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; disruptions to our supply chain, 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, and ability to manage supply chain constraints, increased costs and inflationary pressures; 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 and in Item 1A of Part II of this report. 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 a leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. We are a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, we are a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations and sophisticated wholesale operations with a multi-channel retailing strategy and e-commerce retail operations. We design, manufacture, source and distribute 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 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 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” and “Results of Operations” below.
19
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, 2022, 78.5% of the product that was sold by our retail segment was supplied by our wholesale segment and 28.9 % 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. The total number of corporate Party City stores was 761 as of September 30, 2022 compared to 754 in the prior year period.
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.
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 higher at the end of the second and 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.
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.
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 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, provided 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.
20
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 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.
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 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 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. Art and development costs include the costs associated with art production, creative development and product management, and all operating costs and franchise expenses not included elsewhere in the statement of operations and comprehensive income (loss). Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net 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.
Goodwill Impairment. Goodwill impairment is recognized when the carrying value of a reporting unit exceeds its fair value. The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of October 1 or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. To forecast a reporting unit’s future cash flows, the Company takes into consideration current and future economic conditions and trends, management’s and a market participant’s view of growth rates, estimated future operating results and risk-adjusted discount rates. Revenue growth rates inherent in these forecasts are based on input from internal and external market research that compare factors such as growth in global economies and recent industry trends. Macroeconomic factors such as changes in economies, changes in the competitive landscape and other changes beyond the Company’s control could have a positive or negative impact on achieving its growth rate targets.
Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results. Actual results may ultimately differ from certain key assumptions used in the Company’s impairment tests and certain other key assumptions may change in the future. Accordingly, we continue to closely monitor developments related to our business, as well and other global events and conditions, including continued inflation and rising interest rates. The future magnitude, duration, and effects of these events are difficult to predict at this time, and it is reasonably possible that future developments could have a negative effect on the estimates and assumptions utilized in our goodwill impairment assessments and could result in material impairment charges in future periods.
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 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.
21
Adjusted Net Income (Loss). Adjusted net income (loss) represents our net income (loss) attributable to common shareholders of Party City Holdco Inc., 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) attributable to common shareholders of Party City Holdco Inc 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.
Adjusted Total Gross Profit Margin. We define Adjusted total gross profit margin as net sales less cost of sales, excluding deferred rent.
Adjusted Selling, General and Administrative Expenses. Adjusted selling, general and administrative expenses represents our wholesale selling expenses, retail operating expenses, art and development costs, general and administrative expenses, adjusted for, among other items, share-based compensation, restructuring and severance related charges, store closure charges, losses on the sales of property, plant, and equipment, non-recurring COVID-19 cleaning and sanitation costs, long-lived asset impairment charges, merchandise transformation and employee relocation costs, consulting costs related to the Company’s corporate reorganization, non-recurring legal settlements, and differences between the Company’s accrued and cash rent expense.
The Company presents the measures of adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per common share - diluted, adjusted total gross profit margin, and adjusted selling, general and administrative expenses 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 these non-GAAP measures should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items. These non-GAAP measures have limitations as analytical tools. Because of these limitations, these non-GAAP measures 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 these non-GAAP measures 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;
•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 these non-GAAP measures differently than the Company does, limiting its usefulness as a comparative measure.
22
Results of Operations
Overview
Impact of Macro and Consumer Environment on Our Business
Our business was impacted by many of the macroeconomic inflationary headwinds affecting other businesses, which have resulted in higher input costs including greater costs associated with (i) freight and transportation, (ii) commodities such as helium, (iii) raw materials and finished goods, and (iv) wage rates for talent. These factors and the Company’s responses to them have impacted consumer discretionary spending and purchasing behavior, leading to continued pressure on margins and overall profitability, and we expect these headwinds to continue through the rest of fiscal year 2022. As such, our forward-looking projections of revenues, earnings, and cash flow may be adversely impacted if the macroeconomic environment continues or further deteriorates.
While we navigate this near-term turbulence in costs, we are being thoughtful with our mitigating actions on pricing and are reassessing all vendor relationships. Further, given the continued broader macro pressures, we are operating the business with even more discipline from an expense and capital standpoint. We are also continuing to focus on our strategic priorities of enhancements to customer engagement as well as digital, IT and supply chain.
We will continue on the path of progressing our transformation strategy but will be focusing on fewer initiatives, addressing structural costs and increasing operating efficiencies given the challenging environment. Our decision not to backfill almost 100 open roles, coupled with a 9% reduction in corporate workforce reduction for a combined workforce reduction of 19%, will result in approximately $30 million in annualized costs savings. These are very hard decisions to make but we believe are necessary to ensure the health of the business for our team members, customers and shareholders.
Freight and Transportation
We have seen freight and transportation costs increase in fiscal year 2022 as a result of global supply chain bottlenecks and elevated energy price pressures. We are mitigating increased material and freight costs through price adjustments, when possible.
Talent Constraints
Our operations continue to be impacted by labor availability and, in response, we increased wage rates throughout fiscal year 2021 to attract and retain talent at our retail stores and in our distribution facilities and we expect to continue to be impacted by rising labor costs throughout fiscal years 2022 and 2023.
Helium Constraints
Beginning in late 2021 and continuing into fiscal year 2022, we saw both supply limitations and price increases for helium, which impacted consumer demand for balloons, pressuring both our retail and wholesale business segments. In response, the Company diversified its supply base for of providers into the retail stores, including seeking direct sourcing of helium, and refined retail pricing. Further, as a reaction to such market conditions, we have seen pressure on third-party wholesale balloon purchases. Although the industry continues to face increased costs, which impact consumer demand, we believe that our helium supply constraints have lessened. From a cost perspective, our Retail segment continues to experience material increases in the cost of helium, with an expected 2022 increase of $20 million. We are working to diversify our source bases to mitigate future supply constraints. We are also alleviating supply chain constraints through various measures, including advance purchases of raw materials and finished goods to prevent potential disruptions.
