All other schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Capital lease obligations of $1,623, $223, and $1,474 were incurred during the years ended December 31, 2016, December 31, 2015,
and December 31, 2014, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
Note 1 Organization, Description of Business and Basis of Presentation
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
operations include over 900 specialty retail party supply stores (including 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 also 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 Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries and controlled entities. All
intercompany balances and transactions have been eliminated.
The Companys 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 their 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 consolidated financial statements of the Company combine the Fiscal Year and Fiscal Quarters of the Companys retail
operations with the calendar year and calendar quarters of the Companys wholesale operations, as the differences are not significant. The Companys consolidated financial statements for the year ended December 31, 2014 include the
results of its retail operations for the 53-week Fiscal Year ended January 3, 2015.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management periodically evaluates estimates
used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.
Cash Equivalents
Highly liquid
investments with a maturity of three months or less when purchased are considered to be cash equivalents. All credit card transactions that process in less than seven days are classified as cash and cash equivalents.
Inventories
Inventories are
valued at the lower of cost or market.
69
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The Company principally determines the cost of inventory using the weighted average method.
The Company estimates retail inventory shortage for the period between physical inventory dates on a store-by-store basis. Inventory
shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Companys customers to
make required payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including consideration of the Companys history of receivable write-offs, the level of past due accounts and the
economic status of the Companys customers. In an effort to identify adverse trends relative to customer economic status, the Company assesses the financial health of the markets it operates in and performs periodic credit evaluations of its
customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance
for doubtful accounts and occur only after all collection efforts have been exhausted. At December 31, 2016 and December 31, 2015, the allowance for doubtful accounts was $2,683 and $2,343, respectively.
Long-Lived and Intangible Assets (including Goodwill)
Property, plant and equipment are stated at cost. Equipment under capital leases are stated at the present value of the minimum lease payments
at the inception of the lease. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the
estimated useful life of the asset.
The Company reviews the recoverability of its finite long-lived assets, including finite-lived
intangible assets, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, the Company evaluates long-lived assets other than goodwill based upon the
lowest level of independent cash flows ascertainable to evaluate impairment. If the sum of the undiscounted future cash flows expected over the remaining asset life is less than the carrying value of the assets, the Company may recognize an
impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, the Company performs its cash
flow analysis on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis.
Goodwill represents the excess of the purchase price of acquired companies over the estimated fair value of the net assets acquired. Goodwill
and other intangibles with indefinite lives are not amortized, but are reviewed for impairment annually or more frequently if certain indicators arise.
The Company evaluates the goodwill associated with its acquisitions, and other intangibles with indefinite lives, for impairment as of the
first day of its fourth quarter based on current and projected performance. For purposes of testing goodwill for impairment, reporting units are determined by identifying individual components within the Companys organization which constitute
a business for which discrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they
70
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
have similar economic characteristics. Based on this evaluation, the Company has determined that its operating segments, wholesale and retail, represent reporting units for the purposes of its
goodwill impairment test.
If it is concluded that it is more likely than not that the Companys goodwill is impaired, the Company
estimates the fair value of each reporting unit using a combination of a market approach and an income approach. If the carrying amount of a reporting unit exceeds its fair value, the excess, if any, of the fair value of the reporting unit over
amounts allocable to the units other assets and liabilities is the implied fair value of goodwill. If the carrying amount of a reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss will be
recognized in an amount equal to that excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties.
Deferred Financing Costs
Deferred
financing costs are netted against amounts outstanding under the related debt instruments. They are amortized to interest expense over the lives of the instruments using the effective interest method.
Deferred Rent and Rental Expenses
The Company leases its retail stores under operating leases that generally have initial terms of ten years, with two five year renewal options.
The Companys leases may have early cancellation clauses, which permit the lease to be terminated if certain sales levels are not met in specific periods, and may provide for the payment of contingent rent based on a percentage of the
stores net sales. The Companys lease agreements generally have defined escalating rent provisions, which are reported as a deferred rent liability and expensed on a straight-line basis over the term of the related lease, commencing with
the date of possession. In addition, the Company may receive cash allowances from its landlords on certain properties, which are reported as deferred rent and amortized to rent expense over the term of the lease, also commencing with the date of
possession. Retails deferred rent liability at December 31, 2016 and 2015 was $68,857 and $49,826, respectively.
Investments
The Company has an investment in Convergram Mexico, S. De R.L. De C.V., a joint venture distributing metallic balloons,
principally in Mexico and Latin America. The Company accounts for its 49.9% investment in the joint venture using the equity method.
Additionally, the Company has an investment in PD Retail Group Limited, a joint venture operating party goods stores in the United Kingdom
(U.K.). The Company accounts for its 50% investment using the equity method.
The Companys investments in the joint
ventures are included in other assets on the consolidated balance sheet and the results of the joint ventures operations are included in other expense (income) in the consolidated statement of income and comprehensive income (loss) (see Note
10).
Insurance Accruals
The
Company maintains certain self-insured workers compensation and general liability insurance plans. The Company estimates the required liability for claims under such plans based upon various assumptions, which include, but are not limited to,
historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon changes in claims
71
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity).
Revenue Recognition
The
Companys terms of sale to retailers and other distributors for substantially all of its sales is free-on-board (F.O.B.) shipping point and, accordingly, title and the risks and rewards of ownership are transferred to the customer,
and revenue is recognized, when goods are shipped. The Company estimates reductions to revenues for volume-based rebate programs at the time sales are recognized. Wholesale sales returns are not significant as, generally, we only accept the return
of goods that were shipped to retailers in error. Revenue from retail store operations is recognized at the point of sale. Retail e-commerce sales are recognized on a F.O.B destination basis. The Company estimates future retail sales returns and
records a provision in the period that the related sales are recorded based on historical information. Retail sales are reported net of taxes collected.
Franchise fee revenue is recognized upon the completion of the Companys performance requirements and the opening of the franchise store.
In addition to the initial franchise fee, the Company also recognizes royalty fees generally ranging from 4% to 6% of net sales and advertising fund fees ranging from 1% to 2.25% of net sales each based upon the franchised stores reported
gross retail sales. Additionally, the terms of the Companys franchise agreements also provide for payments to franchisees based on e-commerce sales originating from specified areas relating to the franchisees contractual territory. The
amounts paid by the Company vary based on several factors, including the profitability of the Companys e-commerce sales, and are expensed at the time of sale.
Revenues, and the related profit, on sales from the Companys wholesale operations to its retail operations are eliminated in
consolidation.
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 the Companys manufacturing and distribution facilities, distribution costs and outbound freight to transfer goods to the
Companys 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 the Companys 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 (i.e., procurement,
handling and distribution costs) associated with the Companys e-commerce business.
Retail Operating Expenses
Retail operating expenses include the costs and expenses associated with the operation of the Companys retail stores, with the exception
of occupancy costs included in cost of sales. Retail operating expenses principally consist of employee compensation and benefits, advertising, supplies expense and credit card and banking fees.
Shipping and Handling
Outbound
shipping costs billed to customers are included in net sales. The costs of shipping and handling incurred by the Company are included in cost of sales.
