UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-37344
Party City Holdco Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
|
46-0539758 |
(State or Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
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80 Grasslands Road Elmsford, NY |
|
10523 |
(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
(914) 345-2020
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, Par Value: $0.01/share |
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PRTY |
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New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
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☐ |
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Emerging Growth Company |
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 28, 2022, 112,492,976 shares of the Registrant’s common stock were outstanding.
PARTY CITY HOLDCO INC.
Form 10-Q
March 31, 2022
TABLE OF CONTENTS
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Page |
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PART I |
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Item 1. Condensed Consolidated Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets at March 31, 2022, December 31, 2021 and March 31, 2021 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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15 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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24 |
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24 |
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PART II |
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25 |
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25 |
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26 |
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27 |
2
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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March 31, |
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December 31, |
|
|
March 31, |
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|||
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(Unaudited) |
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(Unaudited) |
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|||
ASSETS |
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|||
Current assets: |
|
|
|
|
|
|
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|||
Cash and cash equivalents |
|
$ |
32,645 |
|
|
$ |
47,914 |
|
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$ |
83,806 |
|
Accounts receivable, net |
|
|
85,280 |
|
|
|
93,301 |
|
|
|
81,658 |
|
Inventories, net |
|
|
517,459 |
|
|
|
443,295 |
|
|
|
428,316 |
|
Prepaid expenses and other current assets |
|
|
69,668 |
|
|
|
57,656 |
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|
|
47,803 |
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Income tax receivable |
|
|
55,614 |
|
|
|
56,317 |
|
|
|
68,632 |
|
Total current assets |
|
|
760,666 |
|
|
|
698,483 |
|
|
|
710,215 |
|
Property, plant and equipment, net |
|
|
224,134 |
|
|
|
221,870 |
|
|
|
214,698 |
|
Operating lease asset |
|
|
729,587 |
|
|
|
693,875 |
|
|
|
687,214 |
|
Goodwill |
|
|
664,943 |
|
|
|
664,296 |
|
|
|
659,865 |
|
Trade names |
|
|
383,761 |
|
|
|
383,737 |
|
|
|
383,733 |
|
Other intangible assets, net |
|
|
22,319 |
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|
|
23,687 |
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|
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29,912 |
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Other assets, net |
|
|
25,425 |
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|
|
25,952 |
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|
|
9,832 |
|
Total assets |
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$ |
2,810,835 |
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|
$ |
2,711,900 |
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|
$ |
2,695,469 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Loans and notes payable |
|
$ |
209,112 |
|
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$ |
84,181 |
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$ |
142,859 |
|
Accounts payable |
|
|
188,842 |
|
|
|
161,736 |
|
|
|
127,812 |
|
Accrued expenses |
|
|
144,397 |
|
|
|
195,531 |
|
|
|
146,742 |
|
Current portion of operating lease liability |
|
|
119,384 |
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|
|
116,437 |
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|
|
150,860 |
|
Income taxes payable |
|
|
10,409 |
|
|
|
10,801 |
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|
|
— |
|
Current portion of long-term obligations |
|
|
928 |
|
|
|
1,373 |
|
|
|
1,359 |
|
Total current liabilities |
|
|
673,072 |
|
|
|
570,059 |
|
|
|
569,632 |
|
Long-term obligations, excluding current portion |
|
|
1,346,724 |
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1,351,189 |
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|
|
1,358,495 |
|
Long-term portion of operating lease liability |
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|
681,949 |
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|
|
655,875 |
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628,217 |
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Deferred income tax liabilities, net |
|
|
28,067 |
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|
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29,195 |
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31,036 |
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Other long-term liabilities |
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23,266 |
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|
22,868 |
|
|
|
33,195 |
|
Total liabilities |
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|
2,753,078 |
|
|
|
2,629,186 |
|
|
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2,620,575 |
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||||
Stockholders’ equity: |
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Common stock (112,463,647, 112,170,944 and 111,258,890 shares outstanding and 124,607,064, 124,157,500 and 122,573,377 shares issued at March 31, 2022, December 31, 2021, and March 31, 2021, respectively) |
|
|
1,384 |
|
|
|
1,384 |
|
|
|
1,383 |
|
Additional paid-in capital |
|
|
984,060 |
|
|
|
982,307 |
|
|
|
976,037 |
|
Accumulated deficit |
|
|
(598,874 |
) |
|
|
(571,985 |
) |
|
|
(579,486 |
) |
Accumulated other comprehensive income |
|
|
4,473 |
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|
|
3,541 |
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|
5,134 |
|
Total Party City Holdco Inc. stockholders’ equity before common stock held in |
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|
391,043 |
|
|
|
415,247 |
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|
403,068 |
|
Less: Common stock held in treasury, at cost (12,143,417, 11,986,556 and 11,314,487 shares at March 31, 2022, December 31, 2021, and March 31, 2021, respectively) |
|
|
(333,286 |
) |
|
|
(332,533 |
) |
|
|
(327,388 |
) |
Total Party City Holdco Inc. stockholders’ equity |
|
|
57,757 |
|
|
|
82,714 |
|
|
|
75,680 |
|
Noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
(786 |
) |
Total stockholders’ equity |
|
|
57,757 |
|
|
|
82,714 |
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|
|
74,894 |
|
Total liabilities and stockholders’ equity |
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$ |
2,810,835 |
|
|
$ |
2,711,900 |
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|
$ |
2,695,469 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except share and per share data)
|
|
Three Months Ended March 31, |
|
|||||
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2022 |
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2021 |
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||
Net sales |
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$ |
432,976 |
|
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$ |
426,807 |
|
Cost of sales |
|
|
294,968 |
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|
274,521 |
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Gross profit |
|
|
138,008 |
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|
|
152,286 |
|
Selling, general and administrative expenses** |
|
|
158,060 |
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|
149,021 |
|
Loss on disposal of assets in international operations |
|
|
— |
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|
|
3,211 |
|
(Loss) income from operations |
|
|
(20,052 |
) |
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|
54 |
|
Interest expense, net |
|
|
23,395 |
|
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|
17,214 |
|
Other (income) expense, net |
|
|
(203 |
) |
|
|
427 |
|
(Loss) before income taxes |
|
|
(43,244 |
) |
|
|
(17,587 |
) |
Income tax (benefit) |
|
|
(16,355 |
) |
|
|
(3,469 |
) |
Net (loss) |
|
|
(26,889 |
) |
|
|
(14,118 |
) |
Less: Net (loss) attributable to noncontrolling interests |
|
|
— |
|
|
|
(54 |
) |
Net (loss) attributable to common shareholders of Party City Holdco Inc. |
|
$ |
(26,889 |
) |
|
$ |
(14,064 |
) |
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Basic |
|
$ |
(0.24 |
) |
|
$ |
(0.13 |
) |
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Diluted |
|
$ |
(0.24 |
) |
|
$ |
(0.13 |
) |
Weighted-average number of common shares-Basic |
|
|
112,407,040 |
|
|
|
110,917,349 |
|
Weighted-average number of common shares-Diluted |
|
|
112,407,040 |
|
|
|
110,917,349 |
|
Dividends declared per share |
|
$ |
— |
|
|
$ |
— |
|
Comprehensive (loss) income |
|
$ |
(25,937 |
) |
|
$ |
20,937 |
|
Less: Comprehensive (loss) attributable to noncontrolling interests |
|
|
— |
|
|
|
(84 |
) |
Comprehensive (loss) income attributable to common shareholders of Party City Holdco Inc. |
|
$ |
(25,937 |
) |
|
$ |
21,021 |
|
** Consists of wholesale selling expenses, retail operating expenses, art and development costs and general and administrative expenses, which were reported separately in the prior year. |
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|||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total Party City |
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|
Common |
|
|
Total Party City |
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|
Non- |
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|
Total |
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|||||||||
Balance at December 31, 2021 |
|
$ |
1,384 |
|
|
$ |
982,307 |
|
|
$ |
(571,985 |
) |
|
$ |
3,541 |
|
|
$ |
415,247 |
|
|
$ |
(332,533 |
) |
|
$ |
82,714 |
|
|
$ |
— |
|
|
$ |
82,714 |
|
Net (loss) |
|
|
— |
|
|
|
— |
|
|
|
(26,889 |
) |
|
|
— |
|
|
|
(26,889 |
) |
|
|
— |
|
|
|
(26,889 |
) |
|
|
— |
|
|
|
(26,889 |
) |
Stock-based compensation** |
|
|
— |
|
|
|
1,733 |
|
|
|
— |
|
|
|
— |
|
|
|
1,733 |
|
|
|
— |
|
|
|
1,733 |
|
|
|
— |
|
|
|
1,733 |
|
Treasury stock purchases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(753 |
) |
|
|
(753 |
) |
|
|
— |
