UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number001-37344
Party City Holdco Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 46-0539758 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
80 Grasslands RoadElmsford, NY | 10523 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(914) (914) 345-2020
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value: $0.01/share | PRTY | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by checkmark whetherwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and, “smaller reporting company”, and “emerging growth company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2017, 119,730,069April 28, 2022, 112,492,976 shares of the Registrant’s common stock were outstanding.
PARTY CITY HOLDCO INC.
Form10-Q
September 30, 2017March 31, 2022
Page | ||||
| ||||
Item 1. Condensed Consolidated Financial Statements (Unaudited) | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 24 | |||
24 | ||||
| ||||
PART II | ||||
25 | ||||
25 | ||||
26 | ||||
27 |
2
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, 2017 | December 31, 2016 |
| March 31, |
|
| December 31, |
|
| March 31, |
| ||||||||||
(Note 2) (Unaudited) | (Note 2) |
| (Unaudited) |
|
|
|
|
| (Unaudited) |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
| |||||||||||
Current assets: |
|
|
|
|
|
|
|
|
| |||||||||||
Cash and cash equivalents | $ | 58,143 | $ | 64,610 |
| $ | 32,645 |
| $ | 47,914 |
| $ | 83,806 |
| ||||||
Accounts receivable, net | 169,059 | 134,091 |
| 85,280 |
| 93,301 |
| 81,658 |
| |||||||||||
Inventories, net | 687,254 | 613,868 |
| 517,459 |
| 443,295 |
| 428,316 |
| |||||||||||
Prepaid expenses and other current assets | 84,859 | 68,255 |
| 69,668 |
| 57,656 |
| 47,803 |
| |||||||||||
|
| |||||||||||||||||||
Income tax receivable |
|
| 55,614 |
|
|
| 56,317 |
|
|
| 68,632 |
| ||||||||
Total current assets | 999,315 | 880,824 |
| 760,666 |
| 698,483 |
| 710,215 |
| |||||||||||
Property, plant and equipment, net | 298,758 | 292,904 |
| 224,134 |
| 221,870 |
| 214,698 |
| |||||||||||
Operating lease asset |
| 729,587 |
| 693,875 |
| 687,214 |
| |||||||||||||
Goodwill | 1,631,806 | 1,572,568 |
| 664,943 |
| 664,296 |
| 659,865 |
| |||||||||||
Trade names | 567,507 | 566,599 |
| 383,761 |
| 383,737 |
| 383,733 |
| |||||||||||
Other intangible assets, net | 65,023 | 76,581 |
| 22,319 |
| 23,687 |
| 29,912 |
| |||||||||||
Other assets, net | 12,703 | 4,502 |
|
| 25,425 |
|
|
| 25,952 |
|
|
| 9,832 |
| ||||||
|
| |||||||||||||||||||
Total assets | $ | 3,575,112 | $ | 3,393,978 |
| $ | 2,810,835 |
|
| $ | 2,711,900 |
|
| $ | 2,695,469 |
| ||||
|
| |||||||||||||||||||
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| |||||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
| |||||||||||
Loans and notes payable | $ | 241,339 | $ | 120,138 |
| $ | 209,112 |
| $ | 84,181 |
| $ | 142,859 |
| ||||||
Accounts payable | 169,130 | 163,415 |
| 188,842 |
| 161,736 |
| 127,812 |
| |||||||||||
Accrued expenses | 184,115 | 149,683 |
| 144,397 |
| 195,531 |
| 146,742 |
| |||||||||||
Current portion of operating lease liability |
| 119,384 |
| 116,437 |
| 150,860 |
| |||||||||||||
Income taxes payable | — | 46,675 |
| 10,409 |
| 10,801 |
| 0 |
| |||||||||||
Current portion of long-term obligations | 13,064 | 13,348 |
|
| 928 |
|
|
| 1,373 |
|
|
| 1,359 |
| ||||||
|
| |||||||||||||||||||
Total current liabilities | 607,648 | 493,259 |
| 673,072 |
| 570,059 |
| 569,632 |
| |||||||||||
Long-term obligations, excluding current portion | 1,534,146 | 1,539,604 |
| 1,346,724 |
| 1,351,189 |
| 1,358,495 |
| |||||||||||
Deferred income tax liabilities | 282,376 | 278,819 | ||||||||||||||||||
Deferred rent and other long-term liabilities | 80,389 | 65,507 | ||||||||||||||||||
|
| |||||||||||||||||||
Long-term portion of operating lease liability |
| 681,949 |
| 655,875 |
| 628,217 |
| |||||||||||||
Deferred income tax liabilities, net |
| 28,067 |
| 29,195 |
| 31,036 |
| |||||||||||||
Other long-term liabilities |
|
| 23,266 |
|
|
| 22,868 |
|
|
| 33,195 |
| ||||||||
Total liabilities | 2,504,559 | 2,377,189 |
| 2,753,078 |
| 2,629,186 |
| 2,620,575 |
| |||||||||||
Redeemable securities | 3,000 | — | ||||||||||||||||||
Commitments and contingencies |
|
|
|
|
|
|
|
|
| |||||||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
| |||||||||||
Common stock (119,662,869 and 119,515,894 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively) | 1,197 | 1,195 | ||||||||||||||||||
Common stock (112,463,647, 112,170,944 and 111,258,890 shares outstanding and 124,607,064, 124,157,500 and 122,573,377 shares issued at March 31, 2022, December 31, 2021, and March 31, 2021, respectively) |
| 1,384 |
| 1,384 |
| 1,383 |
| |||||||||||||
Additionalpaid-in capital | 915,090 | 910,167 |
| 984,060 |
| 982,307 |
| 976,037 |
| |||||||||||
Retained earnings | 188,049 | 157,666 | ||||||||||||||||||
Accumulated other comprehensive loss | (36,783 | ) | (52,239 | ) | ||||||||||||||||
|
| |||||||||||||||||||
Accumulated deficit |
| (598,874 | ) |
| (571,985 | ) |
| (579,486 | ) | |||||||||||
Accumulated other comprehensive income |
|
| 4,473 |
|
|
| 3,541 |
|
|
| 5,134 |
| ||||||||
Total Party City Holdco Inc. stockholders’ equity before common stock held in |
| 391,043 |
| 415,247 |
| 403,068 |
| |||||||||||||
Less: Common stock held in treasury, at cost (12,143,417, 11,986,556 and 11,314,487 shares at March 31, 2022, December 31, 2021, and March 31, 2021, respectively) |
|
| (333,286 | ) |
|
| (332,533 | ) |
|
| (327,388 | ) | ||||||||
Total Party City Holdco Inc. stockholders’ equity |
| 57,757 |
| 82,714 |
| 75,680 |
| |||||||||||||
Noncontrolling interests |
|
| 0 |
|
|
| 0 |
|
|
| (786 | ) | ||||||||
Total stockholders’ equity | 1,067,553 | 1,016,789 |
|
| 57,757 |
|
|
| 82,714 |
|
|
| 74,894 |
| ||||||
|
| |||||||||||||||||||
Total liabilities, redeemable securities and stockholders’ equity | $ | 3,575,112 | $ | 3,393,978 | ||||||||||||||||
|
| |||||||||||||||||||
Total liabilities and stockholders’ equity |
| $ | 2,810,835 |
|
| $ | 2,711,900 |
|
| $ | 2,695,469 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Revenues: | ||||||||
Net sales | $ | 557,350 | $ | 553,382 | ||||
Royalties and franchise fees | 2,759 | 3,568 | ||||||
|
|
|
| |||||
Total revenues | 560,109 | 556,950 | ||||||
Expenses: | ||||||||
Cost of sales | 357,523 | 356,662 | ||||||
Wholesale selling expenses | 16,274 | 14,739 | ||||||
Retail operating expenses | 100,739 | 100,746 | ||||||
Franchise expenses | 3,636 | 3,370 | ||||||
General and administrative expenses | 37,971 | 38,972 | ||||||
Art and development costs | 5,898 | 5,543 | ||||||
Development stage expenses | 680 | — | ||||||
|
|
|
| |||||
Total expenses | 522,721 | 520,032 | ||||||
|
|
|
| |||||
Income from operations | 37,388 | 36,918 | ||||||
Interest expense, net | 23,228 | 22,424 | ||||||
Other expense (income), net | 593 | (905 | ) | |||||
|
|
|
| |||||
Income before income taxes | 13,567 | 15,399 | ||||||
Income tax expense | 3,483 | 5,219 | ||||||
|
|
|
| |||||
Net income | $ | 10,084 | $ | 10,180 | ||||
|
|
|
| |||||
Comprehensive income | $ | 15,329 | $ | 6,028 | ||||
Net income per common share-Basic | $ | 0.08 | $ | 0.09 | ||||
Net income per common share-Diluted | $ | 0.08 | $ | 0.08 | ||||
Weighted-average number of common shares-Basic | 119,587,339 | 119,406,751 | ||||||
Weighted-average number of common shares-Diluted | 120,912,849 | 120,472,297 | ||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 |
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net sales |
| $ | 432,976 |
|
| $ | 426,807 |
|
Cost of sales |
|
| 294,968 |
|
|
| 274,521 |
|
Gross profit |
|
| 138,008 |
|
|
| 152,286 |
|
Selling, general and administrative expenses** |
|
| 158,060 |
|
|
| 149,021 |
|
Loss on disposal of assets in international operations |
|
| 0 |
|
|
| 3,211 |
|
(Loss) income from operations |
|
| (20,052 | ) |
|
| 54 |
|
Interest expense, net |
|
| 23,395 |
|
|
| 17,214 |
|
Other (income) expense, net |
|
| (203 | ) |
|
| 427 |
|
(Loss) before income taxes |
|
| (43,244 | ) |
|
| (17,587 | ) |
Income tax (benefit) |
|
| (16,355 | ) |
|
| (3,469 | ) |
Net (loss) |
|
| (26,889 | ) |
|
| (14,118 | ) |
Less: Net (loss) attributable to noncontrolling interests |
|
| 0 |
|
|
| (54 | ) |
Net (loss) attributable to common shareholders of Party City Holdco Inc. |
| $ | (26,889 | ) |
| $ | (14,064 | ) |
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Basic |
| $ | (0.24 | ) |
| $ | (0.13 | ) |
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Diluted |
| $ | (0.24 | ) |
| $ | (0.13 | ) |
Weighted-average number of common shares-Basic |
|
| 112,407,040 |
|
|
| 110,917,349 |
|
Weighted-average number of common shares-Diluted |
|
| 112,407,040 |
|
|
| 110,917,349 |
|
Dividends declared per share |
| $ | 0 |
|
| $ | 0 |
|
Comprehensive (loss) income |
| $ | (25,937 | ) |
| $ | 20,937 |
|
Less: Comprehensive (loss) attributable to noncontrolling interests |
|
| 0 |
|
|
| (84 | ) |
Comprehensive (loss) income attributable to common shareholders of Party City Holdco Inc. |
| $ | (25,937 | ) |
| $ | 21,021 |
|
** Consists of wholesale selling expenses, retail operating expenses, art and development costs and general and administrative expenses, which were reported separately in the prior year. |
|
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share and per share data)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Revenues: | ||||||||
Net sales | $ | 1,572,966 | $ | 1,523,094 | ||||
Royalties and franchise fees | 9,020 | 11,009 | ||||||
|
|
|
| |||||
Total revenues | 1,581,986 | 1,534,103 | ||||||
Expenses: | ||||||||
Cost of sales | 978,142 | 952,294 | ||||||
Wholesale selling expenses | 47,946 | 45,854 | ||||||
Retail operating expenses | 281,981 | 278,070 | ||||||
Franchise expenses | 10,666 | 10,507 | ||||||
General and administrative expenses | 125,763 | 115,828 | ||||||
Art and development costs | 17,638 | 16,596 | ||||||
Development stage expenses | 7,092 | — | ||||||
|
|
|
| |||||
Total expenses | 1,469,228 | 1,419,149 | ||||||
|
|
|
| |||||
Income from operations | 112,758 | 114,954 | ||||||
Interest expense, net | 65,214 | 67,857 | ||||||
Other expense (income), net | 860 | (4,107 | ) | |||||
|
|
|
| |||||
Income before income taxes | 46,684 | 51,204 | ||||||
Income tax expense | 16,301 | 18,903 | ||||||
|
|
|
| |||||
Net income | $ | 30,383 | $ | 32,301 | ||||
|
|
|
| |||||
Comprehensive income | $ | 45,839 | $ | 22,355 | ||||
Net income per common share-Basic | $ | 0.25 | $ | 0.27 | ||||
Net income per common share-Diluted | $ | 0.25 | $ | 0.27 | ||||
Weighted-average number of common shares-Basic | 119,546,451 | 119,340,610 | ||||||
Weighted-average number of common shares-Diluted | 120,907,979 | 120,312,492 | ||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 |
See accompanying notes to unaudited condensed consolidated financial statements.
