PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Note 2) (Unaudited)
|
|
|
(Note 2)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,617
|
|
|
$
|
42,919
|
|
Accounts receivable, net
|
|
|
177,943
|
|
|
|
132,287
|
|
Inventories, net
|
|
|
683,655
|
|
|
|
564,259
|
|
Prepaid expenses and other current assets
|
|
|
68,752
|
|
|
|
50,450
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
977,967
|
|
|
|
789,915
|
|
Property, plant and equipment, net
|
|
|
282,666
|
|
|
|
272,420
|
|
Goodwill
|
|
|
1,580,551
|
|
|
|
1,562,515
|
|
Trade names
|
|
|
567,142
|
|
|
|
568,712
|
|
Other intangible assets, net
|
|
|
76,933
|
|
|
|
89,157
|
|
Other assets, net
|
|
|
5,269
|
|
|
|
9,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,490,528
|
|
|
$
|
3,292,403
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Loans and notes payable
|
|
$
|
208,056
|
|
|
$
|
126,136
|
|
Accounts payable
|
|
|
189,278
|
|
|
|
111,616
|
|
Accrued expenses
|
|
|
162,853
|
|
|
|
146,319
|
|
Income taxes payable
|
|
|
48
|
|
|
|
8,504
|
|
Current portion of long-term obligations
|
|
|
14,235
|
|
|
|
14,552
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
574,470
|
|
|
|
407,127
|
|
Long-term obligations, excluding current portion
|
|
|
1,638,643
|
|
|
|
1,646,121
|
|
Deferred income tax liabilities
|
|
|
277,358
|
|
|
|
276,667
|
|
Deferred rent and other long-term liabilities
|
|
|
60,166
|
|
|
|
49,471
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,550,637
|
|
|
|
2,379,386
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock (119,498,654 and 119,258,374 shares issued and outstanding at September 30, 2016
and December 31, 2015, respectively)
|
|
|
1,195
|
|
|
|
1,193
|
|
Additional paid-in capital
|
|
|
908,942
|
|
|
|
904,425
|
|
Retained earnings
|
|
|
72,490
|
|
|
|
40,189
|
|
Accumulated other comprehensive loss
|
|
|
(42,736
|
)
|
|
|
(32,790
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
939,891
|
|
|
|
913,017
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,490,528
|
|
|
$
|
3,292,403
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
553,382
|
|
|
$
|
551,380
|
|
Royalties and franchise fees
|
|
|
3,568
|
|
|
|
4,027
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
556,950
|
|
|
|
555,407
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
356,662
|
|
|
|
361,530
|
|
Wholesale selling expenses
|
|
|
14,739
|
|
|
|
15,465
|
|
Retail operating expenses
|
|
|
100,746
|
|
|
|
102,432
|
|
Franchise expenses
|
|
|
3,370
|
|
|
|
3,608
|
|
General and administrative expenses
|
|
|
38,972
|
|
|
|
35,979
|
|
Art and development costs
|
|
|
5,543
|
|
|
|
4,913
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
520,032
|
|
|
|
523,927
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,918
|
|
|
|
31,480
|
|
Interest expense, net
|
|
|
22,424
|
|
|
|
29,554
|
|
Other (income) expense, net
|
|
|
(905
|
)
|
|
|
79,130
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
15,399
|
|
|
|
(77,204
|
)
|
Income tax expense (benefit)
|
|
|
5,219
|
|
|
|
(32,715
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,180
|
|
|
$
|
(44,489
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
6,028
|
|
|
$
|
(55,797
|
)
|
Net income (loss) per common share-Basic
|
|
$
|
0.09
|
|
|
$
|
(0.37
|
)
|
Net income (loss) per common share-Diluted
|
|
$
|
0.08
|
|
|
$
|
(0.37
|
)
|
Weighted-average number of common shares-Basic
|
|
|
119,406,751
|
|
|
|
119,253,707
|
|
Weighted-average number of common shares-Diluted
|
|
|
120,472,297
|
|
|
|
119,253,707
|
|
Dividends declared per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,523,094
|
|
|
$
|
1,500,781
|
|
Royalties and franchise fees
|
|
|
11,009
|
|
|
|
12,251
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,534,103
|
|
|
|
1,513,032
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
952,294
|
|
|
|
958,667
|
|
Wholesale selling expenses
|
|
|
45,854
|
|
|
|
48,825
|
|
Retail operating expenses
|
|
|
278,070
|
|
|
|
267,975
|
|
Franchise expenses
|
|
|
10,507
|
|
|
|
10,597
|
|
General and administrative expenses
|
|
|
115,828
|
|
|
|
110,048
|
|
Art and development costs
|
|
|
16,596
|
|
|
|
15,369
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,419,149
|
|
|
|
1,411,481
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
114,954
|
|
|
|
101,551
|
|
Interest expense, net
|
|
|
67,857
|
|
|
|
101,430
|
|
Other (income) expense, net
|
|
|
(4,107
|
)
|
|
|
126,519
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
51,204
|
|
|
|
(126,398
|
)
|
Income tax expense (benefit)
|
|
|
18,903
|
|
|
|
(50,334
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,301
|
|
|
$
|
(76,064
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
22,355
|
|
|
$
|
(92,980
|
)
|
Net income (loss) per common share-Basic
|
|
$
|
0.27
|
|
|
$
|
(0.69
|
)
|
Net income (loss) per common share-Diluted
|
|
$
|
0.27
|
|
|
$
|
(0.69
|
)
|
Weighted-average number of common shares-Basic
|
|
|
119,340,610
|
|
|
|
109,470,099
|
|
Weighted-average number of common shares-Diluted
|
|
|
120,312,492
|
|
|
|
109,470,099
|
|
Dividends declared per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
Stockholders
Equity
|
|
Balance at December 31, 2015
|
|
|
119,258,374
|
|
|
$
|
1,193
|
|
|
$
|
904,425
|
|
|
$
|
40,189
|
|
|
$
|
(32,790
|
)
|
|
$
|
913,017
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,301
|
|
|
|
|
|
|
|
32,301
|
|
Equity based compensation
|
|
|
|
|
|
|
|
|
|
|
2,829
|
|
|
|
|
|
|
|
|
|
|
|
2,829
|
|
Impact of foreign exchange contracts, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
(310
|
)
|
Exercise of stock options
|
|
|
240,280
|
|
|
|
2
|
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
|
|
1,281
|
|
Foreign currency adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,636
|
)
|
|
|
(9,636
|
)
|
Excess tax benefit
|
|
|
|
|
|
|
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
526
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
119,498,654
|
|
|
$
|
1,195
|
|
|
$
|
908,942
|
|
|
$
|
72,490
|
|
|
$
|
(42,736
|
)
|
|
$
|
939,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,301
|
|
|
$
|
(76,064
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
61,186
|
|
|
|
59,567
|
|
Amortization of deferred financing costs and original issuance discounts
|
|
|
3,821
|
|
|
|
39,225
|
|
Provision (credit) for doubtful accounts
|
|
|
429
|
|
|
|
(10
|
)
|
Deferred income tax expense (benefit)
|
|
|
933
|
|
|
|
(5,994
|
)
|
Deferred rent
|
|
|
12,240
|
|
|
|
9,580
|
|
Undistributed loss in unconsolidated joint venture
|
|
|
380
|
|
|
|
377
|
|
Loss (gain) on sale of assets
|
|
|
14
|
|
|
|
(2,488
|
)
|
Equity based compensation
|
|
|
2,829
|
|
|
|
2,094
|
|
Changes in operating assets and liabilities, net of effects of acquired businesses:
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(46,576
|
)
|
|
|
(50,034
|
)
|
Increase in inventories
|
|
|
(108,882
|
)
|
|
|
(104,968
|
)
|
Increase in prepaid expenses and other current assets
|
|
|
(15,046
|
)
|
|
|
(12,178
|
)
|
Increase (decrease) in accounts payable, accrued expenses and income taxes payable
|
|
|
79,848
|
|
|
|
(23,656
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
23,477
|
|
|
|
(164,549
|
)
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Cash paid in connection with acquisitions, net of cash acquired
|
|
|
(31,820
|
)
|
|
|
(18,405
|
)
|
Capital expenditures
|
|
|
(57,324
|
)
|
|
|
(62,032
|
)
|
Proceeds from disposal of property and equipment
|
|
|
31
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(89,113
|
)
|
|
|
(79,833
|
)
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
Repayment of loans, notes payable and long-term obligations
|
|
|
(28,158
|
)
|
|
|
(2,327,517
|
)
|
Proceeds from loans, notes payable and long-term obligations
|
|
|
97,943
|
|
|
|
2,198,600
|
|
Cash held in escrow in connection with acquisitions
|
|
|
0
|
|
|
|
(3,832
|
)
|
Issuance of common stock
|
|
|
0
|
|
|
|
397,159
|
|
Excess tax benefit from stock options
|
|
|
526
|
|
|
|
0
|
|
Exercise of stock options
|
|
|
1,281
|
|
|
|
30
|
|
Debt issuance costs
|
|
|
(44
|
)
|
|
|
(11,248
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
71,548
|
|
|
|
253,192
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,214
|
)
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
4,698
|
|
|
|
6,591
|
|
Cash and cash equivalents at beginning of period
|
|
|
42,919
|
|
|
|
47,214
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
47,617
|
|
|
$
|
53,805
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
71,095
|
|
|
$
|
127,367
|
|
Income taxes, net of refunds
|
|
$
|
26,103
|
|
|
$
|
36,675
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
7
PARTY CITY HOLDCO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in
thousands, except per share)
Note 1 Description of Business
Party City Holdco Inc. (the Company or Party City Holdco) is a vertically integrated supplier of decorated party goods.