For additional details, see Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.
23
OPERATING METRICS
We believe our financial results and growth model will continue to be driven by store count, wholesale share of shelf, manufacturing share of shelf management, and comparable sales. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
Last 12 Months |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Count |
|
|
|
|
|
|
|
|
|
Corporate Stores: |
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
759 |
|
|
|
746 |
|
|
|
754 |
|
New stores opened |
|
|
7 |
|
|
|
9 |
|
|
|
8 |
|
Acquired |
|
|
1 |
|
|
|
6 |
|
|
|
5 |
|
Closed |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
End of period |
|
|
761 |
|
|
|
754 |
|
|
|
761 |
|
Franchise Stores |
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
72 |
|
|
|
85 |
|
|
|
76 |
|
New stores opened |
|
|
— |
|
|
|
— |
|
|
— |
|
Sold to Party City |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
Closed |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
End of period |
|
|
69 |
|
|
|
76 |
|
|
|
69 |
|
Grand Total |
|
|
830 |
|
|
|
830 |
|
|
|
830 |
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
2022 |
|
2021 |
Wholesale Share of Shelf (a) |
|
79.2% |
|
80.2% |
Manufacturing Share of Shelf (b) |
|
25.8% |
|
28.2% |
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
2022 |
|
2021 |
Brand comparable sales (c) |
|
-3.2% |
|
7.5% |
(a) Wholesale share of shelf represents the percentage of our retail product cost of sales supplied by our wholesale operations.
(b) Manufacturing share of shelf represents the percentage of our retail product cost of sales manufactured by the company.
(c) Party City brand comparable sales include North American e-commerce sales. Comparable store sales growth represents the percentage change in sales in one period from the same prior year period for company-operated stores open for 13 months or longer.
24
Three Months Ended September 30, 2022 Compared To Three Months Ended September 30, 2021
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, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
2022 |
|
|
|
2021 |
|
|
(Dollars in thousands) |
Net sales |
|
$ |
502,191 |
|
|
|
100.0 |
|
% |
|
$ |
510,199 |
|
|
|
100.0 |
|
% |
Cost of sales |
|
|
343,743 |
|
|
|
68.4 |
|
|
|
|
326,501 |
|
|
|
64.0 |
|
|
Gross profit |
|
|
158,448 |
|
|
|
31.6 |
|
|
|
|
183,698 |
|
|
|
36.0 |
|
|
Selling, general and administrative expenses** |
|
|
178,976 |
|
|
|
35.6 |
|
|
|
|
163,644 |
|
|
|
32.1 |
|
|
Goodwill impairment |
|
|
133,000 |
|
|
|
26.5 |
|
|
|
|
— |
|
|
|
- |
|
|
(Loss) income from operations |
|
|
(153,528 |
) |
|
|
(30.6 |
) |
|
|
|
20,054 |
|
|
|
3.9 |
|
|
Interest expense, net |
|
|
26,926 |
|
|
|
5.4 |
|
|
|
|
23,899 |
|
|
|
4.7 |
|
|
Other (income), net |
|
|
(2,333 |
) |
|
|
(0.5 |
) |
|
|
|
(1,444 |
) |
|
|
(0.3 |
) |
|
(Loss) before income taxes |
|
|
(178,121 |
) |
|
|
(35.5 |
) |
|
|
|
(2,401 |
) |
|
|
(0.5 |
) |
|
Income tax expense |
|
|
194,871 |
|
|
|
38.8 |
|
|
|
|
388 |
|
|
|
0.1 |
|
|
Net (loss) |
|
|
(372,992 |
) |
|
|
(74.3 |
) |
|
|
|
(2,789 |
) |
|
|
(0.5 |
) |
|
Less: Net Income (loss) attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
Net (loss) attributable to common shareholders of Party City Holdco Inc. |
|
$ |
(372,992 |
) |
|
|
(74.3 |
) |
% |
|
$ |
(2,789 |
) |
|
|
(0.5 |
) |
% |
Net (loss) per share attributable to common shareholders of Party City Holdco Inc. – Basic |
|
$ |
(3.29 |
) |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
Net (loss) per share attributable to common shareholders of Party City Holdco Inc. – Diluted |
|
$ |
(3.29 |
) |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** 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. |
Sales
Total net sales for the third quarter of 2022 were $502.2 million and were $8.0 million, or 1.6%, lower than the same period in 2021. The following table sets forth the Company’s total net sales for the three months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
2022 |
|
|
|
2021 |
|
|
Dollars in
Thousands |
|
|
Percentage of
Net sales |
|
Dollars in
Thousands |
|
|
Percentage of
Net sales |
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
390,885 |
|
|
|
77.8 |
|
% |
|
$ |
279,634 |
|
|
|
54.8 |
|
% |
Eliminations |
|
|
(283,574 |
) |
|
|
(56.4 |
) |
|
|
|
(168,308 |
) |
|
|
(33.0 |
) |
|
Net wholesale |
|
|
107,311 |
|
|
|
21.4 |
|
|
|
|
111,326 |
|
|
|
21.8 |
|
|
Retail |
|
|
394,880 |
|
|
|
78.6 |
|
|
|
|
398,873 |
|
|
|
78.2 |
|
|
Total net sales |
|
$ |
502,191 |
|
|
|
100.0 |
|
% |
|
$ |
510,199 |
|
|
|
100.0 |
|
% |
Retail
Retail net sales during the third quarter of 2022 were $394.9 million and were $4.0 million, or 1.0%, lower than during the third quarter of 2021. Brand comparable sales for the Party City brand (including North American retail e-commerce sales) decreased by 3.2% during the third quarter of 2022 compared to the 13 weeks ended October 2, 2021. The decrease was due to lower sales of core product in everyday categories and the lapping of strong prior year retail results, along with operational responses to macroeconomic factors previously discussed, like increases in input costs. These headwinds were partially offset by solid results in our seasonal business, including summer, July 4th, and Labor Day.
