PARTY CITY HOLDCO INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
Company Overview
Our company
We are the leading party goods company by revenue inNorth 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 acrossthe United States , we make it easy for our customers to find the perfect party supplies, balloons and costumes for their celebration. Our retail operations include approximately 830 specialty retail party supply stores, which includes franchise stores throughoutNorth America operating under the names Party City andHalloween City, and e-commerce websites, which offer rapid, contactless, and same day shipping options (including in store and at curb side), 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. Segments Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan and Anagram brand names and CostumesUSA brand names through Party City,Halloween City and PartyCity.com. During 2021, 81.1% of the product that was sold by our retail segment was supplied by our wholesale segment and 26.7% of the product that was sold by our retail segment was self-manufactured. Our wholesale revenues are generated from the sale of decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores (including our franchise stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and e-commerce merchandisers. Intercompany sales between the Wholesale and the Retail segment 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 segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues. COVID-19 Update. Our retail and wholesale business is centered around social gatherings to celebrate everyday and seasonal events. Larger gatherings generally result in greater breadth of product purchases and increased average order value in basket. COVID-19 and the evolving measures taken to respond continue to impact the global economy and consumer spending and disrupt global supply chains in various industries. The economy has experienced variability due to geography, climate, local and state variant transmission levels, vaccination adoption and regulatory restrictions. This in turn changes consumer behavior and our results. For example, our wholesale business inCanada was significantly affected in 2021 due to extended government-mandated lockdowns, where a significant third-party customer base is located. In spite of these challenges, consumers found different ways to celebrate, and we evolved our offering and go-to-market approach to meet our customers' needs, enabling them to celebrate life's important milestone in a safe manner. Improving customer engagement across our marketing 28 --------------------------------------------------------------------------------
our messaging, product and merchandising approach, and digital experiences with our brand have become essential to increasing relevance.
Entering 2021, our focus on our core North American party platform resulted in our strategic goal of operating a more effective and customer-led vertical model. This included ongoing improvements to our integrated supply chain, expanded capacity in some of our manufacturing plants and driving new efficiencies in transportation, distribution, and inventory levels. Our logistics team has taken prudent action to ensure the highest possible in-stock rates in a challenging supply chain environment. We applied mitigation activities to address in-stock product availability and delivery and incurred additional transportation and distribution costs in order to ensure we could generally satisfy customer demand. The unique supply chain challenges have resulted in limited benefits from existing contract protections, and therefore we believe all retailers continue to be impacted by these increased costs. We continue to evaluate multiple sources of supply for products in the highest demand, particularly as we focus on quality and innovation within the supply chain, and we have begun to adjust our order timeline throughout the supply chain and continue to find transportation alternatives to mitigate what we expect will be continuing volatility. We also continue to increase capacity in ourU.S. manufacturing plants, including Anagram. We have been able to maintain a reasonable level of staffing in our operations, despite challenges presented by COVID-19 and overall labor shortages in our markets. However, we have been adversely impacted by additional wage pressure in 2021, in addition to continuing impact of state law minimum wage legislation in recent years. Overall, our pricing power in both the retail and wholesale markets has allowed us to meaningfully mitigate rising costs with appropriate price adjustments, which partially offset the forgoing cost headwinds. We have data at both the category and SKU level that allows us to make strategic pricing decisions that optimize profit and minimize impact to the consumer and our customers. As the category-defining brand, we have the pricing power to effectively mitigate the impact of rising input costs. 2021 Overview. 2021 was an important year of transformation as we advanced the fundamental building blocks of our strategy across product innovation, in-store experience, being celebration occasion obsessed and focusing on our North American vertical model. Despite the continued challenging and volatile economic backdrop, the business performed well as the consumer returned to social gatherings, celebrations and parties, while we continued to implement significant operational and capital structure improvements. We delivered a another strong year of financial and operational results with total sales up 7.7% year over year. Throughout the year, we continued to remodel or open NXTGEN stores and enhanced the in-store experience for our customers with an increased focus on product quality and innovation. With our transformation initiatives increasing brand relevancy with our consumers, same-store sales growth led to gross margin improvement. We also finalized the sale of our international wholesale operations providing us opportunity to increase our focus on our North American vertical model. Lastly, we strengthened our financial position and liquidity by refinancing our term loan at the beginning of the year.