|
|
|
(753 |
) |
Foreign currency adjustments |
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
932 |
|
|
|
952 |
|
|
|
— |
|
|
|
952 |
|
|
|
— |
|
|
|
952 |
|
Balance at March 31, 2022 |
|
$ |
1,384 |
|
|
$ |
984,060 |
|
|
$ |
(598,874 |
) |
|
$ |
4,473 |
|
|
$ |
391,043 |
|
|
$ |
(333,286 |
) |
|
$ |
57,757 |
|
|
$ |
— |
|
|
$ |
57,757 |
|
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total Party City |
|
|
Common |
|
|
Total Party City |
|
|
Non- |
|
|
Total |
|
|||||||||
Balance at December 31, 2020 |
|
$ |
1,373 |
|
|
$ |
971,972 |
|
|
$ |
(565,457 |
) |
|
$ |
(29,916 |
) |
|
$ |
377,972 |
|
|
$ |
(327,182 |
) |
|
$ |
50,790 |
|
|
$ |
(269 |
) |
|
$ |
50,521 |
|
Net (loss) |
|
|
— |
|
|
|
— |
|
|
|
(14,064 |
) |
|
|
— |
|
|
|
(14,064 |
) |
|
|
— |
|
|
|
(14,064 |
) |
|
|
(54 |
) |
|
|
(14,118 |
) |
Stock-based compensation** |
|
|
— |
|
|
|
1,230 |
|
|
|
— |
|
|
|
— |
|
|
|
1,230 |
|
|
|
— |
|
|
|
1,230 |
|
|
|
— |
|
|
|
1,230 |
|
Warrant expense (see Note 15 – Kazzam, LLC) |
|
|
4 |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Disposed non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(487 |
) |
|
|
(487 |
) |
Treasury stock purchases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(206 |
) |
|
|
(206 |
) |
|
|
— |
|
|
|
(206 |
) |
Exercise of stock options |
|
|
6 |
|
|
|
2,849 |
|
|
|
— |
|
|
|
— |
|
|
|
2,855 |
|
|
|
— |
|
|
|
2,855 |
|
|
|
— |
|
|
|
2,855 |
|
Foreign currency adjustments |
|
|
— |
|
|
|
(10 |
) |
|
|
35 |
|
|
|
36,398 |
|
|
|
36,423 |
|
|
|
— |
|
|
|
36,423 |
|
|
|
24 |
|
|
|
36,447 |
|
Impact of foreign exchange contracts, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,348 |
) |
|
|
(1,348 |
) |
|
|
— |
|
|
|
(1,348 |
) |
|
|
— |
|
|
|
(1,348 |
) |
Balance at March 31, 2021 |
|
$ |
1,383 |
|
|
$ |
976,037 |
|
|
$ |
(579,486 |
) |
|
$ |
5,134 |
|
|
$ |
403,068 |
|
|
$ |
(327,388 |
) |
|
$ |
75,680 |
|
|
$ |
(786 |
) |
|
$ |
74,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
** Stock-based compensation consists of stock-option expense – time-based, restricted stock units – time-based, restricted stock units – performance-based and directors – non-cash compensation, which were shown separately in prior years. |
|
|||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows (used in) operating activities: |
|
|
|
|
|
|
||
Net (loss) |
|
$ |
(26,889 |
) |
|
$ |
(14,118 |
) |
Adjustments to reconcile net (loss) to net cash (used in) operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization expense |
|
|
15,860 |
|
|
|
17,944 |
|
Amortization of deferred financing costs and original issuance discounts |
|
|
1,271 |
|
|
|
863 |
|
Provision for doubtful accounts |
|
|
945 |
|
|
|
696 |
|
Deferred income tax (benefit) |
|
|
(1,135 |
) |
|
|
(3,386 |
) |
Change in operating lease liability/asset |
|
|
(6,723 |
) |
|
|
(37,556 |
) |
Undistributed loss in equity method investments |
|
|
310 |
|
|
|
336 |
|
Loss on disposal of assets |
|
|
153 |
|
|
|
110 |
|
Loss on disposal of assets in international operations |
|
|
— |
|
|
|
3,211 |
|
Goodwill, intangibles and long-lived assets impairment |
|
|
2,154 |
|
|
|
— |
|
Stock-based compensation** |
|
|
1,733 |
|
|
|
1,230 |
|
Loss on debt refinancing |
|
|
— |
|
|
|
226 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Decrease in accounts receivable |
|
|
7,255 |
|
|
|
2,952 |
|
Increase in inventories |
|
|
(75,596 |
) |
|
|
(17,565 |
) |
Increase in prepaid expenses and other current assets |
|
|
(11,205 |
) |
|
|
(8,768 |
) |
(Decrease) increase in accounts payable, accrued expenses and income taxes payable |
|
|
(24,958 |
) |
|
|
5,014 |
|
Net cash (used in) operating activities |
|
|
(116,825 |
) |
|
|
(48,811 |
) |
Cash flows (used in) investing activities: |
|
|
|
|
|
|
||
Cash paid in connection with acquisitions, net of cash acquired |
|
|
(7 |
) |
|
|
— |
|
Capital expenditures |
|
|
(18,620 |
) |
|
|
(22,184 |
) |
Proceeds from disposal of property and equipment |
|
|
1,610 |
|
|
|
|
|
Proceeds from sale of international operations, net of cash disposed |
|
|
— |
|
|
|
20,556 |
|
Net cash (used in) investing activities |
|
|
(17,017 |
) |
|
|
(1,628 |
) |
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
||
Repayment of loans, notes payable and long-term obligations |
|
|
(5,518 |
) |
|
|
(792,849 |
) |
Proceeds from loans, notes payable and long-term obligations |
|
|
124,759 |
|
|
|
794,750 |
|
Treasury stock purchases |
|
|
(753 |
) |
|
|
(206 |
) |
Exercise of stock options |
|
|
— |
|
|
|
2,855 |
|
Debt issuance costs |
|
|
— |
|
|
|
(21,437 |
) |
Net cash provided by (used in) financing activities |
|
|
118,488 |
|
|
|
(16,887 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
85 |
|
|
|
(177 |
) |
Net (decrease) in cash and cash equivalents and restricted cash |
|
|
(15,269 |
) |
|
|
(67,503 |
) |
Change in cash classified within current assets held for sale |
|
|
— |
|
|
|
31,628 |
|
Cash and cash equivalents and restricted cash at beginning of period* |
|
|
48,914 |
|
|
|
119,681 |
|
Cash and cash equivalents and restricted cash at end of period* |
|
$ |
33,645 |
|
|
$ |
83,806 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash paid during the period for interest expense |
|
$ |
41,173 |
|
|
$ |
20,309 |
|
Cash (received) paid during the period for income taxes, net of refunds |
|
$ |
(421 |
) |
|
$ |
127 |
|
|
|
|
|
|
|
|
||
*Includes $1,000 of restricted cash at March 31, 2022 and December 31, 2021. There was no restricted cash as of March 31, 2021. The Company records restricted cash in other assets, net as presented in the consolidated balance sheet at March 31, 2022 and December 31, 2021. |
|
|||||||
** Stock-based compensation consists of stock-option expense – time-based, restricted stock units – time-based, restricted stock units – performance-based and directors – non-cash compensation, which were shown separately in prior years. |
|
|||||||
|
|
|
|
|
|
|
||
See accompanying notes to unaudited condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share)
Note 1 – Description of Business
Party City Holdco Inc. (the “Company” or “Party City Holdco”) is a leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. With hundreds of retail stores filled with thousands of products across the United States, we make it easy for our customers to find the perfect party solution through our assortment of party products, balloons, and costumes for their celebration aided by the support of our party experts both in-store and online. Our retail operations include approximately 830 specialty retail party supply stores (including franchise stores) throughout North America operating under the names Party City and Halloween City, and e-commerce websites which offer rapid, contactless, and same day shipping options (including in-store and at curbside), principally through the domain name PartyCity.com.
In addition to our retail operations, we are also a global designer, manufacturer and distributor of decorated consumer party products, with items found in retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores.
Party City Holdco is a holding company with no operating assets or operations. The Company owns 100% of PC Nextco Holdings, LLC (“PC Nextco”), which owns 100% of PC Intermediate Holdings, Inc. (“PC Intermediate”). PC Intermediate owns 100% of Party City Holdings Inc. (“PCHI”), which owns most of the Company’s operating subsidiaries.
Note 2 – Basis of Presentation and Recently Issued Accounting Pronouncements
The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its majority-owned and controlled entities. All intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the more detailed financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.
The Company’s retail operations define a fiscal year (“Fiscal Year”) as the 52-week period or 53-week period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim 13-week periods following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our Wholesale operations, as the differences are not significant.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, which provides guidance providing optional expedients and exceptions for applying U.S. generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. Additionally, in January 2021, the FASB issued ASU 2021-01, which allows entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates. The Company has evaluated this guidance and it did not have an impact on our consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard became effective for the Company on January 1, 2022 and only impacts annual financial statement footnote disclosures. The adoption did not have a material effect on our consolidated financial statements.
7
Note 3 – Disposition of Assets
In December 2021, the Company announced the closure of a manufacturing facility in New Mexico. The facility ceased operations in February 2022. In December 2021, the Company recorded charges of $11,545, consisting primarily of equipment and inventory impairments of $8,650 and $2,425, respectively, and severance and other costs of $470. During the three months ended March 31, 2022, additional charges of $2,154 were recorded.
In January 2021, the Company closed the previously disclosed sale of a substantial portion of its international operations. The final consideration for the sale amounted to $54.6 million. During the fourth quarter of 2020, the Company recorded a loss reserve of $73,948 in connection with this sale, and during the first quarter of 2021, the Company recorded an additional loss of $3,211, related to changes in working capital accounts through the transaction close date, which is reported in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Note 4 – Inventories, net
Inventories, net consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||
Finished goods |
|
$ |
471,988 |
|
|
$ |
393,609 |
|
|
$ |
386,108 |
|
Raw materials |
|
|
24,257 |
|
|
|
25,624 |
|
|
|
23,618 |
|
Work in process |
|
|
21,214 |
|
|
|
24,062 |
|
|
|
18,589 |
|
|
|
$ |
517,459 |
|
|
$ |
443,295 |
|
|
$ |
428,316 |
|
Inventories, net are valued at the lower of cost or net realizable value. The Company principally determines the cost of inventory using the weighted average method.
The Company estimates retail inventory shrinkage for the period between physical inventory dates on a store-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.
In the ordinary course of business the Company is involved in transactions with certain of its equity-method investees, primarily for the purchase of finished goods inventory. For the three months ended March 31, 2022, the Company purchased $13.9 million. As of March 31, 2022, approximately $36.2 million of these purchases are reflected in finished goods inventory with accounts payable of $22.9 million related to such transactions.
Note 5 – Income Taxes
The effective income tax rate for the three months ended March 31, 2022 of 37.8% is different from the statutory rate of 21.0% primarily due to state taxes, and valuation allowance resulting from interest carryforward deductions limited by IRC Section 163(j).