72
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Restructuring and Store Closure Costs
The Company records estimated store closure costs, estimated lease commitment costs (net of estimated sublease income) and other miscellaneous
store closing costs when the liability is incurred.
Product Royalty Agreements
The Company enters into product royalty agreements that allow the Company to use licensed designs on certain of its products. These contracts
require the Company to pay royalties, generally based on the sales of such product, and may require guaranteed minimum royalties, a portion of which may be paid in advance. The Company matches royalty expense with revenue by recording royalties at
the time of sale, at the greater of the contractual rate or an effective rate calculated based on the guaranteed minimum royalty and the Companys estimate of sales during the contract period. If a portion of the guaranteed minimum royalty is
determined to be unrecoverable, the unrecoverable portion is charged to expense at that time. Guaranteed minimum royalties paid in advance are recorded in the consolidated balance sheets in either prepaid expenses and other current assets or other
assets, depending on the nature of the royalties.
Catalog Costs
The Company expenses costs associated with the production of catalogs when incurred.
Advertising
Advertising costs are
expensed as incurred. Retail advertising expenses for the years ended December 31, 2016, December 31, 2015, and December 31, 2014 were $63,528, $62,495, and $64,816, respectively.
Art and Development Costs
Art and
development costs are primarily internal costs that are not easily associated with specific designs, some of which may not reach commercial production. Accordingly, the Company expenses these costs as incurred.
Derivative Financial Instruments
Accounting Standards Codification (ASC) Topic 815, Accounting for Derivative Instruments and Hedging Activities,
requires that all derivative financial instruments be recognized on the balance sheet at fair value and establishes criteria for both the designation and effectiveness of hedging activities. The Company uses derivatives in the management of interest
rate and foreign currency exposure. ASC Topic 815 requires the Company to formally document the assets, liabilities or other transactions the Company designates as hedged items, the risk being hedged and the relationship between the hedged items and
the hedging instruments. The Company must measure the effectiveness of the hedging relationship at the inception of the hedge and on an on-going basis.
If derivative financial instruments qualify as fair value hedges, the gain or loss on the instrument and the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in net income during the period of the change in fair values. For derivative financial instruments that qualify as cash flow hedges (
i.e
., hedging the exposure to variability in
expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into net income in the same
period or periods during which the hedged
73
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
transaction affects earnings. The ineffective portion of a cash flow hedge, if any, is determined based on the dollar-offset method (
i.e
., the gain or loss on the derivative financial
instrument in excess of the cumulative change in the present value of future cash flows of the hedged item) and is recognized in net income during the period of change. As long as hedge effectiveness is maintained, interest rate swap arrangements
and foreign currency exchange agreements qualify for hedge accounting as cash flow hedges (see Note 18).
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and
liabilities (and operating loss and tax credit carryforwards) applying enacted statutory tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the
judgment of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based
Compensation
Accounting for stock-based compensation requires measurement of compensation cost for all stock-based awards at fair
value on the date of grant and recognition of compensation expense over the service period for awards expected to vest.
Accumulated Other
Comprehensive Loss
Accumulated other comprehensive loss consists of the Companys foreign currency adjustments and the impact
of interest rate swap and foreign exchange contracts that qualify as hedges (see Notes 18 and 19).
Foreign Currency Transactions and
Translation
The functional currencies of the Companys foreign operations are the local currencies in which they operate.
Foreign currency exchange gains or losses resulting from receivables or payables in currencies other than the functional currencies generally are credited or charged to operations. The balance sheets of foreign subsidiaries are translated into
U.S. dollars at the exchange rates in effect on the balance sheet date. The results of operations of foreign subsidiaries are translated into U.S. dollars at the average exchange rates effective for the periods presented. The differences
from historical exchange rates are recorded as comprehensive income (loss) and are included as a component of accumulated other comprehensive loss.
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
74
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
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 per share
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Net income attributable to Party City Holdco Inc.:
|
|
$
|
117,477
|
|
|
$
|
10,459
|
|
|
$
|
56,123
|
|
Weighted average shares Basic:
|
|
|
119,381,842
|
|
|
|
111,917,168
|
|
|
|
93,996,355
|
|
Effect of dilutive stock options:
|
|
|
987,830
|
|
|
|
1,026,639
|
|
|
|
447,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares Diluted:
|
|
|
120,369,672
|
|
|
|
112,943,807
|
|
|
|
94,444,137
|
|
|
|
|
|
Net income per common share Basic:
|
|
$
|
0.98
|
|
|
$
|
0.09
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share Diluted:
|
|
$
|
0.98
|
|
|
$
|
0.09
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All earnings per share amounts, and the number of shares outstanding, have been retroactively adjusted to give
effect to a 2,800-for-1 split of the Companys common stock, which was effected on April 2, 2015.
During the years ended
December 31, 2016, December 31, 2015 and December 31, 2014, 2,371,876 stock options, 1,991,965 stock options and 0 stock options, respectively, were excluded from the calculations of net income per common share diluted as
they were anti-dilutive.
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 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.
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. See notes 8 and 14 for detail of the Companys leases.
75
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
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. 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; as well as the alternatives for the method of adoption. The Company currently anticipates adopting the
pronouncement through a cumulative-effect adjustment; although this is subject to the completion of its analysis of the standard. The Company will continue its evaluation of ASU 2014-09 through the date of adoption.
76
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Note 3 Inventories, Net
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished goods
|
|
$
|
581,277
|
|
|
$
|
532,606
|
|
Raw materials
|
|
|
23,222
|
|
|
|
21,278
|
|
Work in process
|
|
|
9,369
|
|
|
|
10,375
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
613,868
|
|
|
$
|
564,259
|
|
|
|
|
|
|
|
|
|
|
Note 4 Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Useful lives
|
|
Machinery and equipment
|
|
$
|
157,170
|
|
|
$
|
135,004
|
|
|
|
3-15 years
|
|
Buildings
|
|
|
67,851
|
|
|
|
67,727
|
|
|
|
40 years
|
|
Data processing
|
|
|
49,688
|
|
|
|
41,674
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
|
109,218
|
|
|
|
91,067
|
|
|
|
1-10 years
|
|
Furniture and fixtures
|
|
|
163,539
|
|
|
|
141,089
|
|
|
|
5-10 years
|
|
Land
|
|
|
10,450
|
|
|
|
9,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
557,916
|
|
|
|
485,855
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(265,012
|
)
|
|
|
(213,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
292,904
|
|
|
$
|
272,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property, plant and equipment, including assets under capital
leases, was $66,383, $61,630, and $60,695, for the years ended December 31, 2016, December 31, 2015, and December 31, 2014, respectively.
Note 5 Acquisitions
During January 2016, the Company acquired 19 franchise stores located in Arizona and New Mexico for total consideration of approximately
$26,500. The following summarizes the fair values of the major classes of assets acquired and liabilities assumed: inventories of $8,484, property, plant and equipment of $765, a reacquired right intangible asset in the amount of $5,200 and a
liability in the amount of $500 due to leases that are unfavorable when compared to market rates. The allocation of the purchase price is based on the Companys estimate of the fair value of the assets acquired and liabilities assumed.