4
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)thousands)
Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||
Balance at December 31, 2016 | 119,515,894 | $ | 1,195 | $ | 910,167 | $ | 157,666 | $ | (52,239 | ) | $ | 1,016,789 | ||||||||||||
Net income | 30,383 | 30,383 | ||||||||||||||||||||||
Employee equity based compensation | 3,852 | 3,852 | ||||||||||||||||||||||
Warrant expense | 286 | 286 | ||||||||||||||||||||||
Exercise of stock options | 146,975 | 2 | 785 | 787 | ||||||||||||||||||||
Foreign currency adjustments | 16,818 | 16,818 | ||||||||||||||||||||||
Impact of foreign exchange contracts, net of taxes | (1,362 | ) | (1,362 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at September 30, 2017 | 119,662,869 | $ | 1,197 | $ | 915,090 | $ | 188,049 | $ | (36,783 | ) | $ | 1,067,553 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common |
|
| Additional |
|
| Accumulated |
|
| Accumulated |
|
| Total Party City |
|
| Common |
|
| Total Party City |
|
| Non- |
|
| Total |
| |||||||||
Balance at December 31, 2021 |
| $ | 1,384 |
|
| $ | 982,307 |
|
| $ | (571,985 | ) |
| $ | 3,541 |
|
| $ | 415,247 |
|
| $ | (332,533 | ) |
| $ | 82,714 |
|
| $ | — |
|
| $ | 82,714 |
|
Net (loss) |
|
| — |
|
|
| — |
|
|
| (26,889 | ) |
|
| — |
|
|
| (26,889 | ) |
|
| — |
|
|
| (26,889 | ) |
|
| — |
|
|
| (26,889 | ) |
Stock-based compensation** |
|
| — |
|
|
| 1,733 |
|
|
| — |
|
|
| — |
|
|
| 1,733 |
|
|
| — |
|
|
| 1,733 |
|
|
| — |
|
|
| 1,733 |
|
Treasury stock purchases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (753 | ) |
|
| (753 | ) |
|
| — |
|
|
| (753 | ) |
Foreign currency adjustments |
|
| — |
|
|
| 20 |
|
|
| — |
|
|
| 932 |
|
|
| 952 |
|
|
| — |
|
|
| 952 |
|
|
| — |
|
|
| 952 |
|
Balance at March 31, 2022 |
| $ | 1,384 |
|
| $ | 984,060 |
|
| $ | (598,874 | ) |
| $ | 4,473 |
|
| $ | 391,043 |
|
| $ | (333,286 | ) |
| $ | 57,757 |
|
| $ | — |
|
| $ | 57,757 |
|
|
| Common |
|
| Additional |
|
| Accumulated |
|
| Accumulated |
|
| Total Party City |
|
| Common |
|
| Total Party City |
|
| Non- |
|
| Total |
| |||||||||
Balance at December 31, 2020 |
| $ | 1,373 |
|
| $ | 971,972 |
|
| $ | (565,457 | ) |
| $ | (29,916 | ) |
| $ | 377,972 |
|
| $ | (327,182 | ) |
| $ | 50,790 |
|
| $ | (269 | ) |
| $ | 50,521 |
|
Net (loss) |
|
| — |
|
|
| — |
|
|
| (14,064 | ) |
|
| — |
|
|
| (14,064 | ) |
|
| — |
|
|
| (14,064 | ) |
|
| (54 | ) |
|
| (14,118 | ) |
Stock-based compensation** |
|
| — |
|
|
| 1,230 |
|
|
| — |
|
|
| — |
|
|
| 1,230 |
|
|
| — |
|
|
| 1,230 |
|
|
| — |
|
|
| 1,230 |
|
Warrant expense (see Note 15 – Kazzam, LLC) |
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Disposed non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (487 | ) |
|
| (487 | ) |
Treasury stock purchases |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (206 | ) |
|
| (206 | ) |
|
| — |
|
|
| (206 | ) |
Exercise of stock options |
|
| 6 |
|
|
| 2,849 |
|
|
| — |
|
|
| — |
|
|
| 2,855 |
|
|
| — |
|
|
| 2,855 |
|
|
| — |
|
|
| 2,855 |
|
Foreign currency adjustments |
|
| — |
|
|
| (10 | ) |
|
| 35 |
|
|
| 36,398 |
|
|
| 36,423 |
|
|
| — |
|
|
| 36,423 |
|
|
| 24 |
|
|
| 36,447 |
|
Impact of foreign exchange contracts, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,348 | ) |
|
| (1,348 | ) |
|
| — |
|
|
| (1,348 | ) |
|
| — |
|
|
| (1,348 | ) |
Balance at March 31, 2021 |
| $ | 1,383 |
|
| $ | 976,037 |
|
| $ | (579,486 | ) |
| $ | 5,134 |
|
| $ | 403,068 |
|
| $ | (327,388 | ) |
| $ | 75,680 |
|
| $ | (786 | ) |
| $ | 74,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
** Stock-based compensation consists of stock-option expense – time-based, restricted stock units – time-based, restricted stock units – performance-based and directors – non-cash compensation, which were shown separately in prior years. |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows provided by operating activities: | ||||||||
Net income | $ | 30,383 | $ | 32,301 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 62,519 | 61,186 | ||||||
Amortization of deferred financing costs and original issuance discounts | 3,699 | 3,821 | ||||||
Provision for doubtful accounts | 432 | 429 | ||||||
Deferred income tax expense | 3,221 | 933 | ||||||
Deferred rent | 5,634 | 12,240 | ||||||
Undistributed (income) loss in unconsolidated joint ventures | (92 | ) | 380 | |||||
Loss on disposal of assets | 533 | 14 | ||||||
Non-employee equity based compensation | 3,286 | — | ||||||
Employee equity based compensation | 3,852 | 2,829 | ||||||
Changes in operating assets and liabilities, net of effects of acquired businesses: | ||||||||
Increase in accounts receivable | (25,370 | ) | (46,576 | ) | ||||
Increase in inventories | (46,292 | ) | (108,882 | ) | ||||
Increase in prepaid expenses and other current assets | (11,299 | ) | (15,046 | ) | ||||
(Decrease) increase in accounts payable, accrued expenses and income taxes payable | (24,244 | ) | 79,848 | |||||
|
|
|
| |||||
Net cash provided by operating activities | 6,262 | 23,477 | ||||||
Cash flows used in investing activities: | ||||||||
Cash paid in connection with acquisitions, net of cash acquired | (72,804 | ) | (31,820 | ) | ||||
Capital expenditures | (47,916 | ) | (57,324 | ) | ||||
Proceeds from disposal of property and equipment | 26 | 31 | ||||||
|
|
|
| |||||
Net cash used in investing activities | (120,694 | ) | (89,113 | ) | ||||
Cash flows provided by financing activities: | ||||||||
Repayment of loans, notes payable and long-term obligations | (25,311 | ) | (28,158 | ) | ||||
Proceeds from loans, notes payable and long-term obligations | 129,150 | 97,943 | ||||||
Excess tax benefit from stock options | — | 526 | ||||||
Exercise of stock options | 787 | 1,281 | ||||||
Debt issuance costs | — | (44 | ) | |||||
|
|
|
| |||||
Net cash provided by financing activities | 104,626 | 71,548 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 3,339 | (1,214 | ) | |||||
|
|
|
| |||||
Net (decrease) increase in cash and cash equivalents | (6,467 | ) | 4,698 | |||||
Cash and cash equivalents at beginning of period | 64,610 | 42,919 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 58,143 | $ | 47,617 | ||||
|
|
|
| |||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period | ||||||||
Interest | $ | 60,871 | $ | 71,095 | ||||
Income taxes, net of refunds | $ | 65,002 | $ | 26,103 |
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash flows (used in) operating activities: |
|
|
|
|
|
| ||
Net (loss) |
| $ | (26,889 | ) |
| $ | (14,118 | ) |
Adjustments to reconcile net (loss) to net cash (used in) operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization expense |
|
| 15,860 |
|
|
| 17,944 |
|
Amortization of deferred financing costs and original issuance discounts |
|
| 1,271 |
|
|
| 863 |
|
Provision for doubtful accounts |
|
| 945 |
|
|
| 696 |
|
Deferred income tax (benefit) |
|
| (1,135 | ) |
|
| (3,386 | ) |
Change in operating lease liability/asset |
|
| (6,723 | ) |
|
| (37,556 | ) |
Undistributed loss in equity method investments |
|
| 310 |
|
|
| 336 |
|
Loss on disposal of assets |
|
| 153 |
|
|
| 110 |
|
Loss on disposal of assets in international operations |
|
| 0 |
|
|
| 3,211 |
|
Goodwill, intangibles and long-lived assets impairment |
|
| 2,154 |
|
|
| 0 |
|
Stock-based compensation** |
|
| 1,733 |
|
|
| 1,230 |
|
Loss on debt refinancing |
|
| 0 |
|
|
| 226 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Decrease in accounts receivable |
|
| 7,255 |
|
|
| 2,952 |
|
Increase in inventories |
|
| (75,596 | ) |
|
| (17,565 | ) |
Increase in prepaid expenses and other current assets |
|
| (11,205 | ) |
|
| (8,768 | ) |
(Decrease) increase in accounts payable, accrued expenses and income taxes payable |
|
| (24,958 | ) |
|
| 5,014 |
|
Net cash (used in) operating activities |
|
| (116,825 | ) |
|
| (48,811 | ) |
Cash flows (used in) investing activities: |
|
|
|
|
|
| ||
Cash paid in connection with acquisitions, net of cash acquired |
|
| (7 | ) |
|
| 0 |
|
Capital expenditures |
|
| (18,620 | ) |
|
| (22,184 | ) |
Proceeds from disposal of property and equipment |
|
| 1,610 |
|
|
| — |
|
Proceeds from sale of international operations, net of cash disposed |
|
| 0 |
|
|
| 20,556 |
|
Net cash (used in) investing activities |
|
| (17,017 | ) |
|
| (1,628 | ) |
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
| ||
Repayment of loans, notes payable and long-term obligations |
|
| (5,518 | ) |
|
| (792,849 | ) |
Proceeds from loans, notes payable and long-term obligations |
|
| 124,759 |
|
|
| 794,750 |
|
Treasury stock purchases |
|
| (753 | ) |
|
| (206 | ) |
Exercise of stock options |
|
| 0 |
|
|
| 2,855 |
|
Debt issuance costs |
|
| 0 |
|
|
| (21,437 | ) |
Net cash provided by (used in) financing activities |
|
| 118,488 |
|
|
| (16,887 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 85 |
|
|
| (177 | ) |
Net (decrease) in cash and cash equivalents and restricted cash |
|
| (15,269 | ) |
|
| (67,503 | ) |
Change in cash classified within current assets held for sale |
|
| 0 |
|
|
| 31,628 |
|
Cash and cash equivalents and restricted cash at beginning of period* |
|
| 48,914 |
|
|
| 119,681 |
|
Cash and cash equivalents and restricted cash at end of period* |
| $ | 33,645 |
|
| $ | 83,806 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
| ||
Cash paid during the period for interest expense |
| $ | 41,173 |
|
| $ | 20,309 |
|
Cash (received) paid during the period for income taxes, net of refunds |
| $ | (421 | ) |
| $ | 127 |
|
|
|
|
|
|
|
| ||
*Includes $1,000 of restricted cash at March 31, 2022 and December 31, 2021. There was 0 restricted cash as of March 31, 2021. The Company records restricted cash in other assets, net as presented in the consolidated balance sheet at March 31, 2022 and December 31, 2021. |
| |||||||
** Stock-based compensation consists of stock-option expense – time-based, restricted stock units – time-based, restricted stock units – performance-based and directors – non-cash compensation, which were shown separately in prior years. |
| |||||||
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
PARTY CITY HOLDCO INC.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share)
Note 1 – Description of Business
Party City Holdco Inc. (the “Company” or “Party City Holdco”) is a leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods. The Company designs, manufactures, sourcesgoods globally by revenue. With hundreds of retail stores filled with thousands of products across the United States, we make it easy for our customers to find the perfect party solution through our assortment of party products, balloons, and distributescostumes for their celebration aided by the support of our party goods, including paperexperts both in-store and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Company’sonline. Our retail operations include over 900approximately 830 specialty retail party supply stores (including approximately 150 franchise stores) in the United States and Canada,throughout North America operating under the names Party City and Halloween City, ande-commerce websites which offer rapid, contactless, and same day shipping options (including in-store and at curbside), principally through the domain name PartyCity.com. Party City Holdco franchises both individual
In addition to our retail operations, we are also a global designer, manufacturer and distributor of decorated consumer party products, with items found in retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City.dollar stores.
Party City Holdco is a holding company with no operating assets or operations. The Company owns 100%100% of PC Nextco Holdings, LLC (“PC Nextco”), which owns 100%100% of PC Intermediate Holdings, Inc. (“PC Intermediate”). PC Intermediate owns 100%100% of Party City Holdings Inc. (“PCHI”), which owns most of the Company’s operating subsidiaries.
Note 2 – Basis of Presentation and Recently Issued Accounting Pronouncements
The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its majority-owned and controlled entities. All significant intercompany balances and transactions have been eliminated in consolidation.eliminated. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the more detailed financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.
The majority of ourCompany’s retail operations define a fiscal year (“Fiscal Year”) as the52-week period or53-week period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim13-week periods following the end of the previous Fiscal Year, except in the case of a53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determinedWholesale operations, as the differences between the retail operation’s Fiscal Year and Fiscal Quarters and the calendar year and calendar quarters to be insignificant.
Operating results for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2017. Our business is subject to substantial seasonal variations as our retail segment has realized a significant portion of its net sales, cash flows and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, otheryear-end holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period such as movement in and the general level of raw material costs. For further information see the consolidated financial statements, and notes thereto, included in the Company’s Form10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 16, 2017.significant.
Recently Issued Accounting Pronouncements
In August 2017,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2017-12, “Derivatives 2020-04, which provides guidance providing optional expedients and Hedging: Targeted Improvementsexceptions for applying U.S. generally accepted accounting principles to Accounting for Hedging Activities”. The pronouncement amendscontracts, hedging relationships, and other transactions affected by the existing hedge accounting modeldiscontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. Additionally, in order to enableJanuary 2021, the FASB issued ASU 2021-01, which allows entities to better portrayelect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the economicsinterest rates. The Company has evaluated this guidance and it did not have an impact on our consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of their risk management activities in theirthe assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements.statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The update isnew standard became effective for the Company during the first quarter of 2019. Although the Company continues to evaluate this pronouncement, it does not believe that it will have a material impact on the Company’s consolidatedJanuary 1, 2022 and only impacts annual financial statements.
In November 2016, the FASB issued ASU2016-18, “Statement of Cash Flows: Restricted Cash”.statement footnote disclosures. The pronouncement clarifies how entities should present changes in restricted cash on the statement of cash flows. The update is effective for the Company during the first quarter of 2018. The Company is in the process of evaluating the impact of the pronouncement on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. The pronouncement clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The update is effective for the Company during the first quarter of 2018. The Company is in the process of evaluating the impact of the pronouncement on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. The pronouncement simplifies several aspects of the accounting for share-based payment transactions. The Company adopted the pronouncement during the first quarter of 2017 and such adoption did not have a material impacteffect on the Company’sour consolidated financial statements.
7
Note 3 – Disposition of Assets
In December 2021, the Company announced the closure of a manufacturing facility in New Mexico. The facility ceased operations in February 2016,2022. In December 2021, the FASB issued ASU2016-02, “Leases”Company recorded charges of $11,545, consisting primarily of equipment and inventory impairments of $8,650 and $2,425, respectively, and severance and other costs of $470. During the three months ended March 31, 2022, additional charges of $2,154 were recorded.
In January 2021, the Company closed the previously disclosed sale of a substantial portion of its international operations. The ASU requires that companies recognize on their balance sheets assets and liabilitiesfinal consideration for the rights and obligations created bysale amounted to $54.6 million. During the companies’ leases. The update is effective forfourth quarter of 2020, the Company recorded a loss reserve of $73,948 in connection with this sale, and during the first quarter of 2019. The2021, the Company recorded an additional loss of $3,211, related to changes in working capital accounts through the transaction close date, which is reported in the processConsolidated Statements of evaluating the impact of the pronouncement on the Company’s consolidated financial statements.Operations and Comprehensive Income (Loss).
In January 2016, the FASB issued ASU2016-01, “Financial InstrumentsNote 4 – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. The update impacts the accounting for equity investments and the recognition of changes in fair value of financial liabilities when the fair value option is elected. The pronouncement will be effective for the Company during the first quarter of 2018. Although the Company continues to evaluate this pronouncement, it does not believe that it will have a material impact on the Company’s consolidated financial statements.Inventories, net
In July 2015, the FASB issued ASU2015-11, “Inventory: Simplifying the Measurement of Inventory”. The update changes the measurement principle for inventory from the lower of cost or market to lower of cost andInventories, net realizable value. The Company adopted the pronouncement during the first quarter of 2017 and such adoption did not have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The pronouncement contains a five-step model which replaces most existing revenue recognition guidance. The new standard is effective for the Company during the first quarter of 2018. The pronouncement can be applied retrospectively to prior reporting periods or through a cumulative-effect adjustment as of the date of adoption. The Company has decided to adopt the pronouncement using the modified retrospective approach. Although the Company continues to evaluate the pronouncement and it might impact the accounting for certain discounts and rebates within the Company’s wholesale business, the Company does not believe that the pronouncement will have a material impact on its consolidated financial statements.