The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties and stationery throughout the world. The Companys
retail operations include over 900 specialty retail party supply stores (including approximately 180 franchise stores) in the United States and Canada operating under the names Party City and Halloween City, and e-commerce websites, principally
through the domain name PartyCity.com. Party City Holdco franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City.
Party City Holdco is a holding company with no operating assets or operations. The Company owns 100% of PC Nextco Holdings, LLC (PC
Nextco), which owns 100% of PC Intermediate Holdings, Inc. (PC Intermediate). PC Intermediate owns 100% of Party City Holdings Inc. (PCHI), which owns the Companys operating subsidiaries.
During January 2016, the Company acquired 19 franchise stores located in Arizona and New Mexico in one transaction for total consideration of
approximately $26,500. Additionally, during March 2016, the Company acquired Festival S.A. (Festival), a manufacturer of costumes and accessories, for approximately $5,000.
Note 2 Basis of Presentation and Recently Issued Accounting Pronouncements
The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its majority-owned and
controlled entities. All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.
The majority of our retail operations define a fiscal year (Fiscal Year) as the 52-week period or 53-week period ended on the
Saturday nearest December 31st of each year and define fiscal quarters (Fiscal Quarter) as the four interim 13-week periods following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal Year when the fourth
Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determined the
differences between the retail operations Fiscal Year and Fiscal Quarters and the calendar year and calendar quarters to be insignificant.
Operating results for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2016.
Our business is subject to substantial seasonal variations as our retail segment has realized a significant portion of its net sales, cash flows and net income in the fourth quarter of each year, principally due to its Halloween season sales in
October and, to a lesser extent, other year-end holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period such as movement in and
the general level of raw material costs. For further information see the consolidated financial statements, and notes thereto, included in the Companys Form 10-K for the fiscal year ended December 31, 2015, as filed with the Securities
and Exchange Commission on March 11, 2016.
Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The pronouncement clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The update is effective
for the Company during the first quarter of 2018. The Company is in the process of evaluating the impact of the pronouncement on the Companys consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation Stock Compensation: Improvements to Employee Share-Based Payment
Accounting. The pronouncement simplifies several aspects of the accounting for share-based payment transactions. The update is effective for the Company during the first quarter of 2017. The Company is in the process of evaluating the impact
of the pronouncement on the Companys consolidated financial statements.
8
In February 2016, the FASB issued ASU 2016-02, Leases. The ASU requires that
companies recognize on their balance sheets assets and liabilities for the rights and obligations created by the companies leases. The update is effective for the Company during the first quarter of 2019. The Company is in the process of
evaluating the impact of the pronouncement on the Companys consolidated financial statements.
In January 2016, the FASB issued ASU
2016-01, Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The update impacts the accounting for equity investments and the recognition of changes in fair value of financial
liabilities when the fair value option is elected. The pronouncement will be effective for the Company during the first quarter of 2018. Although the Company continues to evaluate this pronouncement, it does not believe that it will have a material
impact on the Companys consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business
Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which
the adjustment amounts are determined. The Company adopted the update during the three months ended March 31, 2016 and such adoption did not have a material impact on the Companys consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The update changes the measurement
principle for inventory from the lower of cost or market to lower of cost and net realizable value. The pronouncement will be effective for the Company during the first quarter of 2017. The Company is in the process of evaluating the impact of the
pronouncement on the Companys consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles
Goodwill and Other Internal-Use Software: Customers Accounting for Fees Paid in a Cloud Computing Arrangement. The update amended the guidance on internal use software to clarify how customers in cloud computing
arrangements should determine whether the arrangements include software licenses. The Company adopted the update during the three months ended March 31, 2016 and such adoption did not have a material impact on the Companys consolidated
financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation Stock Compensation: Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The update clarifies that a performance target in a share-based payment that affects vesting and that could be achieved
after the requisite service period should be accounted for as a performance condition. The Company adopted the update during the three months ended March 31, 2016 and such adoption did not have any impact on the Companys consolidated
financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The
pronouncement contains a five-step model which replaces most existing revenue recognition guidance. The update is effective for the Company during the first quarter of 2018; however, early adoption is permitted. The pronouncement can be applied
retrospectively to prior reporting periods or through a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of the pronouncement on the Companys consolidated financial statements and
its method of adoption.
Note 3 Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Finished goods
|
|
$
|
649,880
|
|
|
$
|
532,606
|
|
Raw materials
|
|
|
24,329
|
|
|
|
21,278
|
|
Work in process
|
|
|
9,446
|
|
|
|
10,375
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
683,655
|
|
|
$
|
564,259
|
|
|
|
|
|
|
|
|
|
|
Inventories are valued at the lower of cost or market.
The Company estimates retail inventory shortage for the periods between physical inventory dates on a store-by-store basis. Inventory
shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.
9
Note 4 Income Taxes
The income tax expense for the three and nine months ended September 30, 2016 was determined based upon the Companys estimated
consolidated effective income tax rate for the year ending December 31, 2016. The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2016 and the U.S. federal statutory rate is
primarily attributable to state income taxes, unrecognized foreign tax credits and benefits on certain foreign losses, partially offset by a foreign rate differential and available domestic manufacturing deductions.
Note 5 Changes in Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
Foreign
Currency
Adjustments
|
|
|
Impact of
Foreign
Exchange
Contracts,
Net of Taxes
|
|
|
Total,
Net of Taxes
|
|
Balance at June 30, 2016
|
|
$
|
(39,500
|
)
|
|
$
|
916
|
|
|
$
|
(38,584
|
)
|
Other comprehensive loss before reclassifications, net
|
|
|
(3,537
|
)
|
|
|
(470
|
)
|
|
|
(4,007
|
)
|
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated
statement of operations and comprehensive income, net
|
|
|
0
|
|
|
|
(145
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive loss, net
|
|
|
(3,537
|
)
|
|
|
(615
|
)
|
|
|
(4,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
(43,037
|
)
|
|
$
|
301
|
|
|
$
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
|
Foreign
Currency
Adjustments
|
|
|
Impact of
Foreign
Exchange
Contracts,
Net of Taxes
|
|
|
Total,
Net of Taxes
|
|
Balance at June 30, 2015
|
|
$
|
(18,589
|
)
|
|
$
|
246
|
|
|
$
|
(18,343
|
)
|
Other comprehensive (loss) income before reclassifications, net
|
|
|
(11,502
|
)
|
|
|
211
|
|
|
|
(11,291
|
)
|
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated
statement of operations and comprehensive loss, net
|
|
|
0
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive (loss) income, net
|
|
|
(11,502
|
)
|
|
|
194
|
|
|
|
(11,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
(30,091
|
)
|
|
$
|
440
|
|
|
$
|
(29,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Foreign
Currency
Adjustments
|
|
|
Impact of
Foreign
Exchange
Contracts,
Net of Taxes
|
|
|
Total,
Net of Taxes
|
|
Balance at December 31, 2015
|
|
$
|
(33,401
|
)
|
|
$
|
611
|
|
|
$
|
(32,790
|
)
|
Other comprehensive (loss) income before reclassifications, net
|
|
|
(9,636
|
)
|
|
|
183
|
|
|
|
(9,453
|
)
|
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated
statement of operations and comprehensive income, net
|
|
|
0
|
|
|
|
(493
|
)
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive loss, net
|
|
|
(9,636
|
)
|
|
|
(310
|
)
|
|
|
(9,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
(43,037
|
)
|
|
$
|
301
|
|
|
$
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Foreign
Currency
Adjustments
|
|
|
Impact of
Foreign
Exchange
Contracts,
Net of Taxes
|
|
|
Total,
Net of Taxes
|
|
Balance at December 31, 2014
|
|
$
|
(12,969
|
)
|
|
$
|
234
|
|
|
$
|
(12,735
|
)
|
Other comprehensive (loss) income before reclassifications, net
|
|
|
(17,122
|
)
|
|
|
476
|
|
|
|
(16,646
|
)
|
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated
statement of operations and comprehensive loss, net
|
|
|
0
|
|
|
|
(270
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive (loss) income, net
|
|
|
(17,122
|
)
|
|
|
206
|
|
|
|
(16,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
(30,091
|
)
|
|
$
|
440
|
|
|
$
|
(29,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Capital Stock
At September 30, 2016, the Companys authorized capital stock consisted of 300,000,000 shares of $0.01 par value common
stock.
Note 7 Segment Information
Industry Segments
The Company has two identifiable business segments. The Wholesale segment designs, manufactures, contracts for manufacture and distributes
party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties and stationery throughout the world. The Retail segment operates specialty retail party supply stores in the United
States and Canada, principally under the names Party City and Halloween City, and it operates e-commerce websites, principally through the domain name Partycity.com. The Retail segment also franchises both individual stores and franchise areas
throughout the United States, Mexico and Puerto Rico, principally under the name Party City.
