Inter Parfums Annual Report 2021

Plain-text annual report

1 table of contents letter to our shareholders 0202 letter to our shareholders the company 0606 the company the products 1212 the products the organization 5858 the organization INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT2 2021 Letter to our Shareholders DEAR FELLOW SHAREHOLDERS, What a difference a year makes! 2021, the year following the onset of the COVID-19 pandemic, was the best year in our 33 years as a public company. 2021 FINANCIAL HIGHLIGHTS Over the course of the year, our sales exceeded expectations in each and every quarter leading to record net sales of $879 mil- lion, up 63% from 2020 and 23% from 2019. While we were de- lighted by the upside surprise in orders throughout the year, we were even more delighted that we were sufficiently prepared to produce and ship the goods, despite the continuation of the COVID pandemic and the supply chain disruptions that have ensued. In 2021, sales by our four largest brands and many of our mid-sized brands exceeded those of 2019. GUESS joined Mont- blanc, Jimmy Choo and Coach in topping $100 million in annual sales. Further, we gained market share in 2021. According to in- dustry sources, the fragrance industry grew 20% in 2021, while our growth exceeded 63%. The financial pages that follow contain a detailed overview of the inputs that culminated in an operating margin of 17%, and net income attributable to Inter Parfums, Inc. of $87 million. Several key factors are worth mentioning. Our gross margin benefitted from the substantial increase in sales by our U.S. distribution subsidiary. In addition, advertising and promotion expenses as a percent of sales came in lower than the 21% we historically budget, because of the upside sales surprises that we experienced throughout the year. We closed the year with working capital of $465 million, in- cluding approximately $320 million in cash, cash equivalents and short-term investments, and a working capital ratio of 2.9 to 1. Our balance sheet included $133 million of long-term debt which relates to the headquarters acquisition by our Paris subsidiary, Interparfums SA. Cash provided by operating activities aggregat- ed $120 million for 2021. Productivity, measured in sales per em- ployee, came in at $1.9 million based on 467 in staff. Finally, our Board of Directors approved a 100% increase in our annual cash dividend to $2.00 per share payable quarterly. Our Board made this decision in recognition of our excellent prospects for 2022 and for the coming years, coupled with our strong financial position, all of which enables us to grow inter- nally and judiciously invest in new opportunities while reward- ing our shareholders. NEW BRANDS Our portfolio welcomed two new brands in October 2021, notably Salvatore Ferragamo and Ungaro. Operating activities for these Philippe Benacin and Jean Madar brands are conducted through a newly established wholly-owned letter to shareholders 3 subsidiary based in Florence, Italy. Ferragamo fragrances are ternal sales budget three times over, and Jimmy Choo is now being sourced and produced in Italy, as are the brand’s travel our second largest brand. Italian fashion brands are a special amenities. With origins dating back to 1927, Ferragamo is re- priority – both ones with established fragrance business and nowned for the creation, production and worldwide distribu- fragrance orphans. Finally, many of our existing licensors have tion of luxury collections of shoes, leather goods, apparel, silk multiple brands under their control, and they may seek to have products and other accessories for men and women, including us partner with them on their brands. eyewear and watches. Uniqueness and exclusivity, along with the We believe that Inter Parfums has become an increasingly de- blend of style and exquisite ‘Made in Italy’ savoir-faire, are the sirable partner for brand owners. As we have said before, we hallmarks of all Ferragamo’s products. Within a few years, we are small, but not too small, so that we are able to devote the at- expect Ferragamo to be among our largest fragrance brands. tention and resources necessary to grow a licensor’s fragrance Ungaro is a legendary name synonymous with creativity, col- business, which translates into higher royalties and broader ors, signature cuts and patterns representing a best in class brand recognition. Brand owners value the fact that we are a example of the intersection of Italian creativity and crafts- pure play in fragrance. Our distribution network has deep roots manship and French luxury and execution. Today, the brand is in 120 countries, with expertise in their local markets. Moreover, best known and most prized in France, Italy, Japan and Korea. our strong financial position lends confidence to brand owners. Both Ferragamo and Ungaro had an array of legacy scents that In April 2022, our European operations moved into our new Par- form the foundation of our Italian operations, with new scents is headquarters, giving us greater brand capacity and enhanced for both brands on track for a 2023 launch. We are confident coordination of our teams. And, as we just mentioned, our office that over time, the expertise we bring to product development, in Florence is also fully functional and ready to support and opti- packaging, advertising and marketing will elevate the Ferraga- mize the fragrance potential of additional brands. mo and Ungaro fragrance profiles. Following the signing of an agreement with the G-III Apparel 2021 PRODUCT LAUNCHES Group in September 2021, Donna Karan and DKNY fragrances Having withheld most of the 2020 launches until the following will be under license come July 2022. Donna Karan is a global year, 2021 had a large number of products rolling out, includ- lifestyle brand founded in 1984 by the fashion pioneer of the same ing new pillars such as the Away duo for Abercrombie & Fitch, name. In addition to fashion and fragrance, the Donna Karan la- Sky by Anna Sui, Bella Vita for GUESS, I Want Choo for Jimmy bel can be found on shoes, accessories and home fashions. The Choo, Girl for Rochas, and Alibi for Oscar de la Renta. In addi- brand’s lead fragrance, Cashmere Mist launched in 1994 and tion, we introduced Effect, a men’s grooming collection for the was awarded the Fragrance Foundation Hall of Fame Award in GUESS brand. There were also a host of extensions unveiled in 2019. In February 2022 Cashmere Mist was ranked among the 2021, including new entrants for our three leading brands with 100 Greatest Fragrances of All Time by Women’s Wear Daily. Montblanc Explorer Ultra Blue, Jimmy Choo Urban Hero Gold, The DKNY brand emerged in 1989 as the “next generation” and Coach Dreams Sunset. fashion response to Donna Karan’s then teenage daughter raid- New entrants for new brands were also a feature of 2021. Af- ing her mom’s closet. Today, DKNY designs, markets and glob- ter a year’s delay, Kate Spade New York was launched to much ally distributes collections of apparel, accessories, footwear and acclaim. Maddie Ziegler, actress and dancer, is our spokesperson select licensed products. Be Delicious, the brand’s best known and model appearing in all forms of media – from print, broad- scent which launched in 2004, was named one of The 25 Per- cast, social media and outdoor displays. The launch of the gender fumes of All Time in April 2022 by Marie Claire magazine. New neutral MCM signature fragrance was accompanied by a global fragrances for these two aligned brands are in the works, with multi-media communications campaign entitled Travel Beyond, introduction targeted for launch in 2023. These two brands are capturing the essence the brand’s DNA of travel with a one-of-a- exciting additions to our fragrance portfolio, and are expected to kind bottle design that pays homage to the classic backpack. Our achieve significant sales gains over the coming years. collaboration with our MCM partners elevated fragrance, packag- We remain on the lookout for additional brands. Our targets ing, and marketing to a rarefied summit within our industry and as are generally names with established businesses rather than a result, our first MCM scent was named a finalist by the Fragrance start-ups. That said, we are also open to ideas with great po- Foundation in two categories: Universal Prestige and Packaging. tential. That could be said about MCM in 2021, and back in time, In limited distribution in late 2021, Moncler Pour Femme and Jimmy Choo, neither of which had established fragrance busi- Moncler Pour Homme are grounded in nature, exploration and nesses when we teamed up. In 2021, MCM blew through our in- discovery, essential features of the high-end sportswear brand. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT4 The silver-colored ribbing of the bottle design is reminiscent of for GUESS with Uomo and for Boucheron with Singulier. For the quilting in Moncler down jackets, and the 150-ml. refillable many of our largest brands, flankers and extensions are in the bottle comes with a rectangular LED screen so that illuminated pipeline. For example, Montblanc is adding Legend Red to the messages in scrolling red letters can be personalized and dis- Legend pillar while I Want Choo Forever is joining the Jimmy played with a Bluetooth-powered smartphone application. This Choo family. We have new sister scents coming to market extraordinary fragrance duo is also a Fragrance Foundation fi- for GUESS Bella Vita, Lanvin Éclat d’ Arpège, Kate Spade New nalist in the Innovative Product of the Year category. The Mon- York, Rochas Girl, Anna Sui Sky, Oscar de la Renta Alibi and the cler global rollout in 2022 will ultimately reach 3,000 doors. Coach women’s signature line. For Abercrombie & Fitch, brand extensions for the Away and Authentic duos are in the 2022 CHALLENGES, HEADWINDS & PRIORITIES pipeline as are extensions for Hollister’s Canyon and Wave As of this writing, our US operations suspended sales into collections. To keep consumers, retailers and distributors Russia in response to its invasion and devastation of Ukraine. engaged with the brand, we have extensions unveiling for the The magnitude and duration of the business impact due to war, Ferragamo Signorina and Bright Leather collections in 2022, sanctions and price volatility are hard to predict, but in 2021 in advance of the new pillar being readied for fall 2023. our sales in Russia totaled $43 million. We remain optimistic about the prospects for our business. As in 2021, supply chain disruptions continue and sourc- One reason is the unprecedented growth in the fragrance in- ing components, assembling finished goods, shipping and fuel dustry, an unexpected but welcome outgrowth of the COVID costs remain challenging. To meet our sales goals for 2022 and pandemic. Where in the past, consumers bought and wore beyond, we have been carrying more inventory overall, sourcing fragrance when they left home, during the isolation of COVID, similar components from multiple suppliers and when possi- consumers increasingly bought fragrances to wear at home, to ble, manufacturing products closer to where they are sold. As feel good about themselves and as a personal self-indulgence. planned, our newly established operations in Italy have helped They purchased fragrance online more than ever, and they ex- mitigate some of the supply chain disruptions. For example, the perimented with different scents. This trend has traction and labor shortages in the U.S. and France are far less a factor in is showing no signs of relenting. Italy, so we are moving some of our manufacturing to Italy. Well Our core strengths are an even more important cause for beyond our Ferragamo business, Italy is playing an important confidence. We have an expansive brand portfolio featuring role as a point of manufacturing and distribution. names that have appeal among diverse age groups, income We have had to become better forecasters of future needs as brackets, and geographic regions. We have a highly effective some items require a one year lead time. At the same time, we distribution network serving 120 countries, and in several of have been investing in more sophisticated inventory management our most important markets, we own or control the distri- systems and added more people to the inventory management bution organizations. In addition, we have greater bandwidth function. That said, supply chain disruptions and inflation have, resulting from our newly operational Paris headquarters and and for the foreseeable future will have, an impact on costs of raw our new base of operations in Florence. Our strong financial materials such as glass, cardboard, wood, and aluminum, in ad- position gives us unique business agility, along with the trust dition to rising energy and shipping costs. On January 1, 2022 we of suppliers and prospective licensors. We started this letter enacted price increases ranging from 3% to 5%. Another price by stating that 2021 was our best year ever. We have our ex- increase of a similar magnitude will be enacted in August. ceptional staff of creative, motivated, individuals to thank for Hiring and retaining the best talent have become an even great- making it so. They are the backbone of our success. er challenge since the onset of the COVID pandemic. That need has Sincerely yours, been intensified with the staffing requirements of new brands and our expanded geographic footprint. As we approach $1 billion in sales, we have taken an important step in professionalizing the HR function with the hiring in New York City of a Chief Human Resourc- es Officer, a newly created position reporting to our CEO. PLANS FOR 2022 In addition to the global rollout of the new Moncler duo, we have Chairman of the Board Vice Chairman of the Board major men’s fragrance launches for Coach with Open Road, & Chief Executive Officer & President letter to shareholders 5 New Headquarters in Paris INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT6 The Company Founded in 1982, we operate in the fragrance business, and manufacture, market and dis- tribute a wide array of prestige fragrance, and fragrance related products. Our worldwide headquarters and the office of our whol- ly-owned United States subsidiaries, Jean Philippe Fragrances, LLC and Inter Parfums USA, LLC, are located at 551 Fifth Avenue, New York, New York 10176, and our telephone number is 212.983.2640. We also have a newly formed, whol- ly-owned Italian subsidiary, Interparfums Italia Srl. Our consolidated wholly-owned subsidiary, Inter Parfums Holdings, S.A., and its majority-owned subsidiary, Inter- parfums SA, maintain executive offices at 10 rue de Solféri- no, 75007 Paris, France. Our telephone number in Paris is 331.5377.0000. Interparfums SA is the sole owner of one (1) distribution subsidiary: Interparfums Luxury Brands, Inc., a Delaware corporation, for distribution of prestige brands in the United States. Interparfums SA is also the majority own- er of Parfums Rochas Spain, SL, a Spanish limited liability company, which specializes in the distribution of Rochas fra- grances. In addition, Interparfums SA is also the sole owner of Interparfums (Suisse) SARL, a company formed to hold and manage certain brand names, and Interparfums Asia Pacific Pte., Ltd., an Asian sales and marketing office. Our common stock is listed on The Nasdaq Global Select Market under the trading symbol “IPAR”. The common shares of our subsidiary, Interparfums SA, are traded on the Eu- ronext Exchange. The Securities and Exchange Commission (“SEC”) maintains an internet site at http://www.sec.gov that contains financial reports, proxy and information statements, and other informa- tion regarding issuers that file electronically with the SEC. We maintain our internet website at www.interparfumsinc.com, which is linked to the SEC internet site. You can obtain through our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, interactive data files, current reports on Form 8-K, beneficial ownership reports (Forms 3, 4 and 5) and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they have been electronically filed with or furnished to the SEC. We operate in the fragrance business and manufacture, market and distribute a wide array of fragrance and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Moncler Pour Femme Certain prestige fragrance products are produced and mar- keted by our European operations through our 27% owned the company 7 T H E U LT I M AT E L AY E R O F L U X U R Y Donna Karan Cashmere Mist INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT8 subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 73% of Interparfums SA shares trade on United States Operations Prestige brand fragrance products are also produced and the NYSE Euronext. marketed through our United States operations, and rep- Our business is not capital intensive, and it is important to resented approximately 25% of net sales for the year ended note that we do not own manufacturing facilities. We act as a December 31, 2021. These fragrance products are sold under general contractor and source our needed components from trademarks owned by us or pursuant to license or other agree- our suppliers. These components are received at one of our ments with the owners of brands, which include Abercrombie distribution centers and then, based upon production needs, & Fitch, Anna Sui, Dunhill, Ferragamo, Graff, GUESS, Hollister, the components are sent to one of several third party fillers MCM, Oscar de la Renta and Ungaro. which manufacture the finished product for us and deliver them to one of our distribution centers. Our fragrance products focus on prestige brands, each with a devoted following. By concentrating in markets where the BUSINESS STRATEGY Focus On Prestige Beauty Brands Prestige beauty brands are expected to contribute significantly brands are best known, we have had many successful product to our growth. We focus on developing and launching quality launches. We typically launch new fragrance families for our fragrances utilizing internationally renowned brand names. brands every year or two, and more frequently seasonal and By identifying and concentrating in the most receptive market limited edition fragrances are introduced as well. segments and territories where our brands are known, and The creation and marketing of each product family is inti- executing highly targeted launches that capture the essence mately linked with the brand’s name, its past and present po- of the brand, we have had a history of successful launches. sitioning, customer base and, more generally, the prevailing Certain fashion designers and other licensors choose us as a market atmosphere. Accordingly, we generally study the market partner, because our Company’s size enables us to work more for each proposed family of fragrance products for almost a full closely with them in the product development process as well year before we introduce any new product into the market. This as our successful track record. study is intended to define the general position of the fragrance family and more particularly its scent, bottle, packaging and ap- peal to the buyer. In our opinion, the unity of these four elements of the marketing mix makes for a successful product. Grow Portfolio Brands Through New Product Development And Marketing Prestige brands are the core of our business, and we intend to As with any business, many aspects of our operations are add new prestige beauty brands to our portfolio. Over the past subject to influences outside our control. We believe we have 30 years, we have built our portfolio of well-known prestige a strong brand portfolio with global reach and potential. As brands through acquisitions and new license agreements. We part of our strategy, we plan to continue to make investments intend to further build on our success in prestige fragrances behind fast-growing markets and channels to grow market and pursue new licenses and acquire new brands to strengthen share. We discuss in greater detail risk factors relating to our our position in the prestige beauty market. To that end, in business in Item 1A of this Annual Report on Form 10-K for the 2020, we signed a new license for the Moncler brand. We fiscal year ended December 31, 2021, and the reports that we also acquired a minority interest in Divabox, which owns the file from time to time with the SEC. Origines-parfums online platform. As a website of reference European Operations We produce and distribute our fragrance products primarily for all selective fragrance brands, Origines-parfums is a key French player in the online beauty market recognized for its customer relationship expertise. This acquisition enhances the under license agreements with brand owners, and fragrance introduction of dedicated fragrance lines and products designed product sales through our European operations represent- to address a specific consumer demand for this distribution ed approximately 75% of net sales for 2021. We have built a channel and accelerate our digital development. During portfolio of prestige brands, which include Boucheron, Coach, 2021, we closed on a transaction agreement with Salvatore Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Ferragamo S.p.A., whereby an exclusive and worldwide license Moncler, Montblanc, Rochas, S.T. Dupont and Van Cleef & was granted for the production and distribution of Ferragamo Arpels, whose products are distributed in over 120 countries brand perfumes. In 2021, we also entered into a long-term around the world. global licensing agreement for the creation, development and the company 9 distribution of fragrances and fragrance-related products license are subject to certain minimum advertising expenditures under the Donna Karan and DKNY brands. This exclusive and royalty payments as are customary in our industry. The li- license becomes effective on July 1, 2022. As of December cense is effective from October 2021 and will last for 10 years 31, 2021, we had cash, cash equivalents and short-term with a 5-year optional term, subject to certain conditions. investments of approximately $320 million, which we With respect to the management and coordination of activities re- believe should assist us in entering new brand licenses or lated to the license agreement, the Company will operate through a outright acquisitions. We identify prestige brands that can wholly-owned Italian subsidiary Interparfums Italia srl, which was be developed and marketed into a full and varied product acquired from Salvatore Ferragamo on October 1, 2021. families and, with our technical knowledge and practical experience gained over time, take licensed brand names through all phases of concept, development, manufacturing, Emanuel Ungaro In October 2021, we also entered into a 10-year exclusive global marketing and distribution. licensing agreement a with a 5-year optional term subject to cer- Expand Existing Portfolio Into New Categories We selectively broaden our product offering beyond the tain conditions, with Emanuel Ungaro Italia srl, for the creation, development and distribution of fragrances and fragrance-relat- ed products, under the Emanuel Ungaro brand. Our rights under this license are subject to certain minimum advertising expen- fragrance category and offer other fragrance related prod- ditures and royalty payments as are customary in our industry. ucts and personal care products under some of our existing brands. We believe such product offerings meet customer needs and further strengthen customer loyalty. Donna Karan and DKNY In September 2021, we entered into a long-term global licensing agreement for the creation, development and distribution of fra- Continue To Build Global Distribution Footprint Our business is a global business, and we intend to continue grances and fragrance-related products under the Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments to build our global distribution footprint. In order to adapt to as are customary in our industry. With this agreement, we are changes in the environment and our business, in addition to gaining several well-established and valuable fragrance fran- our arrangements with third party distributors globally, we chises, most notably Donna Karan Cashmere Mist and DKNY Be are operating distribution subsidiaries or divisions in the ma- Delicious, as well as a significant loyal consumer base around jor markets of the United States, France and Spain for distri- the world. The exclusive license is effective July 1, 2022, and bution of prestige fragrances. We may look into future joint we are planning to launch new fragrances under these brands arrangements or acquire distribution companies within oth- in 2023. er key markets to distribute certain of our prestige brands. While building a global distribution footprint is part of our long-term strategy, we may need to make certain decisions French Tax Settlement The French authorities had claimed that the existence of based on the short-term needs of the business. We believe Inter Parfums (Suisse) Sarl, a wholly-owned subsidiary of that in certain markets, vertical integration of our distribu- Interparfums SA, our majority owned Paris-based subsidiary, tion network may be one of the keys to future growth of our does not, in and of itself, constitute a permanent establishment, Company, and ownership of such distribution should enable and therefore Interparfums SA should pay French taxes on all or us to better serve our customers’ needs in local markets and part of the profits of that entity. adapt more quickly as situations may determine. In June 2021, a global settlement agreement was reached with the French Tax Authorities, whereby Interparfums SA paid in De- RECENT DEVELOPMENTS Salvatore Ferragamo In October 2021, we closed on a transaction agreement cember 2021, €2.5 million (approximately $2.9 million) effectively lowering the Lanvin brand royalty rate charged by Inter Parfums (Suisse) Sarl for the periods from 2017 through 2020. Interpar- with Salvatore Ferragamo S.p.A., whereby an exclusive and fums SA also agreed to apply the lower rate in 2021 through 2025 worldwide license was granted for the production and distri- and to transfer the Lanvin brand from Inter Parfums (Suisse) Sarl bution of Ferragamo brand perfumes. Our rights under this to Interparfums SA by December 31, 2025. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT10 Land and Building Acquisition - Headquarters in Paris In April 2021, Interparfums SA completed the acquisition of pairment charge on our Rochas fashion trademark. The new license also contains an option for the licensee to buy-out the Rochas fashion trademarks in June 2025 at its then fair its future headquarters at 10 rue de Solférino in the 7th ar- market value. rondissement 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. S.T. Dupont In January 2021, we renewed our license agreement with S.T. Dupont for the creation, development and distribution The $142 million purchase price includes the complete ren- of fragrance products through December 31, 2022, without ovation of the site. As of December 31, 2021, $136.1 million of any material changes in terms and conditions. Our initial 11- the purchase price, including approximately $3.1 million of ac- year license agreement with S.T. Dupont was signed in June quisition costs, is included in property, equipment and lease- 1997 and had previously been extended through December hold improvements on the accompanying balance sheet as of 31, 2021. December 31, 2021. Approximately $8.8 million of cash held in escrow is included in other assets on the accompanying con- solidated balance sheet as of December 31, 2021. In addition, Origines-Parfums In June 2020, the Company through its 73% owned subsidiary, the Company borrowed $17.0 million pursuant to a short-term Interparfums SA, and Divabox SAS (“Divabox”), owner of the loan equal to the VAT credit, and in July 2021, the $17.0 million Origines-parfums e-commerce platform for beauty products, VAT credit was reimbursed by the French Tax Authorities and signed a strategic agreement and equity investment pursu- the loan was repaid. ant to which we acquired a 25% of Divabox capital for $14.0 The acquisition was financed by a 10-year €120 million (ap- million, through a capital increase. In connection with the ac- proximately $139 million) bank loan which bears interest at quisition, the Company entered into a $13.4 million term loan, one-month Euribor plus 0.75%. Approximately €80 million of which was repaid in full in February 2021. As a website of ref- the variable rate debt was swapped for fixed interest rate debt erence for all selective fragrance brands, Origines-parfums with a maximum interest rate of 2%. is a key French player in the online beauty market recognized This acquisition is a unique opportunity with benefits to be for its customer relationship expertise. This agreement realized over the long-term. Owning our corporate headquar- should enhance the introduction of dedicated fragrance lines ters in a very prestigious part of Paris, and customizing the and products designed to address a specific consumer de- complex for our European operations, will enhance our repu- mand for this distribution channel and accelerate our digital tation, provide an exceptional work environment, as well as a development. welcoming and productive atmosphere for our suppliers, dis- tributors and licensors. Moncler In June 2020, the Company entered into an exclusive, 5-year Anna Sui Corp. In January 2021, we renewed our license agreement with Anna worldwide license agreement with a potential 5-year extension with Moncler for the creation, development and distribution Sui Corp. for the creation, development and distribution of of fragrances under the Moncler brand. Our rights under this fragrance products through December 31, 2026, without any license are subject to certain minimum advertising expendi- material changes in terms and conditions. Our initial 10-year tures and royalty payments as are customary in our industry. license agreement with Anna Sui Corp. was signed in 2011. The Moncler was founded at Monestier-de-Clermont, Grenoble, renewal agreement also allows for an additional 5-year term France, in 1952 and is currently headquartered in Italy. Over through 2031 at the option of the Company. the years, the brand has combined style with constant tech- Rochas Fashion Effective January 1, 2021, we entered into a new license agree- nological 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. ment modifying our Rochas fashion business model. The new Following a successful prelaunch in late 2021, our first fra- agreement calls for a reduction in royalties to be received. As grance launch for the Moncler brand is rolling out in the first a result, in the first quarter of 2021, we took a $2.4 million im- quarter of 2022. the company 11 PRODUCTION AND SUPPLY MARKETING AND DISTRIBUTION The stages of the development and production process for all Our products are distributed in over 120 countries around the fragrances are as follows: world through a selective distribution network. For our interna- • Simultaneous discussions with perfume designers and tional distribution, we either contract with independent distribu- creators (includes analysis of esthetic and olfactory trends, tion companies specializing in luxury goods or distribute prestige target clientele and market communication approach) products through our distribution subsidiaries. In each country, • Concept choice we designate anywhere from one to three distributors on an ex- • Produce mock-ups for final acceptance of bottles and clusive basis for one or more of our name brands. We also distrib- packaging ute our products through a variety of duty free operators, such as • Receive bids from component suppliers (glass makers, airports and airlines and select vacation destinations. plastic processors, printers, etc.) and packaging companies As our business is a global one, we intend to continue to • Choose suppliers build our global distribution footprint. For distribution of • Schedule production and packaging brands within our European based operations we operate • Issue component purchase orders through our distribution subsidiaries or divisions in the major • Follow quality control procdures for incoming components; markets of the United States, France, Italy and Spain, in addi- and tion to our arrangements with third party distributors globally. • Follow packaging and inventory control procedures Our third party distributors vary in size depending on the num- ber of competing brands they represent. This extensive and di- Suppliers who assist us with product development include: verse network together with our own distribution subsidiaries • Independent perfumery design companies (Aesthete, Carré provides us with a significant presence in over 120 countries Basset, PI Design, Cent Degrés) around the world. • Perfumers (IFF, Givaudan, Firmenich, Robertet, Takasago, Over 50% of our European based prestige fragrance net sales Mane) which create a fragrance consistent with our expecta- are denominated in U.S. dollars. We address certain financial ex- tions and, that of the fragrance designers and creators posures through a controlled program of risk management that • Fillers (Voyant, CPFPI, Omega Packaging, Société de includes the use of derivative financial instruments. We primarily Diffusion de Produits de Parfumerie, TSM Brands) enter into foreign currency forward exchange contracts to reduce • Bottle manufacturers (Pochet du Courval, Verescence, the effects of fluctuating foreign currency exchange rates. Verreries Brosse, Bormioli Luigi, Stoelzle Masnières, Heinz), The business of our European operations has become in- caps (Qualipac, ALBEA, RPC, Codiplas, LF Beauty, Texen creasingly seasonal due to the timing of shipments by our dis- Grou, S.A.R.L. J3P, SBG Packaging Group), Pumps (Silgan tribution subsidiaries and divisions to their customers, which Dispensing Systems Thomaston Corp, Rexam) or boxes are weighted to the second half of the year. (Autajon, MMPP, Nortier, Draeger) For our United States operations, we distribute product to • Production specialists who carry out packaging (CCI, Edipar, retailers and distributors in the United States as well as inter- Jacomo, Société de Diffusion de Produits de Parfumerie, nationally, including duty free and other travel-related retail- MF Productions, Biopack) or logistics (Bansard and Bolloré ers. We utilize our in-house sales team to reach our third party Logistics for storage, order preparation and shipment) distributors and customers outside the United States. In addi- tion, the business of our United States operations has become Suppliers’ accounts for our European operations are pri- increasingly seasonal as shipments are weighted toward the marily settled in euro and for our United States operations, second half of the year. suppliers’ accounts are primarily settled in U.S. dollars. For For our United States operations, we distribute product to our European operations components for our prestige fra- retailers and distributors in the United States as well as inter- grances are purchased from many suppliers around the world nationally, including duty free and other travel-related retail- and are primarily manufactured in France. ers. We utilize our in-house sales team to reach our third party For United States operations, components for our prestige fra- distributors and customers outside the United States. In addi- grances are sourced from many suppliers around the world and are tion, the business of our United States operations has become primarily manufactured in the United States. However, occasionally, increasingly seasonal as shipments are weighted toward the we will utilize third party manufacturers in France, China and Turkey. second half of the year. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 12 Boucheron December 31, 2025, plus a 5-year optional term if certain sales targets are met Coach June 30, 2026 Donna Karan December 31, 2032*, plus a 5-year optional term if certain sales targets are met Dunhill September 30, 2023 Emanuel Ungaro December 31, 2031, plus a 5-year optional term if certain sales targets are met French Connection December 31, 2027, plus a 10- Graff GUESS Hollister Kate Spade Jimmy Choo year optional term if certain sales targets are met December 31, 2026, plus 3 optional 3-year terms if certain sales targets are met December 31, 2033 Extends until either party terminates on 3 years’ notice June 30, 2030 December 31, 2031 Karl Lagerfeld October 31, 2032 MCM Moncler December 31, 2030, plus 4 option years December 31, 2026, plus a 5-year optional term if certain conditions are met Montblanc December 31, 2025 Oscar de la Renta December 31, 2031, plus a 5-year optional term if certain sales targets are met Salvatore Ferragamo December 31, 2031, plus a 5-year optional term if certain sales targets are met S.T. Dupont December 31, 2022 Van Cleef & Arpels December 31, 2024 The Products We are the owner of the Rochas brand, and the Lanvin brand name and trademark for our class of trade. In addition, we have built a portfolio of licensed prestige brands where- by we produce and distribute our prestige fra- grance products under license agreements with brand owners. Under license agreements, we obtain the right to use the brand name, cre- ate new fragrances and packaging, determine positioning and distribution, and market and sell the licensed products, in exchange for the payment of royalties. Our rights under li- cense agreements are also generally subject to certain minimum sales requirements and advertising expenditures as are customary in our industry. Our licenses for these brands expire on the following dates: In connection with the acquisition of the Lanvin brand Brand Name Expiration Date seller the right to repurchase the brand names and trade- Abercrombie & Fitch Extends until either party marks in 2025 for the greater of €70 million (approximately terminates on 3 years’ notice $86 million) or one times the average of the annual sales for Anna Sui December 31, 2026, the years ending December 31, 2023 and 2024. names and trademarks for our class of trade, we granted the bebe Stores June 30, 2023 * license effective July 1, 2022 plus one 5-year optional term the products 13 Fragrance Portfolio INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT14 In 2014, we entered into a worldwide license to create, produce and distribute new fragrances and fragrance related products under the Abercrombie & Fitch brand name. We distribute these fragrances in specialty stores, department stores and duty free shops, and in the U.S., in select Abercrombie & Fitch retail stores. Our initial men’s scent, First Instinct was launched in 2016 followed by a women’s version in 2017. Since that time, we unveiled several new fragrances most notably the Authentic and Away duos as well as brand extensions. Abercrombie & Fitch Co. is a leading, global, omnichannel specialty retailer of apparel and accessories for men, wom- en and kids. The iconic Abercrombie & Fitch brand was born in 1892 and aims to make every day feel as exceptional as the start of a long weekend. the products 15 Abercrombie & Fitch Away Tonight INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT16 In 2011, we entered into an exclusive worldwide fragrance license to create, produce and distribute fragrances and fra- grance related products under the Anna Sui brand. Anna Sui is one of New York’s most accomplished fashion designers known for creating contemporary clothing inspired by vintage style that capture the brand’s very sweet feminine girly aspect, combined with touch hipness and rock-and-roll. Today, Anna Sui has over 50 boutiques and her collection and products are sold in 300 stores in over 30 countries, but her brand is by far most popular and well received throughout Asia. Over the past decade, we have worked in partnership with Anna Sui and her creative team to build upon the brand’s customer appeal and develop and market a family of fragrances including Fantasia, Sui Dreams and the newest scent, Sky, which was ranked as the second best perfume launch of 2021 by WWD Japan. the products 17 Anna Sui Cosmic Sky INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT18 In 2010, we entered into an exclusive 15-year worldwide li- cense agreement for the creation, development and distri- bution of fragrances under the Boucheron brand. For over a century, since becoming the first jeweler to open a boutique on Place Vendôme in 1893, Boucheron has embodied very high- end creation, luxury and French know-how. The mysterious and seductive collection of Boucheron fragrances unquestion- ably continues this prestigious brand mystique. Boucheron legacy scents, Femme and Homme, and the leg- endary Jaipur perfume form the foundation of brand sales. Our team has enriched the portfolio with Quatre for men and women, along with several special editions, a growing collec- tion of unique scents aptly named, La Collection, and Serpent Boheme. We have a new Boucheron men’s fragrance in the works for 2022, as well as still another addition to our Bouche- ron Collection. Currently Boucheron operates through over 66 boutiques worldwide as well as an e-commerce site. the products 19 BOUCHERON_QUATRE_ICONIC_MODEL_POS_136_160,5x218_UK.indd 1 BOUCHERON_QUATRE_ICONIC_MODEL_POS_136_160,5x218_UK.indd 1 Boucheron Quatre Iconic 23/03/2022 12:35 23/03/2022 12:35 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT20 In 2015, we entered into an exclusive 11-year worldwide license to create, produce and distribute new men’s and women’s fra- grances and fragrance related products under the Coach brand name. We distribute these fragrances globally to department stores, specialty stores and duty free shops, as well as in Coach retail stores. Founded in 1941, Coach is the ultimate American leather goods brand and has always been renowned for its quality crafts- manship. Now the luxury brand that best embodies New York’s casual elegance, Coach also offers collections of ready-to- wear, lifestyle accessories and fragrances. Its contemporary approach to luxury combines authenticity and innovation, ex- ported worldwide thanks to its thoroughly American non-con- formist vision. In 2016, we launched our first Coach fragrance, a women’s signature scent, and in 2017, a men’s scent, both of which be- came and remain top selling prestige fragrances. Subsequent flankers and extensions have enlarged the Coach fragrance enterprise as have entirely new collections, including Coach Dreams which debuted in early 2020, and its sister scent, Dreams Sunset, debuting in 2021. For 2022, we have a new pillar for men unveiling, and new edition to the Coach women’s line. Coach is part of the Tapestry house of brands. the products 21 COACH_WildRose_MODEL_POS_135_160,5x218.indd 1 COACH_WildRose_MODEL_POS_135_160,5x218.indd 1 Coach Coach Wild Rose 24/03/2022 17:03 24/03/2022 17:03 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT22 DKNY fragrances will join the Inter Parfums fragrance portfolio on July 1, 2022. The DKNY brand emerged in 1989 as the “next generation” fashion response to Donna Karan’s then teenage daughter raiding her mom’s closet. Today, DKNY designs, markets and globally distributes collections of apparel, accessories, footwear and select licensed products. Be Delicious, the brand’s best known scent which launched in 2004, was named one of the 25 Perfumes of All Time in April 2022 by Marie Claire magazine. There are new products for the brand under development. Like our Donna Karan fragrance license, our exclusive DKNY license was awarded by G-III Apparel Group in September 2021. 23 DKNY Be Delicious INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT24 Come July 2022, our long-term global licensing agreement with the G-III Apparel Group for the creation, development and distribution of fragrances under the Donna Karan brand becomes effective. Donna Karan is recognized as a fashion pioneer, and in 2004 she received a lifetime achievement award from the Council of Fashion Designers of America. While inspired by the energy and attitude of New York City in 1984, today Donna Karan is a global lifestyle brand whose products are sold worldwide. In addition to fashion and fragrance, the Donna Karan label can be found on shoes, accessories and home fashions. The brand’s lead fragrance, Cashmere Mist launched in 1994 and was awarded the Fragrance Foundation Hall of Fame Award in 2019. In February 2022 Cashmere Mist was ranked among the 100 Greatest Fragrances of All Time by WWD. A new fragrance for the brand is in the works for 2023. 