Note 3 – Inventories
Inventories consisted of the following:
September 30, 2017 | December 31, 2016 |
| March 31, |
|
| December 31, |
|
| March 31, |
| ||||||||||
Finished goods | $ | 646,486 | $ | 581,277 |
| $ | 471,988 |
|
| $ | 393,609 |
| $ | 386,108 |
| |||||
Raw materials | 30,395 | 23,222 |
| 24,257 |
|
|
| 25,624 |
| 23,618 |
| |||||||||
Work in process | 10,373 | 9,369 |
|
| 21,214 |
|
|
| 24,062 |
|
|
| 18,589 |
| ||||||
|
|
| $ | 517,459 |
|
| $ | 443,295 |
|
| $ | 428,316 |
| |||||||
$ | 687,254 | $ | 613,868 | |||||||||||||||||
|
|
Inventories, net are valued at the lower of cost or net realizable value. The Company principally determines the cost of inventory using the weighted average method.
The Company estimates retail inventory shortageshrinkage for the periodsperiod between physical inventory dates on astore-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.
In the ordinary course of business the Company is involved in transactions with certain of its equity-method investees, primarily for the purchase of finished goods inventory. For the three months ended March 31, 2022, the Company purchased $13.9 million. As of March 31, 2022, approximately $36.2 million of these purchases are reflected in finished goods inventory with accounts payable of $22.9 million related to such transactions.
Note 45 – Income Taxes
The effective income tax rate for the ninethree months ended September 30, 2017, 34.9%,March 31, 2022 of 37.8% is lower thandifferent from the effectivestatutory rate for the nine months ended September 30, 2016, 36.9%, principallyof 21.0% primarily due to discrete items related to uncertain tax positions, stock option exercisesstate taxes, andreturn-to-provision adjustments. The impact of such items was partially offset valuation allowance resulting from interest carryforward deductions limited by the effect of state tax rate changes on deferred tax liabilities.IRC Section 163(j).
Note 56 – Changes in Accumulated Other Comprehensive LossIncome (Loss)
The changes in accumulated other comprehensive lossincome (loss) consisted of the following:
Three Months Ended September 30, 2017 | ||||||||||||
Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2017 | $ | (41,650 | ) | $ | (378 | ) | $ | (42,028 | ) | |||
Other comprehensive income (loss) before reclassifications | 5,297 | (281 | ) | 5,016 | ||||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income | — | 229 | 229 | |||||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive income (loss) | 5,297 | (52 | ) | 5,245 | ||||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2017 | $ | (36,353 | ) | $ | (430 | ) | $ | (36,783 | ) | |||
|
|
|
|
|
|
|
| Three Months Ended March 31, 2022 |
| |||||
|
| Foreign |
|
| Total, |
| ||
Balance at December 31, 2021 |
| $ | 3,541 |
|
| $ | 3,541 |
|
Other comprehensive income before reclassifications, |
|
| 932 |
|
|
| 932 |
|
Net current-period other comprehensive income |
|
| 932 |
|
|
| 932 |
|
Balance at March 31, 2022 |
| $ | 4,473 |
|
| $ | 4,473 |
|
Three Months Ended September 30, 2016 | ||||||||||||
Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2016 | $ | (39,500 | ) | $ | 916 | $ | (38,584 | ) | ||||
Other comprehensive loss before reclassifications | (3,537 | ) | (470 | ) | (4,007 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net | — | (145 | ) | (145 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive loss, net | (3,537 | ) | (615 | ) | (4,152 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2016 | $ | (43,037 | ) | $ | 301 | $ | (42,736 | ) | ||||
|
|
|
|
|
|
Nine Months Ended September 30, 2017 | ||||||||||||
Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at December 31, 2016 | $ | (53,171 | ) | $ | 932 | $ | (52,239 | ) | ||||
Other comprehensive income (loss) before reclassifications, net of income tax | 16,818 | (1,077 | ) | 15,741 | ||||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax | — | (285 | ) | (285 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive income (loss) | 16,818 | (1,362 | ) | 15,456 | ||||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2017 | $ | (36,353 | ) | $ | (430 | ) | $ | (36,783 | ) | |||
|
|
|
|
|
|
Balance at December 31, 2015 Other comprehensive (loss) income before reclassifications, net of income tax Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax Net current-period other comprehensive loss Balance at September 30, 2016 8 Nine Months Ended September 30, 2016 Foreign
Currency
Adjustments Impact of
Foreign
Exchange
Contracts,
Net of Taxes Total,
Net of Taxes $ (33,401 ) $ 611 $ (32,790 ) (9,636 ) 183 (9,453 ) — (493 ) (493 ) (9,636 ) (310 ) (9,946 ) $ (43,037 ) $ 301 $ (42,736 )
|
| Three Months Ended March 31, 2021 |
| |||||||||
|
| Foreign |
|
| Impact of |
|
| Total, |
| |||
Balance at December 31, 2020 |
| $ | (31,264 | ) |
| $ | 1,348 |
|
| $ | (29,916 | ) |
Other comprehensive income (loss) before reclassifications, |
|
| (191 | ) |
|
| 77 |
|
|
| (114 | ) |
Release of cumulative foreign currency translation adjustment to net loss as a result of disposition of international operations |
|
| 36,589 |
|
|
| (1,422 | ) |
|
| 35,167 |
|
Amounts reclassified from accumulated other comprehensive |
|
| 0 |
|
|
| (3 | ) |
|
| (3 | ) |
Net current-period other comprehensive income (loss) |
|
| 36,398 |
|
|
| (1,348 | ) |
|
| 35,050 |
|
Balance at March 31, 2021 |
| $ | 5,134 |
|
| $ | 0 |
|
| $ | 5,134 |
|
Note 67 – Capital Stock
At September 30, 2017,March 31, 2022, the Company’s authorized capital stock consisted of 300,000,000 shares of $0.01$0.01 par value common stock and 15,000,000 shares of $0.01$0.01 par value preferred stock.
Note 78 – Segment Information
Industry Segments
The Company has two identifiable business2 reportable operating segments. The Wholesale segment designs, manufactures, sourcescontracts for manufacture and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties gifts and stationery throughout the world. The Retail segment operates specialty retail party supply stores in the United States, and Canada, principally under the names Party City and Halloween City, and it operatese-commerce websites, principally through the domain name Partycity.com. PartyCity.com. The Retail segment also franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City. The Company’s industrycompany's reportable operating segment data for the three months ended September 30, 2017March 31, 2022 and September 30, 20162021 was as follows:
|
| Wholesale |
|
| Retail |
|
| Consolidated |
| |||
Three Months Ended March 31, 2022 |
|
|
|
|
|
|
|
|
| |||
Net sales before eliminations |
| $ | 239,680 |
|
| $ | 340,951 |
|
| $ | 580,631 |
|
Eliminations |
|
| (147,655 | ) |
|
| — |
|
|
| (147,655 | ) |
Net sales |
|
| 92,025 |
|
|
| 340,951 |
|
|
| 432,976 |
|
Gross profit |
| $ | 24,642 |
|
| $ | 113,366 |
|
| $ | 138,008 |
|
Income (loss) from operations |
| $ | 3,501 |
|
| $ | (23,553 | ) |
| $ | (20,052 | ) |
Interest expense, net |
|
|
|
|
|
|
|
| 23,395 |
| ||
Other (income), net |
|
|
|
|
|
|
|
| (203 | ) | ||
(Loss) before income taxes |
|
|
|
|
|
|
| $ | (43,244 | ) |
|
| Wholesale |
|
| Retail |
|
| Consolidated |
| |||
Three Months Ended March 31, 2021 |
|
|
|
|
|
|
|
|
| |||
Net sales before eliminations |
| $ | 212,137 |
|
| $ | 333,282 |
|
| $ | 545,419 |
|
Eliminations |
|
| (118,612 | ) |
|
| — |
|
|
| (118,612 | ) |
Net sales |
|
| 93,525 |
|
|
| 333,282 |
|
|
| 426,807 |
|
Gross profit |
| $ | 29,108 |
|
| $ | 123,178 |
|
| $ | 152,286 |
|
(Loss) income from operations |
| $ | (592 | ) |
| $ | 646 |
|
| $ | 54 |
|
Interest expense, net |
|
|
|
|
|
|
|
| 17,214 |
| ||
Other expense, net |
|
|
|
|
|
|
|
| 427 |
| ||
(Loss) before income taxes |
|
|
|
|
|
|
| $ | (17,587 | ) |
In January 2021, the Company closed the previously disclosed sale of a substantial portion of its international operations.
Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended September 30, 2017 | ||||||||||||
Revenues: | ||||||||||||
Net sales | $ | 381,858 | $ | 364,057 | $ | 745,915 | ||||||
Royalties and franchise fees | — | 2,759 | 2,759 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 381,858 | 366,816 | 748,674 | |||||||||
Eliminations | (188,565 | ) | — | (188,565 | ) | |||||||
|
|
|
|
|
| |||||||
Net revenues | $ | 193,293 | $ | 366,816 | $ | 560,109 | ||||||
|
|
|
|
|
| |||||||
Income from operations | $ | 22,808 | $ | 14,580 | $ | 37,388 | ||||||
|
|
|
| |||||||||
Interest expense, net | 23,228 | |||||||||||
Other expense, net | 593 | |||||||||||
|
| |||||||||||
Income before income taxes | $ | 13,567 | ||||||||||
|
| |||||||||||
Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended September 30, 2016 | ||||||||||||
Revenues: | ||||||||||||
Net sales | $ | 416,387 | $ | 347,557 | $ | 763,944 | ||||||
Royalties and franchise fees | — | 3,568 | 3,568 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 416,387 | 351,125 | 767,512 | |||||||||
Eliminations | (210,562 | ) | — | (210,562 | ) | |||||||
|
|
|
|
|
| |||||||
Net revenues | $ | 205,825 | $ | 351,125 | $ | 556,950 | ||||||
|
|
|
|
|
| |||||||
Income from operations | $ | 35,532 | $ | 1,386 | $ | 36,918 | ||||||
|
|
|
| |||||||||
Interest expense, net | 22,424 | |||||||||||
Other income, net | (905 | ) | ||||||||||
|
| |||||||||||
Income before income taxes | $ | 15,399 | ||||||||||
|
|
The Company’s industry segment data for the nine months ended September 30, 2017 and September 30, 2016 was as follows:9
Wholesale | Retail | Consolidated | ||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||
Revenues: | ||||||||||||
Net sales | $ | 929,255 | $ | 1,103,127 | $ | 2,032,382 | ||||||
Royalties and franchise fees | — | 9,020 | 9,020 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 929,255 | 1,112,147 | 2,041,402 | |||||||||
Eliminations | (459,416 | ) | — | (459,416 | ) | |||||||
|
|
|
|
|
| |||||||
Net revenues | $ | 469,839 | $ | 1,112,147 | $ | 1,581,986 | ||||||
|
|
|
|
|
| |||||||
Income from operations | $ | 49,258 | $ | 63,500 | $ | 112,758 | ||||||
|
|
|
| |||||||||
Interest expense, net | 65,214 | |||||||||||
Other expense, net | 860 | |||||||||||
|
| |||||||||||
Income before income taxes | $ | 46,684 | ||||||||||
|
| |||||||||||
Wholesale | Retail | Consolidated | ||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||
Revenues: | ||||||||||||
Net sales | $ | 945,071 | $ | 1,043,212 | $ | 1,988,283 | ||||||
Royalties and franchise fees | — | 11,009 | 11,009 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 945,071 | 1,054,221 | 1,999,292 | |||||||||
Eliminations | (465,189 | ) | — | (465,189 | ) | |||||||
|
|
|
|
|
| |||||||
Net revenues | $ | 479,882 | $ | 1,054,221 | $ | 1,534,103 | ||||||
|
|
|
|
|
| |||||||
Income from operations | $ | 65,669 | $ | 49,285 | $ | 114,954 | ||||||
|
|
|
| |||||||||
Interest expense, net | 67,857 | |||||||||||
Other income, net | (4,107 | ) | ||||||||||
|
| |||||||||||
Income before income taxes | $ | 51,204 | ||||||||||
|
|
Note 89 – Commitments and Contingencies
The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
On April 5, 2016, a derivative complaint was filed in the Supreme Court for the State of New York, naming certain directors and executives as defendants, and naming the Company as a nominal defendant. The complaint seeks unspecified damages and costs, and corporate governance reforms, for alleged injury to the Company in connection with public filings related to the Company’s April 2015 IPO, compensation paid to executives, and the termination of the management agreement disclosed in the initial public offering-related public filings. The Company intends to vigorously defend itself against this action. The Company is unable, at this time, to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.
Note 910 – Derivative Financial Instruments
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market riskrisks managed through the use of derivative financial instruments isare interest rate risk and foreign currency exchange rate risk.
Foreign Exchange Risk Management
A portion of the Company’s cash flows is derived from transactions denominated in foreign currencies. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling, the Canadian Dollar, the Euro, the Malaysian Ringgit and the Australian Dollar, the The Company enters into foreign exchange contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inventory purchases and sales. For contracts that qualify for hedge accounting, the terms of the foreign exchange contracts are such that cash flows from the contracts should be highly effective in offsetting the expected cash flows from the underlying forecasted transactions.
The foreign currency exchange contracts are reflected in the condensed consolidated balance sheets at fair value. The fair value of the foreign currency exchange contracts is the estimated amount that the counterparties would receive or pay to terminate thedid not have any foreign currency exchange contracts at the reporting date, taking into account current foreign exchange spot rates. At September 30, 2017 and DecemberMarch 31, 2016, the Company had certain foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As these hedges were 100% effective, there was no impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings by June 2018.2022 or 2021.
The following table displays the fair values of the Company’s derivatives at September 30, 2017 and December 31, 2016:
Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||
Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | |||||||||||||||||||||||||
Derivative Instrument | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||
Foreign Exchange Contracts | (a | ) PP | $ | — | (a | ) PP | $ | 697 | (b | ) AE | $ | 355 | (b | ) AE | $ | 215 | ||||||||||||||||
|
|
|
|
|
|
|
|
The following table displays the notional amounts of the Company’s derivatives at September 30, 2017 and December 31, 2016:
Derivative Instrument | September 30, 2017 | December 31, 2016 | ||||||
Foreign Exchange Contracts | $ | 6,875 | $ | 22,502 | ||||
|
|
|
|
Note 1011 – Fair Value Measurements
The provisions of FASB ASC Topic 820, “Fair Value Measurement”, define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
During 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services. As part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology received an ownership interest in Kazzam. The following table showsinterest had been recorded as redeemable securities in the mezzanine of the Company’s consolidated balance sheet as Ampology had the right to cause the Company to purchase the interest. The liability was adjusted to the greater of the current fair value or the original fair value at the time at which the ownership interest was issued (adjusted for any subsequent changes in the ownership interest percentage). On March 23, 2020, the Company purchased all of Ampology’s interest in Kazzam. Refer to Note 15 – Kazzam, LLC for further detail.
