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.
Business Overview
Our Company
We are the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources 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 Company’s retail operations include 830 specialty retail party supply stores (including franchise stores) throughout North America operating under the names Party City and Halloween City, and e-commerce websites, principally through the domain name PartyCity.com.
In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors 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 dollar stores.
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 - Adjusted EBITDA,” “Financial Measures - Adjusted Net Income (Loss)” and “Financial Measures - Adjusted Net Income (Loss) Per Common Share – Diluted” below.
Segments
We have two reportable operating segments: Retail and Wholesale.
Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Anagram and Costumes USA brand names through Party City, Halloween City and PartyCity.com. For the nine months ended September 30, 2021, 80.9% of the product that was sold by our retail segment was supplied by our wholesale segment and 30.3 % of the product that was sold by our retail segment was self-manufactured.
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 our franchise stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and e-commerce merchandisers.
Intercompany sales between the wholesale and the retail 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. 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 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. Retail sales are reported net of taxes collected.
19
Under the terms of our agreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and 2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded.
For 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 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 we use the expected value method to estimate 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 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 retail e-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, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs and outbound freight to get goods to our wholesale customers. At 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 segment. Retail cost of sales also includes inventory 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 retail e-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 an on-going basis in order to identify slow-moving goods.
Cost of sales related to sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.
Wholesale Selling Expenses. 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 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.
General and Administrative Expenses. General and administrative expenses 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.
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
20
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, equity-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, 2021 Compared To Three Months Ended September 30, 2020
The following table sets forth the Company’s operating results and operating results as a percentage of total net sales for the three months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Net sales
|
|
$
|
510,199
|
|
|
|
100.0
|
|
%
|
|
$
|
533,775
|
|
|
|
100.0
|
|
%
|
|
Cost of sales
|
|
|
326,501
|
|
|
|
64.0
|
|
|
|
|
355,923
|
|
|
|
66.7
|
|
|
|
Gross profit
|
|
|
183,698
|
|
|
|
36.0
|
|
|
|
|
177,852
|
|
|
|
33.3
|
|
|
|
Wholesale selling expenses
|
|
|
7,503
|
|
|
|
1.5
|
|
|
|
|
11,950
|
|
|
|
2.2
|
|
|
|
Retail operating expenses
|
|
|
105,206
|
|
|
|
20.6
|
|
|
|
|
97,100
|
|
|
|
18.2
|
|
|
|
General and administrative expenses
|
|
|
45,495
|
|
|
|
8.9
|
|
|
|
|
44,986
|
|
|
|
8.4
|
|
|
|
Art and development costs
|
|
|
5,440
|
|
|
|
1.1
|
|
|
|
|
4,257
|
|
|
|
0.8
|
|
|
|
Store impairment and restructuring charges
|
|
|
—
|
|
|
|
0.0
|
|
|
|
|
1,926
|
|
|
|
0.4
|
|
|
|
Goodwill, intangibles and long-lived assets impairment
|
|
|
—
|
|
|
|
0.0
|
|
|
|
|
44,732
|
|
|
|
8.4
|
|
|
|
Income (loss) from operations
|
|
|
20,054
|
|
|
|
3.9
|
|
|
|
|
(27,099
|
)
|
|
|
(5.1
|
)
|
|
|
Interest expense, net
|
|
|
23,899
|
|
|
|
4.7
|
|
|
|
|
13,422
|
|
|
|
2.5
|
|
|
|
Other (income), net
|
|
|
(1,444
|
)
|
|
|
(0.3
|
)
|
|
|
|
(2,873
|
)
|
|
|
(0.5
|
)
|
|
|
(Gain) on debt refinancing
|
|
|
—
|
|
|
|
0.0
|
|
|
|
|
(273,149
|
)
|
|
|
(51.2
|
)
|
|
|
(Loss) income before income taxes
|
|
|
(2,401
|
)
|
|
|
(0.5
|
)
|
|
|
|
235,501
|
|
|
|
44.1
|
|
|
|
Income tax expense (benefit)
|
|
|
388
|
|
|
|
0.1
|
|
|
|
|
(4,164
|
)
|
|
|
(0.8
|
)
|
|
|
Net (loss) income
|
|
|
(2,789
|
)
|
|
|
(0.5
|
)
|
|
|
|
239,665
|
|
|
|
44.9
|
|
|
|
Less: Net (loss) attributable to noncontrolling interests
|
|
|
—
|
|
|
|
-
|
|
|
|
|
(42
|
)
|
|
|
-
|
|
|
|
Net (loss) income attributable to common shareholders of Party City Holdco Inc.