25 Donna Karan Cashmere Mist INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT26 In October 2021, we also entered into a 10-year exclusive global licensing agreement with Emanuel Ungaro for the creation, development and distribution of fragrances and fragrance- related products, under the Emanuel Ungaro brand. Founded in 1965 in Paris, the house Emanuel Ungaro is an icon of French refinement and haute couture. Its unique style is expressed through unquestioning sensuality, purity of silhouette, flamboyant prints, and exquisite attention to details. Season after season, Emanuel Ungaro dared to be different, combining unexpected yet sensual clashes of bright colors and prints with beautiful draping. Today Ungaro fragrances uphold the same values of audacity and elegance, and the brand is best known and most prized internationally, and such presence will remain our sales focus as we continue to produce and distribute the brand’s legacy scents, notably Diva. Beginning in 2023, we plan to unveil a new fragrance incorporating disruptive design, driven by creativity and authenticity. the products 27 Emanuel Ungaro Diva INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT28 In 2018, we entered into an exclusive, 8-year worldwide license agreement with London-based Graff for the creation, develop- ment and distribution of fragrances under the Graff brand. The 8-year agreement has three 3-year automatic renewal options, potentially extending the license until December 31, 2035. Since Laurence Graff OBE founded the company in 1960, Graff has been dedicated to sourcing and crafting diamonds and gemstones of untold beauty and rarity and transforming them into spectacular pieces of jewelry that move the heart and stir the soul. Throughout its rich history, Graff has become the world leader for diamonds of rarity, magnitude and distinc- tion. Each jewelry creation is designed and manufactured in Graff’s London atelier, where master craftsmen employ tech- niques to emphasize the beauty of each individual stone. The company remains a family business, overseen by Francois Graff, Chief Executive Officer. For Graff, a six-scent collection for women, Lesedi La Rona, debuted exclusively at Harrods beginning in March 2020, which we further extended as a result of the mandatory store clos- ings throughout that year. In 2021, a select market rollout be- gan in the Middle East, with limited luxury distribution to only the most exclusive, upmarket retail outlets. In 2022, we’ll be adding two new scents for the Lesedi La Rona collection. the products 29 L E S E D I L A R O N A F R A G R A N C E S Graff Lesedi La Rona Fragrances INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT30 In 2018, we entered into an exclusive, 15-year worldwide li- cense agreement with GUESS?, Inc. for the creation, develop- ment and distribution of fragrances under the GUESS brand. Established in 1981, GUESS began as a jeans compa- ny and has since successfully grown into a global lifestyle brand. GUESS?, Inc. designs, markets, distributes and li- censes a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. GUESS products are distributed through brand- ed GUESS stores as well as better department and specialty stores around the world. We began selling GUESS legacy scents in 2018. In 2019 the GUESS brand quickly became the largest within our U.S. op- erations, with legacy fragrances dominating the sales mix. In 2019, we began shipments of 1981 Los Angeles and Seductive Noir, both flankers of established scents, which accelerated brand growth. Nearly three years in the making, our first new blockbuster scent, Bella Vita, debuted for the GUESS brand both domes- tically and internationally in 2021. In addition, Effect, a new men’s grooming line and fragrance collection, was launched in 2021. Uomo, a new men’s fragrance for GUESS, comes to market in 2022. the products 31 Guess Uomo INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT32 In 2014, we entered into a worldwide license to create, produce and distribute new fragrances and fragrance related products under the Hollister brand name. We distribute these fragranc- es in specialty stores, department stores and duty free shops, as well as select Hollister retail stores in the U.S. In 2016, we launched our first men’s and women’s fragrance duo, Wave which led to flankers and extensions as did subsequent fra- grance families Festival and Canyon Escape. The quintessential apparel brand of the global teen con- sumer, Hollister Co. celebrates the liberating spirit of the end- less summer inside everyone. Inspired by California’s laidback attitude, Hollister’s clothes are designed to be lived in and made your own, for wherever life takes you. the products 33 Hollister Canyon Rush INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT34 In 2009, we entered into an exclusive 12-year worldwide license agreement for the creation, development and distribution of fragrances and fragrance related products under the Jimmy Choo brand, and in 2017, we extended the license agreement which now runs through December 31, 2031. Jimmy Choo encompasses a complete luxury accessories brand. Women’s shoes remain the core of the product offer- ing, alongside handbags, small leather goods, scarves, eye- wear, belts, fragrance and men’s shoes. Jimmy Choo has a global store network encompassing more than 200 stores and is present in the most prestigious department and specialty stores worldwide. Jimmy Choo is part of the Capri Holdings Limited luxury fashion group. Our initial Jimmy Choo fragrance was launched in 2011, a signature scent for women. In the decade that followed, Jim- my Choo has grown to become our second largest brand with new pillars and flankers debuting regularly, both for men and women. Our newest women’s fragrance, I Want Choo, was launched in 2021 and for 2022, we have a new Jimmy Choo Man flanker as well as one for I Want Choo. the products 35 Jimmy Choo I Want Choo INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT36 In 2012, we entered into a 20-year worldwide license agree- ment with Karl Lagerfeld B.V., the internationally renowned haute couture fashion house, to create, produce and distribute fragrances under the Karl Lagerfeld brand. Under the creative direction of the late Karl Lagerfeld, one of the world’s most influential and iconic designers, the Lager- feld Portfolio represents a modern approach to distribution, an innovative digital strategy and a global 360 degree vision that reflects the designer’s own style and soul. Karl Lagerfeld created the first fragrance that bears his name in 1978, and that legacy has expanded to include several growing multi- scent collection, Les Parfums Matières and most recently, Karl Cities, a new collection featuring entries for New York, Paris, Hamburg and Tokyo was unveiled. the products 37 KL_Matiere_Duo21_POS_135_160,5x218.indd 1 KL_Matiere_Duo21_POS_135_160,5x218.indd 1 Karl Lagerfeld Les Parfums Matières 23/03/2022 09:56 23/03/2022 09:56 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT38 In 2019, we entered into an exclusive, 11-year worldwide li- cense agreement with Kate Spade to create, produce and dis- tribute new perfumes and fragrance related products under the Kate Spade brand which we distribute globally to depart- ment and specialty stores and duty free shops, as well as in Kate Spade retail stores. Our first original scent, Kate Spade New York, debuted in January 2021 and for 2022, we are adding a flanker to our line. Since its launch in 1993 with a collection of six essential handbags, Kate Spade has always stood for optimistic fem- ininity. Today, the brand is a global life and style house with handbags, ready-to-wear, jewelry, footwear, gifts, home décor and more. Polished ease, thoughtful details and a modern, sophisticated use of color—Kate Spade’s founding principles define a unique style synonymous with joy. Under the vision of its creative director, the brand continues to celebrate confident women with a youthful spirit. Kate Spade is part of the Tapestry house of brands. the products 39 KateSpade_Sparkle_Bottle_POS_135_160,5x218.indd 1 KateSpade_Sparkle_Bottle_POS_135_160,5x218.indd 1 Kate Spade Sparkle 23/03/2022 11:01 23/03/2022 11:01 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT40 In 2007, we acquired the worldwide rights to the Lanvin brand names and international trademarks listed in Class 3, our class of trade. A synonym of luxury and elegance, the Lanvin fashion house, founded in 1889 by Jeanne Lanvin, expanded into fragrances in the 1920s. Lanvin fragrances occupy an important position in the se- lective distribution market in France, Eastern Europe and Asia, and we have several lines currently in distribution, including Éclat d’Arpège, Lanvin L’Homme, Jeanne Lanvin, Modern Prin- cess and A Girl in Capri. The Éclat d’Arpège line accounts for almost 50% of brand sales. Les Fleurs de Lanvin, a new flo- ral fragrance collection, was released during the second half 2021. For 2022, we have a new extension unveiling for our Éclat d’Arpège line. the products 41 LES_FLEURS_DE_LANVIN_TRIO_POS_136_160,5x218.indd 1 LES_FLEURS_DE_LANVIN_TRIO_POS_136_160,5x218.indd 1 Lanvin Les Fleurs de Lanvin 23/03/2022 09:49 23/03/2022 09:49 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT42 In 2019, we entered into an exclusive, 10-year worldwide li- cense agreement with German luxury fashion house MCM for the creation, development and distribution of fragrances under the MCM brand. The agreement has a 4-year auto- matic renewal option, potentially extending the license until December 31, 2034. MCM is a luxury lifestyle goods and fashion house founded in 1976 with an attitude defined by the cultural Zeitgeist and its German heritage with a focus on functional innovation, in- cluding the use of cutting-edge techniques. Today, through its association with music, art, travel and technology, MCM em- bodies the bold, rebellious and aspirational. Always with an eye on the disruptive, the driving force behind MCM centers on revolutionizing classic design with futuristic materials. MCM’s millennial and Gen Z audience is genderless, ageless, empow- ered and unconstrained by rules and boundaries. Following through on our plan to develop extraordinary fragrances that capture the creative spirit of MCM, our first new fragrance, MCM, was released during the first quarter of 2021 to great, and somewhat unexpected success. A flanker is in the pipeline for 2022 along with a special edition called MCM EDP Collector’s Edition. Our distribution strategy en- compasses MCM stores, high-end department stores and prestige beauty retailers, with a geographic focus on Asia, the Americas and Europe. the products 43 MCM EDP INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT44 In June 2020, we 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. 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 for the Moncler brand has a revolution- ary LED design, and the flask-shaped bottles of Moncler Pour Femme and Moncler Pour Homme forge a powerful bond with the House Moncler’s alpine roots and pioneering spirit. This playful and unique innovation enables its owner to write a personalized note that scrolls in red letters on the screen of the mirror bottle. Our first fragrance was pre-launched in 250 select outlets in the second half of 2021, and was met with an excellent response. A full rollout to approximately 3,000 doors began in early 2022. 45 Moncler_Parfum_POS_Mens_Final _136_160,5x218_V2.indd 1 Moncler_Parfum_POS_Mens_Final _136_160,5x218_V2.indd 1 23/03/2022 17:31 23/03/2022 17:31 Moncler Pour Homme INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT46 In 2010, we entered into an exclusive license agreement to cre- ate, develop and distribute fragrances and fragrance related products under the Montblanc brand. In 2015, we extended the agreement which now runs through December 31, 2025. Montblanc has achieved a world-renowned position in the luxury segment and has become a purveyor of exclusive products, which reflect today’s exacting demands for timeless design, tradition and master craftsmanship. Through its lead- ership positions in writing instruments, watches and leather goods, promising growth outlook in women’s jewelry, inter- national retail footprint through its network of more than 600 boutiques, high standards of product design and quality, Mont- blanc has grown to be our largest fragrance brand. In 2011, we launched our first new Montblanc fragrance, Legend, which quickly became our best-selling men’s line and has given rise to a plethora of flankers including Legend Night and Legend Spirit. In 2014, we launched our second men’s line, Emblem and like its predecessor, Emblem gave rise to brand extensions. In 2019, we unveiled Montblanc Explorer, which has added flankers, most recently Montblanc Explorer Ultra Blue. The Legend continues, as in 2022, we will be introducing a new flanker, Montblanc Legend Red. the products 47 Montblanc Legend Red INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT48 In 2013, we entered into an exclusive worldwide license to create, produce and distribute fragrances and fragrance re- lated products under the Oscar de la Renta brand. In 2019, the agreement was extended through December 31, 2031, with an additional five-year option potentially extending the agreement through December 31, 2036. After taking over distribution of the brand’s legacy fragrances in 2014, we in- troduced Extraordinary the following year. Oscar de la Renta Bella Blanca debuted in 2018, followed by Bella Rosa and Bella Essence and soon to join them, Bella Bouquet. Debuting in 2021 was an entirely new fragrance pillar, Alibi which will wel- come a sister scent in 2022. Oscar de la Renta is one of the world’s leading luxury goods firms. The New York-based company was established in 1965, and encompasses a full line of women’s accessories, bridal, children’s wear, fragrance, beauty and home goods, in addition to its internationally renowned signature women’s ready to wear collection. Oscar de la Renta products are sold globally in fine department and specialty stores, www.oscardelarenta. com and through wholesale channels. the products 49 Oscar de la Renta Alibi EDT INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT50 In 2015, we acquired the Rochas brand from The Procter & Gamble Company. Founded by Marcel Rochas in 1925, the brand began as a fashion house and expanded into perfumery in the 1950s under Hélène Rochas’ direction. Our first new fragrance for Rochas, Mademoiselle Rochas, had a successful launch in 2017 in its traditional markets of France and Spain. Over the next few years, we debuted flank- ers for legacy scents Eau de Rochas and Mademoiselle Ro- chas, plus others and in 2018 we launched our first new men’s line, Rochas Moustache. Byzance debuted in early 2020 and Rochas Girl in 2021, and the first flanker for both will come to market in 2022 as well as one for L’Homme Rochas. the products 51 Rochas Eau de Rochas INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT52 In October 2021, we closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and world- wide 10-year license was granted for the production and dis- tribution of Ferragamo brand perfumes, with a 5-year optional term if certain conditions are met. Salvatore Ferragamo S.p.A. is the parent company of the Salvatore Ferragamo Group, one of the world’s leaders in the luxury industry and whose origins date back to 1927. Named after its founder, the brand still represents and lives by the original values of Salvatore Ferragamo. The uniqueness and exclusivity of its creations, along with the perfect blend of style, creativity and innova- tion enriched by the quality and superior craftsmanship of the ‘Made in Italy’ tradition, have always been the hallmarks of Salvatore Ferragamo’s products notably shoes, leather goods, apparel, silk products and other accessories for men and women. The current fragrance lineup includes Storie di Seta, a new collection of four refined, luminous olfactory works of art. Each fragrance is made with rare, sustainable raw materials, and can be worn alone or in combination, creating a person- alized multifaceted scent. The genderless collection is com- prised of four fragrances in four colors. Four exclusive motifs drawn from the House’s textile heritage adorn each flacon. Established scents in the Ferragamo portfolio include Ferrag- amo, a collection of fragrances for men, Signoria, a collection of fragrances for women, the Tuscan Creations series, the Amo series and the Uomo series. the products 53 Salvatore Ferragamo Giardini di Seta INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT54 Van Cleef & Arpels fragrances in current distribution include: First and Collection Extraordinaire. Sales of the Collection Extraordinaire line have experienced continued growth since its debut. We continue to introduce new additions to the Van Cleef & Arpels Collection Extraordinaire assortment an- nually, including Oud Blanc, in 2020 and Rêve de Matière in 2021. Patchouli Blanc is the new addition to the Collection Extraordinaire, scheduled for 2022. Founded in 1896, Van Cleef & Arpels is a French luxury jewelry company owned by Richemont Holdings Limited. the products 55 CE_PatchouliBlanc_POS_135_160,5x218.indd 1 CE_PatchouliBlanc_POS_135_160,5x218.indd 1 Van Cleef & Arpels Collection Extraordinaire, Patchouli Blanc 23/03/2022 13:36 23/03/2022 13:36 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT56 40% CONSOLIDATED NET SALES TO CUSTOMERS BY REGION (in millions) Year Ended December 31, North America Western Europe Asia Eastern Europe Middle East Central and South America Other 2021 $354.1 202.0 128.0 69.7 61.0 2020 $193.5 147.1 79.7 33.1 46.8 2019 $235.5 185.5 110.9 55.2 72.6 32.5 56.4 8.4 46.2 7.6 $879.6 $539.0 $713.5 6.3 CONSOLIDATED NET SALES TO CUSTOMERS IN MAJOR COUNTRIES ARE AS FOLLOWS: (in thousands) Year Ended December 31, United States France Russia United Kingdom 2021 $351,300 44,000 43,400 38,500 2020 $187,300 37,600 14,100 24,600 2019 $225,300 43,500 36,800 35,800 57 31% 7% INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT58 The Organization All Corporate Functions: Including product analysis and development, production and sales, and finance are coordinated at the Company’s corpo- rate headquarters in New York and at the corporate offices of Interparfums SA in Paris. Each company is organized into two operational units that report directly to general man- agement, and European operations ultimately report to Mr. Benacin and United States operations ultimately report to Mr. Madar. Finance, Investor Relations And Administration: Russell Greenberg in the United States and Philippe Santi in France: • Financial policy and communication, investor relations; • Financial accounting, cost accounting, budgeting and cash flow management; • Disclosure requirements of the Securities and Exchange Commission and Commission des Operations de Bourse; • Labor relations, tax and legal matters and management information systems. Operations: Franck Moisio in the United States and Axel Marot in France: • Product development; • Logistics and transportation; • Purchasing and industrial relations; • Quality control and inventory cost supervision. Export Sales: Hervé Bouillonnec in the United States and Frédéric Garcia- Pelayo in France: • International development strategy; • Establishment of distributor networks and negotiation of contracts; • Monitoring of profit margins and advertising expenditures. Domestic (Home Country) Sales: Hervé Bouillonnec in the United States and Jérôme Thermoz in France: • Establish and apply domestic sales strategy and distribution policy; • Sales team management and development; • Monitoring of profit margins and advertising expenditures. . the organization 59 SIMPLIFIED CHART OF THE ORGANIZATION 44% PHILIPPE BENACIN JEAN MADAR 56% PUBLIC SHAREHOLDERS 100% 100% 100% INTER PARFUMS HOLDINGS, SA INTER PARFUMS USA, LLC INTER PARFUMS ITALIA SRL 73% 100% INTERPARFUMS SA [ EURONEXT - PARIS ] INTER PARFUMS USA HONG KONG LTD rpar srl (italy) fums 100% 100% 100% 51% INTERPARFUMS LUXURY BRANDS, INC INTERPARFUMS [ SUISSE ] SARL INTERPARFUMS SINGAPORE PTE, LTD PARFUMS ROCHAS SPAIN, SL INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT60 contents management’s discussion and analysis of financial condition and results of operations report on internal control over financial reporting report of independent registered public accounting firm financial statements 61 71 72 74 notes to consolidated financial statements corporate and market information directors and executive officers 79 95 96 management’s discussion and analysis of financial condition and results of operations 61 Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta and Ungaro brands. Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc, Jim- my Choo, Coach and GUESS brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows: Management’s Discussion And Analysis Of Financial Condition And Results Of Operations OVERVIEW Years ended December 31, 2021 2020 2019 22% Montblanc 19% 18% 16% 12% 21% 16% 17% 11% 16% 14% 10% Jimmy Choo Coach GUESS Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We primarily sell direct- ly to retailers in France and the United States. We grow our business in two distinct ways. First, we grow by We operate in the fragrance business, and manufacture, mar- adding new brands to our portfolio, either through new licens- ket and distribute a wide array of fragrances and fragrance es or other arrangements or out-right acquisitions of brands. related products. We manage our business in two segments, Second, we grow through the introduction of new products and European based operations and United States based opera- by supporting new and established products through adver- tions. Certain prestige fragrance products are produced and tising, merchandising and sampling, as well as by phasing out marketed by our European operations through our 73% owned underperforming products, so we can devote greater resourc- subsidiary in Paris, Interparfums SA, which is also a publicly es to those products with greater potential. The economics of traded company as 27% of Interparfums SA shares trade on developing, producing, launching and supporting products in- the NYSE Euronext. fluence our sales and operating performance each year. The We produce and distribute our European based fragrance introduction of new products may have some cannibalizing ef- products primarily under license agreements with brand own- fect on sales of existing products, which we take into account ers, and European based fragrance product sales represented in our business planning. approximately 75%, 78% and 76% of net sales for 2021, 2020 Our business is not capital intensive, and it is important to and 2019, respectively. We have built a portfolio of prestige note that we do not own manufacturing facilities. We act as a brands, which include Boucheron, Coach, Jimmy Choo, Karl general contractor and source our needed components from Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, Rochas, our suppliers. These components are received at one of our S.T. Dupont and Van Cleef & Arpels, whose products are dis- distribution centers and then, based upon production needs, tributed in over 120 countries around the world. the components are sent to one of several third party fillers, Through our United States operations, we also market fra- which manufacture the finished product for us and then deliver grance and fragrance related products. United States oper- them to one of our distribution centers. ations represented 25%, 22% and 24% of net sales in 2021, As with any global business, many aspects of our op- 2020 and 2019, respectively. These fragrance products are erations are subject to influences outside our control. We sold primarily pursuant to license or other agreements with believe we have a strong brand portfolio with global reach the owners of the Abercrombie & Fitch, Anna Sui, Dunhill, and potential. As part of our strategy, we plan to continue to INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 62 make investments behind fast-growing markets and chan- Lastly, the improved economy has put significant strains on nels to grow market share. our supply chain causing disruptions affecting the procure- Our reported net sales are impacted by changes in foreign ment of components, the ability to transport goods, and re- currency exchange rates. A strong U.S. dollar has a negative lated cost increases. These disruptions have come at a time impact on our net sales. However, earnings are positively af- when demand for our product lines has never been stronger fected by a strong dollar, because over 50% of net sales of our or more sustained. We have been addressing this issue since European operations are denominated in U.S. dollars, while the beginning of 2021, by ordering well in advance of need and almost all costs of our European operations are incurred in in larger quantities. Going forward, we aim to carry more in- euro. Conversely, a weak U.S. dollar has a favorable impact on ventory overall, source the same components from multiple our net sales while gross margins are negatively affected. We suppliers and when possible, manufacture products closer to address certain financial exposures through a controlled pro- where they are sold. We do not expect the supply chain bot- gram of risk management that includes the use of derivative tlenecks to begin lifting until later in 2022. Therefore, despite financial instruments, and primarily enter into foreign curren- recent business improvement, the impact of the COVID-19 pan- cy forward exchange contracts to reduce the effects of fluctu- demic may have a material adverse effect on our results of our ating foreign currency exchange rates. operations, financial position and cash flows through at least IMPACT OF COVID-19 PANDEMIC the end of 2022. 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 de- RECENT IMPORTANT EVENTS Salvatore Ferragamo In October 2021, we closed on a transaction agreement clared COVID-19 a pandemic. with Salvatore Ferragamo S.p.A., whereby an exclusive and In response to the COVID-19 pandemic various national, worldwide license was granted for the production and distri- state, and local governments where we, our suppliers, and our bution of Ferragamo brand perfumes. Our rights under this customers operate initially issued decrees prohibiting certain license are subject to certain minimum advertising expendi- businesses from continuing to operate and certain classes of tures and royalty payments as are customary in our industry. workers from reporting to work. In all jurisdictions in which we The license became effective in October 2021 and will last operate, we have been following guidance from authorities and for 10 years with a 5-year optional term, subject to certain health officials. conditions. The effects of the COVID-19 pandemic on the beauty indus- With respect to the management and coordination of activ- try began in early March 2020. Retail store closings, event can- ities related to the license agreement, the Company operates cellations and a shutdown of international air travel brought through a wholly-owned Italian subsidiary based in Florence, our sales to a virtual standstill and caused a significant unfa- that was acquired from Salvatore Ferragamo on October 1, vorable impact on our results of operations in 2020. 