PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(Note 2) (Unaudited)
|
|
|
(Note 2)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,367
|
|
|
$
|
64,610
|
|
Accounts receivable, net
|
|
|
120,580
|
|
|
|
134,091
|
|
Inventories, net
|
|
|
620,764
|
|
|
|
613,868
|
|
Prepaid expenses and other current assets
|
|
|
69,312
|
|
|
|
68,255
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
851,023
|
|
|
|
880,824
|
|
Property, plant and equipment, net
|
|
|
293,663
|
|
|
|
292,904
|
|
Goodwill
|
|
|
1,622,129
|
|
|
|
1,572,568
|
|
Trade names
|
|
|
566,729
|
|
|
|
566,599
|
|
Other intangible assets, net
|
|
|
72,887
|
|
|
|
76,581
|
|
Other assets, net
|
|
|
7,229
|
|
|
|
4,502
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,413,660
|
|
|
$
|
3,393,978
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Loans and notes payable
|
|
$
|
198,269
|
|
|
$
|
120,138
|
|
Accounts payable
|
|
|
99,979
|
|
|
|
163,415
|
|
Accrued expenses
|
|
|
159,218
|
|
|
|
149,683
|
|
Income taxes payable
|
|
|
36,467
|
|
|
|
46,675
|
|
Current portion of long-term obligations
|
|
|
13,327
|
|
|
|
13,348
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
507,260
|
|
|
|
493,259
|
|
Long-term obligations, excluding current portion
|
|
|
1,537,448
|
|
|
|
1,539,604
|
|
Deferred income tax liabilities
|
|
|
279,769
|
|
|
|
278,819
|
|
Deferred rent and other long-term liabilities
|
|
|
71,407
|
|
|
|
65,507
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,395,884
|
|
|
|
2,377,189
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock (119,527,894 and 119,515,894 shares issued and outstanding at March 31, 2017 and
December 31, 2016, respectively)
|
|
|
1,195
|
|
|
|
1,195
|
|
Additional
paid-in
capital
|
|
|
912,629
|
|
|
|
910,167
|
|
Retained earnings
|
|
|
152,983
|
|
|
|
157,666
|
|
Accumulated other comprehensive loss
|
|
|
(49,031
|
)
|
|
|
(52,239
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,017,776
|
|
|
|
1,016,789
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,413,660
|
|
|
$
|
3,393,978
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
473,963
|
|
|
$
|
454,286
|
|
Royalties and franchise fees
|
|
|
3,036
|
|
|
|
3,454
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
476,999
|
|
|
|
457,740
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
298,719
|
|
|
|
287,767
|
|
Wholesale selling expenses
|
|
|
15,627
|
|
|
|
15,842
|
|
Retail operating expenses
|
|
|
90,730
|
|
|
|
86,709
|
|
Franchise expenses
|
|
|
3,317
|
|
|
|
3,563
|
|
General and administrative expenses
|
|
|
48,137
|
|
|
|
38,926
|
|
Art and development costs
|
|
|
5,798
|
|
|
|
5,377
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
462,328
|
|
|
|
438,184
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,671
|
|
|
|
19,556
|
|
Interest expense, net
|
|
|
20,692
|
|
|
|
22,652
|
|
Other expense (income), net
|
|
|
1,162
|
|
|
|
(2,978
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(7,183
|
)
|
|
|
(118
|
)
|
Income tax (benefit) expense
|
|
|
(2,500
|
)
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,683
|
)
|
|
$
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(1,475
|
)
|
|
$
|
1,539
|
|
Net loss per common share-Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
Net loss per common share-Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
Weighted-average number of common shares-Basic
|
|
|
119,523,867
|
|
|
|
119,291,974
|
|
Weighted-average number of common shares-Diluted
|
|
|
119,523,867
|
|
|
|
119,291,974
|
|
Dividends declared per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
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, 2016
|
|
|
119,515,894
|
|
|
$
|
1,195
|
|
|
$
|
910,167
|
|
|
$
|
157,666
|
|
|
$
|
(52,239
|
)
|
|
$
|
1,016,789
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,683
|
)
|
|
|
|
|
|
|
(4,683
|
)
|
Equity based compensation
|
|
|
|
|
|
|
|
|
|
|
2,398
|
|
|
|
|
|
|
|
|
|
|
|
2,398
|
|
Exercise of stock options
|
|
|
12,000
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Foreign currency adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,819
|
|
|
|
3,819
|
|
Impact of foreign exchange contracts, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(611
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
119,527,894
|
|
|
$
|
1,195
|
|
|
$
|
912,629
|
|
|
$
|
152,983
|
|
|
$
|
(49,031
|
)
|
|
$
|
1,017,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,683
|
)
|
|
$
|
(394
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
20,701
|
|
|
|
20,889
|
|
Amortization of deferred financing costs and original issuance discounts