The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, lease assets, inventories and liabilities as of September 30, 2017 thatproperty, plant and equipment, are measurednot required to be carried at fair value on a recurring basis:
Level 1 | Level 2 | Level 3 | Total as of September 30, 2017 | |||||||||||||
Noncontrolling interests liabilities | $ | — | $ | — | $ | 6,016 | $ | 6,016 | ||||||||
Derivative assets | — | — | — | — | ||||||||||||
Derivative liabilities | — | 355 | — | 355 |
The following table shows assetsbasis. However, if certain triggering events occur (or at least annually for goodwill and liabilities as of December 31, 2016 that are measured at fair value onindefinite-lived intangible assets), a recurring basis:
Level 1 | Level 2 | Level 3 | Total as of December 31, 2016 | |||||||||||||
Noncontrolling interests liabilities | $ | — | $ | — | $ | — | $ | — | ||||||||
Derivative assets | — | 697 | — | 697 | ||||||||||||
Derivative liabilities | — | 215 | — | 215 |
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Companynon-financial instrument is required to record other assets and liabilities atbe evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value on a nonrecurring basis, generally as a result of impairment charges. No impairment charges were recorded during the nine months ended September 30, 2017 or the nine months ended September 30, 2016.value.
The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at September 30, 2017March 31, 2022 because of the short-term maturities of the instruments and/or their variable rates of interest.
The carrying amountamounts and fair value of the Company’s borrowings under its senior secured term loan facility (“Term Loan Credit Agreement”) and its $350,000 of 6.125% senior notes (“Senior Notes”) are as follows:
September 30, 2017 | ||||||||
Carrying Amount | Fair Value | |||||||
Term Loan Credit Agreement | $ | 1,198,750 | $ | 1,220,406 | ||||
Senior Notes | 345,162 | 364,809 |
The fair values of borrowings under the Term Loan Credit Agreement and the Senior NotesCompany’s senior notes as of March 31, 2022 are as follows:
|
| March 31, 2022 |
| |||||
|
| Gross Carrying |
|
| Fair |
| ||
8.75% Senior Secured First Lien Notes – due 2026 |
| $ | 750,000 |
|
| $ | 708,750 |
|
6.125% Senior Notes – due 2023 |
|
| 22,924 |
|
|
| 21,147 |
|
6.625% Senior Notes – due 2026 |
|
| 92,254 |
|
|
| 73,919 |
|
First Lien Party City Notes – due 2025 |
|
| 193,501 |
|
|
| 172,942 |
|
First Lien Anagram Notes – due 2025 |
|
| 149,537 |
|
|
| 159,631 |
|
Second Lien Anagram Notes – due 2026 |
|
| 144,625 |
|
|
| 150,229 |
|
10
The fair values represent Level 2 fair value measurements as the debt instruments trade in inactive markets.
The carrying amounts for other long-term debt approximated fair value at September 30, 2017March 31, 2022 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.
During August 2015, the Company acquired 75% of the operations of Accurate Custom Injection Molding Inc. (“ACIM”). Based on the terms of the acquisition agreement, the Company will acquire the remaining 25% interest in ACIM over the next seven years and the Company’s liability for the estimated purchase price of such interest was $0 at September 30, 2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During March 2017, the Company acquired 85% of the common stock of Granmark, S.A. de C.V., a Mexican manufacturer and wholesaler of party goods. See Note 13 for further discussion of the acquisition. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 15% interest over the next five years and it has recorded a liability for the estimated purchase price of such interest, $3,342 at September 30, 2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During July 2017, the Company acquired 60% of Print Appeal, Inc. (“Print Appeal”). See Note 13 for further discussion of the acquisition. Based on the terms of the acquisition agreement, the Company will acquire the remaining 40% interest in Print Appeal over the next six years and the Company’s liability for the estimated purchase price of such interest was $2,674 at September 30, 2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
Note 1112 – Earnings Per Share
Basic earnings per share are computed by dividing net income available forattributable to common stockholdersshareholders of Party City Holdco Inc. by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised.exercised, and restricted stock units, as if they vested.
A reconciliation between basicBasic and diluted incomeloss per share is as follows:
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Net income | $ | 10,084 | $ | 10,180 | $ | 30,383 | $ | 32,301 | ||||||||
Weighted average shares—Basic | 119,587,339 | 119,406,751 | 119,546,451 | 119,340,610 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Warrants | — | — | — | — | ||||||||||||
Stock options | 1,325,510 | 1,065,546 | 1,361,528 | 971,882 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares—Diluted | 120,912,849 | 120,472,297 | 120,907,979 | 120,312,492 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per common share—Basic | $ | 0.08 | $ | 0.09 | $ | 0.25 | $ | 0.27 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per common share—Diluted | $ | 0.08 | $ | 0.08 | $ | 0.25 | $ | 0.27 | ||||||||
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net (loss) attributable to common shareholders of |
| $ | (26,889 | ) |
| $ | (14,064 | ) |
Weighted average shares - Basic |
|
| 112,407,040 |
|
|
| 110,917,349 |
|
Effect of dilutive securities: |
|
|
|
|
|
| ||
Warrants |
|
| 0 |
|
|
| 0 |
|
Restricted stock units |
|
| 0 |
|
|
| 0 |
|
Stock options |
|
| 0 |
|
|
| 0 |
|
Weighted average shares - Diluted |
|
| 112,407,040 |
|
|
| 110,917,349 |
|
Net (loss) per share attributable to common |
| $ | (0.24 | ) |
| $ | (0.13 | ) |
Net (loss) per share attributable to common |
| $ | (0.24 | ) |
| $ | (0.13 | ) |
During the three months ended September 30, 2017March 31, 2022, 4,819,273 restricted stock units, 4,146,742 performance restricted stock units and September 30, 2016, 2,370,1061,800,535 stock options and 2,276,695 stock options, respectively, were excluded from the calculation of net incomeloss per share attributable to common share – diluted as they were anti-dilutive. Additionally, during the three months ended September 30, 2017 and September 30, 2016, 596,000 warrants and 0 warrants, respectively, were excluded from the calculationshareholders of net income per common shareParty City Holdco Inc. – diluted as they were anti-dilutive. During the ninethree months ended September 30, 2017March 31, 2021, 657,920 restricted stock units, 2,853,716 performance restricted stock units and September 30, 2016, 2,370,1062,808,395 stock options and 2,276,695 stock options, respectively, were excluded from the calculation of net incomeloss per share attributable to common shareshareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. Additionally, during the nine months ended September 30, 2017
Note 13 – Current and September 30, 2016, 596,000 warrants and 0 warrants, respectively, were excluded from the calculation of net income per common share – diluted as they were anti-dilutive.
Note 12 – Long-Term Obligations
Long-term obligations at September 30, 2017 andMarch 31, 2022, December 31, 20162021 and March 31, 2021 consisted of the following:
September 30, 2017 | December 31, 2016 |
| March 31, |
|
| December 31, |
|
| March 31, |
| ||||||||||||||||||||||
Term Loan Credit Agreement | $ | 1,198,750 | $ | 1,205,496 | ||||||||||||||||||||||||||||
Capital lease obligations | 3,298 | 2,912 | ||||||||||||||||||||||||||||||
Senior Notes | 345,162 | 344,544 | ||||||||||||||||||||||||||||||
|
|
| Principal Amount |
|
| Gross Carrying Amount |
|
| Deferred Financing Costs |
|
| Net Carrying Amount |
|
| Net Carrying Amount |
|
| Net Carrying Amount |
| |||||||||||||
8.75% Senior Secured First Lien Notes – due 2026 |
| $ | 750,000 |
|
| $ | 750,000 |
|
| $ | (16,185 | ) |
| $ | 733,815 |
| $ | 732,957 |
| $ | 730,508 |
| ||||||||||
6.125% Senior Notes – due 2023 |
| 22,924 |
|
|
| 22,924 |
|
|
| (76 | ) |
|
| 22,848 |
| 22,834 |
| 22,792 |
| |||||||||||||
6.625% Senior Notes – due 2026 |
| 92,254 |
|
|
| 92,254 |
|
|
| (627 | ) |
|
| 91,627 |
| 91,591 |
| 91,483 |
| |||||||||||||
First Lien Party City Notes – due 2025 |
| 161,669 |
|
|
| 193,501 |
|
|
| 0 |
|
|
| 193,501 |
| 198,004 |
| 202,657 |
| |||||||||||||
First Lien Anagram Notes – due 2025 |
| 118,699 |
|
|
| 149,537 |
|
|
| (706 | ) |
|
| 148,831 |
| 149,569 |
| 150,568 |
| |||||||||||||
Second Lien Anagram Notes – due 2026 |
| 93,613 |
|
|
| 144,625 |
|
|
| 0 |
|
|
| 144,625 |
| 144,619 |
| 148,159 |
| |||||||||||||
Finance lease obligations |
|
| 12,405 |
|
|
| 12,405 |
|
|
| 0 |
|
|
| 12,405 |
|
|
| 12,988 |
|
|
| 13,687 |
| ||||||||
Total long-term obligations | 1,547,210 | 1,552,952 |
| 1,251,564 |
|
|
| 1,365,246 |
|
|
| (17,594 | ) |
|
| 1,347,652 |
| 1,352,562 |
| 1,359,854 |
| |||||||||||
Less: current portion | (13,064 | ) | (13,348 | ) |
|
| (928 | ) |
|
| (928 | ) |
|
| — |
|
|
| (928 | ) |
|
| (1,373 | ) |
|
| (1,359 | ) | ||||
|
| |||||||||||||||||||||||||||||||
Long-term obligations, excluding current portion | $ | 1,534,146 | $ | 1,539,604 |
| $ | 1,250,636 |
|
| $ | 1,364,318 |
|
| $ | (17,594 | ) |
| $ | 1,346,724 |
|
| $ | 1,351,189 |
|
| $ | 1,358,495 |
| ||||
|
|
Note 13 – Acquisitions
During January 2017,Prior to April 2019, the Company acquired 18 franchise stores,had a $540,000 asset-based revolving credit facility (with a seasonal increase to $640,000 during a certain period of each calendar year) (the “ABL Facility”), which are located mostlymatures during August 2023 (subject to a springing maturity at an earlier date if the
11
maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in Louisiana and Alabama, for total consideration of approximately $15,000. The Company is in the process of finalizing purchase accounting.
an aggregate face amount at any time outstanding not to exceed $50,000. During March 2017,April 2019, the Company acquired 85%amended the ABL Facility. Such amendment removed the seasonal component and made the ABL Facility a $640,000 facility with no seasonal modification component. In connection with the refinancing, PCHI (1) reduced the ABL revolving commitments and prepaid the outstanding ABL revolving loans, in each case, in an aggregate principal amount equal to $44,000 in accordance with the ABL Facility credit agreement, and (2) designated Anagram Holdings and each of its subsidiaries as an unrestricted subsidiary under the common stock of Granmark, S.A. de C.V. (“Granmark”), a Mexican manufacturerABL Facility and wholesaler of party goods, for total consideration of approximately $22,000 (exclusive of $5,600 of cash acquired). On the acquisition date, Granmark had $6,456 of debt outstanding under various revolving credit facilities. The majority ofTerm Loan Credit Agreement. Additionally, in February 2021 in conjunction with the balance was repaid during the first quarter of 2017. The Company is in the process of finalizing purchase accounting. Based on the terms of the acquisition agreement,transaction discussed below, the Company is requiredamended the ABL Facility by reducing the commitments to acquire$475,000 and extending the remaining 15% interest over a threematurity to five year period and it has recorded a liability for the estimated purchase price of such interest, $3,342 at September 30, 2017.
Also, during March 2017, the Company acquired an additional 18 franchise stores, which are located in North Carolina and South Carolina, for total consideration of approximately $31,000. The Company is in the process of finalizing purchase accounting.
During April 2017, the Company paid approximately $3,500 for a 28% ownership interest in Punchbowl, Inc.February 2026, a provider of digital greeting cards and digital invitations. The Company is accounting for the investment under the equity method of accounting.
During July 2017, the Company acquired 60% of the common stock of Print Appeal, Inc., a wholesaler of personalized cups, napkins, and other items, for total consideration of approximately $2,800. The Company is in the process of finalizing purchase accounting. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 40% interest over a four to six year period and it has recorded a liability for the estimated purchase price of such interest, $2,674 at September 30, 2017.
Note 14 – Organizational Restructuring
On March 15, 2017, the Company and its Chairman of the Board of Directors (“the Board”), Gerald Rittenberg, entered into a Transition and Consulting Agreement under which Mr. Rittenberg’s employment as Executive Chairman of the Company terminated effective March 31, 2017. Beginning on April 1, 2017 and continuing through December 31, 2020, unlessor earlier terminated as provided for in the agreement (the “Consulting Period”agreement. On March 18, 2022, the ABL Facility was further amended. The amendment modified certain eligibility criteria with respect to the inventory component of the borrowing base. The changes lengthen the permitted in-transit time for eligible in-transit inventory being shipped from a location outside of the United States, subject to a cap on the aggregate amount of foreign in-transit inventory that is eligible to be reflected in the borrowing base.
PCHI had approximately $75.2 million, $192.4 million and $129.3 million of availability under the ABL Facility as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively. As discussed further below, Anagram had a separate asset-based revolving credit facility and there was approximately $14.4 million of availability under the Anagram ABL Facility as of March 31, 2022.
February 2021 Debt Transaction
During February 2021, PCHI issued $750,000 of senior secured first lien notes at an interest rate of 8.750% (“8.750% Senior Notes”), Mr. Rittenberg. The 8.750% Senior Notes will servemature in February 2026. The Company used the proceeds from the 8.750% Senior Notes to prepay the outstanding balance of $694,220 under its existing Term Loan Credit Agreement. The prepayment of the Term Loan Credit Agreement was in accordance with the terms of such agreement.
In connection with the transaction, the Company wrote-off a portion of the existing capitalized deferred financing costs and original issuance discounts. Additionally, the Company incurred $18,976 of third-party fees, principally banker fees. The amounts expensed were recorded in Other expense, net in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income and included in Gain on debt repayment in the Company’s Consolidated Statement of Cash Flows.
In conjunction with the amendment of the ABL Facility, the Company wrote-off a portion of existing deferred financing costs. Such amount was recorded in Other expense, net in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income and included in Gain on debt repayment in the Company’s Consolidated Statement of Cash Flows. The remaining capitalized costs, and $2,400 of new third-party costs incurred in conjunction with the amendment, will be amortized over the revised term of the ABL Facility.
Interest on the 8.750% Senior Notes is payable semi-annually in arrears on February 15th and August 15th of each year. The 8.750% Senior Notes are guaranteed, jointly and severally, on a part-timesenior secured basis asby each of PCHI’s existing and future domestic subsidiaries. The 8.750% Senior Notes and related guarantees are secured by a non-employeefirst priority lien on substantially all assets of PCHI and the guarantors, except for the collateral that secures the senior adviser credit facilities on a first lien basis, with respect to which the Company. Additionally, Mr. Rittenberg8.750% Senior Notes and related guarantees will remain as Chairmanbe secured by a second priority lien, in each case subject to permitted liens and certain exclusions and release provisions.
The indenture governing the 8.750% Senior Notes contains covenants that, among other things, limit the PCHI’s ability and the ability of its restricted subsidiaries to:
The indenture governing the notes also contains certain customary affirmative covenants and events of default.