Goodwill, which is tax-deductible, arose due to numerous factors, including the wholesale profit generated via the sale of product from the Companys wholesale operations through the 19 stores. Goodwill also arose due to the value to the
Company of customers knowing that there are party stores in the locations (when the Company opens a new store, sales are initially lower than those of mature stores and increase over time), the Companys ability to run the stores more
efficiently than the franchisee based on the Companys experience with its approximately 700 corporate-owned stores and the assembled workforce at the 19 stores.
77
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Additionally, during March 2016, the Company acquired Festival S.A. (Festival), a
manufacturer of costumes and accessories, for approximately $5,500. The following summarizes the fair values of the major classes of assets acquired and liabilities assumed: inventories of $2,990, accounts receivable of $591, property, plant and
equipment of $338 and current liabilities of $1,994. $3,572 has been recorded as goodwill. The allocation of the purchase price is based on the Companys estimate of the fair value of the assets acquired and liabilities assumed. Goodwill, which
is not tax-deductible, arose due to synergies expected to be generated by selling the manufactured costumes in the Companys approximately 700 corporate-owned Party City stores, in its temporary Halloween City stores and via its e-commerce
sites.
During August 2015, the Company acquired 75% of the operations of Accurate Custom Injection Molding Inc. (ACIM) for
total consideration of approximately $10,000. 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 $0 at December 31, 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
U.K.-based
entity with costume design and sourcing capabilities, for total consideration of approximately $10,500, net of cash acquired. The purchase price included contingent consideration based on the sales
of the acquired business through the end of 2016. At December 31, 2016, the liability for such contingency, which will be paid to the seller during 2017, was $1,077. The liability represents a Level 3 fair value measurement as it is based on
unobservable inputs.
Pro forma financial information has not been presented because the impact of the acquisitions individually, and in
the aggregate, is not material to the Companys consolidated financial results.
Goodwill Changes by Reporting Segment
For the years ended December 31, 2016 and December 31, 2015 goodwill changes, by reporting segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
Wholesale segment:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
494,299
|
|
|
$
|
492,096
|
|
Travis acquisition
|
|
|
0
|
|
|
|
7,489
|
|
ACIM acquisition
|
|
|
0
|
|
|
|
548
|
|
Festival acquisition
|
|
|
3,572
|
|
|
|
0
|
|
Foreign currency impact
|
|
|
(6,012
|
)
|
|
|
(5,834
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
491,859
|
|
|
|
494,299
|
|
|
|
|
Retail segment:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
1,068,216
|
|
|
|
1,065,154
|
|
Store acquisitions
|
|
|
12,869
|
|
|
|
4,028
|
|
Foreign currency impact
|
|
|
(376
|
)
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
1,080,709
|
|
|
|
1,068,216
|
|
|
|
|
|
|
|
|
|
|
Total ending balance, both segments
|
|
$
|
1,572,568
|
|
|
$
|
1,562,515
|
|
|
|
|
|
|
|
|
|
|
78
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Note 6 Intangible Assets
The Company had the following other identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
Useful lives
|
|
Retail franchise licenses
|
|
$
|
72,200
|
|
|
$
|
27,600
|
|
|
$
|
44,600
|
|
|
|
4-19 years
|
|
Customer lists and relationships
|
|
|
56,385
|
|
|
|
30,796
|
|
|
|
25,589
|
|
|
|
20 years
|
|
Copyrights and designs
|
|
|
29,030
|
|
|
|
24,454
|
|
|
|
4,576
|
|
|
|
5-7 years
|
|
Leasehold interests
|
|
|
15,556
|
|
|
|
14,140
|
|
|
|
1,416
|
|
|
|
1-11 years
|
|
Design licenses
|
|
|
2,469
|
|
|
|
2,469
|
|
|
|
0
|
|
|
|
1-4 years
|
|
Non-compete agreements
|
|
|
500
|
|
|
|
100
|
|
|
|
400
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,140
|
|
|
$
|
99,559
|
|
|
$
|
76,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
Useful lives
|
|
Retail franchise licenses
|
|
$
|
67,000
|
|
|
$
|
20,900
|
|
|
$
|
46,100
|
|
|
|
19 years
|
|
Customer lists and relationships
|
|
|
56,459
|
|
|
|
25,592
|
|
|
|
30,867
|
|
|
|
20 years
|
|
Copyrights and designs
|
|
|
29,030
|
|
|
|
20,352
|
|
|
|
8,678
|
|
|
|
5-7 years
|
|
Leasehold interests
|
|
|
16,045
|
|
|
|
13,174
|
|
|
|
2,871
|
|
|
|
1-11 years
|
|
Design licenses
|
|
|
2,469
|
|
|
|
2,328
|
|
|
|
141
|
|
|
|
1-4 years
|
|
Non-compete agreements
|
|
|
500
|
|
|
|
0
|
|
|
|
500
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,503
|
|
|
$
|
82,346
|
|
|
$
|
89,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is amortizing the majority of its intangible assets utilizing accelerated patterns based on the
discounted cash flows that were used to value such assets.
The amortization expense for finite-lived intangible assets for the years
ended December 31, 2016, December 31, 2015, and December 31, 2014 was $17,247, $18,885, and $22,195, respectively. Estimated amortization expense for each of the next five years will be approximately $14,230, $10,883, $9,799,
$7,363, and $6,512, respectively.
In addition to the Companys finite-lived intangible assets, the Company has recorded
indefinite-lived intangible assets for the Party City trade name, the Amscan trade name, the Halloween City trade name, the partycity.com domain name and the partydelights.co.uk domain name.
Note 7 Loans and Notes Payable
ABL Facility
The Company has a
$540,000 asset-based revolving credit facility (with a seasonal increase to $640,000 during a certain period of each calendar year) (ABL Facility), which matures on August 19, 2020. It provides for (a) revolving loans, subject
to a borrowing base described below, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50,000.
79
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Under the ABL Facility, the borrowing base at any time equals (a) a percentage of
eligible trade receivables, plus (b) a percentage of eligible inventory, plus (c) a percentage of eligible credit card receivables, less (d) certain reserves.
The ABL Facility generally provides for two pricing options: (i) an alternate base interest rate (ABR) equal to the greater
of (a) the prime rate, (b) the federal funds rate plus 0.5% or (c) the LIBOR rate plus 1%, in each case, on the date of such borrowing or (ii) a LIBOR based interest rate, in each case plus an applicable margin. The applicable
margin ranges from 0.25% to 0.50% with respect to ABR borrowings and from 1.25% to 1.50% with respect to LIBOR borrowings.
In addition to
paying interest on outstanding principal, the Company is required to pay a commitment fee of 0.25% per annum in respect of unutilized commitments. The Company must also pay customary letter of credit fees.
All obligations under the ABL Facility are jointly and severally guaranteed by PC Intermediate, PCHI and each existing and future domestic
subsidiary of PCHI. PCHI and each guarantor has secured its obligations, subject to certain exceptions and limitations, including obligations under its guaranty, as applicable, by a first-priority lien on its accounts receivable, inventory, cash and
certain related assets and a second-priority lien on substantially all of its other assets.