|
|
|
1,233
|
|
|
|
1,274
|
|
Provision for doubtful accounts
|
|
|
230
|
|
|
|
160
|
|
Deferred income tax expense (benefit)
|
|
|
873
|
|
|
|
(433
|
)
|
Deferred rent
|
|
|
363
|
|
|
|
1,983
|
|
Undistributed loss in unconsolidated joint venture
|
|
|
716
|
|
|
|
147
|
|
(Gain) loss on sale of assets
|
|
|
(3
|
)
|
|
|
17
|
|
Equity based compensation
|
|
|
2,398
|
|
|
|
948
|
|
Changes in operating assets and liabilities, net of effects of acquired businesses:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
20,225
|
|
|
|
17,628
|
|
Decrease (increase) in inventories
|
|
|
13,151
|
|
|
|
(6,848
|
)
|
Decrease (increase) in prepaid expenses and other current assets
|
|
|
565
|
|
|
|
(2,794
|
)
|
Decrease in accounts payable, accrued expenses and income taxes payable
|
|
|
(75,302
|
)
|
|
|
(45,233
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,533
|
)
|
|
|
(12,656
|
)
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Cash paid in connection with acquisitions, net of cash acquired
|
|
|
(62,171
|
)
|
|
|
(28,700
|
)
|
Capital expenditures
|
|
|
(11,424
|
)
|
|
|
(19,535
|
)
|
Proceeds from disposal of property and equipment
|
|
|
5
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(73,590
|
)
|
|
|
(48,235
|
)
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
Repayment of loans, notes payable and long-term obligations
|
|
|
(19,272
|
)
|
|
|
(17,652
|
)
|
Proceeds from loans, notes payable and long-term obligations
|
|
|
87,216
|
|
|
|
68,041
|
|
Excess tax benefit from stock options
|
|
|
0
|
|
|
|
52
|
|
Exercise of stock options
|
|
|
64
|
|
|
|
322
|
|
Debt issuance costs
|
|
|
0
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
68,008
|
|
|
|
50,719
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
872
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(24,243
|
)
|
|
|
(9,762
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
64,610
|
|
|
|
42,919
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,367
|
|
|
$
|
33,157
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
25,232
|
|
|
$
|
26,731
|
|
Income taxes, net of refunds
|
|
$
|
6,749
|
|
|
$
|
9,368
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
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, gifts and stationery throughout the world. The
Companys retail operations include over 900 specialty retail party supply stores (including approximately 150 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.
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, 2017. 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, 2016, as filed with the Securities and Exchange Commission on March 16, 2017.
Recently Issued Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-18,
Statement of Cash Flows: Restricted Cash. The pronouncement clarifies how entities should present changes in restricted cash 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 August 2016, the FASB issued 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 Company adopted the pronouncement during the first quarter of 2017 and such adoption did not
have a material impact on the Companys consolidated financial statements.
7
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 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 Company adopted the pronouncement during the first quarter of 2017 and such
adoption did not have a material 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. 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 and it will continue to do so through the date of adoption. The Company has decided to adopt the pronouncement through a cumulative-effect adjustment.
Note 3 Inventories
Inventories
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Finished goods
|
|
$
|
584,920
|
|
|
$
|
581,277
|
|
Raw materials
|
|
|
25,357
|
|
|
|
23,222
|
|
Work in process
|
|
|
10,487
|
|
|
|
9,369
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
620,764
|
|
|
$
|
613,868
|
|
|
|
|
|
|
|
|
|
|
Inventories are valued at the lower of cost or net realizable value. The Company principally determines the
cost of inventory using the weighted average method.
The Company estimates retail inventory 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.
Note 4
Income Taxes
The income tax benefit for the three months ended March 31, 2017 was determined based upon the Companys
estimated consolidated effective income tax rate for the year ending December 31, 2017. The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2017 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.