Note 6 – Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) consisted of the following:
|
|
Three Months Ended March 31, 2022 |
|
|||||
|
|
Foreign |
|
|
Total, |
|
||
Balance at December 31, 2021 |
|
$ |
3,541 |
|
|
$ |
3,541 |
|
Other comprehensive income before reclassifications, |
|
|
932 |
|
|
|
932 |
|
Net current-period other comprehensive income |
|
|
932 |
|
|
|
932 |
|
Balance at March 31, 2022 |
|
$ |
4,473 |
|
|
$ |
4,473 |
|
8
|
|
Three Months Ended March 31, 2021 |
|
|||||||||
|
|
Foreign |
|
|
Impact of |
|
|
Total, |
|
|||
Balance at December 31, 2020 |
|
$ |
(31,264 |
) |
|
$ |
1,348 |
|
|
$ |
(29,916 |
) |
Other comprehensive income (loss) before reclassifications, |
|
|
(191 |
) |
|
|
77 |
|
|
|
(114 |
) |
Release of cumulative foreign currency translation adjustment to net loss as a result of disposition of international operations |
|
|
36,589 |
|
|
|
(1,422 |
) |
|
|
35,167 |
|
Amounts reclassified from accumulated other comprehensive |
|
|
— |
|
|
|
(3 |
) |
|
|
(3 |
) |
Net current-period other comprehensive income (loss) |
|
|
36,398 |
|
|
|
(1,348 |
) |
|
|
35,050 |
|
Balance at March 31, 2021 |
|
$ |
5,134 |
|
|
$ |
— |
|
|
$ |
5,134 |
|
Note 7 – Capital Stock
At March 31, 2022, the Company’s authorized capital stock consisted of 300,000,000 shares of $0.01 par value common stock and 15,000,000 shares of $0.01 par value preferred stock.
Note 8 – Segment Information
Industry Segments
The Company has two reportable operating segments. The Wholesale segment designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties and stationery throughout the world. The Retail segment operates specialty retail party supply stores in the United States, principally under the names Party City and Halloween City, and it operates e-commerce websites, principally through the domain name PartyCity.com. The company's reportable operating segment data for the three months ended March 31, 2022 and 2021 was as follows:
|
|
Wholesale |
|
|
Retail |
|
|
Consolidated |
|
|||
Three Months Ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|||
Net sales before eliminations |
|
$ |
239,680 |
|
|
$ |
340,951 |
|
|
$ |
580,631 |
|
Eliminations |
|
|
(147,655 |
) |
|
|
— |
|
|
|
(147,655 |
) |
Net sales |
|
|
92,025 |
|
|
|
340,951 |
|
|
|
432,976 |
|
Gross profit |
|
$ |
24,642 |
|
|
$ |
113,366 |
|
|
$ |
138,008 |
|
Income (loss) from operations |
|
$ |
3,501 |
|
|
$ |
(23,553 |
) |
|
$ |
(20,052 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
23,395 |
|
||
Other (income), net |
|
|
|
|
|
|
|
|
(203 |
) |
||
(Loss) before income taxes |
|
|
|
|
|
|
|
$ |
(43,244 |
) |
||
|
|
Wholesale |
|
|
Retail |
|
|
Consolidated |
|
|||
Three Months Ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|||
Net sales before eliminations |
|
$ |
212,137 |
|
|
$ |
333,282 |
|
|
$ |
545,419 |
|
Eliminations |
|
|
(118,612 |
) |
|
|
— |
|
|
|
(118,612 |
) |
Net sales |
|
|
93,525 |
|
|
|
333,282 |
|
|
|
426,807 |
|
Gross profit |
|
$ |
29,108 |
|
|
$ |
123,178 |
|
|
$ |
152,286 |
|
(Loss) income from operations |
|
$ |
(592 |
) |
|
$ |
646 |
|
|
$ |
54 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
17,214 |
|
||
Other expense, net |
|
|
|
|
|
|
|
|
427 |
|
||
(Loss) before income taxes |
|
|
|
|
|
|
|
$ |
(17,587 |
) |
||
In January 2021, the Company closed the previously disclosed sale of a substantial portion of its international operations.
9
Note 9 – Commitments and Contingencies
The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
Note 10 – Derivative Financial Instruments
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed through the use of derivative financial instruments are interest rate risk and foreign currency exchange rate risk. The Company did not have any foreign currency exchange contracts at March 31, 2022 or 2021.
Note 11 – Fair Value Measurements
The provisions of ASC Topic 820, “Fair Value Measurement”, define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
During 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services. As part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology received an ownership interest in Kazzam. The interest had been recorded as redeemable securities in the mezzanine of the Company’s consolidated balance sheet as Ampology had the right to cause the Company to purchase the interest. The liability was adjusted to the greater of the current fair value or the original fair value at the time at which the ownership interest was issued (adjusted for any subsequent changes in the ownership interest percentage). On March 23, 2020, the Company purchased all of Ampology’s interest in Kazzam. Refer to Note 15 – Kazzam, LLC for further detail.
The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, lease assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value.
The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at March 31, 2022 because of the short-term maturities of the instruments and/or their variable rates of interest.
The carrying amounts and fair values of borrowings under the Term Loan Credit Agreement and the Company’s senior notes as of March 31, 2022 are as follows:
|
|
March 31, 2022 |
|
|||||
|
|
Gross Carrying |
|
|
Fair |
|
||
8.75% Senior Secured First Lien Notes – due 2026 |
|
$ |
750,000 |
|
|
$ |
708,750 |
|
6.125% Senior Notes – due 2023 |
|
|
22,924 |
|
|
|
21,147 |
|
6.625% Senior Notes – due 2026 |
|
|
92,254 |
|
|
|
73,919 |
|
First Lien Party City Notes – due 2025 |
|
|
193,501 |
|
|
|
172,942 |
|
First Lien Anagram Notes – due 2025 |
|
|
149,537 |
|
|
|
159,631 |
|
Second Lien Anagram Notes – due 2026 |
|
|
144,625 |
|
|
|
150,229 |
|
10
The fair values represent Level 2 fair value measurements as the debt instruments trade in inactive markets. The carrying amounts for other long-term debt approximated fair value at March 31, 2022 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.
Note 12 – Earnings Per Share
Basic earnings per share are computed by dividing net income attributable to common shareholders of Party City Holdco Inc. by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised, and restricted stock units, as if they vested.
Basic and diluted loss per share is as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net (loss) attributable to common shareholders of |
|
$ |
(26,889 |
) |
|
$ |
(14,064 |
) |
Weighted average shares - Basic |
|
|
112,407,040 |
|
|
|
110,917,349 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
||
Warrants |
|
|
— |
|
|
|
— |
|
Restricted stock units |
|
|
— |
|
|
|
— |
|
Stock options |
|
|
— |
|
|
|
— |
|
Weighted average shares - Diluted |
|
|
112,407,040 |
|
|
|
110,917,349 |
|
Net (loss) per share attributable to common |
|
$ |
(0.24 |
) |
|
$ |
(0.13 |
) |
Net (loss) per share attributable to common |
|
$ |
(0.24 |
) |
|
$ |
(0.13 |
) |
During the three months ended March 31, 2022, 4,819,273 restricted stock units, 4,146,742 performance restricted stock units and 1,800,535 stock options were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. During the three months ended March 31, 2021, 657,920 restricted stock units, 2,853,716 performance restricted stock units and 2,808,395 stock options were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive.
Note 13 – Current and Long-Term Obligations
Long-term obligations at March 31, 2022, December 31, 2021 and March 31, 2021 consisted of the following:
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||||||||||||||
|
|
Principal Amount |
|
|
Gross Carrying Amount |
|
|
Deferred Financing Costs |
|
|
Net Carrying Amount |
|
|
Net Carrying Amount |
|
|
Net Carrying Amount |
|
||||||
8.75% Senior Secured First Lien Notes – due 2026 |
|
$ |
750,000 |
|
|
$ |
750,000 |
|
|
$ |
(16,185 |
) |
|
$ |
733,815 |
|
|
$ |
732,957 |
|
|
$ |
730,508 |
|
6.125% Senior Notes – due 2023 |
|
|
22,924 |
|
|
|
22,924 |
|
|
|
(76 |
) |
|
|
22,848 |
|
|
|
22,834 |
|
|
|
22,792 |
|
6.625% Senior Notes – due 2026 |
|
|
92,254 |
|
|
|
92,254 |
|
|
|
(627 |
) |
|
|
91,627 |
|
|
|
91,591 |
|
|
|
91,483 |
|
First Lien Party City Notes – due 2025 |
|
|
161,669 |
|
|
|
193,501 |
|
|
|
— |
|
|
|
193,501 |
|
|
|
198,004 |
|
|
|
202,657 |
|
First Lien Anagram Notes – due 2025 |
|
|
118,699 |
|
|
|
149,537 |
|
|
|
(706 |
) |
|
|
148,831 |
|
|
|
149,569 |
|
|
|
150,568 |
|
Second Lien Anagram Notes – due 2026 |
|
|
93,613 |
|
|
|
144,625 |
|
|
|
— |
|
|
|
144,625 |
|
|
|
144,619 |
|
|
|
148,159 |
|
Finance lease obligations |
|
|
12,405 |
|
|
|
12,405 |
|
|
|
— |
|
|
|
12,405 |
|
|
|
12,988 |
|
|
|
13,687 |
|
Total long-term obligations |
|
|
1,251,564 |
|
|
|
1,365,246 |
|
|
|
(17,594 |
) |
|
|
1,347,652 |
|
|
|
1,352,562 |
|
|
|
1,359,854 |
|
Less: current portion |
|
|
(928 |
) |
|
|
(928 |
) |
|
|
— |
|
|
|
(928 |
) |
|
|
(1,373 |
) |
|
|
(1,359 |
) |
Long-term obligations, excluding current portion |
|
$ |
1,250,636 |
|
|
$ |
1,364,318 |
|
|
$ |
(17,594 |
) |
|
$ |
1,346,724 |
|
|
$ |
1,351,189 |
|
|
$ |
1,358,495 |
|
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
11
maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in 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, 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 below, 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. On March 18, 2022, the ABL Facility was further amended. The amendment modified certain eligibility criteria with respect to the inventory component of the borrowing base. The changes lengthen the permitted in-transit time for eligible in-transit inventory being shipped from a location outside of the United States, subject to a cap on the aggregate amount of foreign in-transit inventory that is eligible to be reflected in the borrowing base.
PCHI had approximately $75.2 million, $192.4 million and $129.3 million of availability under the ABL Facility as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively. As discussed further below, Anagram had a separate asset-based revolving credit facility and there was approximately $14.4 million of availability under the Anagram ABL Facility as of March 31, 2022.
February 2021 Debt Transaction
During February 2021, PCHI issued $750,000 of senior secured first lien notes at an interest rate of 8.750% (“8.750% Senior Notes”). 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.