On or after August 15, 2023, 2024, and 2025, respectively, PCHI may redeem some or all of the Board through8.750% Senior Notes at the endredemption price of his existing director term (the Company’s 2018 annual meeting of shareholders)104.375%, 102.188% and subsequently, he will be nominated by the Board100.000%, respectively, plus accrued and unpaid interest, if any. In addition, PCHI may redeem up to serve asa non-employee member of such Board throughout the remainder40% of the Consulting Period.aggregate principal amount outstanding on or before August 15, 2023 with the cash proceeds from certain equity offerings at a redemption price of 108.750% of the principal amount, plus accrued and unpaid interest. PCHI may also redeem some or all of the notes before August 15, 2023 at a redemption price of 100% of the principal amount plus a premium that is defined in the indenture. At any time prior to August 15, 2023, PCHI may also at its option redeem during each 12-month period commencing with the issue date up to 10% of the aggregate principal amount of the 8.750% Senior Notes at a redemption price of 103% of the aggregate principal amount, plus accrued and unpaid interest, if any. Also, if PCHI experiences certain types of change in control, as defined, it may be required to offer to repurchase the 8.750% Senior Notes at 101% of their principal amount.
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On May 7, 2021, Anagram Holdings, LLC (“Anagram”), a wholly owned subsidiary of the Company, entered into a $15 million asset-based revolving credit facility (“Anagram ABL Facility”), which matures during May 2024. It provides for (a) revolving loans, subject to a borrowing base described below, and (b) under the Anagram ABL Facility, Borrowers would be entitled to request letters of credit (“Letters of Credit”). The aggregate amount of outstanding Letters of Credit would be reserved against the credit availability and subject to a $3 million cap.
Under the Transition and Consulting Agreement, Mr. RittenbergAnagram ABL Facility, the borrowing base at any time equals (a) a percentage of eligible trade receivables, plus (b) a percentage of eligible inventory, plus (c) a percentage of eligible credit card receivables, less (d) certain reserves. The Anagram ABL Facility generally provides for the following pricing options: All revolving loans will receive payments from April 1, 2017 through December 31, 2017 in amounts equal to his base salary had he remained employed as Executive Chairman during such period (i.e., paybear interest, at an annualthe Anagram's election, at a per annum rate equal to $2,090). Additionally, he will remain eligible to receive an annual bonuseither (a) a base rate, which represents for full-year 2017 based on the terms of the Company’s 2017 bonus plan and the terms of his previous employment agreement (a target amountany day a rate equal to 80%the greater of his 2017 base salary). Further, during 2018, Mr. Rittenberg will receive severance payments aggregating $2,049, which will be made(i) the prime rate on such day subject to a 0% floor, (ii) the federal funds rate plus 5.0% and (iii) one-half of one percent per annum, in four equal quarterly installments. Finally, beginningeach case, plus a margin of 1.5% or (b) the Daily One Month LIBOR subject to a 0.5% floor, plus a margin of 2.5%.
In addition to paying interest on January 1, 2018 and for the remainderoutstanding principal, Anagram is required to pay a commitment fee of the Consulting Period, Mr. Rittenberg will receive payments equal0.5% to $401% per monthannum in consideration for his consulting services.respect of unutilized commitments. Anagram must also pay customary letter of credit fees.
Additionally,All obligations under the TransitionAnagram ABL Facility are jointly and Consulting Agreement, during the Consulting Period, Mr. Rittenberg’s existing unvested stock options will remain eligible to vest in accordanceseverally guaranteed by Anagram and its subsidiaries. The Anagram ABL facility contains covenants and events of default customary for such credit facilities.
Note 14 – Revenue from Contracts with their original terms and Mr. Rittenberg’s existing vested stock options will remain outstanding (also, in accordanceCustomers
The following table summarizes revenue from contracts with their original terms).
As a result of the Transition and Consulting Agreement, the Company recorded a $4,296 severance charge in general and administrative expenses during the nine months ended September 30, 2017. Such amount represents: (1) the amount that he will be paid from April 1, 2017 – December 31, 2017 that is above and beyond the fair value ($40 per month) of his consulting services during such period, $1,207, (2) an estimate of his bonuscustomers for the period from April 1, 2017 – December 31, 2017, $1,040, and (3) the severance to be paid during 2018, $2,049. Throughout the Consulting Period, the Company will record $40 per month in general and administrative expenses, such amount representing the fair value of his consulting services.
Additionally, as a result of the Transition and Consulting Agreement: (1) allowing Mr. Rittenberg’s existing unvested stock options to continue vesting (such options would have been forfeited had he left the Company) and (2) allowing his existing vested stock options to remain outstanding (had he left the Company, he would have only had 60 days to exercise vested options), during the three months ended March 31, 20172022 and 2021:
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| Three Months Ended March 31, |
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| 2022 |
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| 2021 |
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Retail Net Sales: |
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North American Party City Stores |
| $ | 339,399 |
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| $ | 330,045 |
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Other |
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| 1,552 |
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| 3,237 |
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Total Retail Net Sales |
| $ | 340,951 |
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| $ | 333,282 |
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Wholesale Net Sales: |
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Domestic |
| $ | 62,209 |
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| $ | 55,357 |
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International |
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| 29,816 |
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| 38,168 |
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Total Wholesale Net Sales |
| $ | 92,025 |
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| $ | 93,525 |
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Total Consolidated Sales |
| $ | 432,976 |
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| $ | 426,807 |
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The Company maintains allowances for credit losses resulting from the inability of the Company’s customers to make required payments. Judgment is required in assessing the ultimate realization of these receivables, including consideration of the Company’s history of receivable write-offs, the level of past due accounts and the economic status of the Company’s customers. In an effort to identify adverse trends relative to customer economic status, the Company recorded a $1,362 chargeassesses the financial health of the markets it operates in general and administrative expenses due to the modification of such options.
Also, during the nine months ended September 30, 2017, the Company recorded a $3,195 severance charge related to the restructuringperforms periodic credit evaluations of its Retail segment. Of such amount, $2,291 was recorded in retail operating expensescustomers and $904 was recorded in generalongoing reviews of account balances and administrative expenses. The majorityaging of receivables. Amounts are considered past due when payment has not been received within the time frame of the severancecredit terms extended. Write-offs are charged directly against the allowance for credit losses and occur only after all collection efforts have been exhausted. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses. At March 31, 2022, December 31, 2021 and March 31, 2021, the allowance for credit losses was paid during the second quarter of 2017.$8,096, $8,057 and $7,499, respectively.
Note 15 – Kazzam, LLC
During the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services. The website will allow consumers to select, schedule and pay for various services (including entertainment, activities and food) all through a single portal.
AlthoughAt December 31, 2019, although the Company currently only owns 30%owned 26% of Kazzam’s equity, the Company has concluded that: a) Kazzam iswas a variable interest entity as it has insufficient equity at risk and b) the Company is its primary beneficiary. Therefore, the Company has consolidated Kazzam into the Company’s financial statements. Further, as the Company is currentlywas funding all of Kazzam’sstart-up activities via a loan to Kazzam (which will be repaid when the venture is profitable), the Company is recording 100% of Kazzam’sand recorded its operating results in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive (loss) income.
Additionally, as part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology has received a 70% ownership interest in Kazzam had been recorded in redeemable securities in the mezzanine of the Company’s consolidated balance sheet.
In January 2020, the Company and Ampology terminated certain services agreements and warrants that Ampology had in the Company stock. The parties concurrently entered into an interim transition agreement for which expenses are recorded as development stage expenses.
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On March 23, 2020, the Company agreed to purchase Ampology’s interest in Kazzam in exchange for a three-year royalty on net service revenue and a warrant to acquire 596,000purchase up to 1,000,000 shares of Party City Holdco Inc.the Company’s common stock. DuringThe acquisition of Ampology’s interest in Kazzam is an equity transaction and the nine months ended September 30, 2017, Kazzam recognized $3,000 of expense related todifference between the fair value of the 70% interest. Additionally, during such period,consideration transferred and the carrying value of Ampology’s interest in Kazzam was recorded $286 of expense related towithin the warrant. The amounts were recorded in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive income. The 70% interest has been recorded as redeemable securitiesstockholders’ equity.
During the first quarter of 2021, Ampology exercised a warrant in a cashless redemption transaction which is reflected in the Company’s consolidated balance sheet as, in the future, Ampology has the right to cause the Company to purchase the interest. The warrant has an exercise pricestatement of $15.60 and a fair value of $2,544, which is being amortized over four years.stockholders’ equity.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References throughout this document to the “Company” include Party City Holdco Inc. and its subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its subsidiaries and not to any other person.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information, and these statements are qualified by important risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-looking statements. These risks and uncertainties include: our ability to compete effectively in a competitive industry; fluctuations in commodity prices; successful implementation of our store growth strategy; decreases in our Halloween sales; product recalls or product liability; continuing changes in general economic conditions, and the impact on consumer confidence and consumer spending, including inflationary pressures; the continuing impact of COVID-19 on our global supply chain, retail store operations and customer demand; labor and material shortages and investments; disruption to the transportation system or increases in transportation costs; the impact of inflation on consumer spending; new interpretations of or changes to current accounting rules; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; changes in consumer spending based on weather, political, competitive and other conditions beyond our control; delays in store openings; competition from companies with concepts or products similar to ours; timely and effective sourcing of merchandise from our foreign and domestic vendors and delivery of merchandise through our supply chain to our stores and customers; loss or actions of third party vendors and loss of the right to use licensed material; disruptions at our manufacturing facilities; effective inventory management; our ability to manage customer returns; successful catalog management, including timing, sizing and merchandising; uncertainties in e-marketing, infrastructure and regulation; multi-channel and multi-brand complexities; our ability to introduce new brands and brand extensions; challenges associated with our increasing global presence; dependence on external funding sources for operating capital; disruptions in the financial markets; our ability to control employment, occupancy and other operating costs; our ability to improve our systems and processes; changes to our information technology infrastructure; general political, economic and market conditions and events, including war, conflict or acts of terrorism; the impact of tariffs and our ability to mitigate impacts; and the additional risks and uncertainties set forth in “Risk Factors” in Party City’s Annual Report on Form 10-K for the year ended December 31, 2021, in Item 1A of Part II of this report, and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, outlook, guidance, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by any applicable laws, Party City assumes no obligation to publicly update or revise such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments or otherwise.
Business Overview
Our Company
We are thea leading party goods retailercompany by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. With over 900 locations (inclusive of approximately 150 franchised stores),We are a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, we have the onlycoast-to-coast network of party superstores in the U.S.are a global, world-class organization that combines state-of-the-art manufacturing and Canada that make it easysourcing operations and fun to enhance special occasionssophisticated wholesale operations with a differentiated shopping experiencemulti-channel retailing strategy and an unrivaled assortment of innovativee-commerce retail operations. We design, manufactures, sources and exciting merchandise offered at a compelling value. We also operate multipledistributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. Our retail operations include approximately 830 specialty retail party supply stores (including franchise stores) throughout North America operating under the names Party City and Halloween City, and e-commerce sites, websites, principally underthrough the domain name PartyCity.com, and during the Halloween selling season we open a network of approximately 250 - 300 temporary stores under the Halloween City banner.PartyCity.com.
In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party supplies,products, with productsitems found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores. Our products are available in over 100 countries with the United Kingdom (“U.K.”), Germany, Mexico and Australia among the largest end markets for our products outside of the U.S..
During the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity for the purpose of designing, developing and launching an online exchange platform for party-related services. The website will allow consumers to select, schedule and pay for various services (including entertainment, activities and food) all through a single portal.
How We Assess the Performance of Our Company
In assessing the performance of our company, we consider a variety of performance and financial measures for our two reportable operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as adjusted net income (loss), adjusted net income (loss) per common share – diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to “Financial Measures—Measures - Adjusted EBITDA,” “Financial Measures—Measures - Adjusted Net Income (Loss)” and “Financial Measures—Measures - Adjusted Net Income (Loss) Per Common Share – Diluted” and “Results of Operations” below.
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Segments
We have two reportable operating segments: Retail and Wholesale.
Our retail operations generatesegment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Designware, Anagram and Costumes USA and other party suppliesbrand names through Party City, Halloween City and PartyCity.com. During 2016, approximately 77%For the three months ended March 31, 2022, 78.6% of the product that was sold by our retail operationssegment was supplied by our wholesale operations.segment and 31.1 % of the product that was sold by our retail segment was self-manufactured.
Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, year-end holiday sales. To maximize our seasonal opportunity, we operate a chain of temporary Halloween stores, under the Halloween City banner, during the months of September and October of each year.
Our wholesale revenues are generated from the sale of decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores including(including our franchise stores,stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and othere-commerce merchandisers.
Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween, and Christmas, the inventory balances of the Company’s wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, the promotional activities of the Company’s wholesale business, including special dating terms, particularly with respect to Halloween products sold to retailers and other distributors, throughoutresult in slightly higher accounts receivable balances during the world.third quarter.
Intercompany sales between the Wholesalewholesale and the Retail segmentretail segments are eliminated, and the wholesale profits on intercompany sales are deferred and realized at the time the merchandise is sold to the retail consumer. For operating segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.
Financial Measures
Revenues. Revenues Revenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retail e-commerce sales are recognized at point of sale.when the consumer receives the product as control transfers upon delivery. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information.E-commerce sales are recorded on a FOB destination basis and include shipping revenues. Retail sales are reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Additionally, fees paid by franchisees when franchise stores are opened are recognized upon
Under the completionterms of our performance requirementsagreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and the opening2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchise store.franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded.
Revenues from our wholesale operations represent the sale of our products to third parties, less rebates, discounts and other allowances. The termsFor most of our wholesale sales, control transfers upon the shipment of the product as: 1) legal title transfers on such date and 2) we have a present right to payment at such time. Wholesale sales returns are not significant as we generally FOB shipping point,only accept the return of goods that were shipped to the customer in error or that were damaged when received by the customer. Additionally, due to our extensive history operating as a leading party goods wholesaler, we have sufficient history with which to estimate future sales returns and revenue is recognized when goods are shipped. Wewe use the expected value method to estimate reductions to revenues for volume-based rebate programs and subsequent credits at the time sales are recognized. such activity.
Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.
Comparable Retail Same-Store Sales. The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period.period and do not exclude stores closed due to state regulations regarding COVID-19. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retaile-commerce sales.
Cost of Sales. Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, at both retail and wholesale, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs and outbound freight to get goods to our wholesale customers. At retail,Retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale operations.segment. Retail cost of sales also includes inventory
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shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retaile-commerce business.
Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to net sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on anon-going basis in order to identify slow-moving goods.
Wholesale Cost of sales related to sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.
Selling, General and Administrative Expenses.Selling, general and administrative expenses include wholesale selling expenses, retail operating expenses, and art and development costs. Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent,expenses, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes increase.
Retail Operating Expenses. Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to net sales.
Franchise Expenses. Franchise expenses Art and development costs include the costs associated with art production, creative development and product management. and all operating ourcosts and franchise network, includingexpenses not included elsewhere in the statement of operations and comprehensive income (loss). Costs include the salaries and benefits of the administrativerelated work force and other administrative costs.force. These expenses generally do not vary proportionally with royalties and franchise fees.