8
Note 5 Changes in Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Foreign
Currency
Adjustments
|
|
|
Impact of
Foreign
Exchange
Contracts,
Net of Taxes
|
|
|
Total,
Net of Taxes
|
|
Balance at December 31, 2016
|
|
$
|
(53,171
|
)
|
|
$
|
932
|
|
|
$
|
(52,239
|
)
|
Other comprehensive income (loss) before reclassifications, net of income tax
|
|
|
3,819
|
|
|
|
(287
|
)
|
|
|
3,532
|
|
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated
statement of operations and comprehensive loss, net of income tax
|
|
|
0
|
|
|
|
(324
|
)
|
|
|
(324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
3,819
|
|
|
|
(611
|
)
|
|
|
3,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
(49,352
|
)
|
|
$
|
321
|
|
|
$
|
(49,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 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 income (loss) before reclassifications, net of income tax
|
|
|
2,650
|
|
|
|
(514
|
)
|
|
|
2,136
|
|
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated
statement of operations and comprehensive income, net of income tax
|
|
|
0
|
|
|
|
(203
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
2,650
|
|
|
|
(717
|
)
|
|
|
1,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
$
|
(30,751
|
)
|
|
$
|
(106
|
)
|
|
$
|
(30,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Capital Stock
At March 31, 2017, the Companys authorized capital stock consisted of 300,000,000 shares of $0.01 par value common stock and
15,000,000 shares of $0.01 par value preferred stock.
Note 7 Segment Information
Industry Segments
The Company has two identifiable business segments. The Wholesale segment designs, manufactures, sources and distributes party goods, including
paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. 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.
9
The Companys industry segment data for the three months ended March 31, 2017 and
March 31, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
270,692
|
|
|
$
|
339,269
|
|
|
$
|
609,961
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
3,036
|
|
|
|
3,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
270,692
|
|
|
|
342,305
|
|
|
|
612,997
|
|
Eliminations
|
|
|
(135,998
|
)
|
|
|
0
|
|
|
|
(135,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
134,694
|
|
|
$
|
342,305
|
|
|
$
|
476,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
10,416
|
|
|
$
|
4,255
|
|
|
$
|
14,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
20,692
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(7,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
259,821
|
|
|
$
|
319,556
|
|
|
$
|
579,377
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
3,454
|
|
|
|
3,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
259,821
|
|
|
|
323,010
|
|
|
|
582,831
|
|
Eliminations
|
|
|
(125,091
|
)
|
|
|
0
|
|
|
|
(125,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
134,730
|
|
|
$
|
323,010
|
|
|
$
|
457,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
13,507
|
|
|
$
|
6,049
|
|
|
$
|
19,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
22,652
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
(2,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 initial public offering-related public filings. 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.
10
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
March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Foreign Exchange Contracts
|
|
(a) PP
|
|
$
|
219
|
|
|
(a) PP
|
|
$
|
697
|
|
|
(b) AE
|
|
$
|
157
|
|
|
(b) AE
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
PP = Prepaid expenses and other current assets
|
(b)
|
AE = Accrued expenses
|
The following table displays the notional amounts of the Companys
derivatives at March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
Derivative Instrument
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Foreign Exchange Contracts
|
|
$
|
20,725
|
|
|
$
|
22,502
|
|
|
|
|
|
|
|
|
|
|
11
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 March 31, 2017 that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total as of
March 31,
2017
|
|
Derivative assets
|
|
$
|
0
|
|
|
$
|
219
|
|
|
$
|
0
|
|
|
$
|
219
|
|
Derivative liabilities
|
|
|
0
|
|
|
|
157
|
|
|
|
0
|
|
|
|
157
|
|
The following table shows assets and liabilities as of December 31, 2016 that are measured at fair value
on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total as of
December 31,
2016
|
|
Derivative assets
|
|
$
|
0
|
|
|
$
|
697
|
|
|
$
|
0
|
|
|
$
|
697
|
|
Derivative liabilities
|
|
|
0
|
|
|
|
215
|
|
|
|
0
|
|
|
|
215
|
|
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. No impairment charges were recorded during the three months ended March 31, 2017 or the three months ended
March 31, 2016.
The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued expenses and other current liabilities approximated fair value at March 31, 2017 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 senior secured term loan facility (Term Loan Credit
Agreement) and its $350,000 of 6.125% senior notes (Senior Notes) are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Term Loan Credit Agreement
|
|
$
|
1,203,265
|
|
|
$
|
1,217,416
|
|
Senior Notes
|
|
|
344,750
|
|
|
|
350,651
|
|
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
March 31, 2017 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.
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 seven years and the Companys liability for the estimated purchase price of such interest was $0 at March 31, 2017. The liability
represents a Level 3 fair value measurement as it is based on unobservable inputs.