In connection with the transaction, the Company wrote-off a portion of the existing capitalized deferred financing costs and original issuance discounts. Additionally, the Company incurred $18,976 of third-party fees, principally banker fees. The amounts expensed were recorded in Other expense, net in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income and included in Gain on debt repayment in the Company’s Consolidated Statement of Cash Flows.
In conjunction with the amendment of the ABL Facility, the Company wrote-off a portion of existing deferred financing costs. Such amount was recorded in Other expense, net in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income and included in Gain on debt repayment in the Company’s Consolidated Statement of Cash Flows. The remaining capitalized costs, and $2,400 of new third-party costs incurred in conjunction with the amendment, will be amortized over the revised term of the ABL Facility.
Interest on the 8.750% Senior Notes is payable semi-annually in arrears on February 15th and August 15th of each year. The 8.750% Senior Notes are guaranteed, jointly and severally, on a 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:
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.
12
On May 7, 2021, Anagram Holdings, LLC (“Anagram”), a wholly owned subsidiary of the Company, entered into a $15 million asset-based revolving credit facility (“Anagram ABL Facility”), which matures during May 2024. It provides for (a) revolving loans, subject to a borrowing base described below, and (b) under the Anagram ABL Facility, Borrowers would be entitled to request letters of credit (“Letters of Credit”). The aggregate amount of outstanding Letters of Credit would be reserved against the credit availability and subject to a $3 million cap.
Under the 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% to 1% 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.
Note 14 – Revenue from Contracts with Customers
The following table summarizes revenue from contracts with customers for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Retail Net Sales: |
|
|
|
|
|
|
||
North American Party City Stores |
|
$ |
339,399 |
|
|
$ |
330,045 |
|
Other |
|
|
1,552 |
|
|
|
3,237 |
|
Total Retail Net Sales |
|
$ |
340,951 |
|
|
$ |
333,282 |
|
Wholesale Net Sales: |
|
|
|
|
|
|
||
Domestic |
|
$ |
62,209 |
|
|
$ |
55,357 |
|
International |
|
|
29,816 |
|
|
|
38,168 |
|
Total Wholesale Net Sales |
|
$ |
92,025 |
|
|
$ |
93,525 |
|
Total Consolidated Sales |
|
$ |
432,976 |
|
|
$ |
426,807 |
|
The Company maintains allowances for credit losses resulting from the inability of the Company’s customers to make required payments. Judgment is required in assessing the ultimate realization of these receivables, including consideration of the Company’s history of receivable write-offs, the level of past due accounts and the economic status of the Company’s customers. In an effort to identify adverse trends relative to customer economic status, the Company assesses the financial health of the markets it operates in and performs periodic credit evaluations of its customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for credit losses and occur only after all collection efforts have been exhausted. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses. At March 31, 2022, December 31, 2021 and March 31, 2021, the allowance for credit losses was $8,096, $8,057 and $7,499, respectively.
Note 15 – Kazzam, LLC
During the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services.
At December 31, 2019, although the Company owned 26% of Kazzam’s equity, Kazzam was a variable interest entity and the Company consolidated Kazzam into the Company’s financial statements. Further, the Company was funding all of Kazzam’s start-up activities via a loan to Kazzam and recorded its operating results in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive (loss) income. Ampology’s ownership interest in Kazzam had been recorded in redeemable securities in the mezzanine of the Company’s consolidated balance sheet.
In January 2020, the Company and Ampology terminated certain services agreements and warrants that Ampology had in the Company stock. The parties concurrently entered into an interim transition agreement for which expenses are recorded as development stage expenses.
13
On March 23, 2020, the Company agreed to purchase Ampology’s interest in Kazzam in exchange for a three-year royalty on net service revenue and a warrant to purchase up to 1,000,000 shares of the Company’s common stock. The acquisition of Ampology’s interest in Kazzam is an equity transaction and the difference between the fair value of the consideration transferred and the carrying value of Ampology’s interest in Kazzam was recorded within the consolidated statement of stockholders’ equity.
During the first quarter of 2021, Ampology exercised a warrant in a cashless redemption transaction which is reflected in the consolidated statement of stockholders’ equity.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References throughout this document to the “Company” include Party City Holdco Inc. and its subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its subsidiaries and not to any other person.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information, and these statements are qualified by important risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-looking statements. These risks and uncertainties include: our ability to compete effectively in a competitive industry; fluctuations in commodity prices; successful implementation of our store growth strategy; decreases in our Halloween sales; product recalls or product liability; continuing changes in general economic conditions, and the impact on consumer confidence and consumer spending, including inflationary pressures; the continuing impact of COVID-19 on our global supply chain, retail store operations and customer demand; labor and material shortages and investments; disruption to the transportation system or increases in transportation costs; the impact of inflation on consumer spending; new interpretations of or changes to current accounting rules; our ability to anticipate consumer preferences and buying trends; dependence on timely introduction and customer acceptance of our merchandise; changes in consumer spending based on weather, political, competitive and other conditions beyond our control; delays in store openings; competition from companies with concepts or products similar to ours; timely and effective sourcing of merchandise from our foreign and domestic vendors and delivery of merchandise through our supply chain to our stores and customers; loss or actions of third party vendors and loss of the right to use licensed material; disruptions at our manufacturing facilities; effective inventory management; our ability to manage customer returns; successful catalog management, including timing, sizing and merchandising; uncertainties in e-marketing, infrastructure and regulation; multi-channel and multi-brand complexities; our ability to introduce new brands and brand extensions; challenges associated with our increasing global presence; dependence on external funding sources for operating capital; disruptions in the financial markets; our ability to control employment, occupancy and other operating costs; our ability to improve our systems and processes; changes to our information technology infrastructure; general political, economic and market conditions and events, including war, conflict or acts of terrorism; the impact of tariffs and our ability to mitigate impacts; and the additional risks and uncertainties set forth in “Risk Factors” in Party City’s Annual Report on Form 10-K for the year ended December 31, 2021, in Item 1A of Part II of this report, and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, outlook, guidance, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by any applicable laws, Party City assumes no obligation to publicly update or revise such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments or otherwise.
Business Overview
Our Company
We are 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, 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. Our retail operations include approximately 830 specialty retail party supply stores (including franchise stores) throughout North America operating under the names Party City and Halloween City, and e-commerce 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” and “Results of Operations” below.
15
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 three months ended March 31, 2022, 78.6% of the product that was sold by our retail segment was supplied by our wholesale segment and 31.1 % of the product that was sold by our retail segment was self-manufactured.
Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, year-end holiday sales. To maximize our seasonal opportunity, we operate a chain of temporary Halloween stores, under the Halloween City banner, during the months of September and October of each year.
Our wholesale revenues are generated from the sale of decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores (including 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 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.
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 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
16
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.
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.
Adjusted EBITDA. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and (iii) because the credit facilities use Adjusted EBITDA to measure compliance with certain covenants.
Adjusted Net Income (Loss). Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, 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.
The Company presents the measures of adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per common share - Diluted as supplemental non-GAAP measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share—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. The Company also believes that adjusted net income and adjusted net income per common share—diluted are helpful benchmarks to evaluate its operating performance. Adjusted EBITDA, adjusted net income, and adjusted net income per common share—diluted have limitations as analytical tools. Because of these limitations, adjusted EBITDA, adjusted net income, and adjusted net income per common share—diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. The Company compensates for these limitations by relying primarily on its GAAP results and using the metrics only on a supplemental basis and reconciliations from GAAP to non-GAAP measures are provided. Some of the limitations of non-GAAP measures are:
17
Results of Operations
Overview
The Company experienced revenue growth despite the impact of the COVID-19 Omicron variant earlier in the quarter. Our loss from operations was affected by higher costs, including greater freight and commodity costs. We expect supply chain and inflationary headwinds to continue through the rest of fiscal year 2022. While we navigate this near-term turbulence in costs, we are being thoughtful with our mitigating actions on pricing, and we are continuing to focus on our strategic priorities of enhancements to customer engagement as well as digital, IT and supply chain.
Three Months Ended March 31, 2022 Compared To Three Months Ended March 31, 2021
The following table sets forth the Company’s operating results and operating results as a percentage of total net sales for the three months ended March 31, 2022 and 2021.