Wholesale
Wholesale net sales during the third quarter of 2022 totaled $107.3 million and were $4.0 million, or 3.6%, lower than the third quarter of 2021. This decrease was principally due to a decline at Anagram from the continued tightening of helium supply at certain retailers, offset partially by strong performance within our Canadian business.
25
Intercompany sales to our retail affiliates totaled $283.6 million during the third quarter of 2022 and were $115.3 million higher than during the corresponding quarter of 2021. Intercompany sales represented 72.5% of total Wholesale sales during the third quarter of 2022 and were 68.5% higher than during the third quarter of 2021, principally due to earlier Halloween sales to stores as well as easing of supply chain constraints. 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, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
2022 |
|
|
|
2021 |
|
|
Dollars in Thousands |
|
|
Percentage
of Net Sales |
|
|
|
Dollars in Thousands |
|
|
Percentage
of Net Sales |
|
|
Retail gross profit |
|
$ |
132,572 |
|
|
|
33.6 |
|
% |
|
$ |
161,822 |
|
|
|
40.6 |
|
% |
Wholesale gross profit |
|
|
25,876 |
|
|
|
24.1 |
|
|
|
|
21,876 |
|
|
|
19.7 |
|
|
Total gross profit |
|
$ |
158,448 |
|
|
|
31.6 |
|
% |
|
$ |
183,698 |
|
|
|
36.0 |
|
% |
The gross profit margin on net sales at Retail during the third quarter of 2022 was 33.6 % or 700 basis points lower than during the corresponding quarter of 2021. The change was primarily driven by higher helium and occupancy 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 25.8 % during the third quarter of 2022 was 2.4% lower as compared to the third 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 79.2% during the third quarter of 2022 or 1% lower than during the third quarter of 2021.
The gross profit margin on net sales at Wholesale during the third quarters of 2022 and 2021 was 24.1% and 19.7%, respectively. This increase is primarily due to higher volume and mix offset by higher freight and material costs.
Selling, general and administrative expenses
Selling, general and administrative expenses during the third quarter of 2022 totaled $179.0 million and were $15.3 million, or 9.4%, higher than in the third quarter of 2021. The increase was primarily driven by higher labor costs, predominately from higher wage rates in our retail stores.
Goodwill Impairment
In preparing for the Company’s annual impairment review of goodwill and indefinite-lived intangible assets, evidence developed to suggest that the carrying value of the wholesale and retail reporting units could exceed their fair values. Such evidence included recent performance of the reporting unit, revised projections of future cash flows that were lower than previous projections, and a continuing decline in the Company’s market capitalization. To test for potential impairment of goodwill related to our wholesale and retail reporting units, we prepared an estimate of the fair value of these reporting units based on a combination of a market-based valuation technique (utilizing earnings multiples of similarly situated guideline public companies) and an income approach that uses our projected discounted cash flows.
Based on these valuations of the wholesale and retail reporting units, the Company recognized a non-cash pre-tax goodwill impairment charge of $110 million in the wholesale reporting unit and $23 million in the retail reporting unit for a total goodwill impairment charge of $133 million recognized in the three months ended September 30, 2022.
Although the Company believes the assumptions and estimates used in the valuations supporting its impairment tests are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results. Actual results may ultimately differ from certain key assumptions used in the Company’s impairment tests and certain other key assumptions may change in the future. Accordingly, we continue to closely monitor developments related to our business, as well and other global events and conditions, including continued inflation and rising interest rates. The future magnitude, duration, and effects of these events are difficult to predict at this time, and it is reasonably possible that future developments could have a negative effect on the estimates and assumptions utilized in our goodwill impairment assessments and could result in material impairment charges in future periods.
Interest expense, net
26
Interest expense, net, totaled $26.9 million during the third quarter of 2022, compared to $23.9 million during the third quarter of 2021. The increase is driven by higher amounts of net debt outstanding and higher interest rates versus prior-year period.
Other (income) expense, net
For the third quarter of 2022 and 2021, other (income) expense, net, totaled $(2.3) million and $(1.4) million, respectively. The change is primarily due to higher income from equity method investments.
Income tax expense
The effective income tax rate for the three months ended September 30, 2022 of -109.4%, is different from the statutory rate of 21.0% primarily due to state taxes, the valuation allowance resulting from interest carryforward deductions limited by IRC Section 163(j), and the tax impact of the non-cash goodwill impairment charge recorded during the quarter.