2021. The acquisition together with the license agreement Business significantly improved in the second half of 2020 was accounted for as an asset acquisition. The following table and continued to improve throughout 2021, as retail stores re- summarizes the estimated fair values of the assets acquired opened, and consumers increased online purchasing. While we and liabilities assumed on October 1, 2021. All amounts have expect this trend to continue, as the luxury fragrance industry been translated to U.S. dollars at the October 1, 2021 ex- has shown continued resilience, the introduction of variants of change rate. COVID-19 in various parts of the world has caused the tempo- rary re-implementation of governmental restrictions to pre- $ in thousands vent further spread of the virus. In addition, international air Inventories travel has remained curtailed in many jurisdictions due to both Trademarks and licenses governmental restrictions and consumer health concerns. Other assets While COVID-19 has significantly restricted international travel Assets acquired in the near-term, we continue to believe that global travel re- Liabilities assumed tail will once again be a growth opportunity for the long-term. $17,805 $15,880 $3,033 36,718 (958) $35,760 management’s discussion and analysis of financial condition and results of operations 63 Emanuel Ungaro In October 2021, we also entered into a 10-year exclusive glob- al licensing agreement a with a 5-year optional term subject office complex combining three buildings connected by two inner courtyards, and consists of approximately 40,000 total sq. ft. The $142 million purchase price includes the complete ren- to certain conditions, with Emanuel Ungaro Italia S.r.l, for the ovation of the site. As of December 31, 2021, $136.1 million of creation, development and distribution of fragrances and fra- the purchase price, including approximately $3.1 million of ac- grance-related products, under the Emanuel Ungaro brand. quisition costs, is included in property, equipment and lease- Our rights under this license are subject to certain minimum hold improvements on the accompanying balance sheet as of advertising expenditures and royalty payments as are cus- December 31, 2021. Approximately $8.8 million of cash held in tomary in our industry. escrow is included in other assets on the accompanying bal- Donna Karan and DKNY In September 2021, we entered into a long-term global licens- borrowed $17.0 million pursuant to a short-term loan equal to the VAT credit, and in July 2021, the $17.0 million VAT credit ing agreement for the creation, development and distribution of was reimbursed by the French Tax Authorities and the loan ance sheet as of December 31, 2021. In addition, the Company fragrances and fragrance-related products under the Donna was repaid. Karan and DKNY brands. Our rights under this license are sub- The acquisition was financed by a 10-year €120 million (ap- ject to certain minimum advertising expenditures and royalty proximately $136 million) bank loan which bears interest at payments as are customary in our industry. With this agree- one-month Euribor plus 0.75%. Approximately €80 million of ment, we are gaining several well-established and valuable fra- the variable rate debt was swapped for variable interest rate grance franchises, most notably Donna Karan Cashmere Mist debt with a maximum rate of 2% per annum. and DKNY Be Delicious, as well as a significant loyal consumer base around the world. In connection with the grant of license, we issued 65,342 shares of Inter Parfums, Inc. common stock Anna Sui Corp. In January 2021, we renewed our license agreement with Anna valued at $5.0 million to the licensor. The exclusive license is Sui Corp. for the creation, development and distribution of effective July 1, 2022, and we are planning to launch new fra- fragrance products through December 31, 2026, without any grances under these brands in 2023. material changes in terms and conditions. Our initial 10-year French Tax Settlement The French authorities had considered that the existence of IP Suisse, a wholly-owned subsidiary of Interparfums SA, does not, in and of itself, constitute a permanent establishment and therefore Interparfums SA should pay French taxes on all or 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 part of the profits of that entity. agreement modifying our Rochas fashion business model. In June 2021, a global settlement agreement was reached The new agreement calls for a reduction in royalties to be re- with the French Tax Authorities, whereby Interparfums SA paid ceived. As a result, in the first quarter of 2021, we took a $2.4 in December 2021, €2.5 million (approximately $2.9 million) million impairment charge on our Rochas fashion trademark. effectively lowering the Lanvin brand royalty rate charged by The new license also contains an option for the licensee to IP Suisse for the periods from 2017 through 2020. Interpar- buy-out the Rochas fashion trademarks in June 2025 at its fums SA also agreed to apply the lower rate in 2021 through then fair market value. 2025 and to transfer the Lanvin brand from IP Suisse to Inter- parfums SA by December 31, 2025. S.T. Dupont In January 2021, we renewed our license agreement with S.T. Land and Building Acquisition - Future Headquarters in Paris In April 2021, Interparfums SA, completed the acquisition Dupont for the creation, development and distribution of fra- grance products through December 31, 2022, without any mate- rial changes in terms and conditions. Our initial 11-year license of its future headquarters at 10 rue de Solférino in the 7th ar- agreement with S.T. Dupont was signed in June 1997 and had rondissement of Paris from the property developer. This is an previously been extended through December 31, 2021. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 64 DISCUSSION OF CRITICAL ACCOUNTING POLICIES We make estimates and assumptions in the preparation of our financial statements in conformity with accounting prin- Increase (decrease) $ in millions Change to fair value ciples generally accepted in the United States of America. Weighted average cost of capital Actual results could differ significantly from those estimates Weighted average cost of capital under different assumptions and conditions. We believe the Future sales levels following discussion addresses our most critical account- Future sales levels ing policies, which are those that are most important to the +10% -10% +10% -10% $(11.9) $14.0 $13.3 $(13.3) portrayal of our financial condition and results of operations. Intangible assets subject to amortization are evaluated for These accounting policies generally require our manage- impairment testing whenever events or changes in circum- ment’s most difficult and subjective judgments, often as a re- stances indicate that the carrying amount of an amortizable sult of the need to make estimates about the effect of matters intangible asset may not be recoverable. If impairment indica- that are inherently uncertain. Management of the Company tors exist for an amortizable intangible asset, the undiscount- has discussed the selection of significant accounting policies ed future cash flows associated with the expected service and the effect of estimates with the Audit Committee of the potential of the asset are compared to the carrying value of Board of Directors. Long-Lived Assets We evaluate indefinite-lived intangible assets for impairment the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no im- pairment charge is recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangi- at least annually during the fourth quarter, or more frequently ble asset, an impairment charge would be recorded to reduce when events occur or circumstances change, such as an un- the intangible asset to its fair value. The cash flow projections expected decline in sales, that would more likely than not in- are based upon a number of assumptions, including future dicate that the carrying value of an indefinite-lived intangible sales levels and future cost of goods and operating expense asset may not be recoverable. When testing indefinite-lived in- levels, as well as economic conditions, changes to our busi- tangible assets for impairment, the evaluation requires a com- ness model or changes in consumer acceptance of our prod- parison of the estimated fair value of the asset to the carrying ucts which are more subjective in nature. In those cases where value of the asset. The fair values used in our evaluations are we determine that the useful life of long-lived assets should estimated based upon discounted future cash flow projections be shortened, we would amortize the net book value in excess using a weighted average cost of capital of 7.47%. The cash of the salvage value (after testing for impairment as described flow projections are based upon a number of assumptions, in- above), over the revised remaining useful life of such asset cluding, future sales levels and future cost of goods and oper- thereby increasing amortization expense. We believe that the ating expense levels, as well as economic conditions, changes assumptions we have made in projecting future cash flows for to our business model or changes in consumer acceptance of the evaluations described above are reasonable. our products which are more subjective in nature. If the carry- In determining the useful life of our Lanvin brand names and ing value of an indefinite-lived intangible asset exceeds its fair trademarks, we applied the provisions of ASC topic 350-30-35- value, an impairment charge is recorded 3. The only factor that prevented us from determining that the We believe that the assumptions we have made in project- Lanvin brand names and trademarks were indefinite life intan- ing future cash flows for the evaluations described above are gible assets was Item c. “Any legal, regulatory, or contractual reasonable. However, if future actual results do not meet our provisions that may limit the useful life.” The existence of a re- expectations, we may be required to record an impairment purchase option originally in 2025 and amended to 2027, may charge, the amount of which could be material to our results limit the useful life of the Lanvin brand names and trademarks of operations. to the Company. However, this limitation would only take effect if At December 31, 2021 indefinite-lived intangible assets ag- the repurchase option were to be exercised and the repurchase gregated $119.7 million. The following table presents the im- price was paid. If the repurchase option is not exercised, then pact a change in the following significant assumptions would the Lanvin brand names and trademarks are expected to contin- have had on the calculated fair value in 2021 assuming all oth- ue to contribute directly to the future cash flows of our Company er assumptions remained constant: and their useful life would be considered to be indefinite. management’s discussion and analysis of financial condition and results of operations 65 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. RESULTS OF OPERATIONS Net Sales (in millions) Years Ended December 31, European-based product sales United States-based product sales Total net sales 2021 $663.2 216.4 $879.6 % Change 57% 86% 63% 2020 $422.9 116.1 $539.0 % Change (22)% (32)% (24)% 2019 $542.1 171.4 $713.5 Net sales rebounded significantly in 2021, as compared to 2020 for both European and United States based operations. Even more gratifying, 2021 net sales for European based operations and United States based operations increased 22% and 26%, respectively, as compared to 2019. At comparable foreign currency exchange rates, net sales increased 62% in 2021, as compared to 2020 and decreased 26 % in 2020, as compared to 2019. Net sales in 2020 reflected the negative impacts of the COVID-19 pandemic on the beauty industry. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill in early 2020. In the second half of 2020, business began rebounding thanks to retail stores reopening and a robust e-commerce business conducted by our retail customers. However, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns that continue to adversely impact consumer traffic in most travel retail locations. As 2020 was an outlier for our sales due to the COVID-19 pandemic and its effects as discussed above, below are sales comparisons for our largest brands in 2021 with 2019. For European based operations, our largest brands, Montblanc, Jimmy Choo and Coach grew 2021 sales by 7%, 34% and 41%, respectively, as compared to 2019. There were also significant gains made by our mid-sized brands, including Van Cleef & Arpels and Karl Lagerfeld. We also welcomed first time sales by our newest brands, notably Kate Spade and Moncler. In 2021, GUESS became our fourth brand with sales exceeding $100 million. GUESS brand sales increased 41% in 2021, as com- pared to 2019, contributing to the overall increase in 2021 net sales within U.S. based operations. There were also significant gains made by our mid-sized brands, especially Abercrombie & Fitch, Hollister and Oscar de la Renta. We also welcomed first time sales by our newest brands, MCM and Ferragamo. A more detailed discussion relating to our sales for 2020 as compared to 2019 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 2020. We are confident in our future as 2022 has begun on a strong note. We have completed the integration of the Ferragamo and Ungaro brands and our new Italian subsidiary is now staffed and fully operational. We have a solid line-up of new product launches in the pipeline for many of our other brands. This includes the roll out of the first Moncler fragrance line in a series of selective points of sale that faithfully respect the brand’s image. An entirely new men’s collection for GUESS is scheduled for introduction in the spring. Extensions of the Montblanc Legend, Jimmy Choo Man and Jimmy Choo’s I Want Choo, debut in the first, second and third quarters, respectively. Also, in the third quarter, we will unveil new men’s lines for Coach and Boucheron. Brand extensions and flankers are in the works for MCM, Abercrombie & Fitch, Hollister, Anna Sui, and Oscar de la Renta. In addition, we will be add- ing the Donna Karan and DKNY fragrance brands to our portfolio come this summer. In sum, 2022 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds, most notably limited travel retail business and supply chain disruptions. As in the past, we hope to benefit from our strong financial position to potentially acquire one or more brands, either on a propri- etary basis or as a licensee. However, we cannot assure you that any new license or acquisition agreements will be consummated, or acquisition agreements will be consummated. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT66 Net Sales to Customers by Region (in millions) Years ended December 31, 2021 North America $354.1 Western Europe 202.0 128.0 Asia 69.7 61.0 56.4 8.4 $879.6 Central & South America Eastern Europe Middle East Other 2020 $193.5 147.1 79.7 33.1 46.8 32.5 6.3 $539.0 For European based operations, gross profit margin as a percentage of net sales was 66.6%, 64.0% and 65.7% in 2021, 2020 and 2019, respectively. Distribution in the United States for European based operations is handled by a 100% owned subsidiary of Interparfums SA. Therefore, sales are made at a wholesale price rather than at an ex-factory price, result- ing in higher gross margins. Net sales of our U.S. distribution subsidiary increased 86% in 2021, as compared to 2020, giv- ing rise to the increase in gross margin in 2021 over both 2020 and 2019. We carefully monitor movements in foreign curren- 2019 $235.5 185.5 110.9 55.2 72.6 46.2 7.6 $713.5 cy exchange rates as over 50% of our European based opera- tions net sales is denominated in U.S. dollars, while most of As we did with sales for our largest brands, we are discussing our costs are incurred in euro. From a margin standpoint, a net sales to customers by region using comparisons in 2021 strong U.S. dollar has a positive effect on our gross margin with 2019, as the result of the effects of the COVID-19 pandem- while a weak U.S. dollar has a negative effect. The average ic in 2020. Our largest market, North America achieved sales dollar/euro exchange rate was 1.18 in 2021, 1.15 in 2020, and growth of 50% in 2021 compared to 2019, while Western Europe 1.12 in 2019. The weaker dollar in 2021 partially mitigated the and Asia grew sales by 9% and 15% in 2021, respectively, com- increase in margin referred to above and resulted in a small pared to 2019. Latin America and Eastern Europe also achieved decline in our gross margins in 2020. Gross margin in 2020 top line growth of 22% and 26% in 2021, respectively, and only for European operations also included a charge of approxi- the Middle East had a decline in sales compared to 2019. As of mately $2.0 million relating to the assumption of a return the date of this report, international travel has remained largely liability for products sold by the former licensee of a brand curtailed globally due to both government restrictions and con- license acquired in 2019. sumer health concerns that continue to adversely impact con- For United States operations, gross profit margin was sumer traffic in most travel retail locations. 53.1%, 51.8% and 52.5% in 2021, 2020 and 2019, respectively. The impact of the COVID-19 pandemic broadly impacted all With a decline in sales in 2020, certain expenses such as de- regions in 2020, with the steepest declines in the Middle East preciation of tools and molds together with the distribution of and Eastern Europe. Travel retail accounted for much of the point-of-sale materials exaggerated the decline in gross mar- decline in the Middle East and Asian markets. gin for the year as a percentage of sales. With U.S. based oper- Gross Margins (in millions) Years ended December 31, 2021 European Operations Net sales Cost of sales Gross margin Gross margin as ations net sales up 86% in 2021, as compared to 2020, no such effect was seen in 2021. 2020 2019 chase promotions are reflected in cost of sales, and aggregat- Costs relating to purchase with purchase and gift with pur- $663.2 221.2 $442.0 $422.9 152.3 $270.6 $542.1 186.2 $355.9 ed $37.6 million, $26.4 million and $38.9 million in 2021, 2020 and 2019, respectively, and represented 4.3%, 4.9% and 5.5% of net sales, respectively. Generally, we do not bill customers for shipping and han- dling costs and such costs, which aggregated $10.1 million, a percent of net sales 66.7% 64.0% 65.7% $5.0 million and $7.7 million in 2021, 2020 and 2019, respec- tively, are included in selling, general and administrative ex- United States Operations penses in the consolidated statements of income. As such, Net sales Cost of sales Gross margin Gross margin as $216.3 101.4 $114.9 $116.1 56.0 $60.1 $171.4 81.4 $90.0 our Company’s gross margins may not be comparable to oth- er companies, which may include these expenses as a com- ponent of cost of goods sold. a percent of net sales 53.1% 51.8% 52.5% management’s discussion and analysis of financial condition and results of operations 67 Selling, General & Administrative Expenses (in millions) effect was realized, and we were able to achieve significant leverage on fixed costs during the year. Years ended December 31, European Operations Selling, general 2021 2020 2019 Promotion and advertising included in selling, general and administrative expenses aggregated $171.8 million, $91.7 mil- lion and $144.6 million in 2021, 2020 and 2019, respectively. & administrative expenses $327.5 $210.6 $275.3 Promotion and advertising as a percentage of sales repre- Selling, general sented 19.5%, 17.0% and 20.3% of net sales in 2021, 2020 and & administrative expenses 2019, respectively. Promotion and advertising programs were as a percent of net sales 49.4% 49.8% 50.8% cut significantly in 2020 in response to market conditions. United States Operations Selling, general Throughout 2021, sales rebounded far more rapidly than an- ticipated causing us to play catchup with promotional and adverting programs and missing our target spend of 21% of & administrative expenses $79.0 $50.1 $65.9 annual sales. Promotion and advertising are integral parts Selling, general of our industry, and we continue to invest heavily in promo- & administrative expenses tional spending to support new product launches and to build as a percent of net sales 36.5% 43.1% 38.5% brand awareness. We believe that our promotion and adver- tising efforts have had a beneficial effect on online net sales, For European operations, selling, general and administrative causing then to continue to grow strongly on a global basis. expenses increased 55.5% in 2021 and declined 23.6% in 2020, All of our brands have benefitted from newly launched and en- as compared to the corresponding prior year period, and rep- hanced e-commerce sites in existing markets in collaboration resented 49.4%, 49.8% and 50.8% of sales in 2021, 2020 and with our retail customers on their e-commerce sites. We also 2019, respectively. As discussed in more detail below, the continue to develop and implement omnichannel concepts, fluctuations which are in line with the fluctuations in sales for the way brick-and-mortar stores and a business’ online oper- European operations, are primarily from variations in promo- ations work in tandem, and compelling content to deliver an tion and advertising expenditures. integrated consumer experience. We anticipated that on a full Our operating cost structure, of which variable costs typi- year basis, future promotion and advertising expenditures will cally account for over two-thirds, had enabled us to minimize aggregate approximately 21% of net sales, which is in line with the impact of reduced net sales on our bottom line. Due to historical averages. the effects of the COVID-19 pandemic, a substantial portion of Royalty expense included in selling, general and administra- the reduction in selling, general and administrative expenses tive expenses aggregated $69.0 million, $41.1 million and $53.0 in 2020 were attributable to the postponement of advertising million in 2021, 2020 and 2019, respectively. Royalty expense and promotional expenses to 2021, as nearly all major new as a percentage of sales represented 7.8%, 7.6% and 7.4% of product launches were postponed until 2021. In addition, we net sales in 2021, 2020 and 2019, respectively. The increases in also undertook several actions with an eye toward minimizing 2021 and 2020, as a percentage of sales, are directly related to fixed expenses. new licenses and increased royalty-based product sales. As a For United States operations, selling, general and adminis- result of the COVID-19 pandemic, we reached agreements with trative expenses increased 57.8% in 2021 and decreased 24.1% most of our licensors to waive or significantly reduce minimum in 2020, as compared to the corresponding prior year period guaranteed royalties for 2020. and represented 36.5%, 43.1% and 38.5% of sales in 2021, 2020 Service fees, which are fees paid within our European oper- and 2019, respectively. Our U.S. operations are significantly ations to third parties relating to the activities of our distribu- smaller than those of our European operations and carry high- tion subsidiaries, aggregated $9.4 million, $6.8 million and $7.5 er fixed costs that could not be leveraged as efficiently as those million in 2021, 2020 and 2019, respectively. The 2021 and 2020 of our European operations with the decline in 2020 net sales. amounts are in line with and directly related to fluctuations in However, with an 86% increase in 2021 net sales, the opposite sales within our U.S. distribution subsidiary. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 68 Income from Operations As a result of the above analysis regarding net sales, gross Income tax expense represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the profit margins and selling, general and administrative ex- federal statutory rate primarily due to the effect of state and penses, our operating margins aggregated 16.8%, 13.1% and local income taxes, the tax impact of share-based compensa- 14.7% for the years ended December 31, 2021, 2020 and 2019, tion and the taxation of foreign income including tax settle- respectively. Lower than expected promotion and adverting ments. Our effective tax rate will change from year-to-year expense drove the increase in our operating margin in 2021, based on recurring and non-recurring factors including the while strong cost controls in 2020 enabled us to minimize geographical mix of earnings, enacted tax legislation, state the impact of the sudden drop in sales resulting from the and local income taxes, the tax impact of share-based com- COVID-19 pandemic. pensation, the interaction of various global tax strategies and the impact from certain acquisitions. Other Income and Expenses Traditionally, interest expense was primarily related to the Our effective income tax rate for European operations was 30.6%, 29.7% and 30.7% in 2021, 2020 and 2019, respectively. financing of brand and licensing acquisitions. However, in The French authorities had considered that the existence April 2021, we completed the acquisition of the future head- of IP Suisse, a wholly-owned subsidiar y of Interparfums SA, quarters of Interparfums SA. The acquisition was financed does not, in and of itself, constitute a permanent establish- by a 10-year €120 million (approximately $136 million) bank ment and therefore Interparfums SA should pay French tax- loan which bears interest at one-month Euribor plus 0.75%. es on all or part of the profits of that entity. In June 2021, a Also in 2021, approximately €80 million of the variable rate global settlement agreement was reached with the French debt was swapped for fixed interest rate debt. Long-term Tax Authorities, whereby Interparfums SA agreed to pay debt including current maturities aggregated $148.8 million, €2.5 million (approximately $3.0 million) effectively lower- $24.7 million and $23.1 million as of December 31, 2021, ing the Lanvin brand royalty rate charged by IP Suisse for 2020 and 2019, respectively. the periods from 2017 through 2020. Interparfums SA also We enter into foreign currency for ward exchange con- agreed to apply the lower rate in 2021 through 2025 and to tracts to manage exposure related to receivables from un- transfer the Lanvin brand from IP Suisse to Interparfums SA affiliated third par ties denominated in a foreign currency by December 31, 2025. and occasionally to manage risks related to future sales In addition, pursuant to an action plan released by the expected to be denominated in a foreign currency. Gains French Prime Minister, beginning in 2020, the French corpo- and losses on foreign currency transactions have not been rate income tax rate is expected to be cut from approximately significant. 33% to 25% over a three-year period. Interest and dividend income represents interest earned Our effective income tax rate for U.S. operations was 15.6%, on cash and cash equivalents and short-term investments. 16.7% and 17.0% in 2021, 2020 and 2019, respectively. In 2021, short-term investments include approximately $24.5 The Company has determined that it has no tax liability million of marketable equity securities of other companies in related global intangible low-taxed income (“GILTI”) as of De- the luxury goods sector. Interest and dividend income includes cember 31, 2021, 2020 and 2019. The Company also estimated approximately $1.8 million of unrealized gains on marketable the effect of its foreign derived intangible income (“FDII”) and equity securities. recorded a tax benefit of $0.6 million, $0.3 million and $0.9 million as of December 31, 2021, 2020 and 2019, respectively. Income Taxes Our effective income tax rate was 27.1%, 27.9% and 27.7% in Share-based compensation resulted in a discrete tax benefit of $1.3 million, $0.4 million and $0.7 million in 2021, 2020 and 2021, 2020 and 2019, respectively. 2019, respectively. management’s discussion and analysis of financial condition and results of operations 69 Net Income (In thousands, except share and per share data) Years ended December, 31 Net income attributable to European operations Net income attributable to United States operations Net income Less: Net income attributable to the noncontrolling interest Net income attributable to Inter Parfums, Inc. 2021 $80,670 29,357 110,027 22,616 $87,411 2020 $41,990 7,978 49,968 11,749 $38,219 2019 $56,660 19,410 76,070 15,821 $60,249 Net income attributable to European operations was $80.7 million, $42.0 million and $56.7 million in 2021, 2020 and 2019, respec- tively, while net income attributable to United States operations was $29.4 million, $8.0 million and $19.4 million in 2021, 2020 and 2019, respectively. The fluctuations in net income for both European operations and United States operations are directly related to the previous discussions concerning changes in sales, gross profit margins, selling, general and administrative expenses, most of which were caused by the effects of the COVID-19 pandemic beginning in 2020 and the recovery in 2021. The noncontrolling interest arises primarily from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is di- rectly related to the profitability of our European operations and aggregated 28.0% of European operations net income in 2021 and 28.1% in 2020 and 2019. Net margins attributable to Inter Parfums, Inc. aggregated 9.9%, 7.1% and 8.4% in 2021, 2020 and 2019, respectively. liQuidity and capital resources Our conservative financial tradition has enabled us to amass significant cash balances. As of December 31, 2021, we had $320 million in cash, cash equivalents and short-term investments, most of which are held in euro by our European operations and are readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments. As of December 31, 2021, short-term investments include approxi- mately $24.5 million of marketable equity securities. As of December 31, 2021, working capital aggregated $465 million, and we had a working capital ratio of 2.9 to 1. Approximately 82% of the Company’s total assets are held by European operations including approximately $171 million of trademarks, licenses and other intangible assets. The Company is party to a number of license and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various dates through 2033. In connection with certain of these license agreements, the Company is subject to minimum annual advertising commitments, minimum annual royalties and other com- mitments. See Item 8. Financial Statements and Supplementary Data – Note 12 – Commitments in this annual report on Form 10-K. Future advertising commitments are estimated based on planned future sales for the license terms that were in effect at December 31, 2021, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations. The Company hopes to continue to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. In September 2021, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance-related products under the Donna Karan and DKNY brands. This new license takes effect July 1, 2022. In October 2021, we closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license was granted for the production and distribution of Ferragamo brand perfumes. The license became effective in October 2021 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 70 management’s discussion and analysis of financial condition and results of operations and will last for 10 years with a 5-year optional term, subject rondissement of Paris from the property developer. This is an to certain conditions. With respect to the management and office complex combining three buildings connected by two inner coordination of activities related to the license agreement, the courtyards, and consists of approximately 40,000 total sq. ft. Company is operating through a wholly-owned Italian subsidiary The $142 million purchase price is in line with market value based in Florence, that was acquired from Salvatore Ferraga- and includes the complete renovation of the site. As of Decem- mo on October 1, 2021. The acquisition together with the license ber 31, 2021, $136.1 million of the purchase price, including agreement was accounted for as an asset acquisition. The total approximately $3.1 million of acquisition costs, is included cost of the assets acquired net of liabilities assumed aggregated in building, equipment and leasehold improvements on the approximately $35.8 million. In connection with this acquisition, accompanying balance sheet as of December 31, 2021. Ap- we agreed to pay $17.0 million in equal annual installments of proximately $8.8 million of cash held in escrow is included in $1.7 million including interest imputed at 2.0%. other assets on the accompanying balance sheet as of Decem- Opportunities for external growth are regularly examined, ber 31, 2021. In addition, the Company borrowed $17.0 million with the priority of maintaining the quality and homogeneous na- pursuant to a short-term loan equal to the VAT credit, and in ture of our portfolio. However, we cannot assure you that any new July 2021, the $17.0 million VAT credit was reimbursed by the license or acquisition agreements will be consummated. French Tax Authorities and the loan was repaid. Cash provided by operating activities aggregated $119.6 million, The acquisition was financed by a 10-year €120 million (ap- $65.0 million, and $76.5 million in 2021, 2020 and 2019, respective- proximately $136 million) bank loan which bears interest at ly. In 2021, working capital items used $13.7 million in cash from one-month Euribor plus 0.75%. Approximately €80 million of operating activities, as compared to $7.3 million in 2020 and $16.6 the variable rate debt was swapped for variable interest rate million in 2019. Although, from a cash flow perspective, accounts debt with a maximum rate of 2% per annum. receivable is up approximately 37% from year-end 2020, the bal- In June 2020, the Company and Divabox, owner of the Orig- ance is reasonable based upon fourth quarter 2021 record sales ines-parfums e-commerce platform for beauty products, levels and reflects strong collection activity as day’s sales out- signed a strategic agreement and equity investment pursuant standing decreased to 61 days in 2021, as compared to 86 days and to which we acquired 25% of Divabox capital for $14 million 69 days in 2020 and 2019, respectively. From a cash flow perspec- through a capital increase. In connection with the acquisition, tive, inventory levels are up 31% from year-end 2020. However, the Company entered into a $13.4 million term loan, which was inventory days on hand declined significantly to 208 days in 2021, repaid in full in February 2021. as compared to 277 days in 2020, and 224 days in 2019. Although in- Our short-term financing requirements are expected to be ventories include product needed to support new product launch- met by available cash on hand at December 31, 2021, cash gen- es, the overall balance is lower than historic levels due primarily to erated by operations and short-term credit lines provided by the aforementioned supply chain disruptions. domestic and foreign banks. The principal credit facilities for Cash flows used in investing activities reflect the purchase 2021 consist of a $20.0 million unsecured revolving line of credit and sales of short-term investments. These investments con- provided by a domestic commercial bank and approximately $28 sist of certificates of deposit with maturities greater than three million in credit lines provided by a consortium of international months marketable equity securities and other contracts. At financial institutions. There were no balances due from short- December 31, 2021, approximately $45 million of certificates term borrowings as of December 31, 2021 and 2020. of deposit contain penalties where we would forfeit a portion of In October 2019, our Board authorized a 20% increase in the the interest earned in the event of early withdrawal. annual dividend to $1.32 per share. In April 2020, as a result of Our business is not capital intensive as we do not own any the uncertainties raised by the COVID-19 pandemic, the Board of manufacturing facilities. On a full year basis, we generally Directors authorized a temporary suspension of the quarterly spend less than $5.0 million on capital expenditures including cash dividend. In February 2021, our Board of Directors autho- tools and molds needed to support our new product develop- rized a reinstatement of an annual dividend of $1.00, payable ment calendar. Capital expenditures also include amounts for quarterly and in February 2022, our Board authorized a 100% office fixtures, computer equipment and industrial equipment increase in the annual dividend to $2.00 per share. The next needed at our distribution centers. quarterly cash dividend of $0.50 per share is payable on March In April 2021, Interparfums SA completed the acquisition 31, 2022, to shareholders of record on March 15, 2022. Dividends of its future headquarters at 10 rue de Solférino in the 7th ar- paid, including dividends paid once per year to noncontrolling report on internal control over financial reporting 71 stockholders of Interparfums SA, aggregated $41.5 million, $21.1 million and $44.2 million for the years ended December Foreign Exchange Risk Management A general discussion relating to our policies on foreign ex- 31, 2021, 2020 and 2019, respectively. The cash dividends to be change risk management can be found in “Management’s paid in 2022 are not expected to have any significant impact on Discussion and Analysis of Financial Condition and Results our financial position. of Operations” in Part II, Item 7 of our annual report on Form We believe that funds provided by or used in operations can 10-K for the year ended December 2020. be supplemented by our present cash position and available As of December 31, 2021, we had foreign currency con- credit facilities, so that they will provide us with sufficient re- tracts in the form of forward exchange contracts with notional sources to meet all present and reasonably foreseeable future amounts of approximately U.S. $64.5 million and GB £3.5 mil- operating needs. lion which all have maturities of less than one year. We believe Inflation rates in the U.S. and foreign countries in which we that our risk of loss as the result of nonperformance by any of operate did not have a significant impact on operating results such financial institutions is remote. for the year ended December 31, 2021. Quantitative Analysis During the three-year period ended December 31, 2021, we have Interest Rate Risk Management We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be not made any material changes in our assumptions underlying swapped for floating rate debt, or if floating rate debt should be these critical accounting policies or to the related significant esti- swapped for fixed rate debt. mates. The results of our business underlying these assumptions have not differed significantly from our expectations. MANAGEMENT’S ANNUAL REPORT While we believe the estimates we have made are proper and ON INTERNAL CONTROL OVER FINANCIAL REPORTING the related results of operations for the period are presented fair- The management of Inter Parfums, Inc. is responsible for ly in all material respects, other assumptions could reasonably be establishing and maintaining adequate internal control over justified that would change the amount of reported net sales, cost financial reporting as defined in Rule 13(a)-15(f) under the of sales, and selling, general and administrative expenses as they Securities Exchange Act of 1934. With the participation of relate to the provisions for anticipated sales returns, allowance the Chief Executive Officer and the Chief Financial Officer, for doubtful accounts and inventory obsolescence reserves. For our management conducted an evaluation of the effective- 2021, had these estimates been changed simultaneously by 5% in ness of our internal control over financial reporting based on either direction, our reported gross profit would have increased or the framework and criteria established in Internal Control decreased by approximately $0.6 million and selling, general and – Integrated Framework (2013), issued by the Committee of administrative expenses would have changed by approximately Sponsoring Organizations of the Treadway Commission. Based $0.1 million. The collective impact of these changes on 2021 op- on this evaluation, our management has concluded that our erating income, net income attributable to Inter Parfums, Inc., and internal control over financial reporting was effective as of net income attributable to Inter Parfums, Inc. per diluted share December 31, 2021. would be an increase or decrease of approximately $0.6 million, Our independent auditor, Mazars USA LLP, a registered $0.3 million and $0.01, respectively. public accounting firm, has issued its report on its audit of our internal control over financial reporting. This report appears on the following page. Quantitative and Qualitative disclosures about market risk. General We address certain financial exposures through a controlled program of risk management that primarily consists of the use of derivative financial instruments. We primarily enter into for- eign currency forward exchange contracts in order to reduce the effects of fluctuating foreign currency exchange rates. We do not engage in the trading of foreign currency forward change con- tracts or interest rate swaps. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 72 report of independent registered public accounting firm REPORT OF INDEPENDENT REGISTERED We conducted our audits in accordance with the stan- PUBLIC ACCOUNTING FIRM To Shareholders and the Board of Directors of Inter Parfums, Inc. Opinions on the Financial Statements dards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material mis- statement, whether due to error or fraud, and whether effec- and Internal Control over Financial Reporting tive internal control over financial reporting was maintained We have audited the accompanying consolidated balance sheets in all material respects. of Inter Parfums, Inc. (the “Company”) as of December 31, 2021 Our audits of the consolidated financial statements in- and 2020, and the related consolidated statements of income, cluded performing procedures to assess the risks of mate- comprehensive income, shareholders’ equity, and cash flows rial misstatement of the consolidated financial statements, for each of the years in the three-year period ended December whether due to error or fraud, and performing procedures 31, 2021, and the related notes and the schedule listed in the that respond to those risks. Such procedures included exam- Index in Item 15(a)(2) (collectively referred to as the “finan- ining, on a test basis, evidence regarding the amounts and cial statements”). We also have audited the Company’s inter- disclosures in the consolidated financial statements. Our au- nal control over financial reporting as of December 31, 2021, dits also included evaluating the accounting principles used based on criteria established in Internal Control - Integrated and significant estimates made by management, as well as Framework: (2013) issued by the Committee of Sponsoring evaluating the overall presentation of the consolidated finan- Organizations of the Treadway Commission (COSO). cial statements. Our audit of internal control over financial In our opinion, the consolidated financial statements re- reporting included obtaining an understanding of internal ferred to above present fairly, in all material respects, the fi- control over financial reporting, assessing the risk that a nancial position of the Company as of December 31, 2021 and material weakness exists, and testing and evaluating the de- 2020, and the results of its operations and its cash flows for sign and operating effectiveness of internal control based on each of the years in the three-year period ended December 31, the assessed risk. Our audits also included performing such 2021, in conformity with accounting principles generally ac- other procedures as we considered necessary in the circum- cepted in the United States of America. Also in our opinion, the stances. We believe that our audits provide a reasonable ba- Company maintained, in all material respects, effective inter- sis for our opinions. nal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Definition and Limitations of Internal Control Framework: (2013) issued by COSO. over Financial Reporting Basis for Opinion A company’s internal control over financial reporting is a pro- cess designed to provide reasonable assurance regarding the The Company’s management is responsible for these consol- reliability of financial reporting and the preparation of consoli- idated financial statements, for maintaining effective internal dated financial statements for external purposes in accordance control over financial reporting, and for its assessment of with generally accepted accounting principles. A company’s in- the effectiveness of internal control over financial reporting ternal control over financial reporting includes those policies included in the accompanying Management’s Annual Report and procedures that (1) pertain to the maintenance of records on Internal Control over Financial Reporting. Our responsi- that, in reasonable detail, accurately and fairly reflect the bility is to express an opinion on the Company’s consolidated transactions and dispositions of the assets of the company; financial statements and an opinion on the Company’s internal (2) provide reasonable assurance that transactions are re- control over financial reporting based on our audits. We are corded as necessary to permit preparation of consolidated a public accounting firm registered with the Public Company financial statements in accordance with generally accepted Accounting Oversight Board (United States) (“PCAOB”) and accounting principles, and that receipts and expenditures of are required to be independent with respect to the Company the company are being made only in accordance with authori- in accordance with the U.S. federal securities laws and the ap- zations of management and directors of the company; and (3) plicable rules and regulations of the Securities and Exchange provide reasonable assurance regarding prevention or timely Commission and the PCAOB. detection of unauthorized acquisition, use, or disposition of 73 the company’s assets that could have a material effect on the The determination of the future cash flows of the in- consolidated financial statements. tangible assets requires management to make significant Because of its inherent limitations, internal control over estimates and assumptions related to forecasts of future financial reporting may not prevent or detect misstatements. revenues, operating margins