How we assess the performance of our business
In assessing the performance of our company, we consider a variety of
performance and financial measures for our two reportable segments, Retail and
Wholesale. These key measures include revenues and gross profit and comparable
retail same-store sales. We also review other metrics such as adjusted net
income (loss), adjusted net income (loss) per common share - diluted, and
adjusted EBITDA.
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.
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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.
Comparable Retail Same-Store Sales. Same-store sales exclude the net sales of a
store for any period if the store was not open during the same period of the
prior year. Acquired stores are excluded from same-store sales until they are
converted to the Party City format and included in our sales for the comparable
period of the prior year. Comparable sales are calculated based upon stores that
were open at least thirteen full months as of the end of the applicable
reporting period and do not exclude stores closed due to state regulations
regarding COVID-19. When a store is reconfigured or relocated within the same
general territory, the store continues to be treated as the same store. If,
during the period presented, a store was closed, sales from that store up to and
including the closing day are included as same-store sales as long as the store
was open during the same period of the prior year. Same-store sales for the
Party City brand include North American retail e-commerce sales.
Cost of Sales. Cost of sales at wholesale reflects the production costs (i.e.,
raw materials, labor and overhead) of manufactured goods and the direct cost of
purchased goods, inventory shrinkage, inventory adjustments, inbound freight to
our manufacturing and distribution facilities, distribution costs and outbound
freight to get goods to our wholesale customers. At retail, cost of sales
reflects the direct cost of goods purchased from third parties and the
production or purchase costs of goods acquired from our wholesale segment.
Retail cost of sales also includes inventory shrinkage, inventory adjustments,
inbound freight, occupancy costs related to store operations (such as rent and
common area maintenance, utilities and depreciation on assets) and all logistics
costs associated with our retail e-commerce business.
Our cost of sales increases in higher volume periods as the direct costs of
manufactured and purchased goods, inventory shrinkage and freight are generally
tied to net sales. However, other costs are largely fixed or vary based on other
factors and do not necessarily increase as sales volume increases. Changes in
the mix of our products may also impact our overall cost of sales. The direct
costs of manufactured and purchased goods are influenced by raw material costs
(principally paper, petroleum-based resins and cotton), domestic and
international labor costs in the countries where our goods are purchased or
manufactured and logistics costs associated with transporting our goods. We
monitor our inventory levels on an on-going basis in order to identify
slow-moving goods.
Intercompany sales and cost of sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.
Wholesale Selling Expenses. Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes increase.
Retail operating expenses. Retail operating expenses include all costs associated with operating retail stores, excluding occupancy costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies, and credit card fees. Retail costs vary widely, but do not necessarily vary in proportion to net sales.
General and Administrative Expenses. General and administrative expenses include
all operating costs and franchise expenses not included elsewhere in the
statement of operations and comprehensive (loss) income. 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.
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Art and development costs. Art and development costs include costs associated with artistic production, creative development, and product management. Costs include salaries and benefits of affected workforce. These expenses generally do not vary in proportion to 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, refinancing charges, 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 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:
•
they do not reflect the Company’s cash expenditures or future capital expenditure requirements or contractual commitments;
•
they do not reflect variations or cash requirements for the Company’s working capital requirements;
•
Adjusted EBITDA does not reflect significant interest expense, or cash requirements to service interest or principal payments, on the Company’s debt;
•
although depreciation and amortization are non-cash charges, depreciated assets will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirement for such replacements;
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•
non-cash compensation is and will remain a key element of the Company's overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;
•
they do not reflect the impact of certain cash charges resulting from matters that the Company considers not to be indicative of its ongoing operations; and
•
other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net earnings and adjusted net earnings per common share differently from the Company, which limits its usefulness as a comparative measure.