Nine Months Ended September 30, 2022 Compared To Nine Months Ended September 30, 2021
The following table sets forth the Company’s operating results and operating results as a percentage of total net sales for the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
|
2021 |
|
|
(Dollars in thousands) |
Net sales |
|
$ |
1,462,616 |
|
|
|
100.0 |
|
% |
|
$ |
1,472,752 |
|
|
|
100.0 |
|
% |
Cost of sales |
|
|
988,188 |
|
|
|
67.6 |
|
|
|
|
919,596 |
|
|
|
62.4 |
|
|
Gross profit |
|
|
474,428 |
|
|
|
32.4 |
|
|
|
|
553,156 |
|
|
|
37.6 |
|
|
Selling, general and administrative expenses** |
|
|
504,342 |
|
|
|
34.5 |
|
|
|
|
468,001 |
|
|
|
31.8 |
|
|
Loss on disposal of assets in international operations |
|
|
— |
|
|
|
— |
|
|
|
|
3,211 |
|
|
|
0.2 |
|
|
Goodwill impairment |
|
|
133,000 |
|
|
|
9.1 |
|
|
|
|
— |
|
|
|
- |
|
|
(Loss) income from operations |
|
|
(162,914 |
) |
|
|
(11.1 |
) |
|
|
|
81,944 |
|
|
|
5.6 |
|
|
Interest expense, net |
|
|
74,505 |
|
|
|
5.1 |
|
|
|
|
64,229 |
|
|
|
4.4 |
|
|
Other (income), net |
|
|
(4,336 |
) |
|
|
(0.3 |
) |
|
|
|
(2,317 |
) |
|
|
(0.2 |
) |
|
(Loss) income before income taxes |
|
|
(233,083 |
) |
|
|
(15.9 |
) |
|
|
|
20,032 |
|
|
|
1.4 |
|
|
Income tax expense |
|
|
4,625 |
|
|
|
0.3 |
|
|
|
|
7,128 |
|
|
|
0.5 |
|
|
Net (loss) income |
|
|
(237,708 |
) |
|
|
(16.3 |
) |
|
|
|
12,904 |
|
|
|
0.9 |
|
|
Less: Net income attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
|
(54 |
) |
|
|
— |
|
|
Net income (loss) attributable to common shareholders of Party City Holdco Inc. |
|
$ |
(237,708 |
) |
|
|
(16.3 |
) |
% |
|
$ |
12,958 |
|
|
|
0.9 |
|
% |
Net income (loss) per share attributable to common shareholders of Party City Holdco Inc. – Basic |
|
$ |
(2.11 |
) |
|
|
|
|
|
$ |
0.12 |
|
|
|
|
|
Net income (loss) per share attributable to common shareholders of Party City Holdco Inc. – Diluted |
|
$ |
(2.11 |
) |
|
|
|
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** 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. |
Reconciliation of Adjusted Third-Party Wholesale Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
|
2021 |
|
|
Percent Variance |
|
|
Wholesale third-party sales |
|
$ |
303,307 |
|
|
$ |
296,786 |
|
|
|
2.2 |
|
% |
Third-party sales of divested entities |
|
|
— |
|
|
|
(13,165 |
) |
|
|
|
|
Adjusted Wholesale third-party sales |
|
$ |
303,307 |
|
|
$ |
283,621 |
|
|
|
6.9 |
|
% |
27
Sales
Total net sales for the first nine months of 2022 were $1,462.6 million and were $10.2 million, or 0.7%, lower than the first nine months of 2021. The following table sets forth the Company’s total net sales for the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
|
2021 |
|
|
Dollars in
Thousands |
|
|
Percentage of
Net sales |
|
Dollars in
Thousands |
|
|
Percentage of
Net sales |
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
934,142 |
|
|
|
63.9 |
|
% |
|
$ |
722,733 |
|
|
|
49.1 |
|
% |
Eliminations |
|
|
(630,835 |
) |
|
|
(43.2 |
) |
|
|
|
(425,947 |
) |
|
|
(28.9 |
) |
|
Net wholesale |
|
|
303,307 |
|
|
|
20.7 |
|
|
|
|
296,786 |
|
|
|
20.2 |
|
|
Retail |
|
|
1,159,309 |
|
|
|
79.3 |
|
|
|
|
1,175,967 |
|
|
|
79.8 |
|
|
Total net sales |
|
$ |
1,462,616 |
|
|
|
100.0 |
|
% |
|
$ |
1,472,753 |
|
|
|
100.0 |
|
% |
Retail
Retail net sales during the first nine months of 2022 were $1,159.3 million and were $16.7 million, or 1.4 %, lower than during the first nine months of 2021. Same-store sales for the Party City brand (including North American retail e-commerce sales) decreased by 2.6% during the first nine months of 2022 compared to the 13 weeks ended October 2, 2021. The decrease was due mainly to lower sales of core products in everyday categories, partially offset by higher sales in our seasonal businesses.
Wholesale
Wholesale net sales during the first nine months of 2022 totaled $303.3 million and were $6.5 million, or 2.2%, higher than the first nine months of 2021. This increase is principally due to higher sales within our Canadian business, franchise and independent customers, partially offset by the prior year divestiture of a significant portion of our international operations and lower Anagram sales. Excluding the impact of the divestiture, sales increased 6.9%.
Intercompany sales to our retail affiliates totaled $630.8 million during the first nine months of 2022 and were $204.9 million higher than during the corresponding months of 2021. Intercompany sales represented 67.5% of total Wholesale sales during the first nine months of 2022 and were 48.1% higher than during the first nine months of 2021, principally due to higher Halloween sales to stores as well as 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.
Gross Profit
The following table sets forth the Company’s gross profit for the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
|
|
2021 |
|
|
Dollars in Thousands |
|
|
Percentage of Net Sales |
|
|
|
Dollars in Thousands |
|
|
Percentage of Net Sales |
|
|
Retail gross profit |
|
$ |
404,090 |
|
|
|
34.9 |
|
% |
|
$ |
478,565 |
|
|
|
40.7 |
|
% |
Wholesale gross profit |
|
|
70,338 |
|
|
|
23.2 |
|
|
|
|
74,591 |
|
|
|
25.1 |
|
|
Total gross profit |
|
$ |
474,428 |
|
|
|
32.4 |
|
% |
|
$ |
553,156 |
|
|
|
37.6 |
|
% |
The gross profit margin on net sales at Retail during the first nine months of 2022 was 34.9 % or 580 basis points lower than during the corresponding months of 2021. The change was primarily driven by higher helium and occupancy costs during the period. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 28.9 % during the first nine months of 2022 was 1.4% lower as compared to the first nine months 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 78.5% during the first nine months of 2022 or 2.4% lower than during the first nine months of 2021.
The gross profit margin on net sales at Wholesale during the first nine months of 2022 and 2021 was 23.2% and 25.1%, respectively. This decrease is primarily due to higher freight, material and labor costs.
28
Selling, general and administrative expenses
Selling, general and administrative expenses during the first nine months of 2022 totaled $504.3 million and were $36.3 million, or 7.8%, higher than in the first nine months of 2021. The increase was primarily driven by impairment charges related to certain lease assets and property and equipment, higher employee-related costs resulting from higher wages, predominately in our retail stores, partially offset by the international divestiture.