|
|
$
|
(2,789
|
)
|
|
|
(0.5
|
)
|
%
|
|
$
|
239,707
|
|
|
|
44.9
|
|
%
|
|
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc.–Basic
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
2.25
|
|
|
|
|
|
|
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc.–Diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
2.24
|
|
|
|
|
|
21
Sales
Total net sales for the third quarter of 2021 were $510.2 million and were $23.6 million, or 4.4%, lower than the third quarter of 2020. The following table sets forth the Company’s total net sales for the three months ended September 30, 2021 and 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net sales
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net sales
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
279,634
|
|
|
|
54.8
|
|
%
|
|
$
|
346,621
|
|
|
|
64.9
|
|
%
|
|
Eliminations
|
|
|
(168,308
|
)
|
|
|
(33.0
|
)
|
|
|
|
(179,049
|
)
|
|
|
(33.5
|
)
|
|
|
Net wholesale
|
|
|
111,326
|
|
|
|
21.8
|
|
|
|
|
167,572
|
|
|
|
31.4
|
|
|
|
Retail*
|
|
|
398,873
|
|
|
|
78.2
|
|
|
|
|
366,203
|
|
|
|
68.6
|
|
|
|
Total net sales
|
|
$
|
510,199
|
|
|
|
100.0
|
|
%
|
|
$
|
533,775
|
|
|
|
100.0
|
|
%
|
*Retail net sales include royalties and franchise fees. Prior year amount conformed to current year presentation.
Retail
Retail net sales during the third quarter of 2021 were $ 398.9 million and were $ 32.7 million, or 8.9%, higher than during the third quarter of 2020. The increase was due to strong comparable sales in core and Halloween categories. Retail net sales at our Party City stores totaled $365.8 million and were $35.9 million, or 10.9% higher than in the third quarter of 2020.
Same-store sales for the Party City brand (including North American retail e-commerce sales) increased by 7.5% during the third quarter of 2021 compared to the 13 weeks ended October 3, 2020, principally due to growth in core category sales which include balloon, birthday, entertaining and candy.
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 2021 totaled $111.3 million and were $56.3 million, or 33.6%, lower than the third quarter of 2020. This decrease is principally due to the divestiture of a significant portion of our international operations in the first quarter of 2021. Excluding the impact of the divestiture, sales increased 7.8%.
Intercompany sales to our retail affiliates totaled $168.3 million during the third quarter of 2021 and were $10.7 million lower than during the corresponding quarter of 2020. Intercompany sales represented 60.2% of total wholesale sales during the third quarter of 2021 and were 6.0% lower during the third quarter of 2020, principally due to decreased sales to our Party City Corporate stores with some decrease due to the divestiture of the international operations. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage
of Net Sales
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage
of Net Sales
|
|
|
|
Retail gross profit*
|
|
$
|
161,822
|
|
|
|
40.6
|
|
%
|
|
$
|
135,539
|
|
|
|
37.0
|
|
%
|
|
Wholesale gross profit
|
|
|
21,876
|
|
|
|
19.7
|
|
|
|
|
42,313
|
|
|
|
25.3
|
|
|
|
Total gross profit
|
|
$
|
183,698
|
|
|
|
36.0
|
|
%
|
|
$
|
177,852
|
|
|
|
33.3
|
|
%
|
*Retail gross profit include royalties and franchise fees. Prior year amount conformed to current year presentation.
22
The gross profit margin on net sales at Retail during the third quarter of 2021 was 40.6 % or 360 basis points higher than during the corresponding quarter of 2020. The increase was primarily driven by higher sales 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 28.2 % during the third quarter of 2021 was 1.4% lower as compared to the third quarter of 2020. 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 80.2% during the third quarter of 2021 or 0.9% lower than during the third quarter of 2020.
The gross profit margin on net sales at Wholesale during the third quarters of 2021 and 2020 was 19.7% and 25.3%, respectively. This decrease is primarily due to higher freight, material and labor costs.
Operating expenses
Operating expenses totaled $163.6 million or $41.4 million lower than the third quarter of 2020 primarily due to impairment of certain indefinite-lived intangible assets recorded in the third quarter of 2020.
Wholesale selling expenses were $7.5 million during the third quarter of 2021 and were $4.5 million lower than during the corresponding quarter of 2020, largely due to the international divestiture. Wholesale selling expenses were 6.7% and 7.1% of net wholesale sales during the third quarters of 2021 and 2020, respectively.
Retail operating expenses during the third quarter of 2021 were $105.2 million and were $8.1 million higher than the corresponding quarter of 2020, primarily driven by higher payroll, advertising spend and bank charges. Retail operating expenses were 26.4% and 26.5% of retail sales during the third quarters of 2021 and 2020, respectively.