Operating results
The following tables set forth selected historical consolidated financial data for the periods and as of the dates indicated below. The tables include our operating results and operating results as a percentage of total revenues for the years endedDecember 31, 2021 and 2020. For a detailed discussion of our consolidated results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation" under "Results of Operations" in our annual report on Form 10-K for the year endedDecember 31, 2020 . Fiscal Year Ended December 31, 2021 2020 (Dollars in thousands, except per share data) Net sales$ 2,171,060 100.0 %$ 1,850,690 100.0 % Cost of sales 1,403,004 64.6 1,369,935 74.0 Gross profit 768,056 35.4 480,755 26.0 Wholesale selling expenses 30,762 1.4 50,121 2.7 Retail operating expenses 432,531 19.9 387,398 20.9 General and administrative expenses 186,698 8.6 225,322 12.2 Art and development costs 21,174 1.0 17,638 1.0 Store impairment and restructuring charges - - 22,449 1.2 Loss on disposal of assets in international operations 3,211 0.1 73,948 4.0Goodwill , intangibles and long-lived assets impairment 9,048 0.4 581,380 31.4 Income (loss) from operations 84,632 3.9 (877,501 ) (47.4 ) Interest expense, net 87,226 4.0 77,043 4.2 Other (income) expense, net (614 ) - 3,715 0.2 Gain on debt repayment/refinancing (1,106 ) (0.1 ) (273,149 ) (14.8 ) Loss before income taxes (874 ) - (685,110 ) (37.0 ) Income tax expense (benefit) 5,708 0.3 (156,653 ) (8.5 ) Net loss (6,582 ) (0.3 ) % (528,457 ) (28.6 ) % Less: Net loss attributable to noncontrolling interests (54 ) - (219 ) - Net loss attributable to common shareholders of Party City Holdco Inc.$ (6,528 ) (0.3 ) %$ (528,238 ) (28.5 ) % Net loss per share attributable to common shareholders of Party City Holdco Inc.-basic$ (0.06 ) $ (5.24 ) Net loss per share attributable to common shareholders of Party City Holdco Inc.-diluted$ (0.06 ) $ (5.24 ) 32
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Fiscal Year Ended December 31,
2021 2020
Statement of Cash Flow Data:
Net cash provided by (used in)
Operating activities $ 51,935 $ 77,200
Investing activities (65,395 ) (54,271 )
Financing activities (89,125 ) 93,704
Per Share Data:
Basic $ (0.06 ) $ (5.24 )
Diluted $ (0.06 ) $ (5.24 )
Weighted Average
Outstanding basic 110,980,934 100,804,944
Diluted 110,980,934 100,804,944
Cash dividend per common share - -
Other Financial Data:
Adjusted EBITDA $ 266,294 $ 95,534
Adjusted net income $ 78,251 $ (49,230 )
Adjusted net income per common share-diluted $ 0.68 $ (0.45 )
Number of company-owned Party City stores 759
746
Capital expenditures $ 79,222 $
51 128
Party City brand comp sales 34.2 % (16.5 ) % Wholesale Share of shelf (a) 81.1 % 82.1 % Balance Sheet Data (at end of period): Cash and cash equivalents $ 47,914$ 119,532 Working capital 128,424 95,383 Total assets 2,711,900 2,806,455 Total debt 1,436,743 1,519,091 Redeemable common securities - - Total equity 82,714 50,521 (a) Represents the percentage of product costs included in cost of goods sold by our Party City stores and North American retail e - commerce operations which relate to products supplied by our wholesale operations. Fiscal Year Ended December 31, 2021 2020 Net loss$ (6,582 ) $ (528,457 ) Interest expense, net 87,226 77,043 Income taxes 5,708 (156,653 ) Depreciation and amortization 65,611 76,506 EBITDA 151,963 (531,561 ) Store impairment and restructuring charges - 39,323 (a) Inventory restructuring and early lease terminations 7,157 (b) Goodwill, intangibles, long-lived assets impairment 11,974 (c) 581,380 (c) Other restructuring, retention and severance 2,346
12 104
Deferred rent 3,325 (d) (3,147 ) (d) Corporate development expenses - 7,197 (e) Foreign currency losses (gains) (1,090 ) (1,058 ) Closed store expense 4,743 (f) 3,858 (f) Stock option expense 397 (g) 8,643 (g) Non-employee equity based compensation - 1,033 (h) Restricted stock units expense-time based 2,557 (i) 2,071 (i) Restricted stock units expense-performance based 3,773 (i) 1,460 (i) Undistributed loss (income) in equity method investments (220 )
–
Non-recurring legal settlements/costs -
7,843