General and Administrative Expenses. Generalnet sales. Selling, general and administrative expenses also include all operating costs and franchise expenses not included elsewhere in the statement of operations and comprehensive income (loss). These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees, stock and equity-based compensation and data-processing costs. These expenses generally do not vary proportionally with net sales.
Art and Development Costs. Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
Development Stage Expenses. Representsstart-up activities related to Kazzam, LLC. See footnote 15 of the consolidated financial statements in Item 1 for further discussion.
Adjusted EBITDA. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and (iii) because the credit facilities use Adjusted EBITDA to measure compliance with certain covenants.
Adjusted Net Income (Loss). Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization,non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, refinancing charges, equity basedequity-based compensation and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.
Adjusted Net Income (Loss) Per Common Share – Diluted. Adjusted net income (loss) per common share – diluted represents adjusted net income (loss) divided by the Company’s diluted weighted average common shares outstanding. We present the metric because we believe it assists investors in comparing our per share performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.
Results of Operations
Three Months Ended September 30, 2017 Compared To Three Months Ended September 30, 2016
The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the three months ended September 30, 2017 and 2016.
Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Net sales | $ | 557,350 | 99.5 | % | $ | 553,382 | 99.4 | % | ||||||||
Royalties and franchise fees | 2,759 | 0.5 | 3,568 | 0.6 | ||||||||||||
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Total revenues | 560,109 | 100.0 | 556,950 | 100.0 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of sales | 357,523 | 63.8 | 356,662 | 64.0 | ||||||||||||
Wholesale selling expenses | 16,274 | 2.9 | 14,739 | 2.7 | ||||||||||||
Retail operating expenses | 100,739 | 18.0 | 100,746 | 18.1 | ||||||||||||
Franchise expenses | 3,636 | 0.6 | 3,370 | 0.6 | ||||||||||||
General and administrative expenses | 37,971 | 6.8 | 38,972 | 7.0 | ||||||||||||
Art and development costs | 5,898 | 1.1 | 5,543 | 1.0 | ||||||||||||
Development stage expenses | 680 | 0.1 | — | 0.0 | ||||||||||||
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Total expenses | 522,721 | 93.3 | 520,032 | 93.4 | ||||||||||||
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Income from operations | 37,388 | 6.7 | 36,918 | 6.6 | ||||||||||||
Interest expense, net | 23,228 | 4.1 | 22,424 | 4.0 | ||||||||||||
Other expense (income), net | 593 | 0.1 | (905 | ) | (0.2 | ) | ||||||||||
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Income before income taxes | 13,567 | 2.4 | 15,399 | 2.8 | ||||||||||||
Income tax expense | 3,483 | 0.6 | 5,219 | 1.0 | ||||||||||||
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Net income | $ | 10,084 | 1.8 | % | $ | 10,180 | 1.8 | % | ||||||||
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Net income per common share – Basic | $ | 0.08 | $ | 0.09 | ||||||||||||
Net income per common share – Diluted | $ | 0.08 | $ | 0.08 |
Revenues
Total revenues for the third quarter of 2017 were $560.1 million and were $3.2 million, or 0.6%, higher than the third quarter of 2016. The following table sets forth the Company’s total revenues for the three months ended September 30, 2017 and 2016.
Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Dollars in Thousands | Percentage of Total Revenues | Dollars in Thousands | Percentage of Total Revenues | |||||||||||||
Net Sales: | ||||||||||||||||
Wholesale | $ | 381,858 | 68.2 | % | $ | 416,387 | 74.8 | % | ||||||||
Eliminations | (188,565 | ) | (33.7 | )% | (210,562 | ) | (37.8 | )% | ||||||||
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Net wholesale | 193,293 | 34.5 | % | 205,825 | 37.0 | % | ||||||||||
Retail | 364,057 | 65.0 | % | 347,557 | 62.4 | % | ||||||||||
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Total net sales | 557,350 | 99.5 | % | 553,382 | 99.4 | % | ||||||||||
Royalties and franchise fees | 2,759 | 0.5 | % | 3,568 | 0.6 | % | ||||||||||
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Total revenues | $ | 560,109 | 100.0 | % | $ | 556,950 | 100.0 | % | ||||||||
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|
|
|
|
|
|
|
Retail
Retail net sales during the third quarter of 2017 were $364.1 million and increased $16.5 million, or 4.7%, compared to the third quarter of 2016. Retail net sales at our Party City stores totaled $324.8 million and were $19.2 million, or 6.3%, higher than 2016 as franchise store acquisitions and new store growth were partially offset by negative same-store sales (see below for further detail). During the twelve months ended September 30, 2017, we acquired 36 franchise stores and 1 independent store, opened 28 new stores and closed 8 stores. Global retaile-commerce sales totaled $34.1 million during the third quarter of 2017 and were $1.7 million, or 4.7%, lower than during the corresponding quarter of 2016. The North Americane-commerce sales that are included in our Party City brand comp decreased by 9.9% during the third quarter (see below for further detail). Sales at our temporary Halloween City stores were $5.2 million during the third quarter of 2017 or $1.0 million lower than the corresponding quarter of 2016 due, in part, to stores opening later than last year.
Same-store sales for the Party City brand (including North American retaile-commerce sales) decreased by 2.6% during the third quarter of 2017, principally due to the adverse effects of Hurricanes Harvey and Irma, which negatively impacted brand comp sales by approximately 140 basis points.
Excluding the impact ofe-commerce, same-store sales decreased by 1.8% as a 2.2% decrease in transaction count was partially offset by a 0.4% increase in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted same-store sales by approximately 130 basis points.
The North American retaile-commerce sales included in our Party City brand comp decreased by 9.9% due to a 9.1% decrease in transaction count and a 0.8% decrease in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted the percentage by approximately 140 basis points. The remainder of the decrease in transaction count reflects lower traffic as customer conversion levels were consistent with the corresponding quarter of the prior year. The decrease in average transaction dollar size was principally due to increased promotional activity as units per transaction increased by approximately 3% versus the third quarter of 2016.
Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.
Wholesale
Wholesale net sales during the third quarter of 2017 totaled $193.3 million and were $12.5 million, or 6.1%, lower than the third quarter of 2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $80.8 million and were $18.3 million, or 18.5%, lower than during 2016. The decrease was partially due to our acquisition of 36 franchise stores during the first quarter of 2017; as post-acquisition sales to such stores (approximately $10 million during the third quarter of 2016) are now eliminated as intercompany sales. Additionally, sales to existing franchisees decreased versus the corresponding quarter of 2016, principally due to carryover inventory from the 2016 Halloween selling season. Further, gift product sales decreased by approximately $1 million due to the continuedde-emphasis and product-line refinement of our Grasslands Road gift business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $19.2 million during the third quarter of 2017 and were $0.7 million, or 3.8%, higher than during the corresponding quarter of 2016. Our international sales
(which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $93.3 million and were $5.1 million, or 5.8%, higher than in 2016. Our growth was largely driven by the acquisition of Granmark S.A. de C.V. (“Granmark”) in Q1 of this year, as well as continued strong performance in the U.K. and German markets.
Intercompany sales to our retail affiliates totaled $188.6 million during the third quarter of 2017 and were $22.0 million, or 10.4%, lower than during the corresponding quarter of 2016. Intercompany sales represented 49.4% of total wholesale sales during the third quarter of 2017, compared to 50.6% during 2016. The decrease in intercompany sales was due to carryover inventory from the 2016 Halloween selling season. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the third quarter of 2017 totaled $2.8 million and were $0.8 million lower than during the third quarter of 2016 principally due to the acquisition of 36 franchise stores during the first quarter of 2017.
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended September 30, 2017 and September 30, 2016.
Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | |||||||||||||
Retail | $ | 141,334 | 38.8 | % | $ | 133,177 | 38.3 | % | ||||||||
Wholesale | 58,493 | 30.3 | 63,543 | 30.9 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 199,827 | 35.9 | % | $ | 196,720 | 35.5 | % | ||||||||
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|
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|
|
|
The gross profit margin on net sales at retail during the third quarter of 2017 was 38.8%. Such percentage was 50 basis points higher than during the third quarter of 2016. The benefits of increased share of shelf (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) and reduced product costs were partially offset by increased promotional activities. Our wholesale share of shelf at our Party City stores and our North American retaile-commerce operations increased from 75.1% during the third quarter of 2016 to 78.0% during the third quarter of 2017.
The gross profit on net sales at wholesale during 2017 and 2016 was 30.3% and 30.9%, respectively. The decrease was principally due to sales mix (including increased international sales) andde-leveraging of our fixed distribution costs due to the lower overall sales levels.
Operating expenses
Wholesale selling expenses were $16.3 million during the third quarter of 2017 and $14.7 million during the corresponding quarter of 2016. The increase was due to approximately $1.5 million of selling costs at Granmark (acquired in March 2017). Wholesale selling expenses were 8.4% and 7.2% of net wholesale sales during the third quarters of 2017 and 2016, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the third quarter of 2017 were $100.7 million and were principally consistent with the third quarter of 2016. The impact of the higher store count (discussed above) was offset by further realized savings associated with improved labor productivity and efficiency in our stores and slightly lower advertising costs. Retail operating expenses were 27.7% and 29.0% of net retail sales during the third quarters of 2017 and 2016, respectively.
Franchise expenses during the third quarters of 2017 and 2016 were $3.6 million and $3.4 million, respectively.
General and administrative expenses during the third quarter of 2017 totaled $38.0 million and were $1.0 million, or 2.6%, lower than in the third quarter of 2016. Lower executive compensation was partially offset by inflationary cost increases. General and administrative expenses as a percentage of total revenues were 6.8% and 7.0% during the third quarters of 2017 and 2016, respectively.
Art and development costs were $5.9 million and $5.5 million during the third quarters of 2017 and 2016, respectively.
Development stage expenses representstart-up costs related to Kazzam (see footnote 15 to the Company’s consolidated financial statements for further detail).
Interest expense, net
Interest expense, net, totaled $23.2 million during the third quarter of 2017, compared to $22.4 million during the third quarter of 2016. The increase principally relates to adjustments to the Company’s minority interest liabilities for Print Appeal and ACIM (see footnote 10 to the Company’s consolidated financial statements for further detail). The adjustments were partially offset by the impact of a $100 million prepayment of the Company’s Term Loan Credit Agreement during the Company’s October 2016 refinancing; as well as the impact of the credit spread on such debt being reduced by 25 basis points at such time.
Other expense (income), net
For the third quarter of 2017, other expense, net, totaled $0.6 million.
For the third quarter of 2016, other income, net, totaled $0.9 million. Such amount principally represented foreign currency transaction gains.
Income tax expense
The effective income tax rate for the three months ended September 30, 2017, 25.7%, is lower than the effective rate for the three months ended September 30, 2016, 33.9%, principally due to discrete items related to uncertain tax positions, stock option exercises andreturn-to-provision adjustments. The impact of such items was partially offset by the effect of state tax rate changes on deferred tax liabilities.
Nine Months Ended September 30, 2017 Compared To Nine Months Ended September 30, 2016
The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the nine months ended September 30, 2017 and 2016.
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Net sales | $ | 1,572,966 | 99.4 | % | $ | 1,523,094 | 99.3 | % | ||||||||
Royalties and franchise fees | 9,020 | 0.6 | 11,009 | 0.7 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total revenues | 1,581,986 | 100.0 | 1,534,103 | 100.0 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of sales | 978,142 | 61.8 | 952,294 | 62.1 | ||||||||||||
Wholesale selling expenses | 47,946 | 3.0 | 45,854 | 2.9 | ||||||||||||
Retail operating expenses | 281,981 | 17.8 | 278,070 | 18.1 | ||||||||||||
Franchise expenses | 10,666 | 0.7 | 10,507 | 0.7 | ||||||||||||
General and administrative expenses | 125,763 | 7.9 | 115,828 | 7.6 | ||||||||||||
Art and development costs | 17,638 | 1.1 | 16,596 | 1.1 | ||||||||||||
Development stage expenses | 7,092 | 0.4 | — | 0.0 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total expenses | 1,469,228 | 92.9 | 1,419,149 | 92.5 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Income from operations | 112,758 | 7.1 | 114,954 | 7.5 | ||||||||||||
Interest expense, net | 65,214 | 4.1 | 67,857 | 4.4 | ||||||||||||
Other expense (income), net | 860 | 0.1 | (4,107 | ) | (0.2 | ) | ||||||||||
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|
|
|
|
|
|
| |||||||||
Income before income taxes | 46,684 | 3.0 | 51,204 | 3.3 | ||||||||||||
Income tax expense | 16,301 | 1.0 | 18,903 | 1.2 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Net income | $ | 30,383 | 1.9 | % | $ | 32,301 | 2.1 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per common share – Basic | $ | 0.25 | $ | 0.27 | ||||||||||||
Net income per common share – Diluted | $ | 0.25 | $ | 0.27 |
Revenues
Total revenues for the first nine months of 2017 were $1,582.0 million and were $47.9 million, or 3.1%, higher than the corresponding period of 2016. The following table sets forth the Company’s total revenues for the nine months ended September 30, 2017 and 2016.
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Dollars in Thousands | Percentage of Total Revenues | Dollars in Thousands | Percentage of Total Revenues | |||||||||||||
Net Sales: | ||||||||||||||||
Wholesale | $ | 929,255 | 58.7 | % | $ | 945,071 | 61.6 | % | ||||||||
Eliminations | (459,416 | ) | (29.0 | )% | (465,189 | ) | (30.3 | )% | ||||||||
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|
|
|
|
|
|
| |||||||||
Net wholesale | 469,839 | 29.7 | % | 479,882 | 31.3 | % | ||||||||||
Retail | 1,103,127 | 69.7 | % | 1,043,212 | 68.0 | % | ||||||||||
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|
|
|
|
|
|
| |||||||||
Total net sales | 1,572,966 | 99.4 | % | 1,523,094 | 99.3 | % | ||||||||||
Royalties and franchise fees | 9,020 | 0.6 | % | 11,009 | 0.7 | % | ||||||||||
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|
|
|
|
|
|
| |||||||||
Total revenues | $ | 1,581,986 | 100.0 | % | $ | 1,534,103 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Retail
Retail net sales during the first nine months of 2017 were $1,103.1 million and increased $59.9 million, or 5.7%, compared to the first nine months of 2016. Retail net sales at our Party City stores totaled $993.7 million and were $59.4 million, or 6.4%, higher than 2016 as franchise store acquisitions and new store growth were partially offset by negative same-store sales (see below for further detail). During the twelve months ended September 30, 2017, we acquired 36 franchise stores and 1 independent store, opened 28 new stores and closed 8 stores. Global retaile-commerce sales totaled $104.2 million during the first nine months of 2017 and were $1.5 million, or 1.5%, higher than during the corresponding period of 2016, driven by strong internationale-commerce sales. Sales at our temporary Halloween City stores were $5.2 million during the period or $1.0 million lower than the corresponding period of 2016 partially due to the fact that we opened stores later this year than a year ago.
Same-store sales for the Party City brand (including North American retaile-commerce sales) decreased by 0.3%, largely a result of the adverse impact of Hurricanes Harvey and Irma, which adversely impacted brand comp sales by approximately 50 basis points.
Excluding the impact ofe-commerce, same-store sales decreased by 0.3% as a 0.9% decrease in transaction count was partially offset by a 0.6% increase in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted same-store sales by approximately 40 basis points.