General and administrative expenses during the third quarter of 2021 totaled $45.5 million and were $0.5 million, or 1.1%, higher than in the third quarter of 2020 principally due to higher employee-related costs partially offset by the international divestiture. General and administrative expenses as a percentage of total revenues were 8.9% and 8.4% during the third quarters of 2021 and 2020, respectively.
Art and development costs were $5.4 million and $4.3 million during the third quarters of 2021 and 2020, respectively. The increase was due mainly to COVID-19 related furloughs in 2020.
Interest expense, net
Interest expense, net, totaled $23.9 million during the third quarter of 2021, compared to $13.4million during the third quarter of 2020. The increase primarily reflects higher cost debt from the refinancing in the first quarter of 2021 offset by the forgiveness of interest as part of the debt refinancing in the third quarter of 2020.
Other (income), net
For the third quarters of 2021 and 2020, other (income), net, totaled $(1.4) million and $(2.9) million, respectively. The change is primarily due to recognition of a currency gain in 2020 versus a loss in 2021, partially offset by higher income from equity method investments in 2021.
Income tax expense
The effective income tax rate for the three months ended September 30, 2021 of (16.2)%, is different from the statutory rate of 21.0% primarily due to state taxes, the effect of foreign losses with no associated tax benefit, FIN 48 reserves, and equity compensation.
23
Nine Months Ended September 30, 2021 Compared To Nine Months Ended September 30, 2020
The following table sets forth the Company’s operating results and operating results as a percentage of total net sales for the three months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Net sales
|
|
$
|
1,472,752
|
|
|
|
100.0
|
|
%
|
|
$
|
1,202,509
|
|
|
|
100.0
|
|
%
|
|
Cost of sales
|
|
|
919,596
|
|
|
|
62.4
|
|
|
|
|
890,587
|
|
|
|
74.1
|
|
|
|
Gross profit
|
|
|
553,156
|
|
|
|
37.6
|
|
|
|
|
311,922
|
|
|
|
25.9
|
|
|
|
Wholesale selling expenses
|
|
|
23,977
|
|
|
|
1.6
|
|
|
|
|
37,115
|
|
|
|
3.1
|
|
|
|
Retail operating expenses
|
|
|
291,281
|
|
|
|
19.8
|
|
|
|
|
250,502
|
|
|
|
20.8
|
|
|
|
General and administrative expenses
|
|
|
137,328
|
|
|
|
9.3
|
|
|
|
|
174,275
|
|
|
|
14.5
|
|
|
|
Art and development costs
|
|
|
15,415
|
|
|
|
1.0
|
|
|
|
|
13,095
|
|
|
|
1.1
|
|
|
|
Store impairment and restructuring charges
|
|
|
—
|
|
|
|
-
|
|
|
|
|
20,818
|
|
|
|
1.7
|
|
|
|
Loss on disposal of assets in international operations
|
|
|
3,211
|
|
|
|
0.2
|
|
|
|
|
—
|
|
|
|
-
|
|
|
|
Goodwill and intangibles impairment
|
|
|
—
|
|
|
|
-
|
|
|
|
|
581,380
|
|
|
|
48.3
|
|
|
|
Income (loss) from operations
|
|
|
81,944
|
|
|
|
5.6
|
|
|
|
|
(765,263
|
)
|
|
|
(63.6
|
)
|
|
|
Interest expense, net
|
|
|
64,229
|
|
|
|
4.4
|
|
|
|
|
63,954
|
|
|
|
5.3
|
|
|
|
Other (income) expense, net
|
|
|
(2,317
|
)
|
|
|
(0.2
|
)
|
|
|
|
4,287
|
|
|
|
0.4
|
|
|
|
(Gain) on debt refinancing
|
|
|
—
|
|
|
|
-
|
|
|
|
|
(273,149
|
)
|
|
|
(22.7
|
)
|
|
|
Income (loss) before income taxes
|
|
|
20,032
|
|
|
|
1.4
|
|
|
|
|
(560,355
|
)
|
|
|
(46.6
|
)
|
|
|
Income tax expense (benefit)
|
|
|
7,128
|
|
|
|
0.5
|
|
|
|
|
(128,293
|
)
|
|
|
(10.7
|
)
|
|
|
Net income (loss)
|
|
|
12,904
|
|
|
|
0.9
|
|
|
|
|
(432,062
|
)
|
|
|
(35.9
|
)
|
|
|
Less: Net (loss) attributable to noncontrolling interests
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
|
(241
|
)
|
|
|
-
|
|
|
|
Net income (loss) attributable to common shareholders of Party City Holdco Inc.