The facility contains negative covenants
that, among other things and subject to certain exceptions, restrict the ability of PCHI to:
|
|
|
incur additional indebtedness;
|
|
|
|
pay dividends on capital stock or redeem, repurchase or retire capital stock;
|
|
|
|
make certain investments, loans, advances and acquisitions;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
transfer or sell certain assets.
|
In addition, PCHI must comply with a fixed charge coverage
ratio if excess availability under the ABL Facility on any day is less than the greater of: (a) 10% of the lesser of the aggregate commitments and the then borrowing base under the ABL Facility and (b) $40,000. The fixed charge coverage
ratio is the ratio of (i) Adjusted EBITDA (as defined in the facility) minus maintenance-related capital expenditures (as defined in the facility) to (ii) fixed charges (as defined in the facility).
The ABL Facility also contains certain customary affirmative covenants and events of default.
In connection with entering into the ABL Facility, the Company incurred and capitalized third-party costs. All capitalized costs are being
amortized over the life of the ABL Facility and are included in loans and notes payable in the Companys consolidated balance sheet. The balance of related unamortized financing costs at December 31, 2016 was $3,049.
Borrowings under the ABL Facility totaled $122,025 at December 31, 2016. The weighted average interest rate for such borrowings was 2.49%
at December 31, 2016. Outstanding standby letters of credit totaled $26,681 at December 31, 2016 and, after considering borrowing base restrictions, at December 31, 2016 PCHI had $368,484 of available borrowing capacity under the
terms of the facility.
80
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Other Credit Agreements
The Companys subsidiaries have also entered into several foreign asset-based and overdraft credit facilities that provide the Company
with additional borrowing capacity. At December 31, 2016 and December 31, 2015, there were $1,162 and $0 borrowings outstanding under the foreign facilities, respectively. The facilities contain customary affirmative and negative
covenants.
Note 8 Long-Term Obligations
Long-term obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Senior secured term loan facility (Term Loan Credit Agreement) (a)
|
|
$
|
1,205,496
|
|
|
$
|
1,314,538
|
|
6.125% senior notes (Senior Notes) (b)
|
|
|
344,544
|
|
|
|
343,721
|
|
Capital lease obligations (c)
|
|
|
2,912
|
|
|
|
2,414
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
1,552,952
|
|
|
|
1,660,673
|
|
Less: current portion
|
|
|
(13,348
|
)
|
|
|
(14,552
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, excluding current portion
|
|
$
|
1,539,604
|
|
|
$
|
1,646,121
|
|
|
|
|
|
|
|
|
|
|
Term Loan Credit Agreement
(a) During October 2016, the Company amended its Term Loan Credit Agreement. In conjunction with the amendment, the Company borrowed $100,000
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. 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%.
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 (3.00% for LIBOR borrowings and 2.00% for ABR borrowings). 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.
As the Term Loan Credit Agreement is a loan syndication, the Company assessed whether the refinancing should be accounted for as an
extinguishment on a creditor-by-creditor basis and wrote-off $394 of existing deferred financing costs, a $217 capitalized original issue discount and $122 of capitalized call premium. The write-offs were recorded in other expense in the
Companys consolidated statement of income and comprehensive income. The remaining deferred financing costs, original issue discount and capitalized call premium will continue to be amortized over the life of the Term Loan Credit Agreement,
using the effective interest method. Additionally, in conjunction with the amendment, the Company incurred $757 of banker and legal fees, $725 of which was recorded in other expense. The rest of the costs are being amortized over the life of
81
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
the debt. The write-offs of the deferred financing costs, original issuance discount and call premium were included in amortization of deferred financing costs and original issuance discount in
the Companys consolidated statement of cash flows.
Outstanding term loans are subject to mandatory prepayment, subject to certain
exceptions, with (i) 100% of net proceeds above a threshold amount of certain asset sales/insurance proceeds, subject to reinvestment rights and certain other exceptions, (ii) 100% of the net cash proceeds of any incurrence of debt
other than debt permitted under the Term Loan Credit Agreement, (iii) 50% of Excess Cash Flow, as defined in the agreement, if any (reduced to 25% if PCHIs first lien leverage ratio (as defined in the agreement) is less than 3.50 to 1.00,
but greater than 2.50 to 1.00, and 0% if PCHIs first lien leverage ratio is less than 2.50 to 1.00).
The term loans under the Term
Loan Credit Agreement mature on August 19, 2022. The Company is required to repay installments on the loans in quarterly principal amounts of 0.25%, with the remaining amount payable on the maturity date.
All obligations under the agreement are jointly and severally guaranteed by PC Intermediate, PCHI and each existing and future domestic
subsidiary of PCHI. PCHI and each guarantor has secured its obligations, subject to certain exceptions and limitations, by a first-priority lien on substantially all of its assets (other than accounts receivable, inventory, cash and certain related
assets), including a pledge of all of the capital stock held by PC Intermediate, PCHI and each guarantor, and a second-priority lien on its accounts receivable, inventory, cash and certain related assets.
The Term Loan Credit Agreement contains certain customary affirmative covenants and events of default. Additionally, it contains negative
covenants which, among other things and subject to certain exceptions, restrict the ability of PCHI to:
|
|
|
incur additional indebtedness;
|
|
|
|
pay dividends on capital stock or redeem, repurchase or retire capital stock;
|
|
|
|
make certain investments, loans, advances and acquisitions;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
transfer or sell certain assets.
|
At December 31, 2016, the principal amount of term
loans outstanding under the Term Loan Credit Agreement was $1,223,534. Such amount is recorded net of original issue discounts, capitalized call premiums and deferred financing costs on the Companys consolidated balance sheet. At
December 31, 2016, original issue discounts, capitalized call premiums and deferred financing costs totaled $18,038. At December 31, 2016, all outstanding borrowings were based on LIBOR and were at a weighted average interest rate of
4.21%.
Senior Notes
(b) The
Senior Notes mature on August 15, 2023. Interest on the notes is payable semi-annually in arrears on February 15 and August 15 of each year. Interest accrues at 6.125%.
The notes are guaranteed, jointly and severally, on a senior basis by each of PCHIs existing and future wholly-owned domestic
subsidiaries. The Senior Notes and the guarantees are general unsecured senior obligations and are effectively subordinated to all other secured debt to the extent of the assets securing such secured debt.
82
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The indenture governing the Senior Notes contains certain covenants limiting, among other
things and subject to certain exceptions, PCHIs ability to:
|
|
|
incur additional indebtedness or issue certain disqualified stock and preferred stock;
|
|
|
|
pay dividends or distributions, redeem or repurchase equity;
|
|
|
|
prepay subordinated debt or make certain investments;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
consolidate, merge or transfer all or substantially all of PCHIs assets;
|
|
|
|
transfer or sell certain assets.
|
The indenture governing the notes also contains certain
customary affirmative covenants and events of default.