Goodwill Impairment
As discussed above in Management’s Discussion and Analysis section titled “Three Months Ended September 30, 2022 Compared To Three Months Ended September 30, 2021”, the Company recognized a non-cash pre-tax goodwill impairment charge of $110 million in the wholesale reporting unit and $23 million in the retail reporting unit for a total goodwill impairment charge of $133 million in the third quarter of 2022.
Interest expense, net
Interest expense, net, totaled $74.5 million during the first nine months of 2022, compared to $64.2 million during the first nine months of 2021. The increase primarily reflects higher cost debt from the refinancing in the first nine months of 2021 as well as higher amounts of net debt outstanding and higher interest rates.
Other (income), net
For the first nine months of 2022 and 2021, other (income), net, totaled $(4.3) million and $(2.3) million, respectively. The change is primarily due to higher income from equity method investments.
Income tax expense
The effective income tax rate for the nine months ended September 30, 2022 of -2.1%, is different from the statutory rate of 21.0% primarily due to state taxes, the valuation allowance resulting from interest carryforward deductions limited by IRC Section 163(j), and the tax impact of the non-cash goodwill impairment charge recorded during the third quarter.
Reconciliation of Non-GAAP Financial Measures
The tables below provide a reconciliation of the Company’s non-GAAP financial measures to the most comparable GAAP financial measure.
The following is a reconciliation of gross profit margin to Total Adjusted Gross Profit Margin for the three and nine months ended September 30, 2022 and 2021:
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
(Dollars in thousands) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Net sales |
|
$ |
502,191 |
|
|
$ |
510,199 |
|
|
$ |
1,462,616 |
|
|
|
1,472,752 |
|
Cost of sales |
|
|
343,743 |
|
|
|
326,501 |
|
|
|
988,188 |
|
|
|
919,596 |
|
Gross profit |
|
$ |
158,448 |
|
|
$ |
183,698 |
|
|
$ |
474,428 |
|
|
$ |
553,156 |
|
Total gross profit margin |
|
|
31.6 |
% |
|
|
36.0 |
% |
|
|
32.4 |
% |
|
|
37.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
158,448 |
|
|
$ |
183,698 |
|
|
$ |
474,428 |
|
|
$ |
553,156 |
|
Add: Deferred rent |
|
|
2,373 |
|
|
|
945 |
|
|
|
6,569 |
|
|
|
945 |
|
Adjusted gross profit |
|
$ |
160,821 |
|
|
$ |
184,643 |
|
|
$ |
480,997 |
|
|
$ |
554,101 |
|
Total adjusted gross profit margin |
|
|
32.0 |
% |
|
|
36.2 |
% |
|
|
32.9 |
% |
|
|
37.6 |
% |
The following is a reconciliation of selling, general, and administrative expenses to Adjusted selling, general, and administrative Expenses for the three and nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine months ended September 30, |
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
|
(Dollars in thousands) |
|
$ |
|
% of Revenues |
|
$ |
|
% of Revenues |
|
$ |
|
% of Revenues |
|
$ |
|
% of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
178,976 |
|
35.6% |
|
|
163,644 |
|
32.1% |
|
|
504,342 |
|
34.5% |
|
|
468,001 |
|
31.8% |
Stock-based compensation - employee |
|
|
1,917 |
|
0.4% |
|
|
1,892 |
|
0.4% |
|
|
5,847 |
|
0.4% |
|
|
4,854 |
|
0.3% |
Other restructuring, retention and severance (a) |
|
|
281 |
|
0.1% |
|
|
— |
|
0.0% |
|
|
994 |
|
0.1% |
|
|
2,620 |
|
0.2% |
Long-lived assets impairment (b) |
|
|
425 |
|
0.1% |
|
|
— |
|
0.0% |
|
|
10,408 |
|
0.7% |
|
|
— |
|
0.0% |
Deferred rent (c) |
|
|
863 |
|
0.2% |
|
|
(41 |
) |
0.0% |
|
|
3,047 |
|
0.2% |
|
|
1,087 |
|
0.1% |
COVID-19 sanitation and cleaning expense (d) |
|
|
— |
|
0.0% |
|
|
— |
|
0.0% |
|
|
— |
|
0.0% |
|
|
1,270 |
|
0.1% |
Closed store expense (e) |
|
|
745 |
|
0.1% |
|
|
603 |
|
0.1% |
|
|
3,454 |
|
0.2% |
|
|
3,739 |
|
0.3% |
Loss on sale of property, plant and equipment |
|
|
— |
|
0.0% |
|
|
2,687 |
|
0.5% |
|
|
— |
|
0.0% |
|
|
2,798 |
|
0.2% |
Merchandise transformation, relocation payroll |
|
|
216 |
|
0.0% |
|
|
860 |
|
0.2% |
|
|
1,474 |
|
0.1% |
|
|
2,981 |
|
0.2% |
Corporate reorganization consulting |
|
|
604 |
|
0.1% |
|
|
— |
|
0.0% |
|
|
1,808 |
|
0.1% |
|
|
— |
|
0.0% |
One-time legal settlement |
|
|
— |
|
0.0% |
|
|
— |
|
0.0% |
|
|
384 |
|
0.0% |
|
|
— |
|
0.0% |
Adjusted selling, general and administrative expenses |
|
|
173,925 |
|
34.6% |
|
|
157,643 |
|
30.9% |
|
|
476,926 |
|
32.6% |
|
|
448,652 |
|
30.4% |
30
The following is a reconciliation of net (loss) income attributable to common shareholders of Party City Holdco Inc. to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine months ended September 30, |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders of Party City Holdco Inc. |
$ |
(372,992 |
) |
|
$ |
(2,789 |
) |
|
$ |
(237,708 |
) |
|
$ |
12,958 |
|
Interest expense, net |
|
26,926 |
|
|
|
23,899 |
|
|
|
74,505 |
|
|
|
64,229 |
|
Income tax expense |
|
194,871 |
|
|
|
388 |
|
|
|
4,625 |
|
|
|
7,128 |
|
Depreciation and amortization |
|
15,206 |
|
|
|
15,433 |
|
|
|
46,812 |
|
|
|
50,293 |
|
EBITDA |
|
(135,989 |
) |
|
|
36,931 |
|
|
|
(111,766 |
) |
|
|
134,608 |
|
Deferred rent (c) |
|
3,235 |
|
|
|
904 |
|
|
|
9,616 |
|
|
|
2,032 |
|
Stock-based compensation - employee |
|
1,917 |
|
|
|
1,892 |
|
|
|
5,847 |
|
|
|
4,854 |
|
Other restructuring, retention and severance (a) |
|
281 |
|
` |
|
- |
|
|
|
994 |