|
|
$
|
12,958
|
|
|
|
0.9
|
|
%
|
|
$
|
(431,821
|
)
|
|
|
(35.9
|
)
|
%
|
|
Net income (loss) per share attributable to common shareholders of Party City Holdco
Inc.–Basic
|
|
$
|
0.12
|
|
|
|
|
|
|
$
|
(4.41
|
)
|
|
|
|
|
|
Net income (loss) per share attributable to common shareholders of Party City Holdco
Inc.–Diluted
|
|
$
|
0.11
|
|
|
|
|
|
|
$
|
(4.41
|
)
|
|
|
|
|
Sales
Total net sales for the first nine months of 2021 were $1,472.8 million and were $270.3 million, or 22.5%, higher than the third nine months of 2020. The following table sets forth the Company’s total net sales for the nine months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net sales
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net sales
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
722,732
|
|
|
|
49.1
|
|
%
|
|
$
|
692,715
|
|
|
|
57.6
|
|
%
|
|
Eliminations
|
|
|
(425,947
|
)
|
|
|
(28.9
|
)
|
|
|
|
(345,167
|
)
|
|
|
(28.7
|
)
|
|
|
Net wholesale
|
|
|
296,785
|
|
|
|
20.2
|
|
|
|
|
347,548
|
|
|
|
28.9
|
|
|
|
Retail*
|
|
|
1,175,967
|
|
|
|
79.8
|
|
|
|
|
854,961
|
|
|
|
71.1
|
|
|
|
Total net sales
|
|
$
|
1,472,752
|
|
|
|
100.0
|
|
%
|
|
$
|
1,202,509
|
|
|
|
100.0
|
|
%
|
*Retail net sales include royalties and franchise fees. Prior year amount conformed to current year presentation.
24
Retail
Retail net sales during the first nine months of 2021 were $ 1,176.0 million and were $ 321 million, or 37.5%, higher than during the first nine months of 2020. Retail net sales at our Party City stores totaled $1,094.0 million and were $356.5 million, or 48.3% higher than in the first nine months of 2020. Growth in same-store sales for the Party City brand and higher Halloween City store count this year was partially offset by the timing of New Year’s Eve and the divestiture of international retail operations. In addition, store sales were impacted by five new stores opened during the three months ended March 31, 2021, partially offset by two stores closed in the second quarter of 2021.
Same-store sales for the Party City brand (including North American retail e-commerce sales) increased by 43.7% during the first nine months of 2021 compared to the 39 weeks ended October 3, 2020, principally due to growth in core sales particularly in the balloon, birthday, and entertaining categories.
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 2021 totaled $296.8 million and were $50.7 million, or 14.6%, lower than the first nine months of 2020. This decrease in sales is principally due to the divestiture of a significant portion of our international operations offset by post-COVID-19 increased demand. Excluding the impact of the divestiture, sales increased $54.7 million, or 23.9%
Intercompany sales to our retail affiliates totaled $ 425.9 million during the first nine months of 2021 and were $80.8 million higher than during the corresponding months of 2020. Intercompany sales represented 58.9% of total wholesale sales during the first nine months of 2020 and were 23.4% higher than during the first nine months of 2020, principally due to increased sales to our Party City Corporate stores and channel mix changes with the divestiture of the international operations, offset by the volume decrease from the divestiture. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Gross Profit
The following table sets forth the Company’s gross profit for the first nine months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
Dollars in Thousands
|
|
|
Percentage of Net Sales
|
|
|
|
Dollars in Thousands
|
|
|
Percentage of Net Sales
|
|
|
|
Retail gross profit*
|
|
$
|
478,565
|
|
|
|
40.7
|
|
%
|
|
$
|
257,035
|
|
|
|
30.1
|
|
%
|
|
Wholesale gross profit
|
|
|
74,591
|
|
|
|
25.1
|
|
|
|
|
50,538
|
|
|
|
14.5
|
|
|
|
Total gross profit
|
|
$
|
553,156
|
|
|
|
37.6
|
|
%
|
|
$
|
307,573
|
|
|
|
25.6
|
|
%
|
*Retail Gross Profit include royalties and franchise fees. Prior year amount conformed to current year presentation.
The gross profit margin on net sales at retail during the first nine months of 2021 was 40.7 % or 1,060 basis points higher than during the corresponding period of 2020. The increase was driven higher sales for the third quarter and by leverage on occupancy expense and lower year over year markdowns in conjunction with the Company’s 2020 store optimization program for the first six months of the year. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 30.3 % during the first nine months of 2021 was 0.1% higher as compared to the first nine months of 2020. 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 80.9% during the first nine months or 0.5% lower than during the first nine months of 2020.