12
During March 2017, the Company acquired 85% of the common stock of Granmark, S.A. de C.V., a
Mexican manufacturer and wholesaler of party goods. See Note 13 for further discussion of the acquisition. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 15% interest over a three to five year
period and it has recorded a liability for the estimated purchase price of such interest, $2,895 at March 31, 2017. 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
March 31,
2017
|
|
|
Three Months
Ended
March 31,
2016
|
|
Net loss
|
|
$
|
(4,683
|
)
|
|
$
|
(394
|
)
|
Weighted average shares
-
Basic
|
|
|
119,523,867
|
|
|
|
119,291,974
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Diluted
|
|
|
119,523,867
|
|
|
|
119,291,974
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2017 and March 31, 2016, 4,640,205 stock options and
4,404,404 stock options, respectively, were excluded from the calculation of net loss per common share diluted as they were anti-dilutive.
Note
12 Long-Term Obligations
Long-term obligations at March 31, 2017 and December 31, 2016 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Term Loan Credit Agreement
|
|
$
|
1,203,243
|
|
|
$
|
1,205,496
|
|
Capital lease obligations
|
|
|
2,782
|
|
|
|
2,912
|
|
Senior Notes
|
|
|
344,750
|
|
|
|
344,544
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
1,550,775
|
|
|
|
1,552,952
|
|
Less: current portion
|
|
|
(13,327
|
)
|
|
|
(13,348
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, excluding current portion
|
|
$
|
1,537,448
|
|
|
$
|
1,539,604
|
|
|
|
|
|
|
|
|
|
|
13
Note 13 Acquisitions
During January 2017, the Company acquired 18 franchise stores, which are located mostly in Louisiana and Alabama, for total consideration of
approximately $15,000. The Company is in the process of finalizing purchase accounting.
During March 2017, the Company acquired 85% of
the common stock of Granmark, S.A. de C.V. (Granmark), a Mexican manufacturer and wholesaler of party goods, for total consideration of approximately $22,000 (exclusive of $5,600 of cash acquired). On the acquisition date, Granmark had
$6,456 of debt outstanding under various revolving credit facilities. The majority of the balance was repaid prior to March 31, 2017. The Company is in the process of finalizing purchase accounting. Based on the terms of the acquisition agreement,
the Company is required to acquire the remaining 15% interest over a three to five year period and it has recorded a liability for the estimated purchase price of such interest, $2,895 at March 31, 2017.
Also, during March 2017, the Company acquired an additional 18 franchise stores, which are located in North Carolina and South Carolina, for
total consideration of approximately $31,000. The Company is in the process of finalizing purchase accounting.
Note 14 Organizational
Restructuring
On March 15, 2017, the Company and its Chairman of the Board of Directors (the Board), Gerald
Rittenberg, entered into a Transition and Consulting Agreement under which Mr. Rittenbergs employment as Executive Chairman of the Company terminated effective March 31, 2017. Beginning on April 1, 2017 and continuing through
December 31, 2020, unless earlier terminated as provided for in the agreement (the Consulting Period), Mr. Rittenberg will serve on a part-time basis as
a non-employee senior
adviser to the Company. Additionally, Mr. Rittenberg will remain as Chairman of the Board through the end of his existing director term (the Companys 2018 annual meeting of shareholders) and, subsequently, he will be nominated by the
Board to serve as
a non-employee member
of such Board throughout the remainder of the Consulting Period.
Under the Transition and Consulting Agreement, Mr. Rittenberg will receive payments from April 1, 2017 through December 31,
2017 in amounts equal to his base salary had he remained employed as Executive Chairman during such period (i.e., pay at an annual rate equal to $2,090). Additionally, he will remain eligible to receive an annual bonus for full-year 2017 based on
the terms of the Companys 2017 bonus plan and the terms of his previous employment agreement (a target amount equal to 80% of his 2017 base salary). Further, during 2018, Mr. Rittenberg will receive severance payments aggregating $2,049,
which will be made in four equal quarterly installments. Finally, beginning on January 1, 2018 and for the remainder of the Consulting Period, Mr. Rittenberg will receive payments equal to $40 per month in consideration for his consulting
services.
Additionally, under the Transition and Consulting Agreement, during the Consulting Period, Mr. Rittenbergs existing
unvested stock options will remain eligible to vest in accordance with their original terms and Mr. Rittenbergs existing vested stock options will remain outstanding (also, in accordance with their original terms).
As a result of the Transition and Consulting Agreement, the Company recorded a $4,510 severance charge in general and administrative expenses
during the three months ended March 31, 2017. Such amount represents: (1) the amount that he will be paid from April 1, 2017 December 31, 2017 that is above and beyond the fair value ($40 per month) of his consulting
services during such period, $1,207, (2) his bonus target for the period from April 1, 2017 December 31, 2017, $1,254, and (3) the severance to be paid during 2018, $2,049. Throughout the Consulting Period, the Company will
record $40 per month in general and administrative expenses, such amount representing the fair value of his consulting services.