and discount rates. As dis- Also, projections of any evaluation of effectiveness to future closed by management, changes in these assumptions periods are subject to the risk that controls may become inad- could have a significant impact on the future cash flows and equate because of changes in conditions, or that the degree of therefore, on the amount of any impairment charge. The de- compliance with the policies or procedures may deteriorate. termination of an impairment indicator on the finite – life . Critical Audit Matter intangible assets requires management judgments and in- volves assumptions. The critical audit matter communicated below is a matter aris- We identified the impairment assessment of intangible ing from the current period audit of the consolidated financial assets as a critical audit matter and auditing management’s statements that was communicated or required to be commu- judgments regarding the evaluation of impairment indicators, nicated to the audit committee and that: (1) relates to accounts forecasts of future revenue and operating margin, and the dis- or disclosures that are material to the consolidated financial count rate to be applied involve a high degree of subjectivity. statements and (2) involved our especially challenging, subjec- The primary procedures we performed to address this crit- tive, or complex judgments. The communication of critical audit ical audit matter included: matter does not alter in any way our opinion on the consolidated • Reviewing the analysis of the identification of impairment financial statements, taken as a whole, and we are not, by com- evidence for each indefinite and finite-life asset based on three municating the critical audit matter below, providing a separate indicators (sales analysis, new products launches, payment of opinion on the critical audit matter or on the accounts or disclo- minimum guarantees), and then corroborating that analysis sures to which it relates. with external information and evidence obtained in other areas As described in Notes 1 and 8 to the consolidated financial of the audit. statements, the Company’s consolidated indefinite and finite • Testing the effectiveness of controls relating to manage- —life intangible assets balance was $214 million at December ment’s impairment tests, including controls over the impair- 31, 2021. Indefinite lived intangible assets principally consist ment indicators and determination of the future cash flows. of trademarks and finite-lived intangible assets represent • In testing management’s process for determining the fu- fees to acquire, or enter into a license. ture cash flows we evaluated the reasonableness of manage- Those intangible assets are tested for impairment as follows: ment’s forecasts of future revenue and operating margin by • Indefinite – life intangible assets are tested for impairment performing a retrospective review in comparing these fore- at least annually at the reporting unit level or more frequent- casts to historical operating results, evaluating whether the ly when events occur or circumstances change. The evaluation assumptions used were reasonable considering current in- requires a comparison of the estimated fair value of the asset formation as well as future expectations, and using additional to the carrying value of the asset. The fair value is estimated evidence obtained in other areas of the audit. based upon discounted future cash flow projections. If the car- • Utilizing a valuation specialist to assist in auditing the rying value of an indefinite-lived intangible asset exceeds its discount rate. It includes evaluating whether the assump- fair value, an impairment charge is recorded. tions used were reasonable by comparing to third par ty • Finite – life intangible assets are tested for impairment market data. testing whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment indicators exist, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If the Mazars USA LLP projection of undiscounted cash flows is less than the carrying We have served as the Company’s auditor since 2004. value of a finite-lived intangible asset, an impairment charge New York, New York would be recorded. March 1, 2022 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT74 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) Years Ended December 31, ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Receivables, other Other current assets Income taxes receivable Total current assets Equipment and leasehold improvements, net Rights of use assets, net Trademarks, licenses and other intangible assets, net Deferred tax assets Other assets Total assets LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt Current portion of lease liabilities Accounts payable - trade Accrued expenses Income taxes payable Total current liabilities Long–term debt, less current portion Lease liabilities, less current portion Equity: Inter Parfums, Inc. shareholders’ equity: 2021 2020 $169,681 $159,613 160,014 126,627 124,057 159,281 198,914 158,822 10,308 21,375 210 709,715 149,352 33,728 214,047 7,936 30,586 $1,145,364 $15,911 6,014 81,980 136,677 4,328 244,910 132,902 29,220 1,815 16,912 2,806 600,720 19,580 24,734 214,108 8,041 22,962 $890,145 $14,570 5,133 35,576 95,629 5,297 156,205 10,136 21,354 Preferred stock, $0.001 par value. Authorized 1,000,000 shares; none issued - - Common stock, $0.001 par value. Authorized 100,000,000 shares; outstanding, 31,608,588 and 31,513,018 shares at December 31, 2020 and 2019, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost, 9,864,805 common shares at December 31, 2020 and 2020 Total Inter Parfums, Inc. shareholders’ equity Noncontrolling interest Total equity Total liabilities and equity (See accompanying notes to consolidated financial statements 32 87,132 560,663 (38,432) (37,475) 571,920 166,412 738,332 $1,145,364 32 75,708 503,567 (5,997) (37,475) 535,835 166,615 702,450 $890,145 financial statements 75 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share data) Years Ended December 31, Net sales Cost of sales Gross margin Selling, general, and administrative expenses Impairment loss Income from operations Other expenses (income): Interest expense (Gain) Loss on foreign currency Interest and dividend income Other Income Income before income taxes Income taxes Net income Less: Net income attributable to the noncontrolling interest Net income attributable to Inter Parfums, Inc. Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted Weighted average number of shares outstanding: Basic Diluted Dividends declared per share (See accompanying notes to consolidated financial statements.) 2021 $879,516 322,614 556,902 406,459 2,393 - 148,050 2,825 (2,338) (3,403) (53) (2,969) 151,019 40,992 110,027 22,616 $87,411 2020 $539,009 208,278 330,731 260,648 - 70,083 1,970 2,178 (2,865) (549) 734 69,349 19,381 49,968 11,749 2019 $713,514 267,578 445,936 341,209 104,727 2,146 1,128 (3,693) - (419) 105,146 29,076 76,070 15,821 $38,219 $60,249 $2.76 2.75 $1.21 1.21 $1.92 1.90 31,676,796 31,835,408 $1.00 31,536,659 31,654,544 $0.33 31,451,093 31,688,700 $1.16 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 76 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except share and per share data) Years Ended December 31, Net income Other comprehensive income: Net derivative instrument, net of tax Transfer of OCI into earnings Translation adjustments, net of tax Comprehensive income Comprehensive income attributable to noncontrolling interests: Net income Net derivative instrument income (loss), net of tax Translation adjustments, net of tax Comprehensive income attributable to Inter Parfums, Inc. (See accompanying notes to consolidated financial statements.) 2021 $110,027 2020 $49,968 2019 $76,070 (1,367) - (42,967) (44,334) 65,693 22,616 (375) (11,524) 10,717 $54,976 (19) (52) 47,912 47,841 97,809 11,749 (19) 14,004 25,734 $72,075 22 (136) (8,712) (8,826) 67,244 15,821 (30) (2,593) 13,198 $54,046 financial statements 77 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands, except share and per share data) Years Ended December 31, Common stock, beginning of year Shares issued upon exercise of stock options Common stock, end of year Additional paid-in capital, beginning of year Shares issued upon exercise of stock options Share-based compensation Purchase of subsidiary shares from noncontrolling interests Shares issued for license acquisition Transfer of subsidiary shares purchased Additional paid-in capital, end of year Retained earnings, beginning of year Net income Dividends Stock-based compensation Retained earnings, end of year Accumulated other comprehensive loss, beginning of year Foreign currency translation adjustment, net of tax Transfer from other comprehensive income into earnings Net derivative instrument gain, net of tax Accumulated other comprehensive loss, end of year 2021 $32 - $32 75,708 5,393 1,566 - 5,000 (535) $87,132 503,567 87,411 (31,690) 1,375 560,663 (5,997) (31,443) - (992) (38,432) Noncontrolling interest, beginning of year Net income Foreign currency translation adjustment, net of tax Net derivative instrument loss, net of tax Purchase of subsidiary shares from noncontrolling interests Dividends Share-based compensation Transfer of subsidiary shares purchased Noncontrolling interest, end of year Total equity 166,615 22,616 (11,524) (375) - (9,836) (293) (791) 166,412 $738,332 (See accompanying notes to consolidated financial statements.) 2020 $31 1 $32 70,664 2,771 1,711 - - 562 2019 $31 - $31 69,970 4,458 1,403 (5,167) - - $75,708 $70,664 474,637 38,219 (10,406) 1,117 503,567 (39,853) 33,908 (52) - (5,997) 140,994 11,749 14,004 (19) - (324) 350 (139) 166,615 $702,450 448,731 60,249 (36,349) 2,006 474,637 (33,650) (6,119) (136) 52 (39,853) 138,139 15,821 (2,593) (30) (920) (9,654) 231 - 140,994 $608,998 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 78 INTER PARFUMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years ended December, 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization including impairment loss Provision for doubtful accounts Noncash stock compensation Share of income of equity investment Lease expense Deferred tax expense (benefit) Change in fair value of derivatives Changes in: Accounts receivable Inventories Other assets Operating lease liabilities Accounts payable and accrued expenses Income taxes, net Net cash provided by operating activities Cash flows from investing activities: Purchases of short-term investments Proceeds from sale of short-term investments Purchase of equipment and leasehold improvements Payment for intangible assets acquired Purchase of equity investment Net cash provided used in investing activities Cash flows from financing activities: Repayment of long-term debt Proceeds issuance of long-term debt Proceeds from exercise of options Dividends paid Dividends paid to noncontrolling interests Purchase of subsidiary shares from noncontrolling interests Net cash used in financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents – beginning of year Cash and cash equivalents – end of year Supplemental disclosures of cash flow information: Cash paid for: Interest Income taxes (See accompanying notes to consolidated financial statements.) 2021 2020 2019 $110,027 $49,968 $76,070 12,698 853 2,853 (53) 7,302 (465) 65 (45,395) (49,815) (16,725) (7,503) 103,046 2,698 119,586 (55,691) 10,644 (141,274) (1,545) - (187,866) (43,056) 157,382 5,393 (31,690) (9,836) - 78,193 (11,207) (1,294) 169,681 $168,387 9,067 4,824 3,029 (549) 5,483 581 (137) 13,157 19,333 1,176 (5,421) (32,239) (3,279) 64,993 (7,582) 11,513 (11,011) (1,251) (13,998) - (22,329) (13,725) 13,438 - 2,771 (20,805) (324) - (18,645) 12,245 36,264 133,417 $169,681 8,729 1,380 3,394 - 6,021 (2,330) (169) 1,124 (5,925) (4,945) (4,953) (4,960) 3,016 76,452 (97,958) 44,814 (5,427) (6,067) (64,638) (22,321) 4,458 (34,579) (9,654) (6,087) (68,183) (3,350) (59,719) 193,136 $133,417 $2,468 40,497 $1,105 21,772 $1,764 26,332 notes to consolidated financial statements (in thousands, except share and per share data) 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The Company and its Significant Accounting Policies Business Of The Company Inter Parfums, Inc. and its subsidiaries (the “Company”) are in Cash and Cash Equivalents and Short-Term Investments All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. The Company also has short-term investments which consist the fragrance business and manufacture and distribute a wide of certificates of deposit and other contracts with maturities array of fragrances and fragrance related products. greater than three months and available for sale marketable Substantially all of our prestige fragrance brands are licensed equity securities. The Company monitors concentrations of from unaffiliated third parties, and our business is dependent upon credit risk associated with financial institutions with which the continuation and renewal of such licenses. With respect to the the Company conducts significant business. The Company Company’s largest brands, we license the Montblanc, Jimmy Choo, believes its credit risk is minimal, as the Company primarily Coach and GUESS brand names. As a percentage of net sales, prod- conducts business with large, well-established financial in- uct sales for the Company’s largest brands were as follows: stitutions. Substantially all cash and cash equivalents are pri- Year Ended December 31, 2021 2020 2019 22% Montblanc Jimmy Choo Coach GUESS 19% 18% 16% 12% 21% 16% 17% 11% marily held at financial institutions outside the United States and are readily convertible into U.S. dollars. 16% 14% 10% Accounts Receivable Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for doubtful accounts or balances which are estimated to be un- No other brand represented 10% or more of consolidated net sales. collectible, which aggregated $2.2 million and $5.5 million as Basis Of Preparation The consolidated financial statements include the accounts of December 31, 2021 and 2020, respectively. Accounts receiv- able balances are written-off against the allowance for doubt- ful accounts when they become uncollectible. Recoveries of of the Company and its subsidiaries, including 73% owned accounts receivable previously recorded against the allow- Interparfums SA, a subsidiary whose stock is publicly traded ance are recorded in the consolidated statement of income in France. All material intercompany balances and transac- when received. We generally grant credit based upon our anal- tions have been eliminated. ysis of the customer’s financial position, as well as previously established buying patterns. Management Estimates Management makes assumptions and estimates to prepare financial statements in conformity with accounting principles Inventories Inventories, including promotional merchandise, only include generally accepted in the United States of America. Those as- inventory considered saleable or usable in future periods, and sumptions and estimates directly affect the amounts reported are stated at the lower of cost and net realizable value, with and disclosures included in the consolidated financial state- cost being determined on the first-in, first-out method. Cost ments. Actual results could differ from those assumptions and components include raw materials, direct labor and overhead estimates. Significant estimates for which changes in the near (e.g., indirect labor, utilities, depreciation, purchasing, receiv- term are considered reasonably possible and that may have a ing, inspection and warehousing) as well as inbound freight. material impact on the financial statements are disclosed in Promotional merchandise is charged to cost of sales at the time these notes to the consolidated financial statements. the merchandise is shipped to the Company’s customers. Foreign Currency Translation For foreign subsidiaries with operations denominated in a for- Derivatives All derivative instruments are recorded as either assets or eign currency, assets and liabilities are translated to U.S. dol- liabilities and measured at fair value. The Company uses de- lars at year-end exchange rates. Income and expense items are rivative instruments to principally manage a variety of market translated at average rates of exchange prevailing during the risks. For derivatives designated as hedges of the exposure to year. Gains and losses from translation adjustments are accu- changes in fair value of the recognized asset or liability or a mulated in a separate component of shareholders’ equity. firm commitment (referred to as fair value hedges), the gain or INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT80 loss is recognized in earnings in the period of change together Intangible assets subject to amortization are evaluated for im- with the offsetting loss or gain on the hedged item attributable pairment testing whenever events or changes in circumstances to the risk being hedged. The effect of that accounting is to indicate that the carrying amount of an amortizable intangible as- include in earnings the extent to which the hedge is not effec- set may not be recoverable. If impairment indicators exist for an tive in achieving offsetting changes in fair value. For cash flow amortizable intangible asset, the undiscounted future cash flows hedges, the effective portion of the derivative’s gain or loss is associated with the expected service potential of the asset are initially reported in equity (as a component of accumulated oth- compared to the carrying value of the asset. If our projection of er comprehensive income) and is subsequently reclassified into undiscounted future cash flows is in excess of the carrying value earnings in the same period or periods during which the hedged of the intangible asset, no impairment charge is recorded. If our forecasted transaction affects earnings. The ineffective portion projection of undiscounted future cash flows is less than the car- of the gain or loss of a cash flow hedge is reported in earnings rying value of the intangible asset, an impairment charge would be immediately. The Company also holds certain instruments for recorded to reduce the intangible asset to its fair value. economic purposes that are not designated for hedge account- ing treatment. For these derivative instruments, changes in their fair value are recorded in earnings immediately. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are stated at cost Revenue Recognition The Company sells its products to department stores, perfumer- ies, specialty stores and domestic and international wholesalers and distributors. Our revenue contracts represent single per- formance obligations to sell our products to customers. Sales of such products by our domestic subsidiaries are denominated in less accumulated depreciation and amortization. Depreciation and U.S. dollars, and sales of such products by our foreign subsidiar- amortization are provided using the straight-line method over the ies are primarily denominated in either euro or U.S. dollars. The estimated useful lives for equipment, which range between three Company recognizes revenues when contract terms are met, the and ten years and the shorter of the lease term or estimated useful price is fixed and determinable, collectability is reasonably as- asset lives for leasehold improvements. Depreciation has not yet sured, and control of the assets has passed to the customer based begun on property recently purchased, as it has not yet been put into on the agreed upon shipping terms. Net sales are comprised of service. Depreciation provided on equipment used to produce inven- gross revenues less returns, trade discounts and allowances. The tory, such as tools and molds, is included in cost of sales. Company does not bill its customers’ freight and handling charges. Long-Lived Assets Indefinite-lived intangible assets principally consist of trade- All shipping and handling costs, which aggregated $10.1 million, $5.0 million and $7.7 million in 2021, 2020 and 2019, respectively, are included in selling, general and administrative expenses in the marks which are not amortized. The Company evaluates indef- consolidated statements of income. The Company grants credit to inite-lived intangible assets for impairment at least annually all qualified customers and does not believe it is exposed signifi- during the fourth quarter, or more frequently when events occur cantly to any undue concentration of credit risk. No one customer or circumstances change, such as an unexpected decline in sales, represented 10% or more of net sales in 2021, 2020 or 2019. 