|
|
Three months ended March 31, |
||||||||||||||||
|
|
2022 |
|
|
2021 |
|||||||||||||
|
|
(Dollars in thousands) |
||||||||||||||||
Net sales |
|
$ |
432,976 |
|
|
|
100.0 |
|
% |
|
$ |
426,807 |
|
|
|
100.0 |
|
% |
Cost of sales |
|
|
294,968 |
|
|
|
68.1 |
|
|
|
|
274,521 |
|
|
|
64.3 |
|
|
Gross profit |
|
|
138,008 |
|
|
|
31.9 |
|
|
|
|
152,286 |
|
|
|
35.7 |
|
|
Selling, general and administrative expenses** |
|
|
158,060 |
|
|
|
36.5 |
|
|
|
|
149,021 |
|
|
|
34.9 |
|
|
Loss on disposal of assets in international operations |
|
|
— |
|
|
|
— |
|
|
|
|
3,211 |
|
|
|
0.8 |
|
|
(Loss) income from operations |
|
|
(20,052 |
) |
|
|
(4.6 |
) |
|
|
|
54 |
|
|
|
— |
|
|
Interest expense, net |
|
|
23,395 |
|
|
|
5.4 |
|
|
|
|
17,214 |
|
|
|
4.0 |
|
|
Other (income) expense, net |
|
|
(203 |
) |
|
|
— |
|
|
|
|
427 |
|
|
|
0.1 |
|
|
(Loss) before income taxes |
|
|
(43,244 |
) |
|
|
(10.0 |
) |
|
|
|
(17,587 |
) |
|
|
(4.1 |
) |
|
Income tax (benefit) |
|
|
(16,355 |
) |
|
|
(3.8 |
) |
|
|
|
(3,469 |
) |
|
|
(0.8 |
) |
|
Net (loss) |
|
|
(26,889 |
) |
|
|
(6.2 |
) |
|
|
|
(14,118 |
) |
|
|
(3.3 |
) |
|
Less: Net (loss) attributable to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
|
(54 |
) |
|
|
— |
|
|
Net (loss) attributable to common shareholders of Party City Holdco Inc. |
|
$ |
(26,889 |
) |
|
|
(6.2 |
) |
% |
|
$ |
(14,064 |
) |
|
|
(3.3 |
) |
% |
Net (loss) per share attributable to common shareholders of Party City Holdco |
|
$ |
(0.24 |
) |
|
|
|
|
|
$ |
(0.13 |
) |
|
|
|
|
||
Net (loss) per share attributable to common shareholders of Party City Holdco |
|
$ |
(0.24 |
) |
|
|
|
|
|
$ |
(0.13 |
) |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
** Consists of wholesale selling expenses, retail operating expenses, art and development costs and general and administrative expenses, which were reported separately in the prior year. |
||||||||||||||||||
18
|
|
Three months ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
(Dollars in thousands) |
|
|
|
|
|
|
||
Net (loss) |
|
$ |
(26,889 |
) |
|
$ |
(14,118 |
) |
Interest expense, net |
|
|
23,395 |
|
|
|
17,214 |
|
Income tax (benefit) |
|
|
(16,355 |
) |
|
|
(3,469 |
) |
Depreciation and amortization |
|
|
15,860 |
|
|
|
17,944 |
|
EBITDA |
|
|
(3,989 |
) |
|
|
17,571 |
|
Inventory restructuring and early lease terminations (f) |
|
|
— |
|
|
|
3,138 |
|
Other restructuring, retention and severance (a) |
|
|
— |
|
|
|
2,051 |
|
Goodwill, intangibles and long-lived assets impairment (b) |
|
|
2,154 |
|
|
— |
|
|
Deferred rent (c) |
|
|
2,525 |
|
|
|
1,526 |
|
Closed store expense (d) |
|
|
987 |
|
|
|
1,593 |
|
Foreign currency (gains), net |
|
|
(281 |
) |
|
|
(539 |
) |
Stock-based compensation - employee** |
|
|
1,712 |
|
|
|
1,282 |
|
Undistributed loss in equity method investments |
|
|
310 |
|
|
|
336 |
|
Gain on sale of property, plant and equipment |
|
|
(119 |
) |
|
|
— |
|
COVID - 19 (e) |
|
|
— |
|
|
|
615 |
|
Inventory disposal reserve |
|
|
621 |
|
|
|
— |
|
Loss on sale of business |
|
|
— |
|
|
|
3,211 |
|
Net loss on debt repayment (g) |
|
|
— |
|
|
|
226 |
|
Other |
|
|
684 |
|
|
|
1,409 |
|
Adjusted EBITDA |
|
$ |
4,604 |
|
|
$ |
32,419 |
|
** Stock-based compensation consists of stock-option expense – time-based, restricted stock units – time-based and restricted stock units – performance-based, which were shown separately in prior years.
|
|
Three months ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
(Dollars in thousands, except per share amounts) |
|
|
|
|
|
|
||
(Loss) before income taxes |
|
$ |
(43,244 |
) |
|
$ |
(17,587 |
) |
Intangible asset amortization |
|
|
1,544 |
|
|
|
2,477 |
|
Amortization of deferred financing costs and original |
|
|
1,271 |
|
|
|
863 |
|
Other restructuring, retention and severance (a) |
|
|
— |
|
|
|
1,936 |
|
Goodwill, intangibles and long-lived assets impairment (b) |
|
|
2,154 |
|
|
— |
|
|
Stock option expense |
|
|
85 |
|
|
|
113 |
|
Restricted stock unit and restricted cash awards expense – performance-based |
|
|
569 |
|
|
|
817 |
|
COVID - 19 (e) |
|
|
— |
|
|
|
615 |
|
Loss on disposal of assets |
|
|
— |
|
|
|
3,211 |
|
Inventory disposal reserve |
|
|
621 |
|
|
|
764 |
|
Adjusted (loss) before income taxes |
|
|
(37,000 |
) |
|
|
(6,791 |
) |
Adjusted income tax (benefit) (h) |
|
|
(12,321 |
) |
|
|
(1,382 |
) |
Adjusted net (loss) |
|
$ |
(24,679 |
) |
|
$ |
(5,409 |
) |
Adjusted net (loss) per common share – diluted |
|
$ |
(0.22 |
) |
|
$ |
(0.05 |
) |
Weighted-average number of common shares-diluted |
|
|
112,407,040 |
|
|
|
110,917,349 |
|
19
Reconciliation of Adjusted Third-Party Wholesale Sales
|
|
Three Months Ended March 31, |
|||||||||||
|
|
2022 |
|
|
2021 |
|
|
Percent Variance |
|
|
|||
Wholesale third-party sales |
|
$ |
92,025 |
|
|
$ |
93,524 |
|
|
|
(1.6 |
) |
% |
Third-party sales of divested entities |
|
|
— |
|
|
|
(13,165 |
) |
|
|
|
|
|
Adjusted Wholesale third-party sales |
|
$ |
92,025 |
|
|
$ |
80,360 |
|
|
|
14.5 |
|
% |
Sales
Total net sales for the first quarter of 2022 were $433.0 million and were $6.2 million, or 1.4%, higher than the first quarter of 2021. The following table sets forth the Company’s total net sales for the three months ended March 31, 2022 and 2021.
|
|
Three months ended March 31, |
||||||||||||||||
|
|
2022 |
|
|
2021 |
|||||||||||||
|
|
Dollars in |
|
|
Percentage of |
|
Dollars in |
|
|
Percentage of |
||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wholesale |
|
$ |
239,680 |
|
|
|
55.4 |
|
% |
|
$ |
212,137 |
|
|
|
49.7 |
|
% |
Eliminations |
|
|
(147,655 |
) |
|
|
(34.1 |
) |
|
|
|
(118,612 |
) |
|
|
(27.8 |
) |
|
Net wholesale |
|
|
92,025 |
|
|
|
21.3 |
|
|
|
|
93,525 |
|
|
|
21.9 |
|
|
Retail |
|
|
340,951 |
|
|
|
78.7 |
|
|
|
|
333,282 |
|
|
|
78.1 |
|
|
Total net sales |
|
$ |
432,976 |
|
|
|
100.0 |
|
% |
|
$ |
426,807 |
|
|
|
100.0 |
|
% |
Retail
Retail net sales during the first quarter of 2022 were $ 341.0 million and were $ 7.7 million, or 2.3%, higher than during the first quarter of 2021. The increase was due to recovery of sales from the prior year that were impacted by COVID. Retail net sales at our Party City stores totaled $323.2 million and were $12.6 million, or 4.1% higher than in the first quarter of 2021.
Same-store sales for the Party City brand (including North American retail e-commerce sales) increased by 2.1% during the first quarter of 2022 compared to the 13 weeks ended April 3, 2021, principally due to growth in seasonal sales.
Wholesale
Wholesale net sales during the first quarter of 2022 totaled $92.0 million and were $1.5 million, or 1.6%, lower than the first quarter of 2021. This decrease is principally due to the prior year divestiture of a significant portion of our international operations, partially offset by higher sales to franchise and independent customers as well as Anagram sales growth in the first quarter of 2022. Excluding the impact of the divestiture, sales increased 14.5%.
Intercompany sales to our retail affiliates totaled $147.7 million during the first quarter of 2022 and were $29.0 million higher than during the corresponding quarter of 2021. Intercompany sales represented 61.6% of total Wholesale sales during the first quarter of 2022 and were 24.5% higher than during the first quarter of 2021, principally due to easing of supply chain constraints as we replenish store inventory. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
20
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended March 31, 2022 and 2021.
|
|
Three months ended March 31, |
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
||||||||||||
|
|
Dollars in Thousands |
|
|
Percentage of Net Sales |
|
|
|
Dollars in Thousands |
|
|
Percentage of Net Sales |
|
|
||||
Retail gross profit |
|
$ |
113,366 |
|
|
|
33.2 |
|
% |
|
$ |
123,178 |
|
|
|
37.0 |
|
% |
Wholesale gross profit |
|
|
24,642 |
|
|
|
26.8 |
|
|
|
|
29,108 |
|
|
|
31.1 |
|
|
Total gross profit |
|
$ |
138,008 |
|
|
|
31.9 |
|
% |
|
$ |
152,286 |
|
|
|
35.7 |
|
% |
The gross profit margin on net sales at Retail during the first quarter of 2022 was 33.2 % or 380 basis points lower than during the corresponding quarter of 2021. The change was primarily driven by higher helium and freight costs for the quarter. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 31.1 % during the first quarter of 2022 was 1.9% lower as compared to the first quarter of 2021. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 78.6% during the first quarter of 2022 or 2.9% lower than during the first quarter of 2021.
The gross profit margin on net sales at Wholesale during the first quarters of 2022 and 2021 was 26.8% and 31.1%, respectively. This decrease is primarily due to higher freight, material and labor costs.
Selling, general and administrative expenses
Selling, general and administrative expenses during the first quarter of 2022 totaled $158.1 million and were $9.1 million, or 6.1%, higher than in the first quarter of 2021. The increase was primarily driven by higher employee-related costs resulting from higher wages, predominately in our retail stores, partially offset by the international divestiture.
Interest expense, net
Interest expense, net, totaled $23.4 million during the first quarter of 2022, compared to $17.2 million during the first quarter of 2021. The increase primarily reflects higher cost debt from the refinancing in the first quarter of 2021.
Other (income) expense, net
For the first quarters of 2022 and 2021, other (income) expense, net, totaled $(0.2) million and $0.4 million, respectively. The change is primarily due to recognition of a currency gain in 2022 versus a currency loss in 2021.
Income tax benefit
The effective income tax rate for the three months ended March 31, 2022 of 37.8%, is different from the statutory rate of 21.0% primarily due to state taxes, and valuation allowance resulting from interest carryforward deductions limited by IRC Section 163(j).
Liquidity and Capital Resources
We have proactively managed our liquidity profile throughout the quarter and expect to continue to do so going forward. We expect 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, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Company's credit facilities and in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Our business, results of operations, financial condition and liquidity have been and may continue to be materially and adversely affected by COVID-19. Further, the disruption to the global economy and to our business, along with the decline in our stock price, may negatively impact the carrying value of certain assets, including inventories, accounts receivable, intangibles and goodwill. Any additional impact to which COVID-19 and the measures to contain it will impact our business, operations, financial condition and liquidity will depend on future severity, duration of COVID-19 and, as applicable any continued response to the virus, all of which are uncertain in 2022. We will continue to actively monitor the impact of COVID-19.