The gross profit margin on net sales at Wholesale during the first nine months of 2021 and 2020 was 25.1% and 14.5%, respectively. This improvement is primarily due to the deleverage caused by the COVID-19 shutdowns in the prior periods and the divestiture of lower margin international operations offset by higher freight, material and labor costs in the third quarter.
Operating expenses
Operating expenses totaled $471.2 million during the first nine months of 2021 and were $606.0 million lower than the first nine months of 2021 primarily due to goodwill and intangibles impairment.
Wholesale selling expenses were $24.0 million during the first nine months of 2021 and were $13.1 million lower than during the corresponding quarter of 2020, due to the international divestiture. Wholesale selling expenses were 8.1% and 10.7% of net wholesale sales during the first nine months of 2021 and 2020, respectively.
25
Retail operating expenses during the first nine month of 2021 were $291.3 million and were $40.8 million higher than the corresponding quarter of 2020, primarily driven by higher payroll, advertising spend and bank charges. Retail operating expenses were 24.8% and 29.3% of retail sales during the first nine months of 2021 and 2020, respectively, with the leverage attributable to higher sales and disciplined expense management.
General and administrative expenses during the first nine months of 2021 totaled $137.3 million and were $37.0 million, or 21.2%, lower than in the first nine months of 2020 due to the international divestiture and lower legal, stock compensation offset by increased payroll costs. General and administrative expenses as a percentage of total revenues were 9.3% and 14.5% during the first nine months of 2021 and 2020, respectively.
Art and development costs were $15.4 million and $13.1 million during the first nine months of 2021 and 2020, respectively.
Interest expense, net
Interest expense, net, totaled $64.2 million during the first nine months of 2021, compared to $64.0 million during the first nine months of 2020.
Other (income) expense, net
For the first nine months of 2021 and 2020, other (income) expense, net, totaled $(2.3) million and $4.3 million, respectively. The change is primarily due to realized foreign currency gains in 2021 versus foreign currency losses in 2020 and increased income from equity method investments.
Income tax expense
The effective income tax rate for the nine months ended September 30, 2021, 35.6.%, is different from the statutory rate of 21.0% primarily due to state taxes, the effect of foreign losses with no associated tax benefit, FIN 48 reserves, and the additional loss related to the sale of a substantial portion of the international operations recorded in the three months ended March 31, 2021.
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted
The Company presents adjusted EBITDA, adjusted net income 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, refinancing charges, 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 as supplemental 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-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-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 believes that adjusted net income and adjusted net income per common share - diluted are helpful benchmarks to evaluate its operating performance. The Company also utilized wholesale net sales excluding the impact of the international divestiture.
Adjusted EBITDA, adjusted net income, and adjusted net income per common share - diluted wholesale net sales excluding the impact of the divestiture, have limitations as analytical tools. Some of these limitations are:
they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for, the Company’s working capital needs;
adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s indebtedness;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
26
non-cash compensation is and will remain a key element of the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;
they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and
other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative measure.
Because of these limitations, these supplemental measures should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results. The reconciliations from net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,789
|
)
|
|
$
|
239,665
|
|