The Companys industry segment data for
the three months ended September 30, 2016 and September 30, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
416,387
|
|
|
$
|
347,557
|
|
|
$
|
763,944
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
3,568
|
|
|
|
3,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
416,387
|
|
|
|
351,125
|
|
|
|
767,512
|
|
Eliminations
|
|
|
(210,562
|
)
|
|
|
0
|
|
|
|
(210,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
205,825
|
|
|
$
|
351,125
|
|
|
$
|
556,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
35,532
|
|
|
$
|
1,386
|
|
|
$
|
36,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
22,424
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
(905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
15,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Three Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
418,447
|
|
|
$
|
339,465
|
|
|
$
|
757,912
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
4,027
|
|
|
|
4,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
418,447
|
|
|
|
343,492
|
|
|
|
761,939
|
|
Eliminations
|
|
|
(206,532
|
)
|
|
|
0
|
|
|
|
(206,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
211,915
|
|
|
$
|
343,492
|
|
|
$
|
555,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
35,860
|
|
|
$
|
(4,380
|
)
|
|
$
|
31,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
29,554
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
79,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(77,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The Companys industry segment data for the nine months ended September 30, 2016 and
September 30, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
945,071
|
|
|
$
|
1,043,212
|
|
|
$
|
1,988,283
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
11,009
|
|
|
|
11,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
945,071
|
|
|
|
1,054,221
|
|
|
|
1,999,292
|
|
Eliminations
|
|
|
(465,189
|
)
|
|
|
0
|
|
|
|
(465,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
479,882
|
|
|
$
|
1,054,221
|
|
|
$
|
1,534,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
65,669
|
|
|
$
|
49,285
|
|
|
$
|
114,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
67,857
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
(4,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
51,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Nine Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
923,717
|
|
|
$
|
1,003,196
|
|
|
$
|
1,926,913
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
12,251
|
|
|
|
12,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
923,717
|
|
|
|
1,015,447
|
|
|
|
1,939,164
|
|
Eliminations
|
|
|
(426,132
|
)
|
|
|
0
|
|
|
|
(426,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
497,585
|
|
|
$
|
1,015,447
|
|
|
$
|
1,513,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
59,882
|
|
|
$
|
41,669
|
|
|
$
|
101,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
101,430
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
126,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(126,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Commitments and Contingencies
The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will
result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
On
November 18, 2015, a putative class action complaint was filed in the U.S. District Court for the Southern District of New York, naming Party City Holdco Inc. and certain executives as defendants. An Amended Complaint was filed on
April 25, 2016, which named additional defendants. The Amended Complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with public filings related to the Companys April 2015 initial
public offering (IPO). The plaintiff seeks to represent a class of shareholders who purchased stock in the initial public offering or who can trace their shares to that offering. The complaint seeks unspecified damages and
costs. The Company intends to vigorously defend itself against this action. The Company is unable, at this time, to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition
or cash flows.
On April 5, 2016, a derivative complaint was filed in the Supreme Court for the State of New York, naming certain
directors and executives as defendants, and naming the Company as a nominal defendant. The complaint seeks unspecified damages and costs, and corporate governance reforms, for alleged injury to the Company in connection with public filings
related to the Companys April 2015 IPO, compensation paid to executives, and the termination of the management agreement disclosed in the IPO-related public filings. On June 15, 2016, by agreement of the parties, the court entered a
temporary stay of the proceedings pending (among other things) resolution of the motion to dismiss in connection with the November 18, 2015 filed class action. The Company intends to vigorously defend itself against this action. The
Company is unable, at this time, to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.
12
Note 9 Derivative Financial Instruments
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely
impact the Companys financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risk
managed through the use of derivative financial instruments is foreign currency exchange rate risk.
Foreign Exchange Risk Management
A portion of the Companys cash flows is derived from transactions denominated in foreign currencies. In order to reduce the uncertainty
of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling, the Canadian Dollar, the Euro, the Malaysian Ringgit and the Australian Dollar, the Company enters into foreign exchange
contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inventory purchases and sales. For contracts that
qualify for hedge accounting, the terms of the foreign exchange contracts are such that cash flows from the contracts should be highly effective in offsetting the expected cash flows from the underlying forecasted transactions.
The foreign currency exchange contracts are reflected in the condensed consolidated balance sheets at fair value. The fair value of the
foreign currency exchange contracts is the estimated amount that the counterparties would receive or pay to terminate the foreign currency exchange contracts at the reporting date, taking into account current foreign exchange spot rates. At
September 30, 2016 and December 31, 2015, the Company had certain foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As
these hedges were 100% effective, there was no impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency
exchange contracts will be reclassified into earnings by June 2018.
The following table displays the fair values of the Companys
derivatives at September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
Derivative Liabilities
|
|
|
|
Balance
Sheet
Line
|
|
Fair
Value
|
|
|
Balance
Sheet
Line
|
|
Fair
Value
|
|
|
Balance
Sheet
Line
|
|
Fair
Value
|
|
|
Balance
Sheet
Line
|
|
Fair
Value
|
|
Derivative Instrument
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Foreign Exchange Contracts
|
|
(a) PP
|
|
$
|
385
|
|
|
(a) PP
|
|
$
|
773
|
|
|
(b) AE
|
|
$
|
288
|
|
|
(b) AE
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
PP = Prepaid expenses and other current assets
|
(b)
|
AE = Accrued expenses
|
The following table displays the notional amounts of the Companys
derivatives at September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
Derivative Instrument
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Foreign Exchange Contracts
|
|
$
|
21,825
|
|
|
$
|
23,028
|
|
|
|
|
|
|
|
|
|
|
13
Note 10 Fair Value Measurements
The provisions of FASB ASC Topic 820, Fair Value Measurement, define fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair
value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted
cash flow methodologies and similar techniques that use significant unobservable inputs.
|
The following table shows assets
and liabilities as of September 30, 2016 that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative assets
|
|
$
|
0
|
|
|
$
|
385
|
|
|
$
|
0
|
|
|
$
|
385
|
|
Derivative liabilities
|
|
|
0
|
|
|
|
288
|
|
|
|
0
|
|
|
|
288
|
|
The following table shows assets and liabilities as of December 31, 2015 that are measured at fair value
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative assets
|
|
$
|
0
|
|
|
$
|
773
|
|
|
$
|
0
|
|
|
$
|
773
|
|
Derivative liabilities
|
|
|
0
|
|
|
|
391
|
|
|
|
0
|
|
|
|
391
|
|
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is
required to record other assets and liabilities at fair value on a nonrecurring basis, generally as a result of impairment charges.
The
carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at September 30, 2016 because of the
short-term maturities of the instruments and/or their variable rates of interest.
The carrying amount and fair value of the
Companys borrowings under its $1,340,000 senior secured term loan facility (Term Loan Credit Agreement) and its $350,000 of 6.125% senior notes (Senior Notes) are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Term Loan Credit Agreement
|
|
$
|
1,307,026
|
|
|
$
|
1,331,575
|
|
Senior Notes
|
|
|
344,339
|
|
|
|
363,125
|
|
The fair values of the Term Loan Credit Agreement and the Senior Notes represent Level 2 fair value
measurements as the debt instruments trade in inactive markets.
The carrying amounts for other long-term debt approximated fair value at
September 30, 2016 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.
14
During August 2015, the Company acquired 75% of the operations of Accurate Custom Injection
Molding Inc. (ACIM). Based on the terms of the acquisition agreement, the Company will acquire the remaining 25% interest in ACIM over the next eight years and the Companys liability for the estimated purchase price of such
interest was $405 at September 30, 2016. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During March 2015, the Company acquired all of the stock of Travis Designs Limited (Travis), a United Kingdom-based entity with
costume design and sourcing capabilities. The purchase price includes contingent consideration, based on the sales of the business acquired through the end of 2016. As of September 30, 2016, the liability was $1,102. The liability represents a
Level 3 fair value measurement as it is based on unobservable inputs.
Note 11 Earnings Per Share
Basic earnings per share are computed by dividing net income available for common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options as if they were exercised.
A reconciliation between basic and diluted income (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
2016
|
|
|
Three Months
Ended
September 30,
2015
|
|
|
Nine Months
Ended
September 30,
2016
|
|
|
Nine Months
Ended
September 30,
2015
|
|
Net income (loss)
|
|
$
|
10,180
|
|
|
$
|
(44,489
|
)
|
|
$
|
32,301
|
|
|
$
|
(76,064
|
)
|
Weighted average shares - Basic
|
|
|
119,406,751
|
|
|
|
119,253,707
|
|
|
|
119,340,610
|
|
|
|
109,470,099
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,065,546
|
|
|
|
0
|
|
|
|
971,882
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Diluted
|
|
|
120,472,297
|
|
|
|
119,253,707
|
|
|
|
120,312,492
|
|
|
|
109,470,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - Basic
|
|
$
|
0.09
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - Diluted
|
|
$
|
0.08
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.27
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During both the three and nine months ended September 30, 2016 and September 30, 2015, 2,276,695
stock options and 4,544,964 stock options, respectively, were excluded from the calculation of net income (loss) per common share diluted as they were anti-dilutive.