On or after August 15, 2018, the Company may redeem the Senior Notes, in
whole or in part, at the following (expressed as a percentage of the principal amount to be redeemed):
|
|
|
|
|
Twelve-month period beginning on August 15,
|
|
Percentage
|
|
2018
|
|
|
103.063
|
%
|
2019
|
|
|
101.531
|
%
|
2020 and thereafter
|
|
|
100.000
|
%
|
In addition, the Company may redeem up to 40% of the aggregate principal amount outstanding on or before
August 15, 2018 with the net cash proceeds from certain equity offerings at a redemption price of 106.125% of the principal amount. The Company may also redeem some or all of the Senior Notes before August 15, 2018 at a redemption price of
100% of the principal amount plus a premium that is defined in the indenture.
Also, if the Company experiences certain types of change in
control, as defined, the Company may be required to offer to repurchase the Senior Notes at 101% of their principal amount.
In connection
with issuing the Senior Notes, the Company incurred and capitalized third-party costs. Capitalized costs are being amortized over the life of the debt and are included in long-term obligations, excluding current portion, in the Companys
consolidated balance sheet. At December 31, 2016, $5,456 of costs were capitalized.
Other Indebtedness
(c) Additionally, the Company has entered into various capital leases for machinery and equipment. At December 31, 2016 and
December 31, 2015 the balances of such leases were $2,912 and $2,414, respectively.
Subject to certain exceptions, PCHI may not make
certain payments, including the payment of dividends to its shareholders (restricted payments), unless certain conditions are met under the terms of the indenture governing the Senior Notes, the ABL Facility and the Term Loan Credit
Agreement. As of December 31, 2016, the most restrictive of these conditions existed in the indenture for the Senior Notes and in the Term Loan Credit
83
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Agreement, which both limit restricted payments based on PCHIs consolidated net income and leverage ratios. As of December 31, 2016, PCHI had $301,494 of capacity under the two debt
instruments to make restricted payments. PCHIs parent companies, PC Intermediate, PC Nextco and Party City Holdco, have no assets or operations other than their investments in their subsidiaries and income from those subsidiaries.
At December 31, 2016, maturities of long-term obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
Obligations
|
|
|
Capital Lease
Obligations
|
|
|
Totals
|
|
2017
|
|
$
|
12,266
|
|
|
$
|
1,082
|
|
|
$
|
13,348
|
|
2018
|
|
|
12,266
|
|
|
|
560
|
|
|
|
12,826
|
|
2019
|
|
|
12,266
|
|
|
|
441
|
|
|
|
12,707
|
|
2020
|
|
|
12,266
|
|
|
|
291
|
|
|
|
12,557
|
|
2021
|
|
|
12,266
|
|
|
|
282
|
|
|
|
12,548
|
|
Thereafter
|
|
|
1,512,204
|
|
|
|
256
|
|
|
|
1,512,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
1,573,534
|
|
|
$
|
2,912
|
|
|
$
|
1,576,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9 Capital Stock
At December 31, 2016, 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.
During April 2015, the Company consummated an initial public offering of
its common stock and sold 25,156,250 shares. The net proceeds of the offering were used to, among other things, fully redeem $350,000 PIK Notes (Nextco Notes) and pay a management agreement termination fee to affiliates of Thomas H. Lee
Partners, L.P. (THL) and Advent International Corporation (Advent). See Notes 10 and 14 for discussion of the charges recorded by the Company in conjunction with the initial public offering.
Note 10 Other (Income) Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Other (income) expense, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed loss in unconsolidated joint ventures
|
|
$
|
314
|
|
|
$
|
562
|
|
|
$
|
1,556
|
|
Foreign currency (gains)/losses
|
|
|
(7,417
|
)
|
|
|
3,691
|
|
|
|
1,447
|
|
Debt refinancings (a)
|
|
|
1,458
|
|
|
|
94,607
|
|
|
|
4,396
|
|
Management agreement termination fee (b)
|
|
|
0
|
|
|
|
30,697
|
|
|
|
0
|
|
Corporate development expenses
|
|
|
3,290
|
|
|
|
1,786
|
|
|
|
700
|
|
Business interruption proceeds
|
|
|
0
|
|
|
|
0
|
|
|
|
(4,514
|
)
|
Other, net
|
|
|
345
|
|
|
|
(353
|
)
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
$
|
(2,010
|
)
|
|
$
|
130,990
|
|
|
$
|
5,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In October 2016, the Company amended the Term Loan Credit Agreement and recorded charges in other expense. See
Note 8 for further discussion. Additionally, in August 2015, the Company refinanced its debt and recorded $79,010 of charges in other expense related to call premiums, third-party costs and the
write-
|
84
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
|
off of existing deferred financing costs, original issue discounts and capitalized call premiums. Further, during April 2015, the Company consummated an initial public offering of its common
stock and the net proceeds of the offering were used to, among other things, fully redeem the Nextco Notes. The Company recorded $15,597 of charges related to the early redemption of such notes and the write-off of existing deferred financing costs
and original issue discounts.
|
(b)
|
In conjunction with the initial public offering (IPO), the Company paid a management agreement termination fee to affiliates of THL and Advent. See Note 14 for further discussion.
|
Note 11 Employee Benefit Plans
Certain subsidiaries of the Company maintain defined contribution plans for eligible employees. The plans require the subsidiaries to match
from approximately 11% to 100% of voluntary employee contributions to the plans, not to exceed a maximum amount of the employees annual salary, ranging from 5% to 6%. Expense for the plans for the years ended December 31,
2016, December 31, 2015, and December 31, 2014 totaled $5,792, $5,196, and $6,179, respectively.
Note 12 Equity
Incentive Plans
Party City Holdco has adopted the Amended and Restated 2012 Omnibus Equity Incentive Plan (the 2012 Plan)
under which it can grant incentive awards in the form of stock appreciation rights, restricted stock and common stock options to certain directors, officers, employees and consultants of Party City Holdco and its affiliates. A committee of Party
City Holdcos Board of Directors, or the Board itself in the absence of a committee, is authorized to make grants and various other decisions under the 2012 Plan. The maximum number of shares reserved under the 2012 Plan is 15,316,000 shares.
Time-based options
Party City Holdco grants time-based options to key eligible employees and outside directors. In conjunction with the options, the Company
recorded compensation expense of $3,853, $3,042, and $1,583 during the years ended December 31, 2016, December 31, 2015, and December 31, 2014, respectively.
The fair value of time-based options granted during the year ended December 31, 2016 was estimated on the grant date using a
Black-Scholes option valuation model based on the assumptions in the following table:
|
|
|
Expected dividend rate
|
|
0%
|
Risk-free interest rate
|
|
1.16% to 1.53%
|
Volatility
|
|
25.87% to 26.38%
|
Expected option term
|
|
5.5 years 6.5 years
|
The fair value of time-based options granted during the year ended December 31, 2015 was estimated on the
grant date using a Black-Scholes option valuation model based on the assumptions in the following table:
|
|
|
Expected dividend rate
|
|
0%
|
Risk-free interest rate
|
|
1.57% to 1.93%
|
Volatility
|
|
30.00%
|
Expected option term
|
|
5.5 years 6.5 years
|
85
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The fair value of time-based options granted during the year ended December 31, 2013 was
estimated on the grant date using a Black-Scholes option valuation model based on the assumptions in the following table:
|
|
|
Expected dividend rate
|
|
0%
|
Risk-free interest rate
|
|
1.03% to 2.07%
|
Volatility
|
|
35.00%
|
Expected option term
|
|
6.2 years 6.5 years
|
No time-based options were granted during the year ended December 31, 2014.