(Gain) on debt repayment/refinancing (1,106 ) (j) (273,149 ) (j) Loss on disposal of property, plant and equipment 2,784 - Loss on sale of business 3,211 (k) 73,948 (k) Inventory disposal reserve 68,707 (l) 88,358 (l) COVID - 19 1,270 (m) 73,843 (m) Other 4,502 3,388 Adjusted EBITDA$ 266,294 $ 95,534 33
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Fiscal Year Ended December 31,
2021 2020
Loss before income taxes $ (874 ) $ (685,110 )
Intangible asset amortization 9,075 11,362
Amortization of deferred financing costs and
original issuance discounts 4,516
4,198
Store impairment and restructuring charges - 30,813 (a) Goodwill and intangibles impairment 11,974 (c) 581,380 (c) Stock option expense 397 (g) 8,643 (g) Restricted stock units expense-performance based 3,773 (i) 1,460 (i) Non-employee equity based compensation - 1,033 (h) Other restructuring charges 1,967
10,139
Non-recurring legal settlements -
7,094
(Gain) on debt refinancing - (273,149 ) (Gain) on sale of Canada retail assets - - Loss on sale of assets 2,642 Inventory disposal reserve 69,632 (l) 88,358 (l) Loss on sale of business 3,211 (k) 73,948 (k) COVID - 19 1,270 (m) 73,661 (m) Adjusted income (loss) before income taxes 107,583 (66,170 ) Adjusted income tax expense (benefit) 29,332 (n) (16,940 ) (n) Adjusted net income (loss)$ 78,251 $ (49,225 ) Adjusted net income (loss) per common share-diluted $ 0.68$ (0.49 ) (a) During the years endedDecember 31, 2020 and 2019, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations ("store optimization program") and, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio. InJanuary 2020 , 20 stores were closed. In the first quarter of 2020, 21 additional stores identified for closure and were closed in the third quarter. These closings provided the Company with capital flexibility to expand into underserved markets. In addition, the Company evaluated the recoverability of long-lived assets at the open stores and recorded an impairment charge associated with the operating lease asset and property, plant and equipment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19. Refer to Note 3 - Store Impairment and Restructuring Charges, of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further detail.
(b)
Costs incurred for early lease terminations and a merchandise transformation project to transition and optimize stores to reduced SKU assortment levels.
(vs)
InDecember 2021 , the Company announced the closure of a manufacturing facility inNew Mexico that will cease operations inFebruary 2022 . As a result, the Company recorded charges consisting primarily of equipment and inventory impairments, severance and other costs (see Note 6, Disposition of Assets and Assets and Liabilities Held for Sale of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further discussion). During the year endedDecember 31, 2020 , as a result of a sustained decline in market capitalization, the Company recognized non-cash pre-tax goodwill and intangibles impairment charges. (see Note 4,Goodwill , of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K).
(D)
The deferred rent adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company's actual cash outlay for such items.
(e)
The acquisition of Ampology’s stake in
(F)
Mainly charges incurred related to the closure of underperforming stores.
(g)
Represents non-cash charges related to stock options.
(h)
Amounts for 2020 principally represents shares of Kazzam awarded to Ampology as compensation for Ampology's services. See Note 25,Kazzam LLC ., of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further discussion.
(I)
Non-cash charges for service-vested restricted stock units and service- and performance-vested performance restricted stock units.
(j)
The Company recognized net gain on debt repayment in 2021. In 2020, the Company recognized a gain on debt refinancing transactions as described in Note 12 - Long-Term Obligations of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
(k)
The Company sold a substantial portion of its international operations. Related to the sale, the Company recorded a loss reserve in 2020 and an additional loss in 2021. (see Note 6, Disposition of Assets and Assets and Liabilities Held for Sale of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further discussion).