|
$
|
12,904
|
|
|
$
|
(432,062
|
)
|
|
Interest expense, net
|
|
|
23,899
|
|
|
|
13,422
|
|
|
|
64,229
|
|
|
|
63,954
|
|
|
Income tax expense (benefit)
|
|
|
388
|
|
|
|
(4,164
|
)
|
|
|
7,128
|
|
|
|
(128,293
|
)
|
|
Depreciation and amortization
|
|
|
15,433
|
|
|
|
17,278
|
|
|
|
50,293
|
|
|
|
57,796
|
|
|
EBITDA
|
|
|
36,931
|
|
|
|
266,201
|
|
|
|
134,554
|
|
|
|
(438,605
|
)
|
|
Store impairment and restructuring charges (a)
|
|
|
—
|
|
|
|
6,763
|
|
|
|
—
|
|
|
|
36,285
|
|
|
Inventory restructuring and early lease terminations (j)
|
|
|
520
|
|
|
|
—
|
|
|
|
7,157
|
|
|
|
—
|
|
|
Other restructuring, retention and severance (b)
|
|
|
—
|
|
|
|
2,957
|
|
|
|
2,082
|
|
|
|
11,701
|
|
|
Goodwill, intangibles and long-lived assets impairment (c)
|
|
|
—
|
|
|
|
44,732
|
|
|
|
—
|
|
|
|
581,380
|
|
|
Deferred rent (d)
|
|
|
904
|
|
|
|
254
|
|
|
|
2,032
|
|
|
|
(2,618
|
)
|
|
Closed store expense (e)
|
|
|
603
|
|
|
|
1,247
|
|
|
|
3,739
|
|
|
|
2,882
|
|
|
Foreign currency losses/(gains), net
|
|
|
343
|
|
|
|
(3,312
|
)
|
|
|
(968
|
)
|
|
|
955
|
|
|
Stock option expense – time-based
|
|
|
93
|
|
|
|
111
|
|
|
|
310
|
|
|
|
671
|
|
|
Stock option expense – performance – based
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,847
|
|
|
Restricted stock unit and restricted cash awards expense – performance-based
|
|
|
923
|
|
|
|
510
|
|
|
|
2,901
|
|
|
|
510
|
|
|
Restricted stock units – time-based
|
|
|
876
|
|
|
|
429
|
|
|
|
1,643
|
|
|
|
1,568
|
|
|
Non-employee equity-based compensation (f)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,033
|
|
|
Undistributed loss (income) in equity method
investments
|
|
|
(609
|
)
|
|
|
(59
|
)
|
|
|
(820
|
)
|
|
|
356
|
|
|
Corporate development expenses (g)
|
|
|
5
|
|
|
|
581
|
|
|
|
5
|
|
|
|
6,193
|
|
|
Non-recurring legal settlements/costs
|
|
|
—
|
|
|
|
661
|
|
|
|
—
|
|
|
|
7,170
|
|
|
Loss on sale of property, plant and equipment*
|
|
|
2,687
|
|
|
|
—
|
|
|
|
2,798
|
|
|
|
—
|
|
|
COVID - 19 (i)
|
|
|
—
|
|
|
|
679
|
|
|
|
1,270
|
|
|
|
71,059
|
|
|
Loss on sale of business
|
|
|
—
|
|
|
|
—
|
|
|
|
3,211
|
|
|
|
—
|
|
|
(Gain) on debt repayment/refinancing (k)
|
|
|
(1,332
|
)
|
|
|
(273,149
|
)
|
|
|
(1,106
|
)
|
|
|
(273,149
|
)
|
|
Other*
|
|
|
943
|
|
|
|
546
|
|
|
|
2,331
|
|
|
|
3,034
|
|
|
Adjusted EBITDA
|
|
$
|
42,887
|
|
|
$
|
49,151
|
|
|
$
|
161,139
|
|
|
$
|
18,272
|
|
* Prior period amounts have been reclassified to conform with current period presentation.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(2,401
|
)
|
|
$
|
235,501
|
|
|
$
|
20,032
|
|
|
$
|
(560,355
|
)
|
|
Intangible asset amortization
|
|
|
2,177
|
|
|
|
2,899
|
|
|
|
7,008
|
|
|
|
8,444
|
|
|
Amortization of deferred financing costs and original
issuance discounts
|
|
|
1,320
|
|
|
|
875
|
|
|
|
3,257
|
|
|
|
3,276
|
|
|
Store impairment and restructuring charges (a)
|
|
|
—
|
|
|
|
1,321
|
|
|
|
—
|
|
|
|
29,475
|
|
|
Other restructuring charges (b)
|
|
|
—
|
|
|
|
2,622
|
|
|
|
1,967
|
|
|
|
10,139
|
|
|
Goodwill, intangibles and long-lived assets impairment (c)
|
|
|
—
|
|
|
|
44,732
|
|
|
|
—
|
|
|
|
581,380
|
|
|
Non-employee equity-based compensation (f)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,033
|
|
|
Non-recurring legal settlements/costs
|
|
|
—
|
|
|
|
605
|
|
|
|
—
|
|
|
|
7,026
|
|
|
Stock option expense – time-based
|
|
|
93
|
|
|
|
110
|
|
|
|
310
|
|
|
|
671
|
|
|
Stock option expense – performance – based
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,847
|
|
|
Loss on sale of assets
|
|
|
2,642
|
|
|
|
—
|
|
|
|
2,642
|
|
|
|
—
|
|
|
(Gain) on debt repayment/refinancing (k)
|
|
|
—
|
|
|
|
(273,149
|
)
|
|
|
—
|
|
|
|
(273,149
|
)
|
|
Restricted stock unit and restricted cash awards expense – performance-based
|
|
|
930
|
|
|
|
—
|
|
|
|
2,901
|
|
|
|
—
|
|
|
COVID - 19 (i)
|
|
|
—
|
|
|
|
733
|
|
|
|
1,270
|
|
|
|
71,113
|
|
|
Loss on sale of business
|
|
|
—
|
|
|
|
—
|
|
|
|
3,211
|
|
|
|
—
|
|
|
Inventory disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
926
|
|
|
|
—
|
|
|
Adjusted income (loss) before income taxes
|
|
|
4,761
|
|
|
|
16,249
|
|
|
|
43,524
|
|
|
|
(113,100
|
)
|
|
Adjusted income tax expense (benefit) (h)
|
|
|
1,902
|
|
|
|
5,234
|
|
|
|
11,966
|
|
|
|
(36,416
|
)
|
|
Adjusted net income (loss)
|
|
$
|
2,859
|
|
|
$
|
11,015
|
|
|
$
|
31,558
|
|
|
$
|
(76,684
|
)
|
|
Adjusted net income (loss) per common share – diluted