Additionally, as a result of the Transition and Consulting Agreement: (1) allowing Mr. Rittenbergs existing unvested stock
options to continue vesting (such options would have been forfeited had he left the Company) and (2) allowing his existing vested stock options to remain outstanding (had he left the Company, he would have only had 60 days to exercise vested
options), during the three months ended March 31, 2017 the Company recorded a $1,362 charge in general and administrative expenses due to the modification of such options.
Also, during the three months ended March 31, 2017, the Company recorded a $3,304 severance charge related to the restructuring of its
Retail segment. Of such amount, $2,400 was recorded in retail operating expenses and $904 was recorded in general and administrative expenses. The majority of the severance will be paid during the second quarter of 2017.
14
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 150 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. We also operate
multiple
e-commerce
sites, principally under the domain name PartyCity.com, and during the Halloween selling season we open a network of approximately 250 - 300 temporary stores under the Halloween City
banner.
In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of
decorated party supplies, with products found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers and dollar stores. Our products are available in over 100 countries with the United
Kingdom (U.K.), Germany, Australia and France among the largest end markets for our products outside of North America.
During
the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity for the purpose of designing, developing and launching an online exchange platform for party-related services. The
website will allow consumers to select, schedule and pay for various services (including entertainment, activities and food) all through a single portal.
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 net income (loss), adjusted net income (loss) per common share
diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to Financial Measures - Adjusted EBITDA, Financial
Measures - Adjusted Net Income (Loss) and Financial Measures - Adjusted Net Income (Loss) Per Common Share Diluted 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 2016, approximately 77% 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, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores, including our franchise stores, other party goods
retailers, mass merchants, independent card 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.
15
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 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 our 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.
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.
16
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 (loss) represents our net income (loss), adjusted for,
among other items, intangible asset amortization,
non-cash
purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, refinancing charges, equity based compensation
and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of
our core operating performance.
Adjusted Net Income (Loss) Per Common Share Diluted.
Adjusted net income (loss) 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.
Results of Operations
Three Months
Ended March 31, 2017 Compared To Three Months Ended March 31, 2016
The following table sets forth the Companys
operating results and operating results as a percentage of total revenues for the three months ended March 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
473,963
|
|
|
|
99.4
|
%
|
|
$
|
454,286
|
|
|
|
99.2
|
%
|
Royalties and franchise fees
|
|
|
3,036
|
|
|
|
0.6
|
|
|
|
3,454
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
476,999
|
|
|
|
100.0
|
|
|
|
457,740
|
|
|
|
100.0
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
298,719
|
|
|
|
62.6
|
|
|
|
287,767
|
|
|
|
62.9
|
|
Wholesale selling expenses
|
|
|
15,627
|
|
|
|
3.3
|
|
|
|
15,842
|
|
|
|
3.5
|
|
Retail operating expenses
|
|
|
90,730
|
|
|
|
19.0
|
|
|
|
86,709
|
|
|
|
18.9
|
|
Franchise expenses
|
|
|
3,317
|
|
|
|
0.7
|
|
|
|
3,563
|
|
|
|
0.8
|
|
General and administrative expenses
|
|
|
48,137
|
|
|
|
10.1
|
|
|
|
38,926
|
|
|
|
8.5
|
|
Art and development costs
|
|
|
5,798
|
|
|
|
1.2
|
|
|
|
5,377
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
462,328
|
|
|
|
96.9
|
|
|
|
438,184
|
|
|
|
95.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,671
|
|
|
|
3.1
|
|
|
|
19,556
|
|
|
|
4.3
|
|
Interest expense, net
|
|
|
20,692
|
|
|
|
4.3
|
|
|
|
22,652
|
|
|
|
4.9
|
|
Other expense (income), net
|
|
|
1,162
|
|
|
|
0.2
|
|
|
|
(2,978
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(7,183
|
)
|
|
|
(1.5
|
)
|
|
|
(118
|
)
|
|
|
(0.0
|
)
|
Income tax (benefit) expense
|
|
|
(2,500
|
)
|
|
|
(0.5
|
)
|
|
|
276
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,683
|
)
|
|
|
(1.0
|
)%
|
|
$
|
(394
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share Basic and Diluted
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
17
Revenues
Total revenues for the first quarter of 2017 were $477.0 million and were $19.3 million, or 4.2%, higher than the first quarter of
2016. The following table sets forth the Companys total revenues for the three months ended March 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