As Party City Holdcos stock only recently started trading publicly, the Company determined volatility based on the average historical
volatility of guideline companies. Additionally, as there is not sufficient historical exercise data to provide a reasonable basis for determining the expected term, the Company estimated the expected term using the simplified method.
The Company based its estimated forfeiture rate of 13.4% on historical forfeitures for time-based options that were granted by PCHI
between 2004 and 2012 as the number of options given to each of the various levels of management is principally consistent with historical grants and forfeitures are expected to be materially consistent with past experience.
Most of the time-based options that were granted during 2013 vested 20% on July 27, 2013 and vest 20% each July 27
th
thereafter. The Companys other time-based options principally vest 20% on each anniversary date. The Company records compensation expense for such options on a straight-line basis. As of
December 31, 2016, there was $10,537 of unrecognized compensation cost, which will be recognized over a weighted-average period of approximately 40 months.
Performance-based options
During 2013, Party City Holdco granted performance-based stock options to key employees and independent directors. For performance-based
options, vesting is contingent upon THL achieving specified investment returns when it sells its ownership stake in Party City Holdco. Since the sale of THLs shares cannot be assessed as probable before it occurs, no compensation expense has
been recorded for the performance-based options that have been granted. As of December 31, 2016, 3,852,801 performance-based options were outstanding. Based on a Monte Carlo simulation and the following assumptions, the options have an average
grant date fair value of $3.09 per option:
|
|
|
Expected dividend rate
|
|
0%
|
Risk-free interest rate
|
|
1.86%
|
Volatility
|
|
52.00%
|
Expected option term
|
|
5 years
|
As Party City Holdcos stock was not publicly traded when the performance-based options were granted, the
Company determined volatility based on the average historical volatility of guideline companies.
86
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The following table summarizes the changes in outstanding stock options for the years ended
December 31, 2014, December 31, 2015 and December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Average
Exercise
Price
|
|
|
Average Fair
Value of
Time-Based
Options at
Grant Date
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
Outstanding at December 31, 2013
|
|
|
7,131,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(202,720
|
)
|
|
$
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(242,480
|
)
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
6,686,400
|
|
|
|
5.33
|
|
|
|
|
|
|
$
|
40,282
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,013,764
|
|
|
|
17.97
|
|
|
$
|
6.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,600
|
)
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(176,919
|
)
|
|
|
7.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
8,517,645
|
|
|
|
8.28
|
|
|
|
|
|
|
|
39,453
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
484,950
|
|
|
|
15.78
|
|
|
|
4.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(257,520
|
)
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(283,249
|
)
|
|
|
10.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
8,461,826
|
|
|
$
|
8.74
|
|
|
|
|
|
|
$
|
46,214
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
2,053,474
|
|
|
$
|
7.71
|
|
|
|
|
|
|
$
|
13,337
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2016 (excluding performance-based options)
|
|
|
2,555,551
|
|
|
$
|
14.71
|
|
|
|
|
|
|
$
|
(1,294
|
)
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised was $2,726, $60, and $561 for the years ended December 31,
2016, December 31, 2015, and December 31, 2014, respectively. The fair value of options vested was $4,110, $1,726, and $1,769, during the years ended December 31, 2016, December 31, 2015, and December 31, 2014,
respectively.
Note 13 Income Taxes
A summary of domestic and foreign income before income taxes and including noncontrolling interest follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Domestic
|
|
$
|
152,800
|
|
|
$
|
7,180
|
|
|
$
|
67,000
|
|
Foreign
|
|
|
33,914
|
|
|
|
10,688
|
|
|
|
14,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
186,714
|
|
|
$
|
17,868
|
|
|
$
|
81,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
50,851
|
|
|
$
|
8,137
|
|
|
$
|
28,735
|
|
State
|
|
|
8,121
|
|
|
|
2,652
|
|
|
|
5,954
|
|
Foreign
|
|
|
6,864
|
|
|
|
2,798
|
|
|
|
4,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
65,836
|
|
|
|
13,587
|
|
|
|
38,969
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,290
|
|
|
|
(6,710
|
)
|
|
|
(11,522
|
)
|
State
|
|
|
(906
|
)
|
|
|
(1,086
|
)
|
|
|
(2,838
|
)
|
Foreign
|
|
|
1,017
|
|
|
|
1,618
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense (benefit)
|
|
|
3,401
|
|
|
|
(6,178
|
)
|
|
|
(13,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
69,237
|
|
|
$
|
7,409
|
|
|
$
|
25,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Deferred income tax assets and
liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory valuation
|
|
$
|
10,138
|
|
|
$
|
9,794
|
|
Allowance for doubtful accounts
|
|
|
893
|
|
|
|
678
|
|
Accrued liabilities
|
|
|
13,638
|
|
|
|
10,891
|
|
Federal tax loss carryforwards
|
|
|
2,715
|
|
|
|
3,829
|
|
State tax loss carryforwards
|
|
|
1,070
|
|
|
|
1,161
|
|
Foreign tax loss carryforwards
|
|
|
13,992
|
|
|
|
14,778
|
|
Foreign tax credit carryforwards
|
|
|
1,418
|
|
|
|
1,418
|
|
Deferred rent
|
|
|
11,816
|
|
|
|
10,955
|
|
Other
|
|
|
509
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets before valuation allowances
|
|
|
56,189
|
|
|
|
53,798
|
|
Less: valuation allowances
|
|
|
(17,331
|
)
|
|
|
(15,817
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, net
|
|
$
|
38,858
|
|
|
$
|
37,981
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
24,055
|
|
|
$
|
21,810
|
|
Intangible assets
|
|
|
218,046
|
|
|
|
218,636
|
|
Amortization of goodwill and other assets
|
|
|
61,163
|
|
|
|
61,786
|
|
Foreign earnings expected to be repatriated
|
|
|
10,954
|
|
|
|
7,178
|
|
Other
|
|
|
2,655
|
|
|
|
4,072
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
$
|
316,873
|
|
|
$
|
313,482
|
|
|
|
|
|
|
|
|
|
|
88
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
In the Companys December 31, 2016 consolidated balance sheet, $804 was included in
other assets, net and $278,819 was included in deferred income tax liabilities. At December 31, 2015, $1,166 was included in other assets, net and $276,667 was included in deferred income tax liabilities.
Management assesses the available positive and negative evidence to estimate if sufficient taxable income will be generated to realize
existing deferred tax assets. On the basis of this evaluation, a valuation allowance was recorded to reduce the total deferred tax assets to an amount that will, more-likely-than-not, be realized in the future. The valuation allowance and the net
change during the year, relates primarily to foreign net operating loss carryforwards.
As of December 31, 2016, the Company had
foreign tax-effected net operating loss carryforwards in Germany of $8,233, the U.K. of $4,609, and Australia of $824, all of which have an unlimited carryforward; as well as $326 from other foreign countries, which expire at different dates. In
addition, the U.S. Federal net operating loss carryforwards begin to expire in 2019, the U.S. state net operating loss carryforwards, expire beginning in 2018, and the foreign tax credit carryforwards, $1,418, expire beginning in 2020.