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
0.27
|
|
|
$
|
(0.78
|
)
|
|
Weighted-average number of common shares-diluted
|
|
|
116,467,755
|
|
|
|
106,875,631
|
|
|
|
115,822,121
|
|
|
|
97,872,174
|
|
(a)
The Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). After careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of stores, which are primarily located in close proximity to other Party City stores. For further detail, refer to Note 3 – Store Impairment and Restructuring Charges of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q 2021.
(b)
Amounts expensed principally relate to severance due to organizational changes.
(c)
As a result of a sustained decline in market capitalization and reduced fair value of certain intangibles and long-lived assets, the Company recognized non-cash pre-tax goodwill and intangibles impairment charges.
(d)
The “deferred rent” adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay.
(e)
Charges incurred related to closing and relocating stores in the ordinary course of business.
(f)
The acquisition of Ampology’s interest in Kazzam, LLC in an equity transaction. See Note 17 – Kazzam, LLC in Item 1 for further discussion.
(g)
Primarily represents costs for Kazzam (see Note 17 – Kazzam, LLC in Item 1 for further discussion).
(h)
Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
(i)
Represents COVID-19 expenses for employees on temporary furlough for whom the Company provides health benefits; non-payroll expenses including advertising, occupancy and other store expenses.
(j)
Costs incurred for early lease terminations and a merchandise transformation project to transition and optimize stores to the reduced SKU assortment levels.
(k)
The Company recognized net gain on debt repayment in 2021. The Company recognized a gain on debt refinancing transactions in 2020.
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Liquidity
We expect that cash generated from operating activities and availability under our credit agreements 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 twelve months. We cannot provide assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs. The Company had approximately $280.3 million of availability under the ABL Facility and approximately $14.6 million of availability under the Anagram ABL Facility as of September 30, 2021.
Per Note 15, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, as of September 30, 2021, the Company’s indebtedness principally consisted of: (i) 8.750% Senior Secured First Lien Notes due 2026, (ii) 6.125% Senior Notes, (iii) 6.625% Senior Notes, (iv) First Lien Party City Notes, (v) First Lien Anagram Notes, and (vi) Second Lien Anagram Notes. Additionally, the Company had an asset-based revolving credit facility (“ABL Facility”) that it draws down on as necessary and Anagram had a separate asset-based revolving credit facility.
During February 2021, PCHI issued $750,000 of senior secured first lien notes at an interest rate of 8.750% (“8.750% Senior Notes”). The 8.750% Senior Notes will mature 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.
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 senior secured basis by each of PCHI’s existing and future domestic subsidiaries. The 8.750% Senior Notes and related guarantees are secured by a first priority lien on substantially all assets of PCHI and the guarantors, except for the collateral that secures the senior credit facilities on a first lien basis, with respect to which the 8.750% Senior Notes and related guarantees will be 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:
incur additional indebtedness or issue certain disqualified stock or preferred stock;
pay dividends or distributions, redeem or repurchase equity;
prepay junior lien indebtedness, unsecured pari passu indebtedness or subordinated indebtedness or make certain investments;
transfer or sell assets;
engage in consolidation, amalgamation or merger, or sell, transfer or otherwise dispose of all or substantially all of their assets; and
enter into certain transactions with affiliates.
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 8.750% Senior Notes at the redemption price of 104.375%, 102.188% and 100.000%, respectively, plus accrued and unpaid interest, if any. In addition, PCHI may redeem up to 40% of the 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.