(I)
As indicated in Note 7 - Inventories, Net, of Item 8, "Financial Statements and
Supplementary Data," in this Annual Report on Form 10-K, the Company continued
to make progress in improving inventory levels across its stores and
distribution network. Consistent with the strategy of rationalizing in-store SKU
count and improving working capital velocity, the Company has
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updated its seasonal assortment strategy to target higher in-season sell-through
of merchandise and reduce annual inventory carry-over. As a result, for
inventory not required for future seasons, the Company recorded a reserve for
future disposals in 2021 and disposed of and recorded a reserve for future
disposals in 2020.
(m)
Represents COVID-19 expenses for employees on temporary furlough for whom the Company provides health benefits; non-payroll expenses including advertising, occupancy and other store expenses.
(not)
Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
Revenue
Total revenue for 2021 was
Fiscal Year Ended December 31,
2021 2020
Dollars in Percentage of Total Dollars in Percentage of Total
Thousands Revenues Thousands Revenues
Net Sales :
Wholesale $ 990,636 45.6 % $ 940,228 50.8 %
Eliminations (589,562 ) (27.2 ) (471,863 ) (25.5 )
Net wholesale 401,074 18.5 468,365 25.3
Retail 1,769,986 81.5 1,382,325 74.7
Total revenues $ 2,171,060 100.0 % $ 1,850,690 100.0 %
Retail
Retail net sales during 2021 were $1,770.0 million , an increase $387.7 million ,
or 28.0%, compared to 2020. Retail net sales at our Party City stores totaled
$1,734.3 million and were $359.6 million , or 26.2%, higher than 2020. Growth in
same-store sales for the Party City brand, and higher Halloween City store count
and sales this year was partially offset by the divestiture of international
retail operations. In addition, store sales were impacted by store openings and
franchise acquisitions during the year 2021. Same-store sales for the Party City
brand increased by 37.6% during 2021. Sales at our temporary Halloween stores
(principally Halloween City) totaled $35.7 million and were $28.1 million higher
than 2020 due to increased demand and store count.
Wholesale
Wholesale net sales during 2021 totaled$401.1 million and were$67.3 million , or 14.4 %, lower than 2020. The total wholesale net sales decrease is primarily due to the divestiture of a significant portion of our international operations offset by increased sales across our wholesale customer base. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled$171.8 million and were$6.0 million , or 3.6%, higher than during 2020. Wholesale net sales excluding divested international operations were$387.0 and$308.9 in 2021 and 2020, representing a year over year sale increase of 25.3%. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled$91.9 million during 2021 and were$18.8 million , or 25.7%, higher than during 2020 primarily due to higher post-COVID demand. Intercompany sales to our retail affiliates totaled$589.6 million during 2021and were$117.7 million higher than during the prior year. The increase in 2021 intercompany sales principally reflects a higher store count compared to 2020 and an increase in purchases due to higher demand, partially offset by the impact of divestiture of international affiliates. The intercompany sales of our wholesale segment were eliminated against the intercompany purchases of our retail segment in the consolidated financial statements. Intercompany sales represented 59.5% of total wholesale sales during 2021, compared to 50.2% during 2020. 35 --------------------------------------------------------------------------------
Gross profit
The following table shows the Company’s gross profit for the years ended
Fiscal Year Ended December 31,
2021 2020
Dollars in Percentage Dollars in Percentage
Thousands of Net Sales Thousands of Net Sales
Retail Gross Profit$ 694,557 39.2 %$ 406,499 29.4 % Wholesale Gross Profit 73,499 18.3 74,256 15.9 Total Gross Profit$ 768,056 35.4 %$ 480,755 26.0 % The gross profit margin on net sales at retail during 2021 was 39.2% or 980 basis points higher than 29.1% during 2020. The increase is primarily attributable to stronger in store sales, leverage on occupancy expense and lower year over year inventory write-offs and markdowns in conjunction with the Company's 2020 store optimization program. The manufacturing share of shelf at retail (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) increased to 26.7% during 2021 from 26.0% in 2020, driven by the increased balloon production in our wholesale business. 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 81.1% during 2021 compared to 82.1% during 2020. The gross profit on net sales at wholesale during 2021 and 2020 was 18.3% and 15.9%, respectively. This improvement is primarily due to the deleverage caused by the COVID-19 shutdowns in the prior period, the divestiture of lower margin international operations partially offset by a portion of the inventory disposal reserve in 2021, and higher freight, material and labor costs. As indicated in Note 7 - Inventories, Net, of Item 8, "Financial Statements and Supplementary Data," in this Annual Report on Form 10-K, the Company continued to make progress in improving inventory levels across its stores and distribution network. Consistent with the strategy of rationalizing in-store SKU count and improving working capital velocity, the Company has updated its seasonal assortment strategy to target higher in-season sell-through of merchandise and reduce annual inventory carry-over. As a result, for inventory not required for future seasons, the Company recorded a reserve for future disposals in 2021 and a reserve for future disposals and disposed of inventory in 2020. Such amounts are included in cost of sales.