The difference between the Companys effective income tax rate and the U.S. statutory income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Tax provision at U.S. statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal income tax
|
|
|
2.5
|
|
|
|
5.7
|
|
|
|
2.5
|
|
Domestic production activities deduction
|
|
|
(1.0
|
)
|
|
|
(5.1
|
)
|
|
|
(1.9
|
)
|
Deferred tax adjustments
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
Contingent consideration adjustment
|
|
|
(0.1
|
)
|
|
|
(6.0
|
)
|
|
|
0.0
|
|
Transaction costs
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(6.9
|
)
|
Work Opportunity Tax Credit
|
|
|
(0.3
|
)
|
|
|
(3.2
|
)
|
|
|
(0.4
|
)
|
Valuation allowances
|
|
|
0.5
|
|
|
|
21.7
|
|
|
|
0.5
|
|
Foreign earnings
|
|
|
2.3
|
|
|
|
9.1
|
|
|
|
4.9
|
|
U.S. foreign rate differential
|
|
|
(2.4
|
)
|
|
|
(13.7
|
)
|
|
|
(3.4
|
)
|
Other
|
|
|
0.6
|
|
|
|
(2.0
|
)
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
37.1
|
%
|
|
|
41.5
|
%
|
|
|
31.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs:
In 2012, the Company incurred $24,564 of expenses related to the acquisition of the
Company. These expenses were capitalized for tax purposes. During 2014, the Company determined that $15,876 of these expenses qualified for amortization over time for tax purposes. The Company filed an automatic method change with its 2014 tax
return in order to deduct these expenses for tax purposes. The tax benefit of $5,918, realized over 15 years, has been reflected in the Companys 2014 consolidated statement of income and comprehensive income.
Foreign earnings
: During 2016, 2015 and 2014, the U.S. tax effect on foreign earnings which are expected to be remitted in the future
was provided without consideration of offsetting foreign tax credits due to projected future foreign source income being insufficient to utilize any available foreign tax credits.
89
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Other differences between the effective income tax rate and the federal statutory income tax
rate are composed primarily of reserves for unrecognized tax benefits, and non-deductible meals and entertainment expenses.
At
December 31, 2016, the cumulative undistributed earnings of any foreign subsidiaries whose earnings are considered permanently reinvested were approximately $26,534. No provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of these subsidiaries as such earnings have been reinvested indefinitely in the subsidiaries operations. It is not practical to calculate the potential deferred income tax impact that may arise from the distribution of
these earnings, as there is a significant amount of uncertainty with respect to determining the amount of foreign tax credits, additional local withholding tax and other indirect tax consequences at the time of such event.
The following table summarizes the activity related to the Companys gross unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Balance as of beginning of period
|
|
$
|
765
|
|
|
$
|
798
|
|
|
$
|
285
|
|
Increases related to current period tax positions
|
|
|
444
|
|
|
|
130
|
|
|
|
763
|
|
Increases related to prior period tax positions
|
|
|
339
|
|
|
|
0
|
|
|
|
0
|
|
Decrease related to settlements
|
|
|
(635
|
)
|
|
|
(92
|
)
|
|
|
(193
|
)
|
Decreases related to lapsing of statutes of limitations
|
|
|
|
|
|
|
(71
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
913
|
|
|
$
|
765
|
|
|
$
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total unrecognized tax benefits that, if recognized, would impact the Companys
effective tax rate were $913 and $765 at December 31, 2016 and 2015, respectively. As of December 31, 2016, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax
benefits will significantly increase or decrease within the next 12 months.
The Company recognizes accrued interest and penalties related
to unrecognized tax benefits in income tax expense. The Company has accrued $28 and $15 for the potential payment of interest and penalties at December 31, 2016 and 2015, respectively.
In 2016, the IRS concluded an examination of the year ended December 31, 2014 with no material changes. For U.S. state income tax
purposes, tax years 2012-2016 generally remain open, whereas for non-U.S. income tax purposes tax years 2011-2016 generally remain open.
Note 14 Commitments, Contingencies and Related Party Transactions
Lease Agreements
The Company has non-cancelable operating leases for its numerous retail store sites, as well as for its corporate offices, certain distribution
and manufacturing facilities, showrooms, and warehouse equipment that expire on various dates, principally through 2026. These leases generally contain renewal options and require the Company to pay real estate taxes, utilities and related
insurance.
90
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
At December 31, 2016, future minimum lease payments under all operating leases consisted
of the following:
|
|
|
|
|
|
|
Future Minimum
Operating Lease
Payments
|
|
2017
|
|
$
|
171,776
|
|
2018
|
|
|
150,509
|
|
2019
|
|
|
125,993
|
|
2020
|
|
|
113,371
|
|
2021
|
|
|
100,036
|
|
Thereafter
|
|
|
301,024
|
|
|
|
|
|
|
|
|
$
|
962,709
|
|
|
|
|
|
|
The future minimum lease payments included in the above table also do not include contingent rent based upon
sales volumes or other variable costs, such as maintenance, insurance and taxes.
Rent expense for the years ended December 31,
2016, December 31, 2015, and December 31, 2014 was $235,790, $225,543, and $216,572, respectively, and included immaterial amounts of rent expense related to contingent rent.
Litigation
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 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, and the complaint seeks unspecified damages and costs. On February 1, 2017, the Court issued
an opinion dismissing the complaint, and entered Judgment in favor of the defendants.
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. 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.
Additionally, the Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe
that any of these proceedings will result, individually or in the aggregate, in a material adverse effect upon its financial condition or future results of operations.
91
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Product Royalty Agreements
The Company has entered into product royalty agreements, with various licensors of copyrighted and trademarked characters and designs, which
are used on the Companys products, which require royalty payments based on sales of the Companys products, and, in some cases, include annual minimum royalties.
At December 31, 2016, the Companys commitment to pay future minimum product royalties was as follows:
|
|
|
|
|
|
|
Future Minimum
Royalty
Payments
|
|
2017
|
|
$
|
29,833
|
|
2018
|
|
|
16,199
|
|
2019
|
|
|
6,106
|
|
2020
|
|
|
5,550
|
|
2021
|
|
|
0
|
|
Thereafter
|
|
|
0
|
|
|
|
|
|
|
|
|
$
|
57,688
|
|
|
|
|
|
|
Product royalty expense for the years ended December 31, 2016, December 31, 2015, and
December 31, 2014 was $43,914, $45,710, and $42,679, respectively.
Related Party Transactions
During 2012, Party City Holdco and PCHI entered into a management agreement with THL and Advent under which THL and Advent provided advice on,
among other things, financing, operations, acquisitions and dispositions. Under the agreement, THL and Advent were paid, in aggregate, an annual management fee in the amount of the greater of $3,000 or 1.0% of Adjusted EBITDA, as defined in
PCHIs debt agreements. THL and Advent received annual management fees in the amounts of $692 and $238, respectively, during the year ended December 31, 2015, and $2,498 and $858, respectively, during the year ended December 31, 2014.