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, Sales Returns Generally, the Company does not permit customers to return the evaluation requires a comparison of the estimated fair value their unsold products. However, for U.S. based customers, we of the asset to the carrying value of the asset. The fair values used allow returns if properly requested, authorized and approved. in our evaluations are estimated based upon discounted future The Company regularly reviews and revises, as deemed nec- cash flow projections using a weighted average cost of capital of essary, its estimate of reserves for future sales returns based 7.47% and 6.99% in 2021 and 2020, respectively. The cash flow primarily upon historic trends and relevant current data includ- projections are based upon a number of assumptions, including ing information provided by retailers regarding their inventory future sales levels, future cost of goods and operating expense levels. In addition, as necessary, specific accruals may be es- levels, as well as economic conditions, changes to our business tablished for significant future known or anticipated events. The model or changes in consumer acceptance of our products which types of known or anticipated events that we consider include, are more subjective in nature. If the carrying value of an indefi- but are not limited to, the financial condition of our custom- nite-lived intangible asset exceeds its fair value, an impairment ers, store closings by retailers, changes in the retail environ- charge is recorded. ment and our decision to continue to support new and existing notes to consolidated financial statements (in thousands, except share and per share data) 81 products. The Company records its estimate of potential sales returns as a reduction of sales and cost of sales with corre- License Agreements The Company’s license agreements generally provide the sponding entries to accrued expenses, to record the refund Company with worldwide rights to manufacture, market and sell liability, and inventory, for the right to recover goods from the fragrance and fragrance related products using the licensors’ customer. The refund liability associated with estimated returns trademarks. The licenses typically have an initial term of approx- was $5.1 million and $3.6 million at December 31, 2021 and imately 5 to 15 years, and are potentially renewable subject to the 2020, respectively, and the amounts recognized for the rights to Company’s compliance with the license agreement provisions. The recover products was $1.9 million and $1.4 million at December remaining terms, excluding potential renewal periods, range from 31, 2021 and 2020, respectively. The physical condition and approximately 1 to 12 years. Under each license, the Company is marketability of returned products are the major factors we required to pay royalties in the range of 6% to 10% to the licensor, consider in estimating realizable value. Actual returns, as well at least annually, based on net sales to third parties. as estimated realizable values of returned products, may dif- In certain cases, the Company may pay an entry fee to ac- fer significantly, either favorably or unfavorably, from our esti- quire, or enter into, a license where the licensor or another mates, if factors such as economic conditions, inventory levels or licensee was operating a pre-existing fragrance business. In competitive conditions differ from our expectations. those cases, the entry fee is capitalized as an intangible asset and amortized over its useful life. Payments to Customers The Company records revenues generated from purchase with Most license agreements require minimum royalty pay- ments, incremental royalties based on net sales levels and purchase and gift with purchase promotions as sales and the minimum spending on advertising and promotional activities. costs of its purchase with purchase and gift with purchase Royalty expenses are accrued in the period in which net sales promotions as cost of sales. Certain other incentive arrange- are recognized while advertising and promotional expenses ments require the payment of a fee to customers based on are accrued at the time these costs are incurred. their attainment of pre-established sales levels. These fees In addition, the Company is exposed to certain concentra- have been recorded as a reduction of net sales. tion risk. Most of our prestige fragrance brands are licensed Advertising and Promotion Advertising and promotional costs are expensed as incurred and recorded as a component of cost of goods sold (in the case of free goods given to customers) or selling, general and ad- from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. Income Taxes The Company accounts for income taxes using an asset and liability ministrative expenses. Advertising and promotional costs in- approach that requires the recognition of deferred tax assets and cluded in selling, general and administrative expenses were liabilities for the expected future tax consequences of events that $171.8 million, $91.7 million and $144.6 million for 2021, 2020 have been recognized in its financial statements or tax returns. and 2019, respectively. Costs relating to purchase with pur- The net deferred tax assets assume sufficient future earnings for chase and gift with purchase promotions that are reflected in their realization, as well as the continued application of currently cost of sales aggregated $37.6 million, $26.4 million and $38.9 enacted tax rates. Included in net deferred tax assets is a valuation million in 2021, 2020 and 2019, respectively. allowance for deferred tax assets, where management believes Package Development Costs Package development costs associated with new products and re- it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be realizable, an adjustment to the designs of existing product packaging are expensed as incurred. deferred tax asset will result in a reduction of net earnings at that Operating Leases The Company leases its offices and warehouses, vehicles, and time. Accrued interest and penalties are included within the relat- ed tax asset or liability in the accompanying financial statements. certain office equipment, substantially all of which are classi- fied as operating leases. The Company currently has no materi- al financing leases. The Company determines if an arrangement Issuance of Common Stock by Consolidated Subsidiary The difference between the Company’s share of the proceeds is a lease at inception. Operating lease assets and obligations received by the subsidiary and the carrying amount of the por- are recognized at the lease commencement date based on the tion of the Company’s investment deemed sold, is reflected as present value of lease payments over the lease term. an equity adjustment in the consolidated balance sheets. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT82 Treasury Stock The Board of Directors may authorize share repurchases of the Business significantly improved in the second half of 2020 and continued to improve throughout 2021, as retail stores re- Company’s common stock (Share Repurchase Authorizations). opened, and consumers increased online purchasing. While we Share repurchases under Share Repurchase Authorizations may expect this trend to continue, as the luxury fragrance industry be made through open market transactions, negotiated purchase or has shown continued resilience, the introduction of variants of otherwise, at times and in such amounts within the parameters au- COVID-19 in various parts of the world has caused the tempo- thorized by the Board. Shares repurchased under Share Repurchase rary re-implementation of governmental restrictions to pre- Authorizations are held in treasury for general corporate purposes, vent further spread of the virus. In addition, international air including issuances under various employee stock option plans. travel has remained curtailed in many jurisdictions due to both Treasury shares are accounted for under the cost method and re- governmental restrictions and consumer health concerns. ported as a reduction of equity. Share Repurchase Authorizations While COVID-19 has significantly restricted international trav- may be suspended, limited or terminated at any time without notice. el in the near-term, we continue to believe that global travel retail will once again be a growth opportunity for the long- Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) term. Lastly, the improved economy has put significant strains on our supply chain causing disruptions affecting the procure- issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic ment of components, the ability to transport goods, and relat- 326): Measurement of Credit Losses on Financial Instruments”, ed cost increases. These disruptions have come at a time when as updated in 2019 and 2020, which require a financial asset mea- demand for our product lines has never been stronger or more sured at amortized cost basis to be presented at the net amount sustained. We have been addressing this issue since the begin- expected to be collected. The new rules eliminate the probable ning of 2021, by ordering well in advance of need and in larg- initial recognition threshold and, instead, reflect an entity’s current er quantities. Going forward, we aim to carry more inventory estimate of all expected credit losses. The new rules took effect for overall, source the same components from multiple suppliers the Company in the first quarter of 2020 and there was no material and when possible, manufacture products closer to where impact on our consolidated financial statements. they are sold. We do not expect the supply chain bottlenecks There are no other recent accounting pronouncements is- to begin lifting until later in 2022. Therefore, despite recent sued but not yet adopted that would have a material effect on business improvement, the impact of the COVID-19 pandemic our consolidated financial statements. may have a material adverse effect on our results of our oper- ations, financial position and cash flows through at least the Reclassifications Certain prior year’s amounts in the accompanying consolidated end of 2022. statements of cash flows have been reclassified to conform to current period presentation. (2) Impact of COVID-19 Pandemic (3) Recent Agreements Salvatore Ferragamo In October 2021, we closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and world- A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 wide license was granted for the production and distribution and has spread around the world, including to the United States of Ferragamo brand perfumes. Our rights under this license and France. In March 2020, the World Health Organization de- are subject to certain minimum advertising expenditures and clared COVID-19 a pandemic. royalty payments as are customary in our industry. The license In response to the COVID-19 pandemic various national, state, became effective in October 2021 and will last for 10 years with and local governments where we, our suppliers, and our custom- a 5-year optional term, subject to certain conditions. ers operate initially issued decrees prohibiting certain businesses With respect to the management and coordination of activ- from continuing to operate and certain classes of workers from ities related to the license agreement, the Company operates reporting to work. In all jurisdictions in which we operate we have through a wholly-owned Italian subsidiary based in Florence, been following guidance from authorities and health officials. that was acquired from Salvatore Ferragamo on October 1, The effects of the COVID-19 pandemic on the beauty industry 2021. The acquisition together with the license agreement was began in early March 2020. Retail store closings, event cancel- accounted for as an asset acquisition. The following table sum- lations and a shutdown of international air travel brought our marizes the estimated fair values of the assets acquired and sales to a virtual standstill and caused a significant unfavorable liabilities assumed on October 1, 2021. All amounts have been impact on our results of operations in 2020. translated to U.S. dollars at the October 1, 2021 exchange rate. notes to consolidated financial statements (in thousands, except share and per share data) 83 $ in thousands Inventories Trademarks and licenses Other assets Assets acquired Liabilities assumed $17,805 $15,880 $3,033 36,718 (958) $35,760 Land and Building Acquisition Headquarters in Paris In April 2021, Interparfums SA, completed the acquisition of its 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 $142 million purchase price includes the complete reno- Emanuel Ungaro In October 2021, we also entered into a 10-year exclusive glob- vation of the site. As of December 31, 2021, $136.1 million of the purchase price, including approximately $3.1 million of acquisi- al licensing agreement a with a 5-year optional term subject tion costs, is included in property, equipment and leasehold im- to certain conditions, with Emanuel Ungaro Italia S.r.l, for the provements on the accompanying balance sheet as of December creation, development and distribution of fragrances and fra- 31, 2021. Approximately $8.8 million of cash held in escrow is grance-related products, under the Emanuel Ungaro brand. included in other assets on the accompanying balance sheet as Our rights under this license are subject to certain minimum of December 31, 2021. In addition, the Company borrowed $17.0 advertising expenditures and royalty payments as are custom- million pursuant to a short-term loan equal to the VAT credit, ary in our industry. and in July 2021, the $17.0 million VAT credit was reimbursed by the French Tax Authorities and the loan was repaid. Donna Karan and DKNY In September 2021, we entered into a long-term global li- The acquisition was financed by a 10-year €120 million (ap- proximately $136 million) bank loan which bears interest at censing agreement for the creation, development and distri- one-month Euribor plus 0.75%. Approximately €80 million of bution of fragrances and fragrance-related products under the variable rate debt was swapped for fixed interest rate debt the Donna Karan and DKNY brands. Our rights under this with a maximum interest rate of 2%. license are subject to certain minimum advertising expendi- tures and royalty payments as are customary in our industry. With this agreement, we are gaining several well-established Anna Sui Corp. In January 2021, we renewed our license agreement with Anna and valuable fragrance franchises, most notably Donna Sui Corp. for the creation, development and distribution of fra- Karan Cashmere Mist and DKNY Be Delicious, as well as a grance products through December 31, 2026, without any mate- significant loyal consumer base around the world. In con- rial changes in terms and conditions. Our initial 10-year license nection with the grant of license, we issued 65,342 shares of agreement with Anna Sui Corp. was signed in 2011. The renewal Inter Parfums, Inc. common stock valued at $5.0 million to agreement also allows for an additional 5-year term through the licensor. The exclusive license is effective July 1, 2022, 2031 at the option of the Company. and we are planning to launch new fragrances under these brands in 2023. Rochas Fashion Effective January 1, 2021, we entered into a new license agree- French Tax Settlement The French authorities had considered that the existence of IP ment modifying our Rochas fashion business model. The new agreement calls for a reduction in royalties to be received. As a Suisse, a wholly-owned subsidiary of Interparfums SA, does result, in the first quarter of 2021, we took a $2.4 million impair- not, in and of itself, constitute a permanent establishment and ment charge on our Rochas fashion trademark. The new license therefore Interparfums SA should pay French taxes on all or also contains an option for the licensee to buy-out the Rochas part of the profits of that entity. fashion trademarks in June 2025 at its then fair market value. In June 2021, a global settlement agreement was reached with the French Tax Authorities, whereby Interparfums SA paid in December 2021, €2.5 million (approximately $2.9 million) S.T. Dupont In January 2021, we renewed our license agreement with S.T. effectively lowering the Lanvin brand royalty rate charged by Dupont for the creation, development and distribution of fra- IP Suisse for the periods from 2017 through 2020. Interpar- grance products through December 31, 2022, without any mate- fums SA also agreed to apply the lower rate in 2021 through rial changes in terms and conditions. Our initial 11-year license 2025 and to transfer the Lanvin brand from IP Suisse to Inter- agreement with S.T. Dupont was signed in June 1997 and had parfums SA by December 31, 2025. previously been extended through December 31, 2021. INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 84 (4) Inventories Year Ended December 31, Raw materials and component parts Finished goods Overhead included in inventory aggregated $3.7 million and $5.4 million as of December 31, 2021 and 2020, respectively. Included 2021 2020 in inventories is an inventory reserve, which represents the $111,312 87,602 $198,914 $66,492 92,330 $158,822 difference between the cost of the inventory and its estimated realizable value, based upon sales forecasts and the physical condition of the inventories. In addition, and as necessary, spe- cific reserves for future known or anticipated events may be es- tablished. Inventory reserves aggregated $15.8 million and $9.4 million as of December 31, 2021 and 2020, respectively. (5) Fair Value of Financial Instruments The following tables present our financial assets and liabilities that are measured at fair value on a recurring basis and are catego- rized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2021 Quoted Prices in Significant Significant Active Markets for Other Observable Unobservable Total Identical Assets Inputs Inputs (Level 3) (Level 2) (Level 1) Assets: Short-term investments Foreign currency forward exchange contracts accounted for using hedge accounting Foreign currency forward exchange contracts not accounted for using hedge accounting Interest rate swaps FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2020 $160,014 $- $160,014 $- 1,982 63 (234) $1,811 - - - - 1,982 63 (234) $1,811 - - - - Quoted Prices in Significant Significant Active Markets for Other Observable Unobservable Total Identical Assets Inputs Inputs (Level 3) (Level 2) (Level 1) Assets: Short-term investments $126,627 $- $126,627 Foreign currency forward exchange contracts not accounted for using hedge accounting 253 $126,880 - - 253 $126,880 $- - - The carrying amount of cash and cash equivalents including money market funds, short-term investments including marketable equity securities, accounts receivable, other receivables, accounts payable and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans payable approximates fair value as the variable interest rates on the Company’s indebtedness approximate current market rates. notes to consolidated financial statements (in thousands, except share and per share data) 85 Foreign currency forward exchange contracts are valued At December 31, 2021, the Company had foreign currency based on quotations from financial institutions and the value of contracts in the form of forward exchange contracts with no- interest rate swaps are the discounted net present value of the tional amounts of approximately U.S. $64.5 million and GB £3.5 swaps using third party quotes from financial institutions. million, which all have maturities of less than one year. (6) Derivative Financial Instruments (7) Property, Equipment and Leasehold Improvements The Company enters into foreign currency forward exchange Year Ended December 31, 2021 2020 contracts to hedge exposure related to receivables denomi- Land and Building nated in a foreign currency and occasionally to manage risks (construction in progress) related to future sales expected to be denominated in a for- Equipment eign currency. Before entering into a derivative transaction Leasehold Improvements for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the Less accumulated $136,131 $52,036 2,082 190,249 - $51,060 1,989 53,049 hedged item and the change in the value of the derivative in- strument from movement in exchange rates. High effective- depreciation and amortization 40,897 33,469 $149,352 $19,580 ness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows Depreciation and amortization expense was $4.4 million, $3.8 of the hedged item. The effectiveness of each hedged item is million and $3.7 million in 2021, 2020, and 2019, respectively. measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the (8) Trademarks, Licenses and Other Intangible Assets 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 ineffective- ness is also recognized as a gain or loss on foreign currency in Gross Accumulated Net Book 2021 Amount Amortization Value Trademarks the income statement. For hedge contracts that are no longer (indefinite lives) $119,712 $- $119,712 deemed highly effective, hedge accounting is discontinued, and Trademarks gains and losses accumulated in other comprehensive income (finite lives) 43,820 68 43,752 are reclassified to earnings. If it is probable that the forecasted Licenses transaction will no longer occur, then any gains or losses ac- (finite lives) 109,682 62,286 47,396 cumulated in other comprehensive income are reclassified to Other intangible assets current-period earnings. 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 (finite lives) Subtotal Total 17,775 171,277 $290,989 14,588 76,942 $76,942 3,187 94,335 $214,047 in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial in each of the years in the three-year period ended December 31, 2021. For Gross Accumulated Net Book 2020 Amount Amortization Value Trademarks the year ended December 31, 2021, interest expense includes a (indefinite lives) $131,962 $- $131,962 gain of $0.2 million, resulting from an interest rate swap. Trademarks All derivative instruments are reported as either assets or (finite lives) 47,477 74 47,403 liabilities on the balance sheet measured at fair value. The val- Licenses uation of interest rate swap is included in long-term debt on (finite lives) 93,248 62,262 30,986 the accompanying balance sheets. The valuation of foreign cur- Other intangible assets rency forward exchange contracts at December 31, 2021 and (finite lives) December 31, 2020, resulted in an asset and is included in other current assets on the accompanying balance sheets. Subtotal Total 18,194 158,919 14,437 76,773 3,757 82,146 $290,881 $76,773 $214,108 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 86 Amortization expense was $5.9 million, $5.3 million and $5.0 chase, Lanvin was granted the right to repurchase the brand million in 2021, 2020 and 2019, respectively. Amortization names and trademarks on July 1, 2027 for €70 million (ap- expense is expected to approximate $5.4 million in 2022, proximately $79 million) (residual value) in accordance with $4.4 million in 2023, $4.2 million in 2024, 2025 and 2026. The an amendment signed in 2021. Because the residual value of weighted average amortization period for trademarks, licens- the intangible asset exceeds its carrying value, the asset is es and other intangible assets with finite lives are 18 years, 15 not being amortized. years and 2 years, respectively, and 14 years on average. The Company reviews intangible assets with indefinite (9) Accrued Expenses lives for impairment whenever events or changes in circum- Accrued expenses consist of the following: stances indicate that the carrying amount may not be recov- erable. There was an impairment charge for trademarks with Year Ended December 31, indefinite useful lives of $2.4 million in 2021 relating to our Advertising liabilities Rochas fashion business. The fair values used in our evalu- Salary (including bonus ations are estimated based upon discounted future cash flow and related taxes) projections using a weighted average cost of capital of 7.47%, Royalties 6.99%, and 7.94% as of December 31, 2021, 2020 and 2019, re- Due vendors (not yet invoiced) spectively. The cash flow projections are based upon a num- Retirement reserves ber of assumptions, including, future sales levels and future Refund (return) liability cost of goods and operating expense levels, as well as eco- Other nomic conditions, changes to our business model or chang- es in consumer acceptance of our products which are more 2021 2020 $12,164 $31,215 19,993 19,154 45,707 10,234 5,128 5,246 $136,677 14,605 16,966 31,698 11,889 3,616 4,691 $95,629 subjective in nature. The Company believes that the assump- (10) Loans Payable – Banks tions it has made in projecting future cash flows for the evalu- Loans payable – banks consist of the following: ations described above are reasonable and currently no other The Company and its domestic subsidiaries have available a impairment indicators exist for our indefinite-lived assets. $20 million unsecured revolving line of credit due on demand, However, if future actual results do not meet our expecta- which bears interest at the daily Secured Overnight Financing tions, the Company may be required to record an impairment Rate (“SOFR”) plus 2% (the SOFR was 0.05% as of December 31, charge, the amount of which could be material to our results 2021). The line of credit which has a maturity date of December of operations. 