|
|
|
2,620 |
|
Long-lived assets impairment (b) |
|
425 |
|
|
|
- |
|
|
|
10,408 |
|
|
|
- |
|
COVID-19 sanitation and cleaning expense (d) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,270 |
|
Closed store expense (e) |
|
745 |
|
|
|
603 |
|
|
|
3,454 |
|
|
|
3,739 |
|
Loss on sale of property, plant and equipment |
|
- |
|
|
|
2,687 |
|
|
|
- |
|
|
|
2,798 |
|
Merchandise transformation, relocation payroll |
|
216 |
|
|
|
860 |
|
|
|
1,474 |
|
|
|
2,981 |
|
Corporate reorganization consulting |
|
604 |
|
|
|
- |
|
|
|
1,808 |
|
|
|
- |
|
One-time legal settlement |
|
- |
|
|
|
- |
|
|
|
384 |
|
|
|
- |
|
Goodwill impairment (f) |
|
133,000 |
|
|
|
- |
|
|
|
133,000 |
|
|
|
- |
|
Loss on sale of business |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,211 |
|
Foreign currency (gains) losses, net |
|
(1,218 |
) |
|
|
343 |
|
|
|
(1,746 |
) |
|
|
(968 |
) |
Net gain on debt repayment |
|
- |
|
|
|
(1,332 |
) |
|
|
- |
|
|
|
(1,106 |
) |
Note receivable |
|
55 |
|
|
|
33 |
|
|
|
472 |
|
|
|
138 |
|
Undistributed loss in equity method investments |
|
(915 |
) |
|
|
(554 |
) |
|
|
(2,354 |
) |
|
|
(654 |
) |
Gain or loss on sale of PP&E |
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
Adjusted EBITDA |
|
2,356 |
|
|
|
42,367 |
|
|
|
51,587 |
|
|
|
155,523 |
|
31
The following is a reconciliation of net (loss) income attributable to common shareholders of Party City Holdco Inc to Adjusted net loss (income) and of net (loss) income per common share – diluted to Adjusted net (loss) income per common share – diluted for the three and nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
(Dollars in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders of Party City Holdco Inc. |
|
$ |
(372,992 |
) |
|
$ |
(2,789 |
) |
|
$ |
(237,708 |
) |
|
$ |
12,958 |
|
Income tax expense |
|
|
194,871 |
|
|
|
388 |
|
|
|
4,625 |
|
|
|
7,128 |
|
(Loss) income before income taxes |
|
$ |
(178,121 |
) |
|
$ |
(2,401 |
) |
|
$ |
(233,083 |
) |
|
$ |
20,086 |
|
Intangible asset amortization |
|
|
1,527 |
|
|
|
2,177 |
|
|
|
4,599 |
|
|
|
7,008 |
|
Amortization of deferred financing costs and original
issuance discounts |
|
|
1,403 |
|
|
|
1,320 |
|
|
|
3,969 |
|
|
|
3,257 |
|
Other restructuring, retention and severance (a) |
|
|
284 |
|
|
|
— |
|
|
|
994 |
|
|
|
1,967 |
|
COVID-19 sanitation and cleaning expense (d) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,270 |
|
Long-lived assets impairment (b) |
|
|
425 |
|
|
|
— |
|
|
|
10,408 |
|
|
— |
|
Goodwill impairment (f) |
|
|
133,000 |
|
|
|
— |
|
|
|
133,000 |
|
|
— |
|
Non-recurring legal settlements/costs |
|
|
— |
|
|
|
— |
|
|
|
384 |
|
|
— |
|
Stock option expense |
|
|
49 |
|
|
|
93 |
|
|
|
217 |
|
|
|
310 |
|
Loss on sale of assets |
|
|
— |
|
|
|
2,642 |
|
|
|
— |
|
|
|
2,642 |
|
Restricted stock unit and restricted cash awards expense – performance-based |
|
|
686 |
|
|
|
930 |
|
|
|
1,999 |
|
|
|
2,901 |
|
Loss on sale of business |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,211 |
|
Adjusted net (loss) income before income taxes |
|
|
(40,747 |
) |
|
|
4,761 |
|
|
|
(77,513 |
) |
|
|
42,652 |
|
Adjusted income tax expense (g) |
|
|
116,426 |
|
|
|
1,902 |
|
|
|
92,553 |
|
|
|
11,966 |
|
Adjusted net (loss) income |
|
$ |
(157,173 |
) |
|
$ |
2,859 |
|
|
$ |
(170,066 |
) |
|
$ |
30,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to common
shareholders of Party City Holdco Inc. - Diluted |
|
$ |
(3.29 |
) |
|
$ |
(0.02 |
) |
|
$ |
(2.11 |
) |
|
$ |
0.11 |
|
Adjustments per common share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
1.72 |
|
|
|
- |
|
|
|
0.04 |
|
|
|
0.06 |
|
(Loss) income before income taxes |
|
|
(1.57 |
) |
|
|
(0.02 |
) |
|
|
(2.07 |
) |
|
|
0.17 |
|
Intangible asset amortization |
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.04 |
|
|
|
0.07 |
|
Amortization of deferred financing costs and original
issuance discounts |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.04 |
|
|
|
0.03 |
|
Other restructuring, retention and severance |
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.02 |
|
COVID sanitation and cleaning expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.02 |
|
Long-lived assets impairment |
|
|
- |
|
|
|
- |
|
|
|
0.09 |
|
|
|
- |
|
Goodwill impairment |
|
|
1.18 |
|
|
|
- |
|
|
|
1.18 |
|
|
|
- |
|
Loss on sale of assets |
|
|
- |
|
|
|
0.02 |
|
|
|
- |
|
|
|
0.02 |
|
Restricted stock unit and restricted cash awards expense – performance-based |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.04 |
|
Adjusted net (loss) income before income taxes |
|
|
(0.36 |
) |
|
|
0.04 |
|
|
|
(0.69 |
) |
|
|
0.37 |
|
Adjusted income tax expense |
|
|
1.03 |
|
|
|
0.02 |
|
|
|
0.82 |
|
|
|
0.10 |
|
Adjusted net (loss) income per common share – diluted |
|
$ |
(1.39 |
) |
|
$ |
0.02 |
|
|
$ |
(1.51 |
) |
|
$ |
0.27 |
|
Weighted-average number of common shares – diluted |
|
|
113,214,670 |
|
|
|
116,467,755 |
|
|
|
112,751,523 |
|
|
|
115,822,121 |
|
Beginning with this report, we will no longer be excluding inventory disposal costs and the impact of COVID-19 costs related to exempt salaried employees from our determination of Adjusted EBITDA, Adjusted net income or any other non-GAAP financial measure. The prior period Adjusted EBITDA and Adjusted net income results that appear in this report reflect the inclusion of such items.