Note 12 Long-Term Obligations
Long-term obligations at September 30, 2016 and December 31, 2015 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Term Loan Credit Agreement
|
|
$
|
1,307,026
|
|
|
$
|
1,314,538
|
|
Capital lease obligations
|
|
|
1,513
|
|
|
|
2,414
|
|
Senior Notes
|
|
|
344,339
|
|
|
|
343,721
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
1,652,878
|
|
|
|
1,660,673
|
|
Less: current portion
|
|
|
(14,235
|
)
|
|
|
(14,552
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, excluding current portion
|
|
$
|
1,638,643
|
|
|
$
|
1,646,121
|
|
|
|
|
|
|
|
|
|
|
Note 13 Subsequent Event
During October 2016, the Company amended its Term Loan Credit Agreement. Prior to the execution of the amendment in October 2016, the Company
borrowed $100,000 under its $540,000 asset-based revolving credit facility (which has a seasonal increase to $640,000 during a certain period of each calendar year) (ABL Facility) and used the proceeds to make a voluntary prepayment of a
portion of the outstanding balance under the Term Loan Credit Agreement. Then, at the time of the amendment, all outstanding term loans were replaced with new term loans for the same principal amount. The applicable margin for ABR borrowings was
lowered from 2.25% to 2.00% and the applicable margin for LIBOR borrowings was lowered from 3.25% to 3.00%. Additionally, the LIBOR floor was lowered from 1.00% to 0.75%.
15
The amended agreement provides for two pricing options: (i) an ABR for any day, a rate per
annum equal to the greater of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.5%, (c) the adjusted LIBOR rate plus 1% and (d) 1.75% or (ii) the LIBOR rate, with a
LIBOR floor of 0.75%, in each case plus an applicable margin. The amendment provides that the term loans are subject to a 1.00% prepayment premium if voluntarily repaid within six months from the date of the amendment. Otherwise, the term loans may
be voluntarily prepaid at any time without premium or penalty, other than customary breakage costs with respect to loans based on the LIBOR rate.
The Company incurred $626 of costs, principally banker fees, in conjunction with the amendment.
16
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
References throughout this document to the Company include Party City Holdco Inc. and its subsidiaries. In this document the words
we, our, ours and us refer only to the Company and its subsidiaries and not to any other person.
Business Overview
Our Company
We are the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of
decorated party goods globally by revenue. With over 900 locations (inclusive of approximately 180 franchised stores), we have the only coast-to-coast network of party superstores in the U.S. and Canada that make it easy and fun to enhance special
occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. During the Halloween selling season, we also operate a network of approximately 300 temporary
stores under the Halloween City banner.
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 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 EBITDA, adjusted net income (loss) and adjusted net income (loss) per
common share diluted. For a discussion of our use of these measures and a reconciliation of net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss), please see below.
Segments
Our retail
operations generate revenue primarily through the sale of Amscan, Designware, Anagram, Costumes USA and other party supplies through Party City, Halloween City and PartyCity.com. During 2015, approximately 75% of the product that was sold by our
retail operations was supplied by our wholesale operations.
Our wholesale revenues are generated from the sale of party goods for all
occasions, including paper and plastic tableware, accessories and novelties, 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 other retailers and distributors throughout the world.
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.
Financial Measures
Revenues.
Revenues from retail store operations are recognized at point of sale. We estimate future retail sales returns and record a
provision in the period in which the related sales are recorded based on historical information. E-commerce sales are recorded on a free-on-board (FOB) destination basis and include shipping revenues. Retail sales are reported net of
taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Additionally, fees paid by franchisees when franchise stores are opened are recognized upon the completion of the Companys performance requirements
and the opening of the franchise store.
Revenues from our wholesale operations represent the sale of our products to third parties, less
rebates, discounts and other allowances. The terms of our wholesale sales are generally FOB shipping point, and revenue is recognized when goods are shipped. We estimate reductions to revenues for volume-based rebate programs and subsequent credits
at the time sales are recognized. Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.
Comparable Retail Same-Store Sales.
The growth in same-store sales represents the percentage change in same-store sales in the period
presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to
the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. 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.
17
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 at both retail and wholesale, 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 operations. 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.
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 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.
Franchise Expenses.
Franchise expenses include the costs associated with operating our franchise network, including salaries and
benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with royalties and franchise fees.
General and Administrative Expenses.
General and administrative expenses include all operating costs 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
and data-processing costs. These expenses generally do not vary proportionally with net sales.
Art and Development Costs.
Art and
development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
Adjusted EBITDA.
We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization.
We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. We caution investors that amounts presented in accordance with our definition of
Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA is an appropriate measure of operating performance in
addition to EBITDA because we believe it assists investors in 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 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.
Adjusted net income per common share diluted represents adjusted net
income (loss) divided by the Companys 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.
18
Results of Operations
Three Months Ended September 30, 2016 Compared To Three Months Ended September 30, 2015
The following table sets forth the Companys operating results and operating results as a percentage of total revenues for the three
months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
553,382
|
|
|
|
99.4
|
%
|
|
$
|
551,380
|
|
|
|
99.3
|
%
|
Royalties and franchise fees
|
|
|
3,568
|
|
|
|
0.6
|
|
|
|
4,027
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
556,950
|
|
|
|
100.0
|
|
|
|
555,407
|
|
|
|
100.0
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
356,662
|
|
|
|
64.0
|
|
|
|
361,530
|
|
|
|
65.1
|
|
Wholesale selling expenses
|
|
|
14,739
|
|
|
|
2.7
|
|
|
|
15,465
|
|
|
|
2.8
|
|
Retail operating expenses
|
|
|
100,746
|
|
|
|
18.1
|
|
|
|
102,432
|
|
|
|
18.4
|
|
Franchise expenses
|
|
|
3,370
|
|
|
|
0.6
|
|
|
|
3,608
|
|
|
|
0.6
|
|
General and administrative expenses
|
|
|
38,972
|
|
|
|
7.0
|
|
|
|
35,979
|
|
|
|
6.5
|
|
Art and development costs
|
|
|
5,543
|
|
|
|
1.0
|
|
|
|
4,913
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
520,032
|
|
|
|
93.4
|
|
|
|
523,927
|
|
|
|
94.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,918
|
|
|
|
6.6
|
|
|
|
31,480
|
|
|
|
5.7
|
|
Interest expense, net
|
|
|
22,424
|
|
|
|
4.0
|
|
|
|
29,554
|
|
|
|
5.3
|
|
Other (income) expense, net
|
|
|
(905
|
)
|
|
|
(0.2
|
)
|
|
|
79,130
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
15,399
|
|
|
|
2.8
|
|
|
|
(77,204
|
)
|
|
|
(13.9
|
)
|
Income tax expense (benefit)
|
|
|
5,219
|
|
|
|
1.0
|
|
|
|
(32,715
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,180
|
|
|
|
1.8
|
%
|
|
$
|
(44,489
|
)
|
|
|
(8.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share Basic
|
|
$
|
0.09
|
|
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
Net income (loss) per common share Diluted
|
|
$
|
0.08
|
|
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
Revenues
Total revenues for the third quarter of 2016 were $557.0 million and were $1.5 million, or 0.3%, higher than the third quarter of 2015. The
following table sets forth the Companys total revenues for the three months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
416,387
|
|
|
|
74.8
|
%
|
|
$
|
418,447
|
|
|
|
75.3
|
%
|
Eliminations
|
|
|
(210,562
|
)
|
|
|
(37.8
|
)%
|
|
|
(206,532
|
)
|
|
|
(37.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net wholesale
|
|
|
205,825
|
|
|
|
37.0
|
%
|
|
|
211,915
|
|
|
|
38.2
|
%
|
Retail
|
|
|
347,557
|
|
|
|
62.4
|
%
|
|
|
339,465
|
|
|
|
61.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
553,382
|
|
|
|
99.4
|
%
|
|
|
551,380
|
|
|
|
99.3
|
%
|
Royalties and franchise fees
|
|
|
3,568
|
|
|
|
0.6
|
%
|
|
|
4,027
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
556,950
|
|
|
|
100.0
|
%
|
|
$
|
555,407
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Retail net sales during the third quarter of 2016 were $347.6 million and increased $8.1 million, or 2.4%, compared to the third quarter of
2015. Retail net sales at our Party City stores totaled $305.6 million and were $11.7 million, or 4.0%, higher than the third quarter of 2015, reflecting increased store count and positive same-store sales. During the twelve months ended
September 30, 2016, we acquired 23 franchise stores, opened 24 new stores and closed 14 stores. Global retail e-commerce sales totaled $35.8 million during the three months ended September 30, 2016 and were $0.2 million, or 0.6% lower
than the three months ended September 30, 2015. Global retail e-commerce sales were negatively impacted by $1.0 million as the U.S. Dollar strengthened in comparison to the British Pound Sterling. Sales at our temporary Halloween City
stores were $6.2 million during the third quarter of 2016 or $3.4 million lower than the corresponding quarter of 2015. The decrease was principally due to the Company making a strategic decision to open fewer Halloween City stores during the 2016
Halloween selling season in response to the impact of Halloween falling on a Monday this year, as opposed to on a Saturday last year.