21
However, if the duration of the COVID-19 pandemic continues longer than we expect or the severity worsens, we may need to access other sources of financing, including incurring additional indebtedness, selling our assets and raising additional equity capital. These alternatives may not be available to us on satisfactory terms or at all, which could have a material adverse effect on our business.
Sources of Cash
Based on our current operations and planned strategic initiatives (including new store and NXTGEN remodel growth plans and other capital expenditures), we expect to satisfy our short-term and long-term cash requirements through a combination of our existing cash and cash equivalents position, funds generated from operating activities, and the borrowing capacity available under our credit agreements. If cash generated from our operations and borrowings under our credit agreements are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time, in our sole discretion, purchase or retire all or a portion of our existing debt instruments through privately negotiated or open market transactions.
As of March 31, 2022, the Company had cash and cash equivalents of $33 million and available borrowings of $90 million.
Material Cash Commitments
Debt Obligations, Finance Leases and Interest Payments. As of March 31, 2022, we had $209.1 million in loans and notes payable, $0.9 million current long-term obligations and $1,346.7 million in long-term obligations outstanding. Repayment of the Company's debt is dependent on our subsidiaries' ability to make cash available. For additional information regarding the Company's debt, refer to Note 13, Current and Long-Term Obligations in Part I, Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q. As noted, the Company must make payments related to interest payments, principal and fees and the facilities contain debt covenants that the must be met.
Leases. As of March 31, 2022, we had an operating lease liability of $801.3 million. We have numerous non-cancelable operating leases for retail store sites, as well as leases for offices, distribution facilities and manufacturing facilities. These leases generally contain renewal options and require us to pay real estate taxes, utilities and related insurance costs.
Capital Expenditures. Cash commitments are described in the following section on Cash Flow Data.
8.75% Senior Secured Notes — Due 2026 (“8.75% Senior Notes”)
In accordance with the 8.75% Senior Notes, as discussed in Note 13, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, the Company is required to provide quarterly and annual disclosure of certain financial metrics for Anagram Holdings, LLC and its subsidiary (“Anagram”). For the three months ended March 31, 2022, Anagram reported:
Cash Flow Data – Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
Net cash used in operating activities totaled $116.8 million during the three months ended March 31, 2022. Net cash used in operating activities totaled $48.8 million during the three months ended March 31, 2021. The increase in cash used in operating activities is primarily attributable to increased inventory purchases to support higher anticipated sales and increased inventory cost due to freight. The increase in cash used is also due to timing of payments related to accounts payable and accrued expenses and a higher net loss, partially offset by lower lease payments as the prior year reflected payment of COVID deferrals.
Net cash used in investing activities totaled $17 million during the three months ended March 31, 2022, as compared to $1.6 million during the three months ended March 31, 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 lower capital expenditures in the current year. Capital expenditures during the three months ended March 31, 2022 and 2021 were $18.6 million and $22.2 million, respectively.
Net cash provided by financing activities was $118.5 million during the three months ended March 31, 2022 compared to $16.9 million during the three months ended March 31, 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.
22
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.
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our risk exposures from those disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)) as of March 31, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Information in response to this Item is incorporated herein by reference from Note 9 – Commitments and Contingencies , to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There were no material changes during the period covered in this report to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2021, except as follows:
Labor, product, and supply disruptions have had and may continue to have an adverse effect on our operating results.
We have experienced, and expect to continue to experience, logistics constraints and supply chain disruptions, including increased key raw material and helium costs, increased freight, shipping and transportation costs, increased labor wages, labor shortages and delivery delays and associated charges. Failure to effectively manage these disruptions has and may continue to adversely impact our operating results.
25
Item 6. Exhibits
Exhibit Number |
|
Description |
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
10.1* |
|
|
|
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1* |
|
|
|
|
|
32.2* |
|
|
|
|
|
101.INS* |
|
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104* |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
PARTY CITY HOLDCO INC. |
|
|
|
|
|
By: |
|
/s/ Todd Vogensen |
|
|
|
Todd Vogensen |
|
|
|
Chief Financial Officer (Principal Financial Officer) |
Date: May 9, 2022
27
DocuSign Envelope ID: 6F2BA126-89C9-47AC-B0EF-5F39E09612E7
Exhibit 10.1
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(“Agreement”), dated as of April 18, 2022_________________ (the “Effective Date”), by and between Party City Holdings Inc., a Delaware corporation (the “Company”), Party City Holdco Inc., a Delaware corporation (“Holdco”), and Denise Kulikowsky (the “Executive”) and effective as of the Effective Date.
WHEREAS, the Executive has served the Company and Holdco as the Chief Human Resource Officer of the Company pursuant to an Employment Agreement, dated November 14, 2018, as amended by that Amended and Restated Employment Agreement among the parties dated April 5, 2020 (collectively, the “Prior Employment Agreement”); and
WHEREAS, the Company, Holdco and the Executive desire to set forth in this new Agreement the terms and conditions under which the Executive will continue to be employed as the Chief Human Resource Officer of the Company and Holdco effective as of the Effective Date.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
contrary, the parties acknowledge and agree that the Prior Employment Agreement, along with that the Change in Control Severance Agreement dated December 23, 2019 by and between Executive, Company, and Holdco (the “CIC Agreement”) are hereby replaced in their entirety by this Agreement, and further, upon execution of this Agreement, all provisions of the Prior Employment Agreement and CIC Agreement are hereby superseded in their entirety and replaced herein and shall have no further force or effect.
the Executive, and the Executive agrees to, and shall, serve the Company and Holdco, on the terms and conditions set forth in this Agreement, for the period beginning on the Effective Date and ending on March 31, 2024, unless sooner terminated as set forth hereinafter (the “Employment Period”).
DocuSign Envelope ID: 6F2BA126-89C9-47AC-B0EF-5F39E09612E7
sick leave to which the Executive is entitled, the Executive shall devote her full attention and time during normal business hours to the business and affairs of the Company and Holdco and shall use her reasonable best efforts to carry out the responsibilities assigned to the Executive faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (i) serve on civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, (iii) serve on the board of directors of other companies, so long as the Board approves such appointments (such approval not to be unreasonably withheld), or (iv) manage personal investments, so long as such activities do not compete with and are not provided to or for any entity that competes with or intends to compete with the Company or Holdco or any of their respective subsidiaries and affiliates and do not interfere with the performance of the Executive’s responsibilities as an employee of the Company or Holdco in accordance with this Agreement.
from the Company an annual base salary of $450,000 (the “Annual Base Salary”) (as such amount may be increased from time to time in connection with applicable annual compensation review(s), in the sole discretion of the Board or the Compensation Committee of the Board (the “Committee”), payable in regular intervals in accordance with the Company’s customary payroll practices in effect during the Employment Period.
Employment Period, the Executive shall be eligible to receive annual bonus compensation (the “Annual Bonus”) pursuant to the Company’s bonus plan for key executives as in effect from time to time (the “Bonus Plan”). The Annual Bonus (including any pro rata portion thereof, to the extent payable under this Agreement), if any, shall be paid no later than two and one-half months following the end of the calendar year to which such Annual Bonus corresponds. Effective as of the Effective Date, the target amount of the Annual Bonus shall be 60% of the Annual Base Salary
(the “Target Bonus Amount”) and the maximum amount of the Annual Bonus shall be 120% of the Annual Base Salary, with the actual amount of the Annual Bonus, if any, to be determined by the Board or the Committee in accordance with the Bonus Plan (and as such amount may be increased from time to time in connection with applicable annual compensation review(s), in the sole discretion of the Board or the Committee). Except as otherwise provided in Section 5 of this Agreement, (i) in order to receive the Annual Bonus, the Executive must remain continuously employed by the Company and Holdco through the applicable payment date for such bonus, and (ii) for any year during which the Executive is employed by the Company and Holdco for less than the entire calendar year, the Annual Bonus, if any, shall be determined based on actual
-2-
DocuSign Envelope ID: 6F2BA126-89C9-47AC-B0EF-5F39E09612E7
performance, pro-rated for the period during which the Executive was employed during such calendar year (based on the number of days in such calendar year the Executive was so employed divided by 365), as determined in good faith by the Board or the Committee.
the Board or the Committee, the Executive shall be eligible to receive incentive equity grants under Holdco’s equity compensation program for senior executives, subject to the terms of such program as in effect from time to time and with any grants under such program in the discretion of the Board or the Committee.
entitled to receive reimbursement for all reasonable travel and other expenses incurred by the Executive in carrying out the Executive’s duties under this Agreement; provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses.
shall be entitled to all rights to indemnification available under the by-laws or certificate of incorporation of the Company and Holdco, or to which she may otherwise be entitled, through the Company, Holdco and/or any of their respective subsidiaries and affiliates, in accordance with their respective terms.
-3-
DocuSign Envelope ID: 6F2BA126-89C9-47AC-B0EF-5F39E09612E7
terminate automatically upon the Executive’s death during the Employment Period. The Company or Holdco shall be entitled to terminate the Executive’s employment because of the Executive’s Permanent Disability during the Employment Period. “Permanent Disability” means that the Executive (i) is unable to perform her duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, during which time Executive shall continue to be covered by applicable executive benefits if provided for in such benefits plan documents; (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company, during which time Executive shall continue to be covered by applicable executive income replacement benefits if provided for in such benefits plan documents; or (iii) has been determined to be totally disabled by the Social Security Administration. A termination of the Executive’s employment by the Company or Holdco for Permanent Disability shall be communicated to the Executive by written notice and shall be effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), unless the Executive returns to full-time performance of the Executive’s duties in accordance with the provisions of Section 2 before such 30th day. In the event of a dispute as to whether the Executive has suffered a Permanent Disability, the final determination shall be made by an independent licensed physician selected by the Board and acceptable to the Executive in the Executive’s reasonable judgment. If the Company or Holdco shall receive Executive’s protected health information, such protected health information shall be kept confidential in accordance with applicable law, and HIPAA, to the extent applicable to the Company or Holdco.