(a)Amounts expensed related to one-time organizational changes.
(b)In December 2021, the Company announced the closure of a manufacturing facility in New Mexico that ceased operations in February 2022. As a result, the Company recorded related shutdown charges. In addition, during the three months ended June 30, 2022, the
32
Company recorded an impairment charge related to certain lease assets and property and equipment. See Note 3 in Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in the Quarterly Report on Form 10-Q).
(c)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.
(d)In fiscal year 2021, the expenses consisted of additional one-time store cleaning costs, cleaning supplies such as hand sanitizer, and signage related to Covid-19 restrictions for all retail stores, which were incurred from January through June 2021 due to the evolving governmental requirements that existed during such time period.
(e)Charges incurred related to closing and relocating stores, as we do not undertake such closures or relocations on a predictable cycle and the charges can vary significantly.
(f)See Note 4 in Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q.
(g)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.
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 to rely on cash on hand, cash generated by operations and borrowings 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, additional borrowings, and ongoing efforts to manage and enhance our liquidity profile, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We are operating in an uncertain economic environment, however, and we cannot make assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Company's credit facilities and in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
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 September 30, 2022, the Company had cash and cash equivalents of $29.8 million and available borrowings of $91.7 million.
Material Cash Commitments
Debt Obligations, Finance Leases and Interest Payments. As of September 30, 2022, we had $442.9 million in loans and notes payable, $23.4 million current long-term obligations and $1,318.2 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 September 30, 2022, we had an operating lease liability of $800.2 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”)
While we do not regard Anagram Holdings, LLC and its subsidiary (“Anagram”) as a reportable segment under ASC 280, in accordance with the Indenture dated February 19, 2021 (the “Indenture”), which our 8.75% Senior Notes are subject to, we are required to provide quarterly and annual disclosure of certain financial metrics for Anagram in the “Management’s Discussion and Analysis of Financial Condition and Results of
33
Operations” section of our annual Form-10K filings and quarterly Form 10-Q filings, which include revenue, operating income and Adjusted EBITDA.
This Indenture also requires us to provide the Company’s Adjusted EBITDA less capital expenditures.
Management believes that the Adjusted EBITDA of Anagram, a non-GAAP financial measure, and the Company’s Adjusted EBITDA less capital expenditures as defined in the Indenture are important measures in analyzing our financial condition and liquidity, given these disclosure requirements and the carrying amount of our 8.75% Senior Notes, which comprise more than half of our current debt obligations (see Note 13 in Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for more information). While there is no minimum required amount of Adjusted EBITDA of Anagram and Adjusted EBITDA less capital expenditures of the Company that the Company is required to maintain, noncompliance of these disclosure requirements could result in the Company being in default of the 8.75% Senior Notes, which could require us to repay the amounts borrowed under the notes.
Reconciliation of Anagram's Adjusted EBITDA and EBITDA to net income, the most comparable GAAP measure, is as follows (in thousands) for the three and nine months ended September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2022 |
|
Revenue * |
|
$ |
30,270 |
|
|
$ |
153,775 |
|
Operating (loss) income |
|
$ |
(55 |
) |
|
$ |
24,158 |
|
Net (loss) income |
|
$ |
(5,736 |
) |
|
$ |
1,618 |
|
Interest expense, net |
|
$ |
7,799 |
|
|
$ |
22,620 |
|
Income tax (benefit) expense |
|
$ |
(1,829 |
) |
|
$ |
518 |
|
Depreciation and amortization |
|
$ |
1,495 |
|
|
$ |
4,524 |
|
EBITDA |
|
$ |
1,729 |
|
|
$ |
29,280 |
|
Loss on joint venture investment and currency |
|
$ |
(161 |
) |
|
$ |
(443 |
) |
Adjusted EBITDA |
|
$ |
1,568 |
|
|
$ |
28,837 |
|
Note: All GAAP measures provided are those of Anagram on a standalone basis. |
|
|
|
|
|
|
*Includes sales to affiliates of $5,708 and $63,330 for the three and nine months ended September 30, 2022. |
|
|
|
|
|
|
As of September 30, 2022, Anagram's total assets were $220,134.