16, 2022, is expected to be renewed on an annual basis. Bor- The cost of trademarks, licenses and other intangible rowings outstanding pursuant to lines of credit were zero as of assets with finite lives is being amortized by the straight- December 31, 2021 and 2020. line method over the term of the respective license or the The Company’s foreign subsidiaries have available credit intangible assets estimated useful life which range from lines, including several bank overdraft facilities totaling ap- three to twenty years. If the residual value of a finite life in- proximately $28 million. These credit lines bear interest at tangible asset exceeds its carr ying value, then the asset is EURIBOR plus between 0.5% and 0.8% (EURIBOR was minus not amortized. The Company reviews intangible assets with 0.570% at December 31, 2021). Borrowings outstanding pursu- finite lives for impairment whenever events or changes in ant to these bank overdraft facilities were zero as of December circumstances indicate that the carr ying amount may not be 31, 2021 and 2020. recoverable. As there were no borrowings outstanding as of December Trademarks (finite lives) primarily represent Lanvin brand 31, 2021 and 2010, there is no weighted average interest rate on names and trademarks and in connection with their pur- short-term borrowings as of December 31, 2021 and 2020. notes to consolidated financial statements (in thousands, except share and per share data) 87 (11) Long-term Debt Long-term debt consists of the following: Year Ended December 31 2021 $135.9 million payable in 120 equal monthly installments of $1.1 million beginning in April 2021, bearing interest at one-month Euribor plus 0.75% $124,375 $15.0 million payable in 14 equal annual installments of $1.1 million beginning in January 2021 including interest imputed at 4.1% per annum $17 million payable in 10 equal annual installments of $1.7 million beginning in October 2021 including interest imputed at 2.0% per annum $13.4 million term loan amended such that the loan was repaid in February 2021 plus interest at 0.85% per annum Less current maturities Total 10,569 13,869 - $148,813 15,911 $132,902 2020 $- 11,208 - 13,498 $24,706 14,570 $10,136 In April 2021, to finance the acquisition of Interparfums SA’s future corporate headquarters, the Company entered into a $135.9 million (€120 million) ten-year credit agreement. Approximately $90.6 million (€80.0 million) of the variable rate debt was swapped for variable interest rate debt with maximum rate of 2% per annum. The swap is a derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income. Maturities of long-term debt subsequent to December 31, 2021 are approximately $15.9 million in 2022 and $16.4 million per year thereafter through 2033. (12) Commitments Leases In determining lease asset value, the Company considers fixed or variable payment terms, prepayments, incentives, and op- tions 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 incre- 2021 are as follows: (in thousands) 2022 2023 2024 2025 2026 Maturities of lease liabilities subsequent to December 31, mental borrowing rate based on information available at the Thereafter lease commencement date for the location in which the lease $37,912 is held in determining the present value of lease payments. Less imputed interest (based on 3,0% As of December 31, 2021, the weighted average remaining weighted-average discount rate) (2,679) lease term was 6.1 years and the weighted average discount $35,233 rate used to determine the operating lease liability was 2.5%. Rental expense related to operating leases was $8.2 million, $6.2 million, and $7.5 million for the years ended December 31, License Agreements The Company is party to a number of license and other agreements 2021, 2020 and 2019, respectively. Operating lease payments in- for the use of trademarks and rights in connection with the manu- cluded in operating cash flows totaled $7.5 million and noncash facture and sale of its products expiring at various dates through additions to operating lease assets totaled $12.2 million. 2033. In connection with certain of these license agreements, the $6,541 6,776 5,787 4,704 4,087 10,017 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 88 Company is subject to minimum annual advertising commitments, million, $1.7 million and $1.4 million in 2021, 2020 and 2019, minimum annual royalties and other commitments as follows: respectively. Compensation cost, net of estimated forfeitures, 2022 2023 2024 2025 2026 Thereafter is recognized on a straight-line basis over the requisite service $191,422 period for the entire award. Forfeitures are estimated based 206,241 202,774 199,770 136,776 702,780 $1,639,763 on historic trends. It is generally the Company’s policy to issue new shares upon exercise of stock options. The following table sets forth information with respect to nonvested options for 2021: Weighted Average Grant Date Number of Shares Fair Value Future advertising commitments are estimated based on Nonvested options planned future sales for the license terms that were in effect – beginning of year at December 31, 2021, without consideration for potential re- Nonvested options granted newal periods. The above figures do not reflect the fact that our Nonvested options vested 353,790 9,000 $12.96 $11.35 distributors share our advertising obligations. Royalty expense or forfeited (153,280) $12.19 included in selling, general, and administrative expenses, ag- Nonvested options gregated $69.0 million, $41.1 million and $53.0 million, in 2021, -end of year 209,510 $13.45 2020 and 2019, respectively, and represented 7.8%, 7.6% and 7.4% of net sales for the years ended December 31, 2021, 2020 The effect of share-based payment expenses decreased and 2019, respectively. income statement line items as follows: (13) Equity Share-Based Payments: Year Ended December 31, 2021 2020 2019 Income before The Company maintains a stock option program for key em- income taxes $2,850 $3,030 $3,390 ployees, executives and directors. The plans, all of which have Net Income attributable been approved by shareholder vote, provide for the granting of to Inter Parfums, Inc. 1,880 2,040 2,060 both nonqualified and incentive options. Options granted under Diluted earnings per share the plans typically have a six-year term and vest over a four to attributable to five-year period. The fair value of shares vested aggregated $1.4 Inter Parfums, Inc. 0.06 0.06 0.07 The following table summarizes stock option activity and related information for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, 2021 2020 2019 Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price Shares under option- beginning of year Options granted Options exercised Options forfeited Shares under option- 713,210 9,000 (156,490) (40,820) $52.74 62.18 34.46 62.57 815,800 9,000 (95,570) (16,020) $49.89 69.11 28.99 58.38 776,171 194,050 (130,891) (23,530) $41.33 72.89 34.06 45.48 end of year 524,900 $57.58 713,210 $52.74 815,800 $49.89 notes to consolidated financial statements (in thousands, except share and per share data) 89 At December 31, 2021, options for 612,535 shares were available for future grant under the plans. The aggregate intrinsic value of options outstanding is $25.9 million as of December 31, 2021 and unrecognized compensation cost related to stock options out- standing aggregated $2.9 million, which will be recognized over the next five years. The weighted average fair values of options granted by Inter Parfums, Inc. during 2021, 2020 and 2019 were $11.35, $12.16 and $14.14 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value. The assumptions used in the Black-Scholes pricing model are set forth in the following table: Year Ended December 31, Weighted average expected stock-price volatility Weighted average expected option life Weighted average risk-free interest rate Weighted average dividend yield 2021 25% 5.0 yrs 0.4% 1.6% 2020 25% 5.0 yrs 1.4% 2.5% 2019 25% 5.0 yrs 1.7% 2.0% 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 maintain its current payout ratio as a percentage of earnings. Proceeds, tax benefits and intrinsic value related to stock options exercised were as follows: Year Ended December 31, Proceeds from stock options exercised Tax benefits Intrinsic value of stock options exercised 2021 $5,393 $1,300 $7,800 2020 $2,771 $400 $2,873 2019 $4,458 $690 $4,520 The following table summarizes additional stock option information as of December 31, 2021: Options Outstanding Weighted Average Exercice Price Options Outstanding Contractual Life Options Exercisable $32.83 - $33.95 $40.15 - $46.90 $65.18 - $69.11 $73.09 Totals 81,190 123,130 164,940 155,640 524,900 0.99 years 1.94 years 3.03 years 4.00 years 2.75 years 81,190 90,790 84,790 58,620 315,390 As of December 31, 2021, the weighted average exercise price of options exercisable was $52.23 and the weighted average re- maining contractual life of options exercisable is 2.35 years. The aggregate intrinsic value of options exercisable at December 31, 2021 is $17.2 million. In December 2018, Interparfums SA 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 March 2020, due to the potential impact on future net sales and operating results resulting from the COVID-19 pandemic, the estimated number of shares to be distributed, after forfeited shares, was reduced from 142,571 to 82,162. As the Company had INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 90 already purchased shares in contemplation of the higher anticipated distribution, shares purchased in excess of the reduced antic- ipated distribution were transferred to treasury shares at the Interparfums SA level. The fair value of the grant had been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant. The original cost of the grant was approximately $4.4 million, and the March 2020 revaluation resulted in a reduction of the cost, to approximately $2.5 million. In June 2020, the performance conditions were modified affecting 96 employees. As of December 31, 2021, the number of shares to be distributed, after forfeited shares, increased to 172,343. The increase in shares anticipated to be distributed were transferred from treasury shares at the Interparfums SA level. The modification resulted in a revised cost of the grant to ap- proximately $4.6 million. In order to avoid dilution of the Company’s ownership of Interparfums SA, all shares distributed or to be distributed pursuant to these plans are pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. All share purchases and issuances have been classified as equity transactions on the accompanying balance sheet. Dividends In October 2019, our Board of Directors authorized a 20% increase in the annual dividend to $1.32 per share on an annual basis. In April 2020, as a result of the uncertainties raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspension of the annual cash dividend. In February 2021, the Board of Directors authorized a reinstatement of an annual divi- dend of $1.00 payable quarterly. In February 2022, the Board of Directors authorized a 100% increase in the annual dividend to $2.00 per share. The next quarterly cash dividend of $0.50 per share is payable on March 31, 2022 to shareholders of record on March 15, 2022. (14) Net Income Attributable to Inter Parfums, Inc. Common Shareholders 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: Year Ended December 31, Numerator for diluted earnings per share Denominator: Weighted average shares Effect of dilutive securities: stock options Denominator for diluted earnings per share Earnings per share: Net income attributable to Inter Parfums, Inc. common shareholders: Basic Diluted 2021 $87,411 2020 2019 $60,249 $38,219 31,676,796 158,612 31,835,408 31,536,659 117,885 31,654,544 31,451,093 237,607 31,688,700 $2.76 $2.75 $1.21 $1.21 $1.92 $1.90 Not included in the above computations is the effect of anti-dilutive potential common shares, which consist of outstanding op- tions to purchase 175,000, 450,000, and 183,000 shares of common stock for 2021, 2020, and 2019, respectively. notes to consolidated financial statements (in thousands, except share and per share data) 91 (15) Segments and Geographical Areas 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 and United States operations primarily represent the sale of prestige brand name fragrances. Information on the Company’s operations by segments is as follows: Year Ended December 31, Net sales: 2021 2020 2019 United States Europe $216,559 663,290 Eliminations of intercompany sales (333) $879,516 $117,489 422,947 (1,427) $539,009 $173,522 542,226 (2,234) $713,514 Net income attributable to Inter Parfums, Inc.: United States Europe Eliminations Depreciation and amortization expense including impairment loss: United States Europe Interest and investment income: United States $29,359 57,869 183 $87,411 $3,835 8,863 $12,698 $3 3,526 $7,942 30,241 36 $38,219 $3,354 5,713 $9,067 $19,365 40,840 44 $60,249 $3,088 5,641 $8,729 $24 $345 3,501 Europe Eliminations (126) (130) (153) $3,693 2,971 $2,865 $3,403 Interest expense: United States Europe Eliminations Income tax expense: United States Europe Eliminations $636 2,315 (126) $2,825 $673 $604 1,496 1,626 (130) (153) $2,146 $1,970 $1,590 $3,945 $5,336 35,607 17,782 25,101 30 49 $40,992 9 $19,381 $29,076 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 92 Segments and Geographical Areas continued Year Ended December 31, Total assets: United States Europe Eliminations Additions to long-lived assets: United States Europe Total long-lived assets: United States Europe Deferred tax assets: United States Europe Eliminations 2021 2020 2019 $247,703 931,735 (34,074) $1,145,364 $2,711 138,563 $141,274 $63,094 334,033 $397,127 $870 7,066 - $7,936 $166,180 $141,316 758,812 670,657 (9,983) (8,005) $828,832 $890,145 $1,004 11,259 $12,263 $40,656 217,766 $258,422 $886 7,106 49 $8,041 $5,851 5,643 $11,494 $44,473 196,976 $241,449 $705 7,241 58 $8,004 United States export sales were approximately $126.2 million, $71.5 million and $112.0 million in 2021, 2020 and 2019, respective- ly. Consolidated net sales to customers by region are as follows: Year Ended December 31, North America Europe Asia Middle East Central and South America Other Consolidated net sales to customers in major countries are as follows: Year Ended December 31, United States France Russia United Kingdom (16) Income Taxes 2021 $354,100 271,600 128,000 61,000 56,400 8,400 $879,500 2021 $351,300 $44,000 $43,400 $38,500 2020 $193,500 180,200 79,700 46,800 32,500 6,300 2019 $235,500 240,800 110,900 72,600 46,200 7,500 $539,000 $713,500 2020 $187,300 $37,600 $14,100 $24,600 2019 $225,300 $43,500 $36,800 $35,800 The Company and its subsidiaries file income tax returns in the U.S. federal, and various states and foreign jurisdictions. The Company assessed its uncertain tax positions and determined that it has no material uncertain tax position at December 31, 2021. The components of income before income taxes consist of the following: notes to consolidated financial statements (in thousands, except share and per share data) 93 Year Ended December 31, U.S. operations Foreign operations 2021 $34,742 116,277 2020 $9,577 59,772 81,762 $151,019 $69,349 $105,146 2019 $23,384 Valuation allowances have been provided for deferred tax assets relating to foreign net operating loss carry-forwards and reserves acquired in connection with the acquisition of In- terparfums Italia srl, as future profitable operations from cer- tain foreign subsidiaries might not be sufficient to realize the The provision for current and deferred income tax expense full amount of the deferred tax assets. (benefit) consists of the following: No other valuation allowances have been provided as man- Year Ended December 31, 2021 2020 2019 will be realized in the reduction of future taxable income. agement believes that it is more likely than not that the asset Current: Federal State and local Foreign Deferred: Federal State and local Foreign Total income tax expense $4,825 518 36,164 $1,685 90 17,024 $41,507 $18,799 $3,280 713 27,412 $31,405 4 11 (530) (515) (215) 44 753 582 (3) (22) (2,304) (2,329) The Company estimated of the effect of global intangible low-taxed income (“GILTI”) and has determined that it has no tax liability related to GILTI as of December 31, 2021, 2020 and 2019. The Company also estimated the effect of foreign de- rived intangible income (“FDII”) and recorded a tax benefit of approximately $0.9 million, $0.3 million and $0.9 million as of December 31, 2021, 2020 and 2019, respectively. French Tax Settlement The French authorities had considered that the existence of IP Suisse, a wholly-owned subsidiary of Interparfums SA, does $40,992 $19,381 $29,076 not, in and of itself, constitute a permanent establishment and therefore Interparfums, SA should pay French taxes on all or The tax effects of temporary differences that give rise to part of the profits of that entity. In June 2021, a global settlement significant portions of the deferred tax assets and deferred tax agreement was reached with the French Tax Authority whereby liabilities are as follows: Interparfums SA paid in December 2021, €2.5 million (approxi- December 31, Deferred tax assets: Foreign net operating loss carry-forwards Inventory and accounts receivable Profit sharing Stock option compensation Effect of inventory profit elimination Other Total gross deferred tax assets, net Valuation allowance Net deferred tax assets Deferred tax liabilities (long-term): Building expenses Trademarks and licenses Unrealized gain on marketable equity securities Other Total deferred tax liabilities Net deferred tax assets 2021 2020 ty rate charged by IP Suisse for the periods from 2017 through mately $2.9 million) effectively lowering the Lanvin brand royal- 2020. Interparfums SA also agreed to apply the lower rate in 2021 through 2025 and to transfer the Lanvin brand from IP Suisse to Interparfums, SA by December 31, 2025. The Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years $360 1,928 2,936 718 before 2017. $1,292 4,508 3,787 732 5,112 407 4,443 910 15,838 (3,582) 12,256 11,295 (360) 10,935 Differences between the United States federal statutory in- come tax rate and the effective income tax rate were as follows: Year Ended December 31, Statutory rates State and local taxes, 2021 21.0% 2020 21.0% 2019 21.0% net of Federal benefit 0.3 0.2 0.6 Windfall benefit from (1,082) (2,551) - (2,894) exercise of stock options (0.9) Benefit of Foreign Derived (0.6) (0.7) Intangible Income (0.6) (0.4) (0.9) Effect of foreign taxes greater - - (436) (251) (4,320) $7,936 (2,894) $8,041 Other Effective rates than U.S. statutory rates 7.4 (0.1) 27.1% 7.5 0.2 27.9% 7.5 0.1 27.6% INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 94 notes to consolidated financial statements (in thousands, except share and per share data) (17) Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive loss consist of the following: Year Ended December 31, Net derivative instruments,beginning of year Net derivative instrument gain (loss), net of tax Net derivative instruments end of year Cumulative translation adjustments,beginning of year Translation adjustments Cumulative translation adjustments, end of year Accumulated other comprehensive loss (18) Net Income Attributable to Inter Parfums, Inc. and Transfers from the Noncontrolling Interest 2021 $- (992) (992) (5,997) (31,443) (37,440) $(38,432) 2020 $52 (52) - (39,905) 33,908 (5,997) $(5,997) 2019 $136 (84) 52 (33,786) (6,119) (39,905) $(39,853) Year Ended December 31, Net income attributable to Inter Parfums, Inc. Decrease in Inter Parfums, Inc.’s additional paid-in capital for subsidiary share transactions Change from net income attributable to Inter Parfums, Inc. 2021 $87,411 2020 $38,219 2019 $60,249 - - (5,167) and transfers from noncontrolling interest $87,411 $38,219 $55,082 (19) Reconciliation of Cash and Cash Equivalents to the Statement of Cash Flows The following table summarizes cash and cash equivalents as of December 31, 2021: Year Ended December 31, Cash and cash equivalents per balance sheet Cash held in escrow included in other assets (see note 3) Cash and cash equivalents per statement of cash flows $159,613 8,774 $168,387 corporate and market information 95 the market for our common stock Our Company’s common stock, $.001 par value per share, is traded April 2020, as a result of the uncertainties raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspen- on The Nasdaq Global Select Market under the symbol “IPAR”. The sion of the annual cash dividend. In February 2021, our Board of following table sets forth in dollars, the range of high and low clos- Directors authorized a reinstatement of an annual dividend of $1.00, ing prices for the past two fiscal years for our common stock. payable quarterly. In February 2022, our Board of Directors autho- High Closing Low Closing Fiscal 2021 Price Price 75.89 Fourth Quarter 67.55 69.96 59.17 106.90 79.42 77.95 76.75 Second Quarter Third Quarter First Quarter High Closing Low Closing Fiscal 2020 Price Price 36.63 Fourth Quarter 61.08 rized a 100% increase in the annual dividend to $2.00 per share. The next quarterly cash dividend of $0.50 per share is payable on March 31, 2022, to shareholders of record on March 15, 2022. Form 10-K A copy of the company’s 2021 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge to shareholders upon request (except for exhib- its) To: Inter Parfums, Inc. 551 Fifth Avenue New York, NY 10176 Attention: Corporate Secretary. Third Quarter Second Quarter First Quarter 49.40 51.68 75.00 36.46 37.63 34.20 Corporate Performance Graph The following graph compares the performance for the periods indicated in the graph of our common stock with the performance of the Nasdaq Market Index and the average performance of As of February 8, 2022, the number of record holders, which a group of the Company’s peer corporations consisting of: CCA include brokers and broker nominees, etc., of our common Industries, Inc., Colgate-Palmolive Co., Estée Lauder Companies, stock was 32. We believe there are approximately 15,700 bene- Inc., Inter Parfums, Inc., Kimberly Clark Corp., Natural Health ficial owners of our common stock. Trends Corp., Procter & Gamble Co., Revlon, Inc., Stephan Co., Dividends In October 2019, our Board of Directors authorized a 20% increase sumes that the value of the investment in our common stock and each index was $100 at the beginning of the period indicated in the in the annual dividend to $1.32 per share on an annual basis. In graph, and that all dividends were reinvested. Summer Infant, Inc. and United Guardian, Inc. The graph as- COMPARISON 0F 5 YEAR CUMULATIVE TOTAL RETURN* Among Inter Parfums, Inc., The NASDAQ Composite Index, and a Peer Group Inter Parfums, Inc. NASDAQ Composite Peer Group *$100 invested on 12/31/16 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Below is the list of the data points for each year that corresponds to the lines on the above graph. Inter Parfums, Inc. NASDAQ Composite Peer Group 12/16 100.00 100.00 100.00 12/17 135.07 129.64 117.42 12/18 207.10 125.96 120.74 12/19 233.46 172.17 116.63 12/20 195.51 249.51 160.22 12/21 349.98 304.85 225.46 INTERPARFUMS, INC. 2021 ANNUAL REPORTINTERPARFUMS, INC. 2021 ANNUAL REPORT 96 directors and executive officers DIRECTORS AND EXECUTIVE OFFICERS Directors Jean Madar Michel Dyens Frédéric Garcia-Pelayo Chairman, and Chief Executive Officer, Directeur Général Délégué Chief Executive Officer, Michel Dyens & Co. and Chairman of the Board of Directors Executive Vice President Chief International Officer Inter Parfums, Inc. Véronique Gabai-Pinsky Interparfums SA Philippe Benacin President of Startup Specialty Fragrance Company and Former President, and Vice Chairman of the President, Vera Wang Group Board of Directors, Inter Parfums, Inc. Chief Executive Officer, Interparfums SA Russell Greenberg Executive Vice President, and Chief Financial Officer Inter Parfums, Inc. Philippe Santi Executive Vice President Chief Financial Officer Interparfums SA Corporate Information Inter Parfums, Inc. 551 Fifth Avenue New York, NY 10176 Gilbert Harrison Chairman, Harrison Group, Inc. Tel. (212) 983-2640 Founder and Chairman Emeritus www.interparfumsinc.com Financo LLC Executive Officers Jean Madar Chief Executive Officer, European Operations Interparfums SA 10 rue de Solferino 75007 Paris, France and Chairman of the Board of Directors Tel. (1) 53-77-00-00 Inter Parfums, Inc. Philippe Benacin Interparfums Italia, Srl Piazza della Repubblica, 6 President, and Vice Chairman of the 50123 Firenze, Italy Francois Heilbronn Board of Directors, Inter Parfums, Inc. Managing Partner M.M. Friedrich, Chief Executive Officer, Auditors Heilbronn & Fiszer Interparfums SA Robert Bensoussan-Torres Russell Greenberg Co-founder of Sirius Equity, Executive Vice President, Mazars USA, LLP 135 West 50th Street New York, NY 10020 a retail and branded luxury goods and Chief Financial Officer Transfer Agent investment company Inter Parfums, Inc. American Stock Transfer Patrick Choël Philippe Santi Business Consultant and Former Executive Vice President President and Chief Executive Officer Chief Financial and Legal Officer Parfums Christian Dior Interparfums SA and the LVMH Perfume and Cosmetics Division and Trust Company 6201 15th Avenue Brooklyn, NY 11219

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