Executive’s employment at any time during the Employment Period with or without Cause upon thirty (30) days prior notice to the Executive.
during the Employment Period for Good Reason, upon prior written notice to the Company setting forth in reasonable detail the nature of such Good Reason, as set forth below. For purposes of this Agreement, “Good Reason” is defined as any one or more of the following without the Executive’s consent: any attempt to relocate the Executive to a work location that is more than 75 miles from the Company’s offices, as of the date hereof in Elmsford, NY and as of September 1, 2022 anticipated to be Woodcliff Lake, NJ; any material diminution in the nature or scope of the Executive’s responsibilities or duties as defined under this Agreement; any material breach by the Company or any affiliate of the Company of any provision of this Agreement or any other written agreement with the Executive, which breach is not cured within twenty (20) days following written notice by the Executive to the Company; or any material failure of the Company to provide the Executive with at least the Annual Base Salary and/or any other compensation or benefits in accordance with the terms of Section 3 hereof, other than an inadvertent failure which is cured
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within ten (10) business days following written notice from the Executive specifying in reasonable detail the nature of such failure; or a Change in Control as set forth in 4(d). Notwithstanding the foregoing, the appointment of an interim Chief Human Resource Officer during and for any period of the Executive’s disability (which may potentially result in a Permanent Disability) will not be considered “Good Reason” (so long as the Executive continues to be compensated pursuant to the terms of this Agreement), until the occurrence of a Permanent Disability as defined in Section 4(a). The Executive’s employment will only be deemed to have been terminated for Good Reason if she gives written notice to the Company setting forth in reasonable detail the nature of such Good Reason, gives the Company an opportunity to cure such Good Reason event (which cure period shall not be less than fifteen (15) days) and terminates employment within sixty (60) days of the date of the later of the first occurrence and the Executive’s knowledge of the circumstances giving rise to Good Reason (to the extent the Company has not previously cured the circumstances giving rise to Good Reason).
defined) during the Employment Period, and the Executive is not offered employment on substantially similar terms by the Company or Holdco or one of its continuing affiliates immediately thereafter, then, for all purposes of this Agreement, the Executive’s employment shall be deemed to have been terminated by the Company or Holdco other than for Cause effective as of the date of such Change in Control; provided, however, that the Company or Holdco shall not have any obligation to the Executive under this Section 4 if the Executive is hired or offered employment on substantially similar terms by the purchaser of the stock or assets of the Company or Holdco, if the Executive’s employment hereunder is continued by the Company or Holdco or one of its continuing affiliates or if the Executive does not actually terminate employment. As used herein, a “Change in Control” shall be deemed to have occurred solely upon the occurrence of any of the following events:
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the Executive dies during the Employment Period or the Company or Holdco terminates the Executive’s employment due to the Executive’s Permanent Disability, the Company shall pay the Executive or her legal representative:
Year’s Bonus”); and (3) any unreimbursed expenses incurred prior to the Date of Termination, including any then unreimbursed car allowance for each month or partial month of employment; and
The Accrued Obligations (other than Prior Year’s Bonus) shall be paid in cash within thirty (30) days of the Date of Termination. The Annual Bonus, if earned, shall be pro-rated as described above and both such pro-rated Annual Bonus and the Prior Year’s Bonus, if payable, shall otherwise be calculated and paid in accordance with Section 3(b)). Notwithstanding anything to the contrary set forth herein, the Executive shall not be entitled to the Prior Year’s Bonus or any payment pursuant to clause (ii) of this Section 5(a) unless the Executive (or her legal representative) shall have executed a release of any and all legal claims substantially in the form attached hereto as Exhibit A (which form may be modified by the Company or Holdco to the extent necessary to reflect execution by a person other than the Executive) (the “Release”) no later than twenty-one (21) days (or, if so instructed by the Company or Holdco, forty-five (45) days) following the Date of Termination and shall not have revoked the Release in accordance with its terms. The Company or Holdco shall provide the final Release promptly in connection with any termination of the Executive’s employment hereunder.
the Company or Holdco for “Cause” (as hereinafter defined), then the Executive shall be entitled to only the payment of the Accrued Obligations which shall be paid to the Executive in cash in a lump sum within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which shall be paid in accordance with Section 3(b)) and the Company or Holdco shall not have any further obligation under this Agreement,
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except as expressly provided herein. For purposes of this Agreement, “Cause” shall mean (1) conviction of the Executive by a court of competent jurisdiction of a felony (excluding felonies under any state or local vehicle and traffic code); (2) any act of intentional fraud in connection with her duties under this Agreement; (3) any act of gross negligence or willful misconduct with respect to the Executive’s duties under this Agreement and (4) any act of willful disobedience in violation of specific reasonable directions of the Board or the CEO consistent with the Executive’s duties; provided, in the case of clause (3) or (4), that the Executive has not cured the circumstances giving rise to “Cause” within thirty (30) days of the date the Company or Holdco gives notice to the Executive of its intent to terminate her employment on such basis.
Good Reason other than a Change of Control Termination. If the Executive’s employment is terminated during the Employment Period (i) by Holdco and its affiliates other than for Cause, death or Permanent Disability or (ii) by the Executive for Good Reason, in each case, except if such termination is a Change in Control Termination:
amount equal to twelve (12) months’ Annual Base Salary;
termination, calculated and paid in accordance with Section 3(b), which pro-ration shall reflect the number of days the Executive was employed by Holdco and its affiliates in the applicable year prior to the Date of Termination; and
The Severance Payment shall be payable in cash in the form of salary continuation
over the twelve (12) months following the Date of Termination, with the first payment(s) being payable in arrears on the date that is sixty (60) days following the Date of Termination. Notwithstanding anything to the contrary set forth herein, the Executive shall not be entitled to the
Prior Year’s Bonus or any payment or benefit pursuant to clause (ii) of this Section 5(c) unless the Executive shall have, at the written request of Holdco or any its affiliates, executed the Release no later than twenty-one (21) days (or, if so instructed by Holdco and its affiliates, forty-five (45) days) following the Date of Termination and shall not have revoked such release in accordance with its terms. Holdco or the Company shall provide the final Release promptly in connection with any termination of the Executive’s employment hereunder.
set forth herein, in the event of a Change in Control Termination:
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then current Annual Base Salary and (2) the target Annual Bonus,
termination, calculated and paid in accordance with Section 3(b), which pro-ration shall reflect the number of days the Executive was employed by Holdco or any of its affiliates in the applicable year prior to the Date of Termination, and
coverage in the group health plan covering employees of the Company or Holdco under the federal law known as “COBRA”, a monthly amount equal to that portion of the monthly health premiums for such coverage paid by Holdco or the Company on behalf of the Executive prior to the Date of Termination until the date that is twenty-four (24) months following the Date of Termination (the “Health Continuation Benefits”); and
Change in Control Termination, such awards and rights shall be earned based on
actual achievement of the applicable performance goals, as provided in the applicable award agreement and shall immediately become vested without proration and (2) otherwise, such awards and rights shall be earned based on assumed achievement of the applicable performance goals at 100% of the performance target, as provided in the applicable award agreement, and shall immediately vest as to a prorated portion of each such award or right based on the number of days of the Executive’s actual employment or other service with Holdco or any of its affiliates prior to the Change in Control Termination during the applicable full performance period; provided, that, if the Executive does not experience a Change in Control Termination prior to the end of the applicable original performance period, such awards and rights shall be earned based on
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assumed achievement of the applicable performance goals at 100% of the performance target, as provided in the applicable award agreement, and shall be eligible to vest as of the last day of the applicable original performance period without pro-ration, subject to the terms of the applicable award agreement. Any stock options, restricted stock, restricted stock units, performance stock units, restricted cash or similar awards (or any awards or rights issued in exchange for such grants in connection with a Change in Control or otherwise) that do not vest after application of the preceding sentence or clause (iii) hereof shall be immediately forfeited without payment due thereon.
Notwithstanding the foregoing, in the event that the Health Continuation Benefits would subject the Executive or Holdco or any of its affiliates to any tax or penalty under the ACA or Section 105(h) of the Code (as defined below), or applicable subsequent regulations, guidance or successor statutes, the Executive and the Company agree to work together in good faith to restructure the Health Continuation Benefits in a manner that avoids such adverse consequences. All amounts payable hereunder (except the pro rata Annual Bonus and the Prior Year’s Bonus, which are each payable in accordance with Section 3(b), the Accrued Obligations (other than the Prior Year’s Bonus), which shall be calculated and paid in a lump sum in cash within thirty (30) days of the date of the Change in Control Termination and the Health Continuation Benefits, which shall be paid as described above in this Section 5(d)) shall be paid in cash in a lump sum on the date that is the later of sixty (60) days following the date of the Change in Control Termination or sixty (60) days following the consummation of the Change in Control (except that, if the Change in Control Termination occurs due to a qualifying termination within six (6) months prior to a Change in Control, such payment will be made over the twenty four (24) months following the Date of Termination, with the first payment(s) being payable in arrears on the date that is sixty (60) days following the Date of Termination). Notwithstanding anything to the contrary set forth herein, the Executive shall not be entitled to the Prior Year’s Bonus or any payment or benefit pursuant to clauses (ii) or (iii) of this Section 5(d) unless the Executive shall have, at the written request of Holdco or any its affiliates, executed the Release no later than twenty-one (21) days (or, if so instructed by Holdco and its affiliates, forty-five (45) days) following the date of the Change in Control Termination and shall not have revoked such release in accordance with its terms. Holdco or the Company shall provide the final Release promptly in connection with any termination of the Executive’s employment hereunder.
Reason, the Company or Holdco shall pay the Accrued Obligations to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination (other than the amount described in clause (2) of the definition of Accrued Obligations, which shall be paid in accordance with Section 3(b)) and neither the Company or Holdco shall have any further obligation under this Agreement except as expressly provided herein.
of this Agreement, or, unless the Company or Holdco shall give Executive one hundred twenty (120) days’ notice of its intent to not renew, the Employment Period and the Executive’s
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employment hereunder will automatically renew for additional 12-month periods. If the Company or Holdco shall notify Executive of its intent to not renew, then the Executive’s employment may continue after expiration of the then-current Employment Period on an “at will” basis and no Severance Payment will be due.
of employment” and similar or correlative phrases shall be construed to require a “separation from service” (as defined in Section 1.409A-1(h) of the Treasury regulations after giving effect to the presumptions contained therein), and the term “specified employee” means an individual determined by the Company or Holdco to be a specified employee under Treasury regulation Section 1.409A-1(i).