19
Same-store sales for the Party City brand (including North American retail e-commerce sales)
increased by 1.2% during the third quarter of 2016; as a 2.8% increase in average transaction dollar size was partially offset by a 1.6% decrease in transaction count. Excluding the impact of e-commerce, same-store sales increased by 0.4% as a 2.5%
increase in average transaction dollar size, principally due to less promotional activity in our retail stores, opportunistic price increases and improved mix, was partially offset by a 2.1% decrease in transaction count. The North American retail
e-commerce sales included in our same store sales for the Party City brand comp increased by 8.6% as a 10.3% increase in transaction count was partially offset by a 1.7% decrease in average transaction dollar size. The increase in e-commerce
transaction count reflects improved customer conversion (the percentage of website visitors who purchase product from the site), principally due to enhanced digital marketing, expanded product assortment and increased promotional activity. The
decrease in average transaction dollar size principally reflects the increased promotional activity, mostly related to free shipping of product. Same-store sales percentages were not affected by foreign currency as such percentages are calculated in
local currency.
Wholesale
Wholesale net sales during the third quarter of 2016 totaled $205.8 million and were $6.1 million, or 2.9% lower than during the third
quarter of 2015. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $106.3 million and were $8.0 million, or 7.0%, lower than in the third quarter of 2015. The decrease was principally due to
our acquisition of 23 franchise stores during December 2015 and January 2016, as post-acquisition sales to such stores (approximately $6 million during the third quarter of 2015) are now eliminated as intercompany sales. Additionally, gift product
sales were approximately $2 million lower than during the third quarter of 2015 principally due to the de-emphasis and reorganization of our Grasslands Road gift division. Net sales of metallic balloons to domestic distributors and retailers and our
franchisee network totaled $18.5 million in the third quarter of 2016 and were $0.3 million, or 1.6%, higher than the third quarter of 2015. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign
subsidiaries) totaled $81.0 million and were $1.6 million, or 2.0% higher than the third quarter of 2015 despite a $7.2 million negative impact from foreign currency translation. The translation impact was principally due to the
U.S. Dollar strengthening in comparison to the British Pound Sterling. International sales increased versus the corresponding quarter of 2015 primarily due to higher costumes sales (impact of approximately $4 million, principally into the U.K.
market), increased sales of garments and accessories (impact of approximately $2 million, also principally into the U.K. market) and higher sales of latex balloons (impact of approximately $1 million).
Intercompany sales to our retail affiliates totaled $210.6 million during the third quarter of 2016 and were $4.0 million, or 2.0% higher
than the corresponding quarter of 2015. Intercompany sales represented 50.6% of total wholesale sales during the third quarter of 2016, compared to 49.4% during the corresponding quarter of 2015. The increase in intercompany sales was principally
due to the impact of the higher company store count (as discussed above under -Retail) and the increasing share of shelf (as noted below under -Gross Profit) being partially offset by certain shipments of Halloween product
shifting from the third quarter of 2015 to the second quarter of 2016. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the third quarter of 2016 were $3.6 million and were $0.5 million lower than the third quarter of 2015
principally due to acquiring 23 franchise stores during December 2015 and January 2016.
Gross Profit
The following table sets forth the Companys gross profit for the three months ended September 30, 2016 and September 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
Retail
|
|
$
|
133,177
|
|
|
|
38.3
|
%
|
|
$
|
127,871
|
|
|
|
37.7
|
%
|
Wholesale
|
|
|
63,543
|
|
|
|
30.9
|
|
|
|
61,979
|
|
|
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196,720
|
|
|
|
35.5
|
%
|
|
$
|
189,850
|
|
|
|
34.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross profit margin on net sales at retail during the third quarter of 2016 was 38.3% or 60 basis points
higher than in the third quarter of 2015. The increase in margin was principally driven by: 1) an increase in our wholesale share of shelf at our Party
20
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 operations) from 73.5% during the third quarter
of 2015 to 75.1% during the third quarter of 2016, 2) reduced promotional activity in our retail stores and 3) favorable mix. These positive drivers were partially offset by higher occupancy costs and the impact of the strengthening of the
U.S. Dollar on our international retail operations that purchase product denominated in U.S. Dollars and sell in local currency (approximately $0.5 million impact).
The gross profit on net sales at wholesale during the third quarters of 2016 and 2015 was 30.9% and 29.2%, respectively. The increase in
margin was primarily driven by reduced product costs and the favorable impact on gross margin rate associated with lower sales of licensed products, partially offset by the strengthening of the U.S. Dollar and its unfavorable impact on certain
of our international subsidiaries that purchase product denominated in U.S. Dollars and sell in local currency (approximately $1 million impact).
Operating expenses
Wholesale
selling expenses totaled $14.7 million in the third quarter of 2016 and were $0.7 million, or 4.7%, lower than during the corresponding quarter of 2015 principally due to the impact of foreign currency translation. Wholesale selling expenses
were 7.2% and 7.3% of net wholesale sales during the third quarters of 2016 and 2015, respectively.
Retail operating expenses during the
third quarter of 2016 were $100.7 million and were $1.7 million, or 1.6%, lower than during the third quarter of 2015. The decrease was principally due to improved labor productivity and efficiency in our stores, in part as a result of the
costs associated with last years reset activities. Retail operating expenses were 29.0% and 30.2% of net retail sales during the third quarters of 2016 and 2015, respectively.
Franchise expenses during the third quarters of 2016 and 2015 were $3.4 million and $3.6 million, respectively.
General and administrative expenses during the third quarter of 2016 totaled $39.0 million and were $3.0 million, or 8.3%, higher
than in the third quarter of 2015. The increase was principally due to inflationary cost increases and higher professional fees (partially related to costs incurred in connection with Sarbanes-Oxley compliance procedures).
Art and development costs were $5.5 million and $4.9 million during the third quarters of 2016 and 2015, respectively. The increase was
principally due to increased head count and other costs incurred in order to support the expansion of Halloween and other retail programs.
Interest
expense, net
Interest expense, net, totaled $22.4 million during the third quarter of 2016, compared to $29.6 million during
the third quarter of 2015. The decrease reflects the reduction in interest rates following the Companys August 2015 debt refinancing.
Other
(income) expense, net
Other (income) expense, net generally includes foreign currency transaction (gains) losses, corporate
development expenses and (gains) losses from unconsolidated joint ventures.
For the third quarter of 2016, other income, net, totaled
$0.9 million. Such amount included $1.8 million of foreign currency transaction gains.
For the third quarter of 2015, other expense,
net, totaled $79.1 million, all of which related to the refinancing of the Companys debt. During the three months ended September 30, 2015, the Company redeemed its $700 million of 8.875% senior notes (Old Senior Notes)
and refinanced its existing $1,125 million senior secured term loan facility (Old Term Loan Credit Agreement) and $400 million asset-based revolving credit facility (Old ABL Facility) with new indebtedness consisting of:
(i) a $1,340 million senior secured term loan facility (Term Loan Credit Agreement), (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a certain period of each calendar
year) (ABL Facility) and (iii) $350 million of 6.125% senior notes (Senior Notes). The redemption price for the Old Senior Notes was 6.656 % of the principal amount, $46.6 million. The Company recorded such amount
in other expense, net. Additionally, in conjunction with the refinancing, the Company wrote-off $22.7 million of previously capitalized deferred financing costs, original issuance discounts and call premiums and also recorded such amount in other
expense, net. Further, in conjunction with the refinancing of the term loans, the Company incurred banker and legal fees, $9.8 million of which was recorded in other expense, net.
21
Income tax expense (benefit)
The income tax expense for the three months ended September 30, 2016 was determined based upon the Companys estimated
consolidated effective income tax rate for the year ending December 31, 2016.
The difference between the estimated consolidated
effective income tax rate for the year ending December 31, 2016, as determined as of September 30, 2016, and the U.S. federal statutory rate is primarily attributable to state income taxes, unrecognized foreign tax credits and benefits on
certain foreign losses, partially offset by a foreign rate differential and available domestic manufacturing deductions.
