PARTY CITY HOLDCO INC. References throughout this document to the "Company" includeParty 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 ourHalloween 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 endedDecember 31, 2021 , in Item 1A of Part II of this report, and in subsequent reports filed with or furnished to theSecurities 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 inNorth 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) throughoutNorth America operating under the names Party City andHalloween 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.
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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 CostumesUSA brand names through Party City,Halloween City and PartyCity.com. For the three months endedMarch 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 ourHalloween sales in October and, to a lesser extent, year-end holiday sales. To maximize our seasonal opportunity, we operate a chain of temporaryHalloween stores, under theHalloween 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 toHalloween , 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 toHalloween 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
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shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our 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:
•
they do not reflect the Company's cash expenditures or future requirements for capital expenditures or contractual commitments;
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•
they do not reflect changes in, or cash requirements for, the Company's working capital needs;
•
adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's indebtedness;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
•
non-cash compensation is and will remain a key element of the Company's overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;
•
they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and
•
other companies in the Company's industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative measure.
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
The following table sets forth the Company's operating results and operating results as a percentage of total net sales for the three months endedMarch 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 ofParty City Holdco Inc. -Basic $ (0.24 ) $ (0.13 ) Net (loss) per share attributable to common shareholders ofParty City Holdco Inc. -Diluted $ (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.
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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 ) 17,571Inventory 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
issuance discounts 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 (a)
Amounts expensed principally relate to severance due to organizational changes.
(b)
InDecember 2021 , the Company announced the closure of a manufacturing facility inNew Mexico that ceased operations inFebruary 2022 . As a result, the Company recorded related shutdown charges (see Note 3, Disposition of Assets in Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in the Quarterly Report on Form 10-Q).
(c)
The "deferred rent" adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company's actual cash outlay.
(d)
Charges incurred related to closing and relocating stores in the ordinary course of business.
(e)
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.
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(f)
Costs incurred for early lease terminations and a merchandise transformation project to transition and optimize stores to the reduced SKU assortment levels.
(g)
The Company recognized net gain on debt repayment in 2021.
(h)
Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
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
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 endedMarch 31, 2022 and 2021. Three months ended March 31, 2022 2021 Dollars in Percentage of Dollars in
Percentage of
Thousands Net sales Thousands Net sales
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
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
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Gross Profit
The following table sets forth the Company's gross profit for the three months
ended
Three months ended March 31,
2022 2021
Dollars in Percentage of Dollars in Percentage of
Thousands Net Sales Thousands 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
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.
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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
Material Cash Commitments
Debt Obligations, Finance Leases and Interest Payments. As ofMarch 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 ofMarch 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 forAnagram Holdings, LLC and its subsidiary ("Anagram"). For the three months endedMarch 31, 2022 , Anagram reported:
•
Revenue of
• Operating income of$13,067 • Adjusted EBITDA of 14,545 •
Total assets of
Cash Flow Data - Three Months Ended
Net cash used in operating activities totaled$116.8 million during the three months endedMarch 31, 2022 . Net cash used in operating activities totaled$48.8 million during the three months endedMarch 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 endedMarch 31, 2022 , as compared to$1.6 million during the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 compared to$16.9 million during the three months endedMarch 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
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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
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