Reconciliation of the Company’s Adjusted EBITDA less capital expenditures to net income (loss), the most comparable GAAP measure, is as follows (in thousands) for the three and nine months ended September 30, 2022:
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine months ended September 30, |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common shareholders of Party City Holdco Inc. |
$ |
(372,992 |
) |
|
$ |
(2,789 |
) |
|
$ |
(237,708 |
) |
|
$ |
12,958 |
|
Interest expense, net |
|
26,926 |
|
|
|
23,899 |
|
|
|
74,505 |
|
|
|
64,229 |
|
Income tax expense |
|
194,871 |
|
|
|
388 |
|
|
|
4,625 |
|
|
|
7,128 |
|
Depreciation and amortization |
|
15,206 |
|
|
|
15,433 |
|
|
|
46,812 |
|
|
|
50,293 |
|
EBITDA |
|
(135,989 |
) |
|
|
36,931 |
|
|
|
(111,766 |
) |
|
|
134,608 |
|
Deferred rent (c) |
|
3,235 |
|
|
|
904 |
|
|
|
9,616 |
|
|
|
2,032 |
|
Stock-based compensation - employee |
|
1,917 |
|
|
|
1,892 |
|
|
|
5,847 |
|
|
|
4,854 |
|
Other restructuring, retention and severance (a) |
|
281 |
|
` |
|
- |
|
|
|
994 |
|
|
|
2,620 |
|
Long-lived assets impairment (b) |
|
425 |
|
|
|
- |
|
|
|
10,408 |
|
|
|
- |
|
COVID-19 sanitation and cleaning expense (d) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,270 |
|
Closed store expense (e) |
|
745 |
|
|
|
603 |
|
|
|
3,454 |
|
|
|
3,739 |
|
Loss on sale of property, plant and equipment |
|
- |
|
|
|
2,687 |
|
|
|
- |
|
|
|
2,798 |
|
Merchandise transformation, relocation payroll |
|
216 |
|
|
|
860 |
|
|
|
1,474 |
|
|
|
2,981 |
|
Corporate reorganization consulting |
|
604 |
|
|
|
- |
|
|
|
1,808 |
|
|
|
- |
|
One-time legal settlement |
|
- |
|
|
|
- |
|
|
|
384 |
|
|
|
- |
|
Goodwill impairment (f) |
|
133,000 |
|
|
|
- |
|
|
|
133,000 |
|
|
|
- |
|
Loss on sale of business |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,211 |
|
Foreign currency (gains) losses, net |
|
(1,218 |
) |
|
|
343 |
|
|
|
(1,746 |
) |
|
|
(968 |
) |
Net gain on debt repayment |
|
- |
|
|
|
(1,332 |
) |
|
|
- |
|
|
|
(1,106 |
) |
Note receivable |
|
55 |
|
|
|
33 |
|
|
|
472 |
|
|
|
138 |
|
Undistributed loss in equity method investments |
|
(915 |
) |
|
|
(554 |
) |
|
|
(2,354 |
) |
|
|
(654 |
) |
Gain or loss on sale of PP&E |
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
Adjusted EBITDA |
|
2,356 |
|
|
|
42,367 |
|
|
|
51,587 |
|
|
|
155,523 |
|
Capital expenditures |
|
(24,891 |
) |
|
|
(8,759 |
) |
|
|
(75,985 |
) |
|
|
(49,211 |
) |
Adjusted EBITDA less capital expenditures |
$ |
(22,535 |
) |
|
$ |
33,608 |
|
|
$ |
(24,398 |
) |
|
$ |
106,312 |
|
35
Cash Flow Data – Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021
Net cash used in operating activities totaled $286.4 million during the nine months ended September 30, 2022. Net cash used in operating activities totaled $73.6 million during the nine months ended September 30, 2021. The increase in cash used in operating activities is primarily attributable to increased inventory purchases due to timing of seasonal product receipts and higher cost due to freight and raw materials inflation, partially offset by timing of payments related to accounts payable and accrued expenses and lower lease payments as the prior year reflected payment of COVID deferrals.
Net cash used in investing activities totaled $74.5 million during the nine months ended September 30, 2022, as compared to $33.1 million during the nine months ended September 30, 2021. The increase in cash used in investing activities is primarily due to the prior year reflecting the proceeds from the sale of our international operations, offset by higher capital expenditures in the current year. Capital expenditures during the nine months ended September 30, 2022 were $76 million and $40.5 million, respectively.
Net cash provided by financing activities was $343.0 million during the nine months ended September 30, 2022 compared to net cash provided by financing activities of $16.9 million during the nine months ended September 30, 2021. The variance was principally due to higher borrowings under the ABL Facility 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.
As of the end of the third quarter 2022, the Company had total liquidity of $121.5 million consisting of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Party City Credit Group |
|
|
Anagram Holdings, LLC |
|
|
PCHI Consolidated |
|
(in Thousands) |
September 30,
2022 |
|
Cash |
$ |
27,834 |
|
|
$ |
1,976 |
|
|
$ |
29,810 |
|
ABL Availability: |
|
|
|
|
|
|
|
|
Borrowing Base |
|
562,111 |
|
|
|
14,427 |
|
|
|
576,538 |
|
Less: Letters of Credit Outstanding |
|
39,820 |
|
|
|
— |
|
|
|
39,820 |
|
Less: Borrowings under the ABL Facility |
|
444,990 |
|
|
|
— |
|
|
|
444,990 |
|
Total ABL Availability |
|
77,301 |
|
|
|
14,427 |
|
|
|
91,728 |
|
Total Liquidity |
$ |
105,135 |
|
|
$ |
16,403 |
|
|
$ |
121,538 |
|
The weighted average interest rate for Borrowings under the ABL Facility was 4.76% at September 30, 2022
Critical Accounting Estimates
See Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in our Annual Report on Form 10-K for the year ended December 31, 2021, for a discussion of our critical accounting estimates.
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