The North American retaile-commerce sales included in our Party City brand comp increased by 0.1% as a 2.9% increase in transaction count was mostly offset by a decrease in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted the percentage by approximately 50 basis points. The increase ine-commerce transaction count reflects higher customer conversion levels versus the same period of last year. The decrease in average transaction dollar size principally relates to lower units, largely a reflection of lower free-freight promotional thresholds.
Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.
Wholesale
Wholesale net sales during the first nine months of 2017 totaled $469.8 million and were $10.0 million, or 2.1%, lower than during 2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $204.4 million and were $32.3 million, or 13.6%, lower than during the first nine months of 2016. The decrease was principally due to our acquisition of 36 franchise stores during the first quarter of 2017; as post-acquisition sales to such stores (approximately $19 million during the first nine months of 2016) are now eliminated as intercompany sales. Additionally, sales to existing franchisees decreased versus the corresponding period of 2016, principally due to carryover inventory from the 2016 Halloween selling season. Further, gift product sales decreased by approximately $3 million due to the continuedde-emphasis and product-line refinement of our Grasslands Road gift business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $62.4 million during the first nine months of 2017 and were $3.7 million, or 6.3%, higher than during the corresponding period of 2016 primarily due to stronger Valentine’s Day sales, in part due to the timing of certain shipments. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $203.0 million and were $18.6 million, or 10.1%, higher than in 2016, despite a $4.9 million negative impact from foreign currency translation during the first nine months of 2017. This growth was attributable to two acquisitions and further expansion of ourstore-in-store concept with key retailers.
Intercompany sales to our retail affiliates totaled $459.4 million during the first nine months of 2017 and were $5.8 million, or 1.2%, lower than during the corresponding period of 2016. Intercompany sales represented 49.4% of total wholesale sales during the first nine months of 2017, compared to 49.2% during 2016. The decrease in intercompany sales was due to carryover inventory from the 2016 Halloween selling season. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the first nine months of 2017 totaled $9.0 million and were $2.0 million, or 18.1%, lower than during the first nine months of 2016 principally due to the acquisition of 36 franchise stores during the first quarter of 2017.
Gross Profit
The following table sets forth the Company’s gross profit for the nine months ended September 30, 2017 and September 30, 2016.
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | |||||||||||||
Retail | $ | 447,787 | 40.6 | % | $ | 419,283 | 40.2 | % | ||||||||
Wholesale | 147,037 | 31.3 | 151,517 | 31.6 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 594,824 | 37.8 | % | $ | 570,800 | 37.5 | % | ||||||||
|
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|
|
|
|
The gross profit margin on net sales at retail during the first nine months of 2017 was 40.6%. Such percentage was 40 basis points higher than during the corresponding period of 2016. The benefits of increased share of shelf (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) and reduced product costs were partially offset by increased promotional activities. Our wholesale share of shelf at our Party City stores and our North American retaile-commerce operations increased from 75.9% during the first nine months of 2016 to 78.0% during the first nine months of 2017.
The gross profit on net sales at wholesale during 2017 and 2016 was 31.3% and 31.6%, respectively. The decrease was principally due to the strengthening of the U.S. Dollar and its unfavorable impact on certain of our international subsidiaries that purchase product in U.S. Dollars and sell in local currency. Benefits associated with continued improvements in our sourcing efforts were offset by the impact of sales mix (including increased international sales) andde-leveraging of our fixed distribution costs due to the lower overall sales levels.
Operating expenses
Wholesale selling expenses were $47.9 million during the first nine months of 2017 and $45.9 million during the corresponding period of 2016. Approximately $3 million of selling costs at Granmark (acquired in March 2017) and inflationary cost increases were partially offset by favorable foreign currency translation ($0.7 million) and lower intangible asset amortization. Wholesale selling expenses were 10.2% and 9.6% of net wholesale sales during the first nine months of 2017 and 2016, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the first nine months of 2017 were $282.0 million and were $3.9 million, or 1.4%, higher than during the first nine months of 2016. The impact of the increased store count (discussed above) and inflationary cost increases were mostly offset by realized savings associated with improved labor productivity and efficiency in our stores and lower advertising expenses. Retail operating expenses were 25.6% and 26.7% of net retail sales during the first nine months of 2017 and 2016, respectively.
Franchise expenses during the first nine months of 2017 and 2016 were $10.7 million and $10.5 million, respectively.
General and administrative expenses during the first nine months of 2017 totaled $125.8 million and were $9.9 million, or 8.6%, higher than in the first nine months of 2016. In conjunction with the Transition and Consulting Agreement disclosed in Note 14 to our consolidated financial statements, during the first nine months of 2017 we recorded a $5.7 million severance charge, $1.4 million of which related to equity-based compensation. Additionally, as part of a retail restructuring (also disclosed in Note 14), during the first nine months of 2017 we recorded $0.9 million of severance expense for employees of our retail segment. The remainder of the variance versus the first nine months of 2016 was principally due to inflationary cost increases and administrative costs at Granmark (acquired in March 2017). General and administrative expenses as a percentage of total revenues increased from 7.6% in 2016 to 7.9% in 2017 due to the severance.
Art and development costs were $17.6 million and $16.6 million during the first nine months of 2017 and 2016, respectively. Such amounts represent 1.1% of total revenues in both periods.
Development stage expenses representstart-up costs related to Kazzam (see footnote 15 to the Company’s consolidated financial statements for further detail).
Interest expense, net
Interest expense, net, totaled $65.2 million during the first nine months of 2017, compared to $67.9 million during the first nine months of 2016. The decrease principally reflects a $100 million prepayment of the Company’s Term Loan Credit Agreement during the Company’s October 2016 refinancing; as well as the impact of the credit spread on such debt being reduced by 25 basis points at such time.
Other expense (income), net
For the first nine months of 2017, other expense, net, totaled $0.9 million.
During the corresponding period of 2016, other income, net, totaled $4.1 million. Such amount included $6.9 million of foreign currency transaction gains, primarily the impact of the change in the U.S. Dollar from December 31, 2015 to September 30, 2016 and the correspondingre-measurement of the U.S. dollar-denominated receivables and payables of our foreign operations.
Income tax expense
The effective income tax rate for the nine months ended September 30, 2017, 34.9%, is lower than the effective rate for the nine months ended September 30, 2016, 36.9%, principally due to discrete items related to uncertain tax positions, stock option exercises andreturn-to-provision adjustments. The impact of such items was partially offset by the effect of state tax rate changes on deferred tax liabilities.
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted
The Company presents the measures of adjusted EBITDA, adjusted net income (loss) and adjusted net income per common share—diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization,non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures- Diluted as supplemental non-GAAP measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-dilutedshare—diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual ornon-recurring items. The Company presents the measures because the Company believes they assist investors in comparing the Company’s performance across reporting periods on a consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per common share—diluted are helpful benchmarks to evaluate its operating performance.
Adjusted EBITDA, adjusted net income, and adjusted net income per common share—diluted have limitations as analytical tools. SomeBecause of these limitations, adjusted EBITDA, adjusted net income, and adjusted net income per common share—diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. The Company compensates for these limitations by relying primarily on its GAAP results and using the metrics only on a supplemental basis and reconciliations from GAAP to non-GAAP measures are provided. Some of the limitations of non-GAAP measures are:
17
BecauseResults of these limitations, adjusted EBITDA, adjustedOperations
Overview
The Company experienced revenue growth despite the impact of the COVID-19 Omicron variant earlier in the quarter. Our loss from operations was affected by higher costs, including greater freight and commodity costs. We expect supply chain and inflationary headwinds to continue through the rest of fiscal year 2022. While we navigate this near-term turbulence in costs, we are being thoughtful with our mitigating actions on pricing, and we are continuing to focus on our strategic priorities of enhancements to customer engagement as well as digital, IT and supply chain.
Three Months Ended March 31, 2022 Compared To Three Months Ended March 31, 2021
The following table sets forth the Company’s operating results and operating results as a percentage of total net incomesales for the three months ended March 31, 2022 and adjusted net income per common share2021.
|
| Three months ended March 31, | ||||||||||||||||
|
| 2022 |
|
| 2021 | |||||||||||||
|
| (Dollars in thousands) | ||||||||||||||||
Net sales |
| $ | 432,976 |
|
|
| 100.0 |
| % |
| $ | 426,807 |
|
|
| 100.0 |
| % |
Cost of sales |
|
| 294,968 |
|
|
| 68.1 |
|
|
|
| 274,521 |
|
|
| 64.3 |
|
|
Gross profit |
|
| 138,008 |
|
|
| 31.9 |
|
|
|
| 152,286 |
|
|
| 35.7 |
|
|
Selling, general and administrative expenses** |
|
| 158,060 |
|
|
| 36.5 |
|
|
|
| 149,021 |
|
|
| 34.9 |
|
|
Loss on disposal of assets in international operations |
|
| — |
|
|
| — |
|
|
|
| 3,211 |
|
|
| 0.8 |
|
|
(Loss) income from operations |
|
| (20,052 | ) |
|
| (4.6 | ) |
|
|
| 54 |
|
|
| — |
|
|
Interest expense, net |
|
| 23,395 |
|
|
| 5.4 |
|
|
|
| 17,214 |
|
|
| 4.0 |
|
|
Other (income) expense, net |
|
| (203 | ) |
|
| — |
|
|
|
| 427 |
|
|
| 0.1 |
|
|
(Loss) before income taxes |
|
| (43,244 | ) |
|
| (10.0 | ) |
|
|
| (17,587 | ) |
|
| (4.1 | ) |
|
Income tax (benefit) |
|
| (16,355 | ) |
|
| (3.8 | ) |
|
|
| (3,469 | ) |
|
| (0.8 | ) |
|
Net (loss) |
|
| (26,889 | ) |
|
| (6.2 | ) |
|
|
| (14,118 | ) |
|
| (3.3 | ) |
|
Less: Net (loss) attributable to noncontrolling interests |
|
| — |
|
|
| — |
|
|
|
| (54 | ) |
|
| — |
|
|
Net (loss) attributable to common shareholders of Party City Holdco Inc. |
| $ | (26,889 | ) |
|
| (6.2 | ) | % |
| $ | (14,064 | ) |
|
| (3.3 | ) | % |
Net (loss) per share attributable to common shareholders of Party City Holdco |
| $ | (0.24 | ) |
|
|
|
|
| $ | (0.13 | ) |
|
|
|
| ||
Net (loss) per share attributable to common shareholders of Party City Holdco |
| $ | (0.24 | ) |
|
|
|
|
| $ | (0.13 | ) |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
** Consists of wholesale selling expenses, retail operating expenses, art and development costs and general and administrative expenses, which were reported separately in the prior year. |
18
|
| Three months ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
(Dollars in thousands) |
|
|
|
|
|
| ||
Net (loss) |
| $ | (26,889 | ) |
| $ | (14,118 | ) |
Interest expense, net |
|
| 23,395 |
|
|
| 17,214 |
|
Income tax (benefit) |
|
| (16,355 | ) |
|
| (3,469 | ) |
Depreciation and amortization |
|
| 15,860 |
|
|
| 17,944 |
|
EBITDA |
|
| (3,989 | ) |
|
| 17,571 |
|
Inventory restructuring and early lease terminations (f) |
|
| — |
|
|
| 3,138 |
|
Other restructuring, retention and severance (a) |
|
| — |
|
|
| 2,051 |
|
Goodwill, intangibles and long-lived assets impairment (b) |
|
| 2,154 |
|
| — |
| |
Deferred rent (c) |
|
| 2,525 |
|
|
| 1,526 |
|
Closed store expense (d) |
|
| 987 |
|
|
| 1,593 |
|
Foreign currency (gains), net |
|
| (281 | ) |
|
| (539 | ) |
Stock-based compensation - employee** |
|
| 1,712 |
|
|
| 1,282 |
|
Undistributed loss in equity method investments |
|
| 310 |
|
|
| 336 |
|
Gain on sale of property, plant and equipment |
|
| (119 | ) |
|
| — |
|
COVID - 19 (e) |
|
| — |
|
|
| 615 |
|
Inventory disposal reserve |
|
| 621 |
|
|
| — |
|
Loss on sale of business |
|
| — |
|
|
| 3,211 |
|
Net loss on debt repayment (g) |
|
| — |
|
|
| 226 |
|
Other |
|
| 684 |
|
|
| 1,409 |
|
Adjusted EBITDA |
| $ | 4,604 |
|
| $ | 32,419 |
|
** Stock-based compensation consists of stock-option expense – diluted should not be consideredtime-based, restricted stock units – time-based and restricted stock units – performance-based, which were shown separately in isolation or as substitutesprior years.
|
| Three months ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
(Dollars in thousands, except per share amounts) |
|
|
|
|
|
| ||
(Loss) before income taxes |
| $ | (43,244 | ) |
| $ | (17,587 | ) |
Intangible asset amortization |
|
| 1,544 |
|
|
| 2,477 |
|
Amortization of deferred financing costs and original |
|
| 1,271 |
|
|
| 863 |
|
Other restructuring, retention and severance (a) |
|
| — |
|
|
| 1,936 |
|
Goodwill, intangibles and long-lived assets impairment (b) |
|
| 2,154 |
|
| — |
| |
Stock option expense |
|
| 85 |
|
|
| 113 |
|
Restricted stock unit and restricted cash awards expense – performance-based |
|
| 569 |
|
|
| 817 |
|
COVID - 19 (e) |
|
| — |
|
|
| 615 |
|
Loss on disposal of assets |
|
| — |
|
|
| 3,211 |
|
Inventory disposal reserve |
|
| 621 |
|
|
| 764 |
|
Adjusted (loss) before income taxes |
|
| (37,000 | ) |
|
| (6,791 | ) |
Adjusted income tax (benefit) (h) |
|
| (12,321 | ) |
|
| (1,382 | ) |
Adjusted net (loss) |
| $ | (24,679 | ) |
| $ | (5,409 | ) |
Adjusted net (loss) per common share – diluted |
| $ | (0.22 | ) |
| $ | (0.05 | ) |
Weighted-average number of common shares-diluted |
|
| 112,407,040 |
|
|
| 110,917,349 |
|
19
Reconciliation of Adjusted Third-Party Wholesale Sales
|
| Three Months Ended March 31, | |||||||||||
|
| 2022 |
|
| 2021 |
|
| Percent Variance |
|
| |||
Wholesale third-party sales |
| $ | 92,025 |
|
| $ | 93,524 |
|
|
| (1.6 | ) | % |
Third-party sales of divested entities |
|
| — |
|
|
| (13,165 | ) |
|
|
|
| |
Adjusted Wholesale third-party sales |
| $ | 92,025 |
|
| $ | 80,360 |
|
|
| 14.5 |
| % |
Sales
Total net sales for the first quarter of 2022 were $433.0 million and were $6.2 million, or 1.4%, higher than the first quarter of 2021. The following table sets forth the Company’s total net sales for the three months ended March 31, 2022 and 2021.
|
| Three months ended March 31, | ||||||||||||||||
|
| 2022 |
|
| 2021 | |||||||||||||
|
| Dollars in |
|
| Percentage of |
| Dollars in |
|
| Percentage of | ||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Wholesale |
| $ | 239,680 |
|
|
| 55.4 |
| % |
| $ | 212,137 |
|
|
| 49.7 |
| % |
Eliminations |
|
| (147,655 | ) |
|
| (34.1 | ) |
|
|
| (118,612 | ) |
|
| (27.8 | ) |
|
Net wholesale |
|
| 92,025 |
|
|
| 21.3 |
|
|
|
| 93,525 |
|
|
| 21.9 |
|
|
Retail |
|
| 340,951 |
|
|
| 78.7 |
|
|
|
| 333,282 |
|
|
| 78.1 |
|
|
Total net sales |
| $ | 432,976 |
|
|
| 100.0 |
| % |
| $ | 426,807 |
|
|
| 100.0 |
| % |
Retail
Retail net sales during the first quarter of 2022 were $ 341.0 million and were $ 7.7 million, or 2.3%, higher than during the first quarter of 2021. The increase was due to recovery of sales from the prior year that were impacted by COVID. Retail net sales at our Party City stores totaled $323.2 million and were $12.6 million, or 4.1% higher than in the first quarter of 2021.