“nonqualified deferred compensation” subject to Section 409A would be subject to subsection (a)(2)(B)(i) of Section 409A (relating to payments made to “specified employees” of publiclytraded companies upon separation from service), any such payment or benefit to which the Executive would otherwise be entitled during the six (6) month period following the Executive’s separation from service will instead be provided or paid without interest on the first business day following the expiration of such six (6) month period, or if earlier, the date of the Executive’s death.
treated as a separate payment.
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termination of the Executive’s employment with the Company and Holdco and any of their affiliates, during the “Restriction Period” (as hereinafter defined) and provided in such instance Company or Holdco is paying to Executive the Severance Payment as set forth in Article 5, then the Executive shall not directly or indirectly participate in or permit her name directly or indirectly to be used by or become associated with (including as an advisor, representative, agent, promoter, independent contractor, provider of personal services or otherwise) any person, corporation, partnership, firm, association or other enterprise or entity (a “person”) that is, or intends to be, engaged in any business which is in competition with any business of the Company or Holdco or any of their respective subsidiaries or affiliates in any geographic area in which the Company or Holdco or any of their respective subsidiaries or affiliates operate, compete or are engaged in such business or at such time intend so to operate, compete or become engaged in such business, as set forth more fully pursuant to Schedule A (each, a “Competitor”); provided, however, that the foregoing will not prohibit the Executive from participating in or becoming associated with a person if (i) less than 10% of the consolidated gross revenues of such person, together with its affiliates, derive from activities or businesses that are in competition with any business of the Company or Holdco or any of its subsidiaries or affiliates (a “Competitive Business”) and (ii) the Executive does not, directly or indirectly, participate in, become associated with, or otherwise have
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responsibilities that relate to the conduct or operations of, any Competitive Business that is conducted by such person or a division, group, or subsidiary or affiliate of such person. For purposes of this Agreement, the term “participate” includes any direct or indirect interest, whether as an officer, director, employee, partner, sole proprietor, trustee, beneficiary, agent, representative, independent contractor, consultant, advisor, provider of personal services, creditor, or owner (other than by ownership of less than five percent of the stock of a publicly-held corporation whose stock is traded on a national securities exchange or in an over-the-counter market).
following termination of employment, the Executive will not, except with the prior written consent of the Company or Holdco, directly or indirectly, induce any employee of the Company or Holdco or any of their respective subsidiaries or affiliates to terminate employment with such entity, and will not, directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ, offer employment or cause employment to be offered to any person (including employment as an independent contractor) who is or was employed by the Company or Holdco or any of their respective subsidiaries or affiliates unless such person shall have ceased to be employed by such entity for a period of at least twelve months. For purposes of this Section 9(c),
“employment” shall be deemed to include rendering services as an independent contractor and “employees” shall be deemed to include independent contractors.
mean the one-year period immediately following the Date of Termination (other than a termination at the expiration of the Employment Period).
termination of employment, including due to expiration of the Employment Period, the Executive shall return to the Company all property of the Company or Holdco and their respective subsidiaries and affiliates, and all copies thereof, in the Executive’s possession or under her control, including, without limitation, all Confidential Information in whatever media such Confidential Information is maintained.
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the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives and heirs and successors.
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the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective heirs, successors and legal representatives.
writing and shall be given by hand delivery to the other party or by overnight courier or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile (with receipt confirmation), addressed as follows:
or to such other address as either party furnishes to the other in writing in accordance with this Section 12(b). Notices and communications shall be effective when actually received by the addressee.
not affect the validity or enforceability of any other provision of this Agreement.
withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. In addition, the obligations of the Company under this Agreement shall be conditional on compliance with this Section 12(d), and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Executive.
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or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement.
controversies and claims arising out of this Agreement and the Executive’s employment hereunder, shall be submitted to and resolved by arbitration in accordance with and pursuant to the Employment Arbitration Rules of the American Arbitration Association, as then in effect. The parties agree that any dispute will be heard by a single arbitrator. The arbitrator shall be selected by mutual agreement of the Parties, or if no agreement can be reached, the arbitrator shall be selected by the American Arbitration Association. All arbitration costs shall be shared equally by the parties and each party shall bear its own costs and expenses in the event of any dispute hereunder.
deemed to be an original, but all of which shall together constitute one and the same instrument.
if so provided herein or if necessary or desirable to accomplish the purposes of other surviving provisions, including, without limitation, the obligations of the Executive under Sections 8 and 9 hereof.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization of the board of directors, the Company and Holdco has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.
PARTY CITY HOLDINGS INC.
By:________________________________
Name: Brad Weston
Title: Chief Executive Officer
PARTY CITY HOLDCO INC.
By:________________________________
Name: Brad Weston
Title: Chief Executive Officer
__________________________________
DENISE KULIKOWSKY
Schedule A
Competitors
Exhibit A
FORM OF RELEASE OF CLAIMS
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This Release of Claims is provided by me, Denise Kulikowsky (or by my designated beneficiary or estate, in the event of my death during my employment), pursuant to the Amended and Restated Employment Agreement between me, Party City Holdings Inc. (the “Company”) and Party City Holdco Inc. (“Holdco”) dated as of April 5, 2020 (the “Employment Agreement”).
This Release of Claims is given in consideration of the severance benefits to be provided to me (or, in the event of my death during my employment, to my designated beneficiary) in connection with the termination of my employment under Section 5 of the Employment Agreement (the “Separation Payments”), which are conditioned on my signing this Release of Claims and to which I am not otherwise entitled, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged. On my own behalf and that of my heirs, executors, administrators, beneficiaries, representatives and assigns, and all others connected with or claiming through me, I hereby release and forever discharge the Company from any and all causes of action, rights or claims of any type or description, known or unknown, which I have had in the past, now have or might have, through the date of my signing of this Release of Claims. This includes, without limitation, any and all causes of action, rights or claims in any way resulting from, arising out of or connected with my employment by the Company or the termination of that employment or pursuant to any federal, state or local law, regulation or other requirement, including without limitation Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the fair employment practices statutes of the state or states in which I have provided services to the Company or any other federal, state, local or foreign law, all as amended, any contracts of employment, any tort claims, or any agreements, plans or policies.
For purposes of this Release of Claims, the word “Company” always includes the Company, Holdco the subsidiaries and affiliates of the Company or Holdco and all of their respective past, present and future officers, directors, trustees, shareholders, employees, employee benefit plans and any of the trustees or administrators thereof, agents, general and limited partners, members, managers, investors, joint venturers, representatives, predecessors, successors and assigns, and all others connected with any of them, both individually and in their official capacities.
Nothing in this Release of Claims shall be construed to prohibit me from filing a charge with or participating in any investigation or proceeding conducted by the federal Equal Employment Opportunity Commission or a comparable state or local agency, except that I hereby agree to waive my right to recover monetary damages or other individual relief in any charge, complaint or lawsuit filed by me or by anyone else on my behalf.
Nothing in this Release of Claims is intended to or does waive or release any rights I may have with respect to (i) coverage under liability insurance or indemnification rights provided or maintained by the Company during, or applicable to, my employment with the Company, or under any other obligation or policy of insurance maintained by the Company in accordance with their respective terms; (ii) any other defense or indemnity right under applicable law; (iii) the enforcement of the right to any payment or benefits due upon the termination of my employment in accordance with the express terms of the Employment Agreement or (iv) any right or claim that cannot, by law, be waived or released through this Release of Claims.
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Also excluded from the scope of this Release of Claims is any right to benefits that were vested or eligible for continuation under the Company’s employee benefit plans on the date on which my employment with the Company terminated, in accordance with the terms of such plans.
In signing this Release of Claims, I give the Company assurance that I have returned to the Company any and all documents, materials and information related to the business, whether present or otherwise, of the Company and all keys and other property of the Company that were in my possession or control, all as required by and consistent with Section 9(e) of the Employment Agreement. I agree that I will not, for any purpose, attempt to access or use any computer or computer network or system of the Company, including without limitation their electronic mail systems. I further acknowledge that I have disclosed to the Company all passwords necessary or desirable to enable the Company to access all information which I have password-protected on its computer network or system.
In signing this Release of Claims, I agree that I have been paid in full all compensation due to me, whether for services rendered by me to the Company or otherwise, through the date on which my employment with the Company terminated and that, exclusive only of the Separation Payments and the Accrued Obligations, as defined in the Employment Agreement, no further compensation of any kind shall be due to me by the Company, whether arising under the Employment Agreement or otherwise, in connection with my employment or the termination thereof. I also agree that except for any right I and my eligible dependents may have to continue participation in the Company’s health and dental plans under the federal law commonly known as COBRA, my right to participate in any employee benefit plan of the Company will be determined in accordance with the terms of such plan.
I acknowledge that my eligibility for the Separation Payments is not only contingent on my signing and returning this Release of Claims to the Company in a timely manner and not revoking it thereafter, but also is subject to my compliance with the covenants contained in the Employment Agreement.
In signing this Release of Claims, acknowledge that I have not relied on any promises or representations, express or implied, that are not set forth expressly in this Release of Claims. I further acknowledge that I am waiving and releasing any rights I may have under the Age Discrimination in Employment Act of 1967, as amended (“ADEA”), and that this waiver and release is knowing and voluntary and is being done with a full understanding of its terms. I agree that the consideration given for this wavier and release is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing as required by the ADEA that:
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Intending to be legally bound, I have signed this Release of Claims under seal as of the date written below.
Signature:____________________________ Date signed:_________________________
Party City Holdings Inc.
___________________________________ Name:
Title:
Party City Holdco Inc.
___________________________________ Name:
Title:
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brad Weston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Party City Holdco Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 9, 2022
/s/ Brad Weston |
Brad Weston |
Chief Executive Officer |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Todd Vogensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Party City Holdco Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 9, 2022
/s/ Todd Vogensen |
Todd Vogensen |
Chief Financial Officer |
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Party City Holdco Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Brad Weston, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Brad Weston |
Brad Weston |
Chief Executive Officer |
(Principal Executive Officer) |
Date: May 9, 2022
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Party City Holdco Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Todd Vogensen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Todd Vogensen |
Todd Vogensen |
Chief Financial Officer |
(Principal Financial Officer) |
Date: May 9, 2022