Nine
Months Ended September 30, 2016 Compared To Nine Months Ended September 30, 2015
The following table sets forth the
Companys operating results and operating results as a percentage of total revenues for the nine months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,523,094
|
|
|
|
99.3
|
%
|
|
$
|
1,500,781
|
|
|
|
99.2
|
%
|
Royalties and franchise fees
|
|
|
11,009
|
|
|
|
0.7
|
|
|
|
12,251
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,534,103
|
|
|
|
100.0
|
|
|
|
1,513,032
|
|
|
|
100.0
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
952,294
|
|
|
|
62.1
|
|
|
|
958,667
|
|
|
|
63.4
|
|
Wholesale selling expenses
|
|
|
45,854
|
|
|
|
2.9
|
|
|
|
48,825
|
|
|
|
3.2
|
|
Retail operating expenses
|
|
|
278,070
|
|
|
|
18.1
|
|
|
|
267,975
|
|
|
|
17.7
|
|
Franchise expenses
|
|
|
10,507
|
|
|
|
0.7
|
|
|
|
10,597
|
|
|
|
0.7
|
|
General and administrative expenses
|
|
|
115,828
|
|
|
|
7.6
|
|
|
|
110,048
|
|
|
|
7.3
|
|
Art and development costs
|
|
|
16,596
|
|
|
|
1.1
|
|
|
|
15,369
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,419,149
|
|
|
|
92.5
|
|
|
|
1,411,481
|
|
|
|
93.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
114,954
|
|
|
|
7.5
|
|
|
|
101,551
|
|
|
|
6.7
|
|
Interest expense, net
|
|
|
67,857
|
|
|
|
4.4
|
|
|
|
101,430
|
|
|
|
6.7
|
|
Other (income) expense, net
|
|
|
(4,107
|
)
|
|
|
(0.2
|
)
|
|
|
126,519
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
51,204
|
|
|
|
3.3
|
|
|
|
(126,398
|
)
|
|
|
(8.4
|
)
|
Income tax expense (benefit)
|
|
|
18,903
|
|
|
|
1.2
|
|
|
|
(50,334
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32,301
|
|
|
|
2.1
|
%
|
|
$
|
(76,064
|
)
|
|
|
(5.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share Basic
|
|
$
|
0.27
|
|
|
|
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
Net income (loss) per common share Diluted
|
|
$
|
0.27
|
|
|
|
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
Revenues
Total revenues for the nine months ended September 30, 2016 were $1,534.1 million and were $21.1 million, or 1.4%, higher than the
corresponding period of 2015. The following table sets forth the Companys total revenues for the nine months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
945,071
|
|
|
|
61.6
|
%
|
|
$
|
923,717
|
|
|
|
61.1
|
%
|
Eliminations
|
|
|
(465,189
|
)
|
|
|
(30.3
|
)%
|
|
|
(426,132
|
)
|
|
|
(28.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net wholesale
|
|
|
479,882
|
|
|
|
31.3
|
%
|
|
|
497,585
|
|
|
|
32.9
|
%
|
Retail
|
|
|
1,043,212
|
|
|
|
68.0
|
%
|
|
|
1,003,196
|
|
|
|
66.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,523,094
|
|
|
|
99.3
|
%
|
|
|
1,500,781
|
|
|
|
99.2
|
%
|
Royalties and franchise fees
|
|
|
11,009
|
|
|
|
0.7
|
%
|
|
|
12,251
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,534,103
|
|
|
|
100.0
|
%
|
|
$
|
1,513,032
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Retail
Retail net sales during the nine months ended September 30, 2016 were $1,043.2 million and increased $40.0 million, or 4.0%, compared to
the corresponding period of 2015. Retail net sales at our Party City stores totaled $934.3 million and were $37.3 million, or 4.2% higher than the corresponding period of 2015, as increased store count and positive same-store sales were
partially offset by the impact of foreign currency translation. During the twelve months ended September 30, 2016, we acquired 23 franchise stores, opened 24 new stores and closed 14 stores. A strengthening of the U.S. Dollar, in
comparison to the Canadian Dollar, negatively impacted our Canadian retail sales during the first nine months of 2016 by $2.5 million. Global retail e-commerce sales totaled $102.7 million during the nine months ended September 30, 2016
and were $6.1 million, or 6.3% higher than the nine months ended September 30, 2015. The North American retail e-commerce sales included in our same store sales for the Party City brand comp increased by 11.8% during the period (see below for
further detail). This positive factor was partially offset by a $1.8 million decrease in e-commerce sales due to the strengthening of the U.S. Dollar in comparison to the British Pound Sterling. Sales at our temporary Halloween City stores were
$6.2 million during 2016 or $3.4 million lower than the corresponding period of 2015. The decrease was principally due to the Company making a strategic decision to open fewer Halloween City stores during the 2016 Halloween selling season in
response to the impact of Halloween falling on a Monday this year, as opposed to on a Saturday last year.
Same-store sales for the Party
City brand (including North American retail e-commerce sales) increased by 1.3% during the first nine months of 2016; as a 2.3% increase in average transaction dollar size was partially offset by a 1.0% decrease in transaction count. Excluding the
impact of e-commerce, same-store sales increased by 0.3% as a 1.8% increase in average transaction dollar size was partially offset by a 1.5% decrease in transaction count. The increase in average transaction dollar size was principally due to
opportunistic price increases and improved mix. The North American retail e-commerce sales included in our same store sales for the Party City brand comp increased by 11.8% as a 12.5% increase in transaction count was partially offset by a 0.7%
decrease in average transaction dollar size. The increase in e-commerce transaction count reflects improved customer conversion (the percentage of website visitors who purchase product from the site), principally due to enhanced digital marketing,
expanded product assortment and increased promotional activity. The decrease in average transaction dollar size principally relates to the increased promotional activity, mostly related to free shipping of product. Same-store sales percentages were
not affected by foreign currency as such percentages are calculated in local currency.
Wholesale
Wholesale net sales during the first nine months of 2016 totaled $479.9 million and were $17.7 million, or 3.6% lower than during the
first nine months of 2015. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $247.3 million and were $23.3 million, or 8.6% lower than the corresponding period of 2015. The decrease was
principally due to our acquisition of 23 franchise stores during December 2015 and January 2016; as post-acquisition sales to such stores (approximately $14 million during the first nine months of 2015) are now eliminated as intercompany sales. The
decrease was also partially due to lower gift product sales (approximately $7 million impact) due to the de-emphasis and reorganization of our Grasslands Road gift division. These factors were partially offset by the August 2015 acquisition of
Accurate Custom Injection Molding Inc. positively impacting sales during the first nine months of 2016 by approximately $3 million. Net sales of metallic balloons to domestic distributors and retailers and our franchisee network totaled $58.8
million during the first nine months of 2016 and were $1.3 million, or 2.2% lower than the corresponding period of 2015 as certain Valentines Day sales shifted into December 2015 (the corresponding sales for the previous Valentines
Day occurred in January 2015). Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $173.8 million and were $6.9 million, or 4.1% higher than the corresponding period of
2015, despite an $11.3 million negative impact from foreign currency translation during 2016. International sales increased versus the corresponding period of 2015 primarily due to higher costumes sales (impact of approximately $4 million,
principally into the U.K. market), increased sales of garments and accessories (impact of approximately $3 million, also principally into the U.K. market), the success of a new store-in-store program with a mass merchandiser in Australia (impact of
approximately $2 million), increased sales in Europe due to the 2016 European football championships (impact of approximately $2 million) and higher sales of latex balloons (impact of approximately $1 million).
Intercompany sales to our retail affiliates totaled $465.2 million during the first nine months of 2016 and were $39.1 million, or 9.2%,
higher than the corresponding period of 2015. Intercompany sales represented 49.2% of total wholesale sales during the first nine months of 2016, compared to 46.1% during the corresponding period of 2015. The increase in intercompany sales was
principally due to the impact of the higher company store count (as discussed above under -Retail), the increasing share of shelf (as noted below under -Gross Profit), and higher shipments of summer/luau product. The
intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the first nine months of 2016 were $11.0 million and were $1.2 million lower than the first nine months of
2015 principally due to acquiring franchise stores during December 2015 and January 2016.
23
Gross Profit
The following table sets forth the Companys gross profit for the nine months ended September 30, 2016 and September 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
Retail
|
|
$
|
419,283
|
|
|
|
40.2
|
%
|
|
$
|
394,607
|
|
|
|
39.3
|
%
|
Wholesale
|
|
|
151,517
|
|
|
|
31.6
|
|
|
|
147,507
|
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
570,800
|
|
|
|
37.5
|
%
|
|
$
|
542,114
|
|
|
|
36.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross profit margin on net sales at retail during the first nine months of 2016 was 40.2%, or 90 basis
points, higher than the corresponding period of 2015. The increase in margin was principally driven by an increase in 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 operations) from 73.6% during the first nine months of 2015 to 75.9% during the first nine months of 2016.
The gross profit on net sales at wholesale during the first nine months of 2016 and 2015 was 31.6% and 29.6%, respectively. The increase in
margin was primarily driven by reduced product costs and the favorable impact on gross margin rate associated with lower sales of licensed products. These positive factors were partially offset by the strengthening of the U.S. Dollar and its
unfavorable impact on certain of our international subsidiaries that purchase product denominated in U.S. Dollars and sell in local currency.
Operating expenses
Wholesale
selling expenses totaled $45.9 million in the first nine months of 2016 and were $3.0 million, or 6.1%, lower than in the corresponding period of 2015. The decrease was principally due to cost savings associated with the reorganization of our
gift sales group (discussed above) and, to a lesser extent, the $1.0 million impact of foreign currency translation at international subsidiaries. Wholesale selling expenses were 9.6% and 9.8% of net wholesale sales during the first nine months of
2016 and 2015, respectively.
Retail operating expenses during the first nine months of 2016 were $278.1 million and were $10.1
million, or 3.8%, higher than the corresponding period of 2015. The increase was principally due to higher store payroll costs (driven by the higher store count) and higher advertising costs in support of our new campaign which was launched in the
second quarter of 2016. Foreign currency translation at international subsidiaries reduced retail operating expenses by $0.8 million in comparison to 2015. Retail operating expenses were 26.7% of net retail sales during both the first nine months of
2016 and the first nine months of 2015.
Franchise expenses during the first nine months of 2016 and 2015 were $10.5 million and
$10.6 million, respectively.