Same-store sales for the Party City brand (including North American retail e-commerce sales) increased by 2.1% during the first quarter of 2022 compared to the 13 weeks ended April 3, 2021, principally due to growth in seasonal sales.
Wholesale
Wholesale net sales during the first quarter of 2022 totaled $92.0 million and were $1.5 million, or 1.6%, lower than the first quarter of 2021. This decrease is principally due to the prior year divestiture of a significant portion of our international operations, partially offset by higher sales to franchise and independent customers as follows:well as Anagram sales growth in the first quarter of 2022. Excluding the impact of the divestiture, sales increased 14.5%.
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income | $ | 10,084 | $ | 10,180 | $ | 30,383 | $ | 32,301 | ||||||||
Interest expense, net | 23,228 | 22,424 | 65,214 | 67,857 | ||||||||||||
Income taxes | 3,483 | 5,219 | 16,301 | 18,903 | ||||||||||||
Depreciation and amortization | 20,694 | 20,015 | 62,519 | 61,186 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
EBITDA | 57,489 | 57,838 | 174,417 | 180,247 | ||||||||||||
Non-cash purchase accounting adjustments | 1,500 | — | 6,350 | 3,689 | ||||||||||||
Restructuring, retention and severance (a) | 212 | 92 | 8,839 | 254 | ||||||||||||
Deferred rent (b) | 2,719 | 7,095 | 5,634 | 12,240 | ||||||||||||
Closed store expense (c) | 1,285 | 971 | 4,164 | 2,927 | ||||||||||||
Foreign currency losses (gains), net | 36 | (1,767 | ) | (1,684 | ) | (6,945 | ) | |||||||||
Employee equity based compensation (d) | 630 | 948 | 3,852 | 2,829 | ||||||||||||
Non-employee equity based compensation (e) | 21 | — | 3,286 | — | ||||||||||||
Undistributed loss (income) in unconsolidated joint ventures | 134 | 113 | (92 | ) | 380 | |||||||||||
Corporate development (f) | 1,634 | 683 | 6,078 | 1,895 | ||||||||||||
Hurricane-related costs | 385 | — | 385 | — | ||||||||||||
Other | 84 | 61 | 562 | 118 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted EBITDA | $ | 66,129 | $ | 66,034 | $ | 211,791 | $ | 197,634 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Income before income taxes | $ | 13,567 | $ | 15,399 | $ | 46,684 | $ | 51,204 | ||||||||
Intangible asset amortization | 3,879 | 4,049 | 11,704 | 12,182 | ||||||||||||
Non-cash purchase accounting adjustments (g) | 2,241 | (102 | ) | 8,165 | 4,991 | |||||||||||
Amortization of deferred financing costs and original issuance discounts | 1,240 | 1,277 | 3,699 | 3,821 | ||||||||||||
Restructuring, retention and severance (a) | (323 | ) | — | 7,491 | — | |||||||||||
Non-employee equity based compensation (e) | 21 | — | 3,286 | — | ||||||||||||
Hurricane-related costs | 385 | — | 385 | — | ||||||||||||
Employee equity based compensation (d) | 630 | 948 | 3,852 | 2,829 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted income before income taxes | 21,640 | 21,571 | 85,266 | 75,027 | ||||||||||||
Adjusted income tax expense (h) | 6,467 | 7,568 | 30,713 | 27,918 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted net income | $ | 15,173 | $ | 14,003 | $ | 54,553 | $ | 47,109 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Adjusted net income per common share –diluted | $ | 0.13 | $ | 0.12 | $ | 0.45 | $ | 0.39 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted-average number of common shares-diluted | 120,912,849 | 120,472,297 | 120,907,979 | 120,312,492 |
Liquidity
During 2015, the Company replaced its then-existing debt with indebtedness consisting of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) a $540 million asset-based revolving credit facility (with a seasonal increaseIntercompany sales to $640our retail affiliates totaled $147.7 million during the first quarter of 2022 and were $29.0 million higher than during the corresponding quarter of 2021. Intercompany sales represented 61.6% of total Wholesale sales during the first quarter of 2022 and were 24.5% higher than during the first quarter of 2021, principally due to easing of supply chain constraints as we replenish store inventory. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
20
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended March 31, 2022 and 2021.
|
| Three months ended March 31, | ||||||||||||||||
|
| 2022 |
|
|
| 2021 | ||||||||||||
|
| Dollars in Thousands |
|
| Percentage of Net Sales |
|
|
| Dollars in Thousands |
|
| Percentage of Net Sales |
|
| ||||
Retail gross profit |
| $ | 113,366 |
|
|
| 33.2 |
| % |
| $ | 123,178 |
|
|
| 37.0 |
| % |
Wholesale gross profit |
|
| 24,642 |
|
|
| 26.8 |
|
|
|
| 29,108 |
|
|
| 31.1 |
|
|
Total gross profit |
| $ | 138,008 |
|
|
| 31.9 |
| % |
| $ | 152,286 |
|
|
| 35.7 |
| % |
The gross profit margin on net sales at Retail during the first quarter of 2022 was 33.2 % or 380 basis points lower than during the corresponding quarter of 2021. The change was primarily driven by higher helium and freight costs for the quarter. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 31.1 % during the first quarter of 2022 was 1.9% lower as compared to the first quarter of 2021. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 78.6% during the first quarter of 2022 or 2.9% lower than during the first quarter of 2021.
The gross profit margin on net sales at Wholesale during the first quarters of 2022 and 2021 was 26.8% and 31.1%, respectively. This decrease is primarily due to higher freight, material and labor costs.
Selling, general and administrative expenses
Selling, general and administrative expenses during the first quarter of 2022 totaled $158.1 million and were $9.1 million, or 6.1%, higher than in the first quarter of 2021. The increase was primarily driven by higher employee-related costs resulting from higher wages, predominately in our retail stores, partially offset by the international divestiture.
Interest expense, net
Interest expense, net, totaled $23.4 million during the first quarter of 2022, compared to $17.2 million during the first quarter of 2021. The increase primarily reflects higher cost debt from the refinancing in the first quarter of 2021.
Other (income) expense, net
For the first quarters of 2022 and 2021, other (income) expense, net, totaled $(0.2) million and $0.4 million, respectively. The change is primarily due to recognition of a certain periodcurrency gain in 2022 versus a currency loss in 2021.
Income tax benefit
The effective income tax rate for the three months ended March 31, 2022 of each calendar year) (“ABL Facility”)37.8%, is different from the statutory rate of 21.0% primarily due to state taxes, and (iii) $350 million of 6.125% senior notes.valuation allowance resulting from interest carryforward deductions limited by IRC Section 163(j).
Liquidity and Capital Resources
We have proactively managed our liquidity profile throughout the quarter and expect to continue to do so going forward. We expect thatto rely on cash on hand, cash generated from operating activitiesby operations and availabilityborrowings available under our credit agreements to meet our working capital needs and will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL FacilityCompany's credit facilities and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Our business, results of operations, financial condition and liquidity have been and may continue to be materially and adversely affected by COVID-19. Further, the disruption to the global economy and to our business, along with the decline in our stock price, may negatively impact the carrying value of certain assets, including inventories, accounts receivable, intangibles and goodwill. Any additional impact to which COVID-19 and the measures to contain it will impact our business, operations, financial condition and liquidity will depend on future severity, duration of COVID-19 and, as applicable any continued response to the virus, all of which are uncertain in 2022. We will continue to actively monitor the impact of COVID-19.
21
However, if the duration of the COVID-19 pandemic continues longer than we expect or the severity worsens, we may need to access other sources of financing, including incurring additional indebtedness, selling our assets and raising additional equity capital. These alternatives may not be available to us on satisfactory terms or at all, which could have a material adverse effect on our business.
Sources of Cash
Based on our current operations and planned strategic initiatives (including new store and NXTGEN remodel growth plans and other capital expenditures), we expect to satisfy our short-term and long-term cash requirements through a combination of our existing cash and cash equivalents position, funds generated from operating activities, and the borrowing capacity available under our credit agreements. If cash generated from our operations and borrowings under our credit agreements are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time, in our sole discretion, purchase or retire all or a portion of our existing debt instruments through privately negotiated or open market transactions.
As of March 31, 2022, the Company had cash and cash equivalents of $33 million and available borrowings of $90 million.
Material Cash Commitments
Debt Obligations, Finance Leases and Interest Payments. As of March 31, 2022, we had $209.1 million in loans and notes payable, $0.9 million current long-term obligations and $1,346.7 million in long-term obligations outstanding. Repayment of the Company's debt is dependent on our subsidiaries' ability to make cash available. For additional information regarding the Company's debt, refer to Note 13, Current and Long-Term Obligations in Part I, Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q. As noted, the Company must make payments related to interest payments, principal and fees and the facilities contain debt covenants that the must be met.
Leases. As of March 31, 2022, we had an operating lease liability of $801.3 million. We have numerous non-cancelable operating leases for retail store sites, as well as leases for offices, distribution facilities and manufacturing facilities. These leases generally contain renewal options and require us to pay real estate taxes, utilities and related insurance costs.
Capital Expenditures. Cash commitments are described in the following section on Cash Flow Data.
8.75% Senior Secured Notes — Due 2026 (“8.75% Senior Notes”)
In accordance with the 8.75% Senior Notes, as discussed in Note 13, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, the Company is required to provide quarterly and annual disclosure of certain financial metrics for Anagram Holdings, LLC and its subsidiary (“Anagram”). For the three months ended March 31, 2022, Anagram reported:
Cash Flow Data – Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Net cash provided byused in operating activities totaled $6.3 million and $23.5$116.8 million during the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2022. Net cash flows provided byused in operating activities before changes in operating assets and liabilities were $113.5totaled $48.8 million during the first ninethree months of 2017, compared to $114.1 million during 2016. Changesended March 31, 2021. The increase in cash used in operating assetsactivities is primarily attributable to increased inventory purchases to support higher anticipated sales and liabilities during the first nine months of 2017 and 2016 resulted in the use of cash of $107.2 million and $90.6 million, respectively. The use of cash was higher during 2017 principallyincreased inventory cost due to increased income tax paymentsfreight. The increase in cash used is also due to timing of payments related to accounts payable and accrued expenses and a higher net loss, partially offset by lower lease payments as the Company’s increased profitability.prior year reflected payment of COVID deferrals.
Net cash used in investing activities totaled $120.7$17 million during the ninethree months ended September 30, 2017,March 31, 2022, as compared to $89.1$1.6 million during the ninethree months ended September 30, 2016. InvestingMarch 31, 2021. The increase in cash used in investing activities during 2017 included $72.8 million paid in connection with acquisitions, principally related to franchise stores and Granmark (see Note 13is primarily due to the consolidated financial statements for further detail).prior year reflecting the proceeds from the sale of our international operations, offset by lower capital expenditures in the current year. Capital expenditures during the ninethree months ended September 30, 2017March 31, 2022 and 20162021 were $47.9$18.6 million and $57.3$22.2 million, respectively. Retail capital expenditures totaled $25.1 million during 2017 and principally related to store conversions and information technology-related expenditures. Wholesale capital expenditures during 2017 totaled $22.8 million and primarily related to printing plates and dies, as well as machinery and equipment at the Company’s manufacturing operations and main distribution center.
Net cash provided by financing activities was $104.6$118.5 million during the ninethree months ended September 30, 2017, asMarch 31, 2022 compared to $71.5$16.9 million during the corresponding period of 2016. Borrowings were higher during 2017three months ended March 31, 2021. The variance was principally due to the acquisitions.
At September 30, 2017, the Company had approximately $372 million of availabilityhigher borrowings under itsthe ABL Facility after considering borrowing base restrictions.in the current year and the impact of the prior year debt refinancing transactions as discussed in Note 13, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q.
Contractual Obligations22
Critical Accounting Estimates
Other than as described above under “LiquiditySee Item 7, Management’s Discussion and Capital Resources”, there were no material changes to our future minimum contractual obligations asAnalysis of December 31, 2016 as previously disclosedResults of Operations and Financial Condition in our Annual Report on Form10-K for the year ended December 31, 2016.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during the three months ended September 30, 2017 and the year ended December 31, 2016.
Seasonality
Wholesale Operations
Despite2021, for a concentration of holidays in the fourth quarter of the year, as a resultdiscussion of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the quarter.critical accounting estimates.
Retail Operations
Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent,year-end holiday sales.23
Cautionary Note Regarding Forward-Looking Statements
From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the section titled “Risk Factors” included in our Annual Report on Form10-K filed with the SEC on March 16, 2017. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of the date of this filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:
Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this filing to conform these statements to actual results or to changes in our expectations.
You should read this filing with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risks since December 31, 2016 asrisk exposures from those disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk from those previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2016.2021.
Item 4. Controls and Procedures
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) as of September 30, 2017.March 31, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in our internal control over financial reporting (as defined inRules 13a-15(f) and15d-15(f) under the Act) during the quarterthree months ended September 30, 2017March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PARTII-OTHER INFORMATION
24
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Information in response to this Item is incorporated herein by reference from Note 8,9 – Commitments and Contingencies , to our Condensed Consolidated Financial Statements in this Quarterly Report on Form10-Q.
Item 1A. Risk Factors
There have beenwere no material changes during the period covered in this report to the risk factors previously disclosed under the heading “Risk Factors” in the Company’sPart I, Item 1A, of our Annual Report on Form10-K for the year ended December 31, 2016.2021, except as follows:
Labor, product, and supply disruptions have had and may continue to have an adverse effect on our operating results.
We have experienced, and expect to continue to experience, logistics constraints and supply chain disruptions, including increased key raw material and helium costs, increased freight, shipping and transportation costs, increased labor wages, labor shortages and delivery delays and associated charges. Failure to effectively manage these disruptions has and may continue to adversely impact our operating results.
25
Item 6. Exhibits
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
10.1* | ||
31.1* | ||
31.2* | ||
32.1* | ||
32.2* | ||
101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and |
* Filed herewith.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report onForm 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
PARTY CITY HOLDCO INC. | ||||||||
By: | /s/ Todd Vogensen | |||||||
Todd Vogensen | ||||||||
Chief Financial Officer ( Financial Officer) |
Date: May 9, 2022
3327