270,692
|
|
|
|
56.7
|
%
|
|
$
|
259,821
|
|
|
|
56.8
|
%
|
Eliminations
|
|
|
(135,998
|
)
|
|
|
(28.5
|
)%
|
|
|
(125,091
|
)
|
|
|
(27.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net wholesale
|
|
|
134,694
|
|
|
|
28.2
|
%
|
|
|
134,730
|
|
|
|
29.4
|
%
|
Retail
|
|
|
339,269
|
|
|
|
71.1
|
%
|
|
|
319,556
|
|
|
|
69.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
473,963
|
|
|
|
99.4
|
%
|
|
|
454,286
|
|
|
|
99.2
|
%
|
Royalties and franchise fees
|
|
|
3,036
|
|
|
|
0.6
|
%
|
|
|
3,454
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
476,999
|
|
|
|
100.0
|
%
|
|
$
|
457,740
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Retail net sales during the first quarter of 2017 were $339.3 million and increased $19.7 million, or 6.2%, compared to the first
quarter of 2016. Retail net sales at our Party City stores totaled $305.0 million and were $17.7 million, or 6.2%, higher than 2016 principally due to comp sales growth, franchise store acquisitions and new store growth. Additionally, a
weakening of the U.S. Dollar, in comparison to the Canadian Dollar, positively impacted our Canadian retail sales by $0.7 million. During the twelve months ended March 31, 2017, we acquired 36 franchise stores, opened 29 new stores
and closed 12 stores. Global retail
e-commerce
sales totaled $34.3 million during the first quarter of 2017 and were $2.0 million, or 6.2%, higher than during the corresponding quarter of 2016. The
North American
e-commerce
sales that are included in our Party City brand comp increased by 5.3% during the first quarter (see below for further detail). International
e-commerce
sales growth, in local currency, was offset by the impact of the strengthening of the U.S. Dollar versus the British Pound Sterling ($1 million).
Same-store sales for the Party City brand (including North American retail
e-commerce
sales) increased
by 1.7% during the first quarter of 2017, principally due to an increase in average transaction dollar size.
Excluding the impact of
e-commerce,
same-store sales increased by 1.4%, mostly due to an increase in average transaction dollar size. The increase in average transaction dollar size was principally due to the positive effect of product
mix.
The North American retail
e-commerce
sales included in our Party City brand comp increased
by 5.3% as a 9.3% increase in transaction count was partially offset by a 4.0% decrease in average transaction dollar size. The increase in
e-commerce
transaction count reflects increased traffic, as we saw
over a 3% increase in visits, coupled with slightly higher conversion levels versus the same period of last year. The decrease in average transaction dollar size principally relates to lower units, largely a reflection of lower promotional activity.
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 quarter of 2017 totaled $134.7 million and were consistent with the first quarter of
2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $63.1 million and were $7.5 million, or 10.6%, lower than during 2016. The decrease was partially due to our acquisition of 36
franchise stores during the first quarter of 2017; as post-acquisition sales to such stores (approximately $3 million during the first quarter of 2016) are now eliminated as intercompany sales. Additionally, gift product sales decreased by
approximately $1.5 million due to the continued
de-emphasis
and product-line refinement of our Grasslands Road gift business. The remainder of the variance was principally due to lower sales to our
franchise stores. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $22.7 million during the first quarter of 2017 and were $2.5 million, or 12.4%, higher than during the
corresponding quarter of 2016 primarily due to stronger Valentines Day sales, in part due to the timing of certain shipments. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries)
totaled $48.9 million and were $5.0 million, or 11.4%, higher than in 2016, despite a $2.6 million negative impact from foreign currency translation during the first quarter of 2017. Our international business growth is reflective of
a combination of acquisitions, channel expansion, increased assortment and the growing consumer participation in parties and celebrations. U.K. sales increased by approximately $2 million principally due to an expansion of our
store-in-store
strategy and increased costume sales. Additionally, sales in continental Europe increased by
18
approximately $1 million, versus the first quarter of 2016, due to strong Carnival-related sales and increased sales of metallic balloons. Acquisitions, including the addition of Granmark
S.A. de C.V. (Granmark) in March 2017, contributed approximately $3 million to sales during the quarter.
Intercompany
sales to our retail affiliates totaled $136.0 million during the first quarter of 2017 and were $10.9 million, or 8.7%, higher than during the corresponding quarter of 2016. Intercompany sales represented 50.2% of total wholesale sales
during the first quarter of 2017, compared to 48.1% during 2016. 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). 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 quarter of 2017 totaled $3.0 million and were $0.4 million lower than during the first
quarter of 2016 principally due to the acquisition of 36 franchise stores during the first quarter of 2017.