Prior to April 2019, the Company 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 matures during August 2023 (subject to a springing maturity at an earlier date if the 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 an aggregate face amount at any time outstanding not to exceed $50,000. During April 2019, the Company 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 transactions as follows, 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 ABL Facility and the Term Loan Credit Agreement. Additionally, in February 2021 in conjunction with the transaction discussed above, the Company amended the ABL Facility by reducing the commitments to $475,000 and extending the maturity to February 2026, or earlier as provided for in the agreement.
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In accordance with the 8.75% Senior Notes, 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 and nine months ended September 30, 2021, Anagram reported:
Revenue of $59,936 and $171,136 including net sales to Party City affiliates of $19,181 and $64,070
Operating income of $13,455 and $37,972
Adjusted EBITDA of $14,921 and $42,212
Total assets of $207,798, including affiliate accounts receivable of $10,530
On May 7, 2021, Anagram, 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 Anagram 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 bear interest, at the Anagram's election, at a per annum rate equal to either (a) a base rate, which represents for any day a rate equal to the greater of (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 each 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 outstanding principal, Anagram is required to pay a commitment fee of 0.5% to1% per annum in respect of unutilized commitments. Anagram must also pay customary letter of credit fees.
All obligations under the Anagram ABL Facility are jointly and severally guaranteed by Anagram and its subsidiaries. The Anagram ABL facility contains covenants and events of default customary for such credit facilities.
Cash Flow
Net cash used in operating activities totaled $73.6 million during the nine months ended September 30, 2021. Net cash used in operating activities totaled $56.8 million during the nine months ended September 30, 2020. The increase in cash used in operating activities is primarily attributable to an increase in seasonal inventory and the related freight and higher lease payments partially offset by the recognition of net income in the current year as compared with a net loss in the prior year.
Net cash used in investing activities totaled $33.1 million during the nine months ended September 30, 2021, as compared to $32.4 million used in investing activities during the nine months ended September 30, 2020. The decrease in cash used in investing activities is primarily due to higher capital expenditures primarily due to store remodeling, offset by the proceeds from the sale of international operations. Capital expenditures during the nine months ended September 30, 2021 and 2020 were $49.2 million ($32.7 million for Retail and $16.5 million for Wholesale) and $32.1 million, respectively.
Net cash provided by financing activities was $16.9 million during the nine months ended September 30, 2021 and $227.4 million was provided during the nine months ended September 30, 2020. The variance was principally due to higher borrowings under the ABL Facility in the prior year and the impact of the debt refinancing transactions as discussed in Note 15, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, as of September 30, 2021.
Cash interest paid of $56.7 million as disclosed in the Condensed Consolidated Statements of Cash Flows provides the amount of cash paid in relation to GAAP interest expense for the nine months ended September 30, 2021. In addition, cash payments made in relation to contractual coupon interest amounts included in the carrying value of the debt accounted for as a troubled debt restructuring were $17.6 million for the nine months ended September 30, 2021.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the condensed consolidated financial statements included herein.
We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have
30
found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.
Long-Lived and Intangible Assets (including Goodwill)
We review the recoverability of our long-lived assets, including finite-lived intangible assets, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets/asset groups, other than goodwill, based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If an impairment indicator exists, we compare the undiscounted future cash flows of the asset/asset group to the carrying value of the asset/asset group. If the sum of the undiscounted future cash flows is less than the carrying value of the asset/asset group, we would calculate discounted future cash flows based on market participant assumptions. If the sum of discounted cash flows is less than the carrying value of the asset/asset group, we would recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). When fair values are not readily available, we estimate fair values using discounted expected future cash flows. Such estimates of fair value require significant judgment, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.
In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, we perform our cash flow analysis generally on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.
Goodwill and other intangibles that have indefinite lives are reviewed for potential impairment on an annual basis or more frequently if circumstances indicate a possible impairment. For purposes of testing for impairment, reporting units are determined by identifying individual reportable operating segments within our organization which constitute a business for which discrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our reportable operating segments, Wholesale and Retail, represent our reporting units for the purposes of our goodwill impairment test.
If it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of the reporting unit using a combination of a market approach and an income approach. If such carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to such excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.
During the first quarter of 2020, the Company identified impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units. As a result, the Company recorded a $536.6 million goodwill, intangibles and long-lived assets impairment charge. See Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record additional impairment charges for the goodwill of such reporting units.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements during the three months ended September 30, 2021, the year ended December 31, 2020 and the three months ended September 30, 2020.
Seasonality
Wholesale Operations
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, result in slightly higher accounts receivable balances during the third quarter.
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,
31
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.
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 Form 10-K filed with the SEC on March 11, 2021 and in the section titled “Risk Factors” including in this Quarterly Report on Form 10-Q. 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.
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.
32