General and administrative expenses during the first nine months of 2016 totaled $115.8 million and
were $5.8 million, or 5.3%, higher than in 2015. The increase was principally due to inflationary cost increases, higher professional fees (partially related to costs incurred in connection with Sarbanes-Oxley compliance procedures) and higher
stock-based compensation expense. Foreign currency translation at international subsidiaries reduced general and administrative expenses by $1.2 million in comparison to 2015.
Art and development costs were $16.6 million and $15.4 million during the first nine months of 2016 and 2015, respectively. The increase was
principally due to increased head count and other costs incurred in order to support the expansion of Halloween and other retail programs.
Interest
expense, net
Interest expense, net, totaled $67.9 million during the first nine months of 2016, compared to $101.4 million
during the corresponding period of 2015. The decrease principally reflects the reduction in interest rates following the Companys third quarter 2015 debt refinancing and the repayment of the $350.0 million PIK notes (the Nextco
Notes), which were fully redeemed during the second quarter 2015 with proceeds from the Companys initial public offering.
Other
(income) expense, net
Other (income) expense, net generally includes foreign currency transaction (gains) losses, corporate
development expenses and (gains) losses from unconsolidated joint ventures.
24
For the nine months ended September 30, 2016, other income, net, totaled $4.1 million.
Such amount included $6.9 million of foreign currency transaction gains, primarily the impact of the change in the U.S. Dollar from December 31, 2015 to September 30, 2016 and the corresponding re-measurement of the U.S.
dollar-denominated receivables and payables of our foreign operations.
For the nine months ended September 30, 2015, other expense,
net, totaled $126.5 million, $79.1 million of which related to the third quarter refinancing of the Companys debt and $46.3 million of which related to the Companys initial public offering.
During the three months ended September 30, 2015, the Company redeemed its Old Senior Notes and refinanced its Old Term Loan Credit
Agreement and Old ABL Facility with new indebtedness consisting of: (i) a $1,340 million senior secured term loan facility, (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a
certain period of each calendar year) and (iii) $350 million of 6.125% senior notes. The redemption price for the Old Senior Notes was 6.656 % of the principal amount, $46.6 million. The Company recorded such amount in other expense, net.
Additionally, in conjunction with the refinancing, the Company wrote-off $22.7 million of previously capitalized deferred financing costs, original issuance discounts and call premiums and also recorded such amount in other expense, net. Further, in
conjunction with the refinancing of the term loans, the Company incurred banker and legal fees, $9.8 million of which was recorded in other expense, net.
During April 2015, in conjunction with the Companys initial public offering, the Company paid a 2% prepayment penalty, or $7.0 million,
in order to redeem its Nextco Notes, and paid a management agreement termination fee of $30.7 million to affiliates of THL and Advent. Additionally, in conjunction with the redemption of the Nextco Notes, the Company wrote off $8.6 million of
capitalized debt issuance costs and original issuance discounts.
Income tax expense (benefit)
The income tax expense for the nine months ended September 30, 2016 was determined based upon the Companys estimated
consolidated effective income tax rate for the year ending December 31, 2016.
The difference between the estimated consolidated
effective income tax rate for the year ending December 31, 2016, as determined as of September 30, 2016, and the U.S. federal statutory rate is primarily attributable to state income taxes, unrecognized foreign tax credits and benefits on
certain foreign losses, partially offset by a foreign rate differential and available domestic manufacturing deductions.
Adjusted EBITDA, Adjusted Net
Income and Adjusted Net Income per Common Share Diluted
The Company presents adjusted EBITDA, adjusted net income and adjusted
net income per common share - diluted as supplemental measures of our operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as
EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Companys net
income (loss) adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, refinancing charges, equity based compensation, and
impairment charges. Adjusted net income per common share diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating
performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that
are the same as, or similar to, some of the adjustments in this presentation. The Companys presentation of adjusted EBITDA and adjusted net income should not be construed as an inference that the Companys 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 Companys performance across reporting periods on a consistent basis by eliminating items that
the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business
strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company 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 sharediluted have
limitations as analytical tools. Some of these limitations are:
|
|
|
they do not reflect the Companys cash expenditures or future requirements for capital expenditures or contractual commitments;
|
|
|
|
they do not reflect changes in, or cash requirements for, the Companys 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 Companys indebtedness;
|
25
|
|
|
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 and adjusted net income do not reflect any cash
requirements for such replacements;
|
|
|
|
non-cash compensation is and will remain a key element of the Companys 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 Companys industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share diluted differently than the Company does, limiting its usefulness as a
comparative measure.
|
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. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA,
adjusted net income and adjusted net income per common share diluted only on a supplemental basis. The reconciliations from net income (loss) to each of adjusted EBITDA and adjusted net income (loss) for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Three Months Ended
September 30, 2015
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2015
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,180
|
|
|
$
|
(44,489
|
)
|
|
$
|
32,301
|
|
|
$
|
(76,064
|
)
|
Interest expense, net
|
|
|
22,424
|
|
|
|
29,554
|
|
|
|
67,857
|
|
|
|
101,430
|
|
Income taxes
|
|
|
5,219
|
|
|
|
(32,715
|
)
|
|
|
18,903
|
|
|
|
(50,334
|
)
|
Depreciation and amortization
|
|
|
20,015
|
|
|
|
19,766
|
|
|
|
61,186
|
|
|
|
59,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
57,838
|
|
|
|
(27,884
|
)
|
|
|
180,247
|
|
|
|
34,599
|
|
Non-cash purchase accounting adjustments
|
|
|
|
|
|
|
224
|
|
|
|
3,689
|
|
|
|
5,979
|
|
Management fee (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,627
|
|
Restructuring, retention and severance
|
|
|
92
|
|
|
|
166
|
|
|
|
254
|
|
|
|
2,311
|
|
Refinancing charges (b)
|
|
|
|
|
|
|
79,011
|
|
|
|
|
|
|
|
94,607
|
|
Deferred rent (c)
|
|
|
7,095
|
|
|
|
5,479
|
|
|
|
12,240
|
|
|
|
9,580
|
|
Store closing expenses (d)
|
|
|
971
|
|
|
|
335
|
|
|
|
2,927
|
|
|
|
903
|
|
Foreign currency (gains) losses, net
|
|
|
(1,767
|
)
|
|
|
(978
|
)
|
|
|
(6,945
|
)
|
|
|
1,782
|
|
Equity based compensation
|
|
|
948
|
|
|
|
970
|
|
|
|
2,829
|
|
|
|
2,094
|
|
Undistributed non-cash loss in unconsolidated joint venture
|
|
|
113
|
|
|
|
342
|
|
|
|
380
|
|
|
|
377
|
|
Gain on sale of assets (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,660
|
)
|
Corporate development expenses (f)
|
|
|
683
|
|
|
|
414
|
|
|
|
1,895
|
|
|
|
1,543
|
|
Other
|
|
|
61
|
|
|
|
167
|
|
|
|
118
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
66,034
|
|
|
$
|
58,246
|
|
|
$
|
197,634
|
|
|
$
|
182,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Three Months Ended
September 30, 2015
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2015
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
15,399
|
|
|
$
|
(77,204
|
)
|
|
$
|
51,204
|
|
|
$
|
(126,398
|
)
|
Intangible asset amortization
|
|
|
4,049
|
|
|
|
4,700
|
|
|
|
12,182
|
|
|
|
14,216
|
|
Non-cash purchase accounting adjustments (g)
|
|
|
(102
|
)
|
|
|
955
|
|
|
|
4,991
|
|
|
|
8,430
|
|
Amortization of deferred financing costs and original issuance discounts (b)
|
|
|
1,277
|
|
|
|
24,774
|
|
|
|
3,821
|
|
|
|
39,225
|
|
Management fee (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,627
|
|
Refinancing charges (b)
|
|
|
|
|
|
|
58,338
|
|
|
|
|
|
|
|
65,338
|
|
Equity based compensation
|
|
|
948
|
|
|
|
970
|
|
|
|
2,829
|
|
|
|
2,094
|
|
Gain on sale of assets (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income before income taxes
|
|
|
21,571
|
|
|
|
12,533
|
|
|
|
75,027
|
|
|
|
31,872
|
|
Adjusted income tax expense (h)
|
|
|
7,568
|
|
|
|
623
|
|
|
|
27,918
|
|
|
|
8,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
14,003
|
|
|
$
|
11,910
|
|
|
$
|
47,109
|
|
|
$
|
23,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per common share diluted
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
|
$
|
0.39
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares-diluted
|
|
|
120,472,297
|
|
|
|
120,386,423
|
|
|
|
120,312,492
|
|
|
|
110,503,035
|
|
26
(a)
|
In 2012, the Company entered into a management agreement with THL and Advent under which THL and Advent provided advice to the Company on, among other things, financing, operations, acquisitions and dispositions. Under
the management agreement, THL and Advent were paid an annual management fee for such services. In connection with the initial public offering, the management agreement was terminated and the Company paid THL and Advent a termination fee. Such amount
was recorded in other expense, net in the Companys condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2015.