Gross Profit
The following table sets forth the Companys gross profit for the three months ended March 31, 2017 and March 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
Retail
|
|
$
|
132,581
|
|
|
|
39.1
|
%
|
|
$
|
124,026
|
|
|
|
38.8
|
%
|
Wholesale
|
|
|
42,663
|
|
|
|
31.7
|
|
|
|
42,493
|
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
175,244
|
|
|
|
37.0
|
%
|
|
$
|
166,519
|
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross profit margin on net sales at retail during the first quarter of 2017 was 39.1%. Such percentage was
30 basis points higher than during the first quarter of 2016. The benefits of increased share of shelf and reduced product costs were partially offset by higher occupancy costs. 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) increased from 75.4% during the first quarter of 2016 to 77.4% during the
first quarter of 2017.
The gross profit on net sales at wholesale during 2017 and 2016 was 31.7% and 31.5%, respectively. The increase
was principally due to the benefits associated with continued improvements in our sourcing efforts, 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 were $15.6 million during the first quarter of 2017 and $15.8 million during the corresponding quarter of
2016. A $0.4 million favorable foreign currency translation impact and cost savings associated with the reorganization of our gift sales group were principally offset by selling expenses at Granmark (acquired in March 2017) and inflationary
cost increases. Wholesale selling expenses were 11.6% and 11.8% of net wholesale sales during the first quarters of 2017 and 2016, respectively.
Retail operating expenses during the first quarter of 2017 were $90.7 million and were $4.0 million, or 4.6%, higher than during the
first quarter of 2016. The increase was largely due to $2.4 million of severance costs related to a restructuring of the Companys retail operations. Such severance and increased payroll costs at our stores (driven by the higher store
count discussed above) were partially offset by further realized savings associated with improved labor productivity and efficiency. Retail operating expenses were 26.7% and 27.1% of net retail sales during the first quarters of 2017 and 2016,
respectively.
Franchise expenses during the first quarters of 2017 and 2016 were $3.3 million and $3.6 million, respectively.
General and administrative expenses during the first quarter of 2017 totaled $48.1 million and were $9.2 million, or 23.7%,
higher than in the first quarter of 2016. In conjunction with the Transition and Consulting Agreement disclosed in Note 14 to the Companys consolidated financial statements, during the quarter, the Company recorded a $5.9 million
severance charge, $1.4 million of which related to equity-based compensation. Additionally, as part of the retail restructuring (also disclosed in Note 14), during the
19
quarter we recorded $0.9 million of severance expense for employees of our retail segment. The remainder of the variance versus the first quarter of 2016 was principally due to inflationary
cost increases. General and administrative expenses as a percentage of total revenues increased from 8.5% in 2016 to 10.1% in 2017 due to the severance.
Art and development costs were $5.8 million and $5.4 million during the first quarters of 2017 and 2016, respectively.
Interest expense, net
Interest
expense, net, totaled $20.7 million during the first quarter of 2017, compared to $22.7 million during the first quarter of 2016. The decrease principally reflects the Companys $100 million prepayment of its Term Loan Credit
Agreement in conjunction with its October 2016 refinancing. Additionally, to a lesser extent, the lower interest expense is due to the credit spread on such debt being reduced by 25 basis points at the time of the refinancing.
Other expense (income), net
For
the three months ended March 31, 2017, other expense, net, totaled $1.2 million. Losses from unconsolidated joint ventures and corporate development costs were partially offset by foreign currency transaction gains.
For the three months ended March 31, 2016, other income, net, totaled $3.0 million and principally related to foreign currency
transaction gains. The foreign currency transaction gains primarily reflected a weaker U.S. dollar at March 31, 2016, compared to December 31, 2015, and the corresponding impact on the translation of the U.S. dollar-denominated payables of
our foreign operations.
Income tax (benefit) expense
The income tax benefit for the three months ended March 31, 2017 was determined based upon the Companys estimated consolidated
effective income tax rate for the year ending December 31, 2017.
