international financial institutions. There were no balances due from short-term borrowings as ofDecember 31, 2019 and 2018. Purchase of subsidiary shares from noncontrolling interest primarily represents the purchase of treasury shares ofInterparfums SA , which are expected to be issued toInterparfums SA employees pursuant to its Free Share Plan. InOctober 2017 , our Board authorized a 24% increase in the annual dividend to$0.84 per share. InOctober 2018 , our Board authorized a 31% increase in the annual dividend to$1.10 per share and inOctober 2019 , our Board authorized a further 20% increase in the annual dividend to$1.32 per share. The next quarterly cash dividend of$0.33 per share is payable onApril 15, 2020 to shareholders of record onMarch 31, 2020 . Dividends paid, including dividends paid once per year to noncontrolling stockholders ofInterparfums SA , aggregated$44.2 million ,$35.0 million and$27.2 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The cash dividends to be paid in 2020 are not expected to have any significant impact on our financial position. We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs. Inflation rates in theU.S. and foreign countries in which we operate did not have a significant impact on operating results for the year ended December
31, 2019. 46 Contractual Obligations
The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations ($ in thousands):
Payments due by period Less than Years Years More than Contractual Obligations Total 1 year 2-3 4-5 5 years Long-Term Debt$ 23,060 $ 12,326 $ 2,142 $ 2,142 $ 6,450 Lease Liabilities$ 29,991 $ 5,871 $ 9,772 $ 7,759 $ 6,589 Purchase Obligations(1)$ 1,665,369 $ 173,159 $ 350,386 $ 344,796 $ 797,028 Total$ 1,718,420 $ 191,356 $ 362,300 $ 354,697 $ 810,067
(1) Consists of purchase commitments for advertising and promotional items,
minimum royalty guarantees, including fixed or minimum obligations, and
estimates of such obligations subject to variable price provisions. Future
advertising commitments were estimated based on planned future sales for the
license terms that were in effect at
for potential renewal periods and do not reflect the fact that our
distributors share our advertising obligations.
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