|
(b)
|
During the third quarter 2015, the Company refinanced its debt. In conjunction with the refinancing, the Company paid a call premium and other third-party costs. The Company recorded such payments, $56.4 million in
aggregate, in other expense in the Companys condensed consolidated statement of operations and comprehensive loss. The amount is included in Refinancing charges in the tables above. Additionally, in conjunction with the
refinancing, the Company wrote off $22.7 million of capitalized deferred financing costs, original issuance discounts and call premiums. Such charge was recorded in other expense in the Companys condensed consolidated statement of operations
and comprehensive loss and included in Refinancing charges in the adjusted EBITDA table above and in Amortization of deferred financing costs and original issue discounts in the adjusted net income table above (consistent
with the presentation in the Companys condensed consolidated statement of cash flows included elsewhere in this Form 10-Q). Further, as the Company was required to provide 30 days of notice when calling its Old Senior Notes, during a portion
of the third quarter 2015 both the Old Senior Notes and Senior Notes were outstanding. The overlapping interest expense, $2.0 million, is included in Refinancing charges in the adjusted net income table above. During the second quarter
2015, the Company used proceeds from the initial public offering to redeem the Nextco Notes. The redemption resulted in a prepayment penalty of $7.0 million. The Company recorded the prepayment penalty in other expense in the Companys
condensed consolidated statement of operations and comprehensive loss. The amount is included in Refinancing charges in the tables above. Additionally, in conjunction with the redemption, the Company wrote off $8.6 million of capitalized
debt issuance costs and original issuance discounts related to the Nextco Notes. Such charge was recorded in other expense in the Companys consolidated statement of operations and comprehensive loss and included in Refinancing
charges in the adjusted EBITDA table above and in Amortization of deferred financing costs and original issue discounts in the adjusted net income table above (consistent with the presentation in the Companys consolidated
statement of cash flows included elsewhere in this Form 10-Q).
|
(c)
|
The deferred rent adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Companys actual cash outlay for such items.
|
(d)
|
Charges incurred related to closing unprofitable stores.
|
(e)
|
During January 2015, the Company recorded a gain on the sale of certain assets obtained in the October 2014 acquisition of U.S. Balloon Manufacturing Co., Inc.
|
(f)
|
Represents third-party costs related to acquisitions (principally legal expenses).
|
(g)
|
On July 27, 2012, PC Merger Sub, Inc., which was our wholly-owned indirect subsidiary, merged into Party City Holdings Inc. (PCHI), with PCHI being the surviving entity (the Transaction). As
a result of the Transaction, the Company applied the acquisition method of accounting and increased the value of certain property, plant and equipment. The impact of such adjustments on depreciation expense increased the Companys expenses.
These property, plant and equipment depreciation amounts are included in Non-cash purchase accounting adjustments for purposes of calculating adjusted net income, but are excluded from Non-cash purchase accounting
adjustments for purposes of calculating adjusted EBITDA since they are included in depreciation expense.
|
(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.
|
27
Liquidity and Capital Resources
During 2015, the Company redeemed its $700 million of 8.875% senior notes and refinanced its existing $1,125 million senior secured term loan
facility and $400 million asset-based revolving credit facility with new indebtedness consisting of: (i) a senior secured term loan facility (Term Loan Credit Agreement), (ii) a $540 million asset-based revolving credit
facility (with a seasonal increase to $640 million during a certain period of each calendar year) (ABL Facility) and (iii) $350 million of 6.125% senior notes.
During October 2016, the Company amended its Term Loan Credit Agreement. Prior to the execution of the amendment in October 2016, the Company
borrowed $100 million under its ABL Facility and used the proceeds to make a voluntary prepayment of a portion of the outstanding balance under the Term Loan Credit Agreement. Then, at the time of the amendment, the applicable margin for ABR
borrowings under the Term Loan Credit Agreement was lowered from 2.25% to 2.00% and the applicable margin for LIBOR borrowings was lowered from 3.25% to 3.00%. Additionally, the LIBOR floor was lowered from 1.00% to 0.75%.
We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of
liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 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 ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Cash Flow
Net cash provided by
operating activities totaled $23.5 million during the first nine months of 2016. Net cash used in operating activities totaled $164.5 million during the first nine months of 2015. Net cash flows provided by operating activities before changes
in operating assets and liabilities were $114.1 million during the first nine months of 2016 and $26.3 million during the first nine months of 2015. The increase in net cash flows provided by operating activities before changes in operating
assets and liabilities was due to improved profitability in 2016; principally driven by 2015 including refinancing costs and a management agreement termination fee (see Results of Operations above for further discussion) and 2016
including lower interest expense. Interest expense decreased due to the redemption of the Nextco Notes, which were fully redeemed during the second quarter of 2015 with proceeds from the Companys initial public offering, and the reduction in
interest rates following the Companys third quarter 2015 debt refinancing. Changes in operating assets and liabilities during the first nine months of 2016 and 2015 resulted in the use of cash of $90.6 million and $190.8 million,
respectively. The variance was principally due to lower interest payments (discussed above) and income tax payments in 2016. Income tax payments were lower in 2016 as taxable income decreased in 2015 due to non-recurring payments related to the
initial public offering and the debt refinancing.
Net cash used in investing activities totaled $89.1 million during the nine months
ended September 30, 2016, as compared to $79.8 million during the nine months ended September 30, 2015. Investing activities during 2016 included $31.8 million paid in connection with the acquisitions of franchise stores and a
costumes manufacturer. Capital expenditures during the nine months ended September 30, 2016 and 2015 were $57.3 million and $62.0 million, respectively. Retail capital expenditures totaled $39.1 million during 2016 and principally related to
store conversions and new stores. Wholesale capital expenditures totaled $18.2 million and primarily related to printing plates and dies, as well as machinery and equipment at the Companys manufacturing operations.
Net cash provided by financing activities was $71.5 million during the nine months ended September 30, 2016, as compared to
$253.2 million during the corresponding period of 2015. Net borrowings were lower during 2016 principally due to the lower interest and income tax payments (noted above) and 2015 including refinancing costs and the management agreement
termination fee.
At September 30, 2016, the Company had approximately $405 million of availability under its ABL Facility,
after considering borrowing base restrictions. During October 2016, the Company borrowed $100 million under the ABL Facility in order to make a voluntary prepayment of a portion of the outstanding balance under the Term Loan Credit Agreement.
28
Contractual Obligations
Other than as described above under Liquidity and Capital Resources, there were no material changes to our future minimum
contractual obligations as of December 31, 2015 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Off Balance Sheet Arrangements
We had no
off balance sheet arrangements during the nine months ended September 30, 2016 and the year ended December 31, 2015.
Seasonality
Wholesale Operations
Despite a
concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been
limited. However, due to Halloween and Christmas, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, the promotional activities of our wholesale
business, including special dating terms, particularly with respect to Halloween products sold to retailers and other distributors, result in slightly higher accounts receivable balances during the third quarter.
Retail Operations
Our retail
operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October
and, to a lesser extent, year-end holiday sales.
Cautionary Note Regarding Forward-Looking Statements
From time to time, including in this filing and, in particular, the section captioned Managements Discussion and Analysis of
Financial Condition and Results of Operations, we make forward-looking statements within the meaning of federal and state securities laws. Disclosures that use words such as the company believes,
anticipates, expects, estimates, intends, will, may or plans and similar expressions are intended to identify forward-looking statements. These forward-looking
statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability
under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These
risks, as well as other risks and uncertainties, are detailed in the section titled Risk Factors included in our Annual Report on Form 10-K filed with the SEC on March 11, 2016. Moreover, we operate in a very competitive and rapidly
changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed may not occur and actual results
could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of the date of this filing. Any such
forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results
to differ materially from those described in the forward-looking statements:
|
|
|
our ability to compete effectively in a competitive industry;
|
|
|
|
fluctuations in commodity prices;
|
|
|
|
our ability to appropriately respond to changing merchandise trends and consumer preferences;
|
|
|
|
successful implementation of our store growth strategy;
|
|
|
|
decreases in our Halloween sales;
|
|
|
|
disruption to the transportation system or increases in transportation costs;
|
29
|
|
|
product recalls or product liability;
|
|
|
|
economic slowdown affecting consumer spending and general economic conditions;
|
|
|
|
loss or actions of third party vendors and loss of the right to use licensed material;
|
|
|
|
disruptions at our manufacturing facilities;
|
|
|
|
failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;
|
|
|
|
our international operations subjecting us to additional risks (including fluctuations in foreign exchange rates);
|
|
|
|
potential litigation and claims;
|
|
|
|
lack of available additional capital;
|
|
|
|
our inability to retain or hire key personnel;
|
|
|
|
risks associated with leasing substantial amounts of space;
|
|
|
|
failure of existing franchisees to conduct their business in accordance with agreed upon standards;
|
|
|
|
adequacy of our information systems, order fulfillment and distribution facilities;
|
|
|
|
our ability to adequately maintain the security of our electronic and other confidential information;
|
|
|
|
our inability to successfully identify and integrate acquisitions;
|
|
|
|
adequacy of our intellectual property rights;
|
|
|
|
risks related to our substantial indebtedness; and
|
|
|
|
the other factors set forth under Risk Factors in our Annual Report on Form 10-K, filed with the SEC on March 11, 2016.
|
Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this filing to
conform these statements to actual results or to changes in our expectations.
You should read this filing with the understanding that our
actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.