Operating Expenses
Wholesale selling expenses totaled$30.8 million during 2021 compared to$50.1 million during 2020. The decrease of$19.4 million , or 38.7%, is primarily due to the international divestiture. Retail operating expenses during 2021 were$432.5 million and were$45.1 million , or 11.7%, higher than in 2020, primarily driven by higher payroll and bank charges related to higher sales, partially offset by the international divestiture. Retail operating expenses were 24.4% and 28.0% of net retail sales during 2021 and 2020, respectively.
General and administrative expenses in 2021 totaled
Art and development costs were$21.2 million and$17.6 million during 2021 and 2020, respectively, consistent at 1.0% of total revenue. The increase in 2021 was mainly due to higher payroll costs, consulting fees and merchandise sample costs. 36 --------------------------------------------------------------------------------
Interest expense, net
Interest expense, net, totaled
Other (income) expenses, net
Other (income) expenses, net, totaled
during 2020.
Capital loss on disposal of assets in international operations
InJanuary 2021 , the Company closed the previously disclosed sale of a substantial portion of its international operations. The announced sale had a total transaction value of approximately$50.6 million . As ofDecember 31, 2020 , the assets and liabilities of the international operations are considered held for sale. As a result, the company recorded a loss reserve of$73,948 . Refer to Note 6 - Disposition of Assets and Assets and Liabilities Held for Sale of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Gain on repayment/refinancing of debt
In 2020, the Company recognized a gain of$273.1 million on debt refinancing transactions. Refer to Note 12 - Long-Term Obligations, of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further detail.
income tax expense
The effective income tax rate for the year endedDecember 31, 2021 , is significantly influenced by the relative impact of permanent differences and tax accruals on the lower pretax earnings for the year. The effective income tax rate of (653.1)%, is different from the statutory rate, 21%, primarily due to state income tax and uncertain tax positions. See Note 17, Income Tax, of Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further discussion.
Impairment of goodwill and intangible assets
During the three months endedMarch 31, 2020 , the Company identified intangible assets' impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as ofMarch 31, 2020 . The interim impairment tests were performed using an income approach. The Company recognized non-cash pre-tax goodwill impairment charges atMarch 31, 2020 of$253,110 and$148,326 against the goodwill associated with its retail and wholesale reporting units, respectively. In addition, during the three months endedMarch 31, 2020 , the Company recorded an impairment charge of$131,287 and$3,925 on its Party City andHalloween City tradenames, respectively. During the three months endedSeptember 30, 2020 the Company has determined that the fair value of certain indefinite-lived intangible assets is lower than the related book values. Additionally, for certain long-lived assets it is more likely than not that those long-lived assets will be disposed significantly before the end of their previously estimated useful lives. As a result, impairment charges of$11,032 ,$2,423 and$31,277 were recorded in the third quarter on its business indefinite-lived trade name intangibles, finite-lived intangibles and tangible assets, respectively. During the twelve months endedDecember 31, 2021 , there was no goodwill or intangibles impairment.