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 its 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, 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, adjusted net income and adjusted net income per common share-diluted 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 share - diluted 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;
|
20
|
|
|
although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not
reflect any cash requirements for such replacements;
|
|
|
|
non-cash
compensation is and will remain a key element of the 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 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 adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
|
Three Months Ended
March 31, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,683
|
)
|
|
$
|
(394
|
)
|
Interest expense, net
|
|
|
20,692
|
|
|
|
22,652
|
|
Income taxes
|
|
|
(2,500
|
)
|
|
|
276
|
|
Depreciation and amortization
|
|
|
20,701
|
|
|
|
20,889
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
34,210
|
|
|
|
43,423
|
|
Non-cash
purchase accounting adjustments
|
|
|
1,850
|
|
|
|
1,401
|
|
Restructuring, retention and severance (a)
|
|
|
7,814
|
|
|
|
0
|
|
Deferred rent (b)
|
|
|
363
|
|
|
|
1,983
|
|
Closed store expense (c)
|
|
|
1,367
|
|
|
|
1,420
|
|
Foreign currency gains, net
|
|
|
(537
|
)
|
|
|
(3,164
|
)
|
Equity based compensation (d)
|
|
|
2,398
|
|
|
|
948
|
|
Undistributed loss in unconsolidated joint venture
|
|
|
716
|
|
|
|
147
|
|
Corporate development (e)
|
|
|
723
|
|
|
|
266
|
|
Other
|
|
|
218
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
49,122
|
|
|
$
|
46,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
2017
|
|
|
Three Months
Ended
March 31,
2016
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(7,183
|
)
|
|
$
|
(118
|
)
|
Intangible asset amortization
|
|
|
3,713
|
|
|
|
4,145
|
|
Non-cash purchase accounting adjustments (f)
|
|
|
2,004
|
|
|
|
1,956
|
|
Amortization of deferred financing costs and original
issuance discounts
|
|
|
1,233
|
|
|
|
1,274
|
|
Restructuring, retention and severance (a)
|
|
|
7,814
|
|
|
|
0
|
|
Equity based compensation (d)
|
|
|
2,398
|
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
Adjusted income before income taxes
|
|
|
9,979
|
|
|
|
8,205
|
|
Adjusted income tax expense (g)
|
|
|
3,928
|
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
6,051
|
|
|
$
|
4,759
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per common share diluted
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares-diluted
|
|
|
120,862,319
|
|
|
|
120,141,598
|
|
(a)
|
During the first quarter of 2017, the Company recorded restructuring charges. See Note 14 for further discussion. This amount excludes a $1,362 stock option modification charge for Gerald Rittenberg, which is included
in Equity based compensation in this table.
|
21
(b)
|
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.
|
(c)
|
Charges incurred related to closing unprofitable stores.
|
(d)
|
The first quarter of 2017 includes a $1,362 stock option modification charge for Gerald Rittenberg. See Note 14 for further discussion.
|
(e)
|
Represents third-party costs related to acquisitions (principally legal expenses).
|
(f)
|
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.
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(g)
|
Represents income tax expense/benefit after excluding the specific tax impacts for each of the
pre-tax
adjustments. The tax impacts for each of the adjustments were determined by
applying to the
pre-tax
adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
|
Liquidity
During 2015, the Company
replaced its then-existing debt with 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.
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 used in
operating activities totaled $19.5 million and $12.7 million during the three months ended March 31, 2017 and 2016, respectively. Net cash flows provided by operating activities before changes in operating assets and liabilities were
$21.8 million during the first three months of 2017, compared to $24.6 million during 2016. Changes in operating assets and liabilities during the first three months of 2017 and 2016 resulted in the use of cash of $41.3 million and
$37.3 million, respectively, principally due to the payment of Halloween-related payables.
Net cash used in investing activities
totaled $73.6 million during the three months ended March 31, 2017, as compared to $48.2 million during the three months ended March 31, 2016. Investing activities during 2017 included $62.2 million paid in connection with
acquisitions, principally related to franchise stores and Granmark (see Note 13 to the consolidated financial statements for further detail). Capital expenditures during the three months ended March 31, 2017 and 2016 were $11.4 million and
$19.5 million, respectively. Retail capital expenditures totaled $6.3 million during 2017 and principally related to store conversions and information technology-related expenditures. Wholesale capital expenditures during 2017 totaled
$5.1 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 $68.0 million during the three months ended March 31, 2017, as compared to
$50.7 million during the corresponding period of 2016. Borrowings were higher during 2017 principally due to the acquisitions.
At
March 31, 2017, the Company had approximately $299 million of availability under its ABL Facility, after considering borrowing base restrictions.
22
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, 2016 as previously disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2016.
Off Balance Sheet Arrangements
We had no
off balance sheet arrangements during the three months ended March 31, 2017 and the year ended December 31, 2016.
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, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors
result in slightly higher accounts receivable balances during the 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 16, 2017. 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;
|
|
|
|
unexpected or unfavorable consumer responses to our promotional or merchandising programs
|
|
|
|
failure to comply with existing or future laws relating to our marketing programs,
e-commerce
initiatives and the use of consumer information
|
|
|
|
disruption to the transportation system or increases in transportation costs;
|
23
|
|
|
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;
|
|
|
|
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 16, 2017.
|
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.