Liquidity and capital resources and significant cash requirements
We have proactively managed our liquidity profile throughout the fiscal year 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
37
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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.
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.
From
Material Cash Commitments Debt Obligations, Finance Leases and Interest Payments. As ofDecember 31, 2021 , we had$84.1 million in loans and notes payable,$1.4 million current long-term obligations and$1,351 million in long-term obligations outstanding, respectively. As indicated in Item 1A. Risks Related to Our Indebtedness, repayment of the Company debt is dependent on our subsidiaries ability to make cash available. for additional information regarding the company's debt. Refer to Part II, Item 8, "Financial Statements and Supplementary Data - Note 11, Loans and Notes Payable and Note 12, Long-Term Obligations in this Annual Report on Form 10-K. 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 ofDecember 31, 2021 , we had an operating lease liability of$772.3 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. Additionally, we had approximately$110 million of future payment obligations related to an executed lease agreement for which the related lease has not commenced as ofDecember 31, 2021 . See 38 --------------------------------------------------------------------------------
see Note 20 – Leases, in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for more information regarding the Company’s operating leases as well as lease payment due dates.
Capital expenditure. Cash commitments are described in the following section on cash flow data.
8.75% Senior Secured Bonds – Due 2026 (“8.75% Senior Secured Bonds”)
In accordance with the 8.75% Senior Notes, as disclosed in the notes previously referenced, the Company is required to provide quarterly and annual disclosure of certain financial metrics forAnagram Holdings, LLC and its subsidiary ("Anagram"). For the quarters endedDecember 31, 2021 and 2020, Anagram reported:
•
Income from
•
Operating result of
•
Adjusted EBITDA of
•
AT
•
AT
For the years ended
•
Income from
•
Operating result of
•
Adjusted EBITDA of
•
AT
•
AT
Cash Flow Data – Year Ended
Net cash provided by operating activities totaled$51.9 million during 2021, versus net cash provided by operating activities totaled$77.2 million during 2020. The year over year operating cash decrease was predominantly driven by a change in inventory and a repayment of lease costs deferred from 2020, partially offset by higher levels of operating income. Although the Company reduced inventory by disposal reserves taken at the end of 2021, that reduction was more than offset by higher in-transit inventory and inflationary pressure included in the inventory value. The resulting impact on accounts payable as result of higher in-transit inventory led to an increase in accounts payable. Net cash used in investing activities totaled$65.4 million during 2021, as compared to$54.3 million used in 2020. Capital expenditures during 2021 and 2020 were$79.2 million and$51.1 million , respectively. Retail capital expenditures totaled$56.6 million during 2021 and were related to store remodeling, initiatives in technology and investments in our NXTGEN store conversions. Wholesale capital expenditures during 2021 totaled$22.6 million and primarily related to printing plates and dyes, as well as machinery and equipment at the Company's manufacturing operations and main distribution center. The increase in capital expenditures was offset by the net proceeds from the sale of international operations. Net cash used in financing activities was$89.1 million during 2021. Net cash provided by financing activities was$93.7 million during 2020. The variance was principally due to higher borrowings under the ABL Facility in 2020 and the impact of the debt refinancing transactions as discussed in Note 12 - Long-Term Obligations of Item 8, "Financial Statements and Supplementary Data" and Company's "Risks Related to Our Indebtedness" in Item 1A of this Annual Report. 39 --------------------------------------------------------------------------------
Critical accounting estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein. We believe our application of accounting policies, and the estimates inherently required, are reasonable. These estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.
For further details, refer to Note 2 – Summary of Significant Accounting Policies in Section 8, “Financial Statements and Supplementary Data” of this Annual Report.
Revenue Recognition Revenue Transactions - Retail 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. The Company has history with which to estimate future retail sales returns and it uses the expected value method to estimate such activity. The transaction price for the majority of the Company's retail sales is based on either: the item's stated price or the stated price adjusted for the impact of a coupon which can only be applied to such transaction. To the extent that the Company charges customers for freight costs on e-commerce sales, the Company records such amounts in revenue. The Company excludes all sales taxes and value-added taxes from revenue.
Revenue Transactions – Wholesale
For most of the Company’s wholesale sales, control passes when the Company ships the product. Wholesale returns are not meaningful as the Company generally only accepts the return of goods that were shipped to the customer in error or damaged upon receipt by the customer. The Company has a history enabling it to estimate future returns on sales.
In most cases, the determination of the transaction price is fixed based on the
contract and/or purchase order. To the extent that the Company charges customers
for freight costs, the Company records such amounts in revenue. The Company
excludes all sales taxes and value-added taxes from revenue. For the majority of
these sales payment is due within 30 to 120 days from the transfer of control of
the product and substantially all of the sales are collected within a year from
such transfer.
Judgments
Although most of the Company's revenue transactions consist of fixed transaction
prices and the transfer of control at either the point of sale (for retail) or
when the product is shipped (for wholesale), certain transactions involve a
limited number of judgments. For transactions for which control transfers to the
customer when the freight carrier delivers the product to the customer, the
Company estimates the date of such receipt based on historical shipping times.
Additionally, the Company utilizes historical data to estimate sales returns.
Due to its extensive operating history, the Company has sufficient history with
which to estimate such amounts.
40
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Inventories
Inventories are valued at the lower of cost and net realizable value. In evaluating the final realization of inventory, we are required to make judgments regarding, among other things, future demand and market conditions, current inventory levels and the impact of possible design discontinuation. some products. We primarily determine the cost of inventory using the weighted average method.
We estimate retail inventory shrinkage for the period between physical inventory dates on a store-by-store basis. Our inventory shrinkage estimate 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. Should the actual shrinkage vary from estimates, inventory values may be affected.
Long-lived and intangible assets (including
We review the recoverability of our long-lived assets, including finite-lived intangible assets, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets/asset groups, other than goodwill, based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If an impairment indicator exists, we compare the undiscounted future cash flows of the asset/asset group to the carrying value of the asset/asset group. If the sum of the undiscounted future cash flows is less than the carrying value of the asset/asset group, we would calculate discounted future cash flows based on market participant assumptions. If the sum of discounted cash flows is less than the carrying value of the asset/asset group, we would recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). When fair values are not readily available, we estimate fair values using discounted expected future cash flows. Such estimates of fair value require significant judgment, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates. In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, we perform our cash flow analysis generally on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.Goodwill is reviewed for potential impairment on an annual basis or more frequently if circumstances indicate a possible impairment. The Company performed its annual impairment test on its wholesale and retail reporting units, respectively. In the analysis performed for the wholesale reporting unit, there was approximately 25% excess fair value over carrying value. Should actual results differ from certain key assumptions used in impairment tests, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record an impairment charge for goodwill. 41 -------------------------------------------------------------------------------- For purposes of testing goodwill for impairment, reporting units are determined by identifying individual operating segments within our organization which constitute a business for which discrete financial information is available and is reviewed by management. Components within an operating segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our operating segments, wholesale and retail, represent our reporting units for the purposes of our goodwill impairment test. If it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of the reporting unit using a combination of a market approach and an income approach. If such carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to such excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions including discount rates.
Income taxes
Temporary differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense, are determined through management's estimations, interpretation of tax law for multiple jurisdictions and tax planning. However, inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax laws and published guidance with respect to applicability to our operations. If our actual results differ from estimated results due to changes in tax laws or tax planning, our effective tax rate and tax balances could be affected. As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting Standards Codification Topic 740 prescribes a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. In accordance with these requirements, we recognize a tax benefit when a tax position is more-likely-than-not to be sustained upon examination, based solely on its technical merits. We measure the recognized tax benefit as the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority. We reverse previously recognized tax benefits if we determine that the tax position no longer meets the more-likely-than-not threshold of being sustained. We accrue interest and penalties related to unrecognized tax benefits in income tax expense.
Recently issued accounting pronouncements
Refer to Note 2 – Summary of Significant Accounting Policies in Section 8, “Financial Statements and Supplementary Data” of this Annual Report.
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