Such amounts were recorded in general and administrative expenses in the Companys consolidated statement of income and comprehensive income (loss). In the case of an initial public offering or a change in control, as defined in Party City
Holdcos stockholders agreement, at the time of such event the Company was required to pay THL and Advent the net present value of the remaining annual management fees that were payable over the agreements ten year term. Therefore,
during April 2015, in conjunction with the Companys initial public offering, the Company paid a management agreement termination fee of $30,697.
Note 15 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.
92
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The Companys industry segment data for the years ended December 31,
2016, December 31, 2015, and December 31, 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,252,218
|
|
|
$
|
1,641,068
|
|
|
$
|
2,893,286
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
17,005
|
|
|
|
17,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,252,218
|
|
|
|
1,658,073
|
|
|
|
2,910,291
|
|
Eliminations
|
|
|
(626,900
|
)
|
|
|
0
|
|
|
|
(626,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
625,318
|
|
|
$
|
1,658,073
|
|
|
$
|
2,283,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
91,920
|
|
|
$
|
182,164
|
|
|
$
|
274,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
89,380
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
186,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
29,695
|
|
|
$
|
53,935
|
|
|
$
|
83,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
26,854
|
|
|
$
|
55,094
|
|
|
$
|
81,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,004,599
|
|
|
$
|
2,389,379
|
|
|
$
|
3,393,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,226,989
|
|
|
$
|
1,621,524
|
|
|
$
|
2,848,513
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
19,411
|
|
|
|
19,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,226,989
|
|
|
|
1,640,935
|
|
|
|
2,867,924
|
|
Eliminations
|
|
|
(573,391
|
)
|
|
|
0
|
|
|
|
(573,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
653,598
|
|
|
$
|
1,640,935
|
|
|
$
|
2,294,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
85,728
|
|
|
$
|
186,491
|
|
|
$
|
272,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
123,361
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
130,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
17,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
29,352
|
|
|
$
|
51,163
|
|
|
$
|
80,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
18,849
|
|
|
$
|
59,976
|
|
|
$
|
78,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
864,698
|
|
|
$
|
2,427,705
|
|
|
$
|
3,292,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,213,024
|
|
|
$
|
1,605,228
|
|
|
$
|
2,818,252
|
|
Royalties and franchise fees
|
|
|
0
|
|
|
|
19,668
|
|
|
|
19,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,213,024
|
|
|
|
1,624,896
|
|
|
|
2,837,920
|
|
Eliminations
|
|
|
(566,663
|
)
|
|
|
0
|
|
|
|
(566,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
646,361
|
|
|
$
|
1,624,896
|
|
|
$
|
2,271,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
74,177
|
|
|
$
|
168,965
|
|
|
$
|
243,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
155,917
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
5,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
81,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
32,446
|
|
|
$
|
50,444
|
|
|
$
|
82,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
27,651
|
|
|
$
|
50,590
|
|
|
$
|
78,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Segments
Export sales of metallic balloons of $23,631, $22,803, and $22,023 during the years ended December 31, 2016, December 31, 2015,
and December 31, 2014, respectively, are included in domestic sales to unaffiliated customers below. Intercompany sales between geographic areas primarily consist of sales of finished goods and are generally made at cost plus a share of
operating profit.
The Companys geographic area data follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,917,158
|
|
|
$
|
349,228
|
|
|
$
|
0
|
|
|
$
|
2,266,386
|
|
Net sales between geographic areas
|
|
|
51,916
|
|
|
|
80,776
|
|
|
|
(132,692
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,969,074
|
|
|
|
430,004
|
|
|
|
(132,692
|
)
|
|
|
2,266,386
|
|
Royalties and franchise fees
|
|
|
17,005
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,986,079
|
|
|
$
|
430,004
|
|
|
$
|
(132,692
|
)
|
|
$
|
2,283,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
257,774
|
|
|
$
|
16,310
|
|
|
$
|
0
|
|
|
$
|
274,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,380
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
77,176
|
|
|
$
|
6,454
|
|
|
|
|
|
|
$
|
83,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets (excluding goodwill, trade names and other intangible assets,
net)
|
|
$
|
269,047
|
|
|
$
|
28,359
|
|
|
|
|
|
|
$
|
297,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,147,003
|
|
|
$
|
246,975
|
|
|
$
|
0
|
|
|
$
|
3,393,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,937,793
|
|
|
$
|
337,329
|
|
|
$
|
0
|
|
|
$
|
2,275,122
|
|
Net sales between geographic areas
|
|
|
47,752
|
|
|
|
74,974
|
|
|
|
(122,726
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,985,545
|
|
|
|
412,303
|
|
|
|
(122,726
|
)
|
|
|
2,275,122
|
|
Royalties and franchise fees
|
|
|
19,411
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,004,956
|
|
|
$
|
412,303
|
|
|
$
|
(122,726
|
)
|
|
$
|
2,294,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
267,209
|
|
|
$
|
5,010
|
|
|
$
|
0
|
|
|
$
|
272,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,361
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
74,849
|
|
|
$
|
5,666
|
|
|
|
|
|
|
$
|
80,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets (excluding goodwill, trade names and other intangible assets,
net)
|
|
$
|
251,328
|
|
|
$
|
30,776
|
|
|
|
|
|
|
$
|
282,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,093,949
|
|
|
$
|
198,454
|
|
|
$
|
0
|
|
|
$
|
3,292,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,930,270
|
|
|
$
|
321,319
|
|
|
$
|
0
|
|
|
$
|
2,251,589
|
|
Net sales between geographic areas
|
|
|
44,903
|
|
|
|
75,462
|
|
|
|
(120,365
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,975,173
|
|
|
|
396,781
|
|
|
|
(120,365
|
)
|
|
|
2,251,589
|
|
Royalties and franchise fees
|
|
|
19,668
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,994,841
|
|
|
$
|
396,781
|
|
|
$
|
(120,365
|
)
|
|
$
|
2,271,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
236,495
|
|
|
$
|
6,647
|
|
|
$
|
0
|
|
|
$
|
243,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,917
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
77,445
|
|
|
$
|
5,445
|
|
|
|
|
|
|
$
|
82,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 Quarterly Results (Unaudited)
Despite a concentration of holidays in the fourth quarter of the year, as a result of the Companys expansive product lines and customer
base and increased promotional activities, the impact of seasonality on the quarterly results of the Companys wholesale operations has been limited. However, due to Halloween and Christmas, the inventory balances of the Companys
wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, the promotional activities of the Companys 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. The Companys retail operations are subject to significant seasonal variations. Historically, the
Companys retail operations have
95
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
realized a significant portion of their revenues, cash flow and net income in the fourth quarter of the year, principally due to Halloween sales in October and, to a lesser extent, year-end
holiday sales.
The following table sets forth our historical revenues, gross profit, income (loss) from operations, net income (loss),
net income (loss) attributable to Party City Holdco Inc., net income (loss) per common share Basic, and net income (loss) per common shareDiluted for each of the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended,
|
|
2016:
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
454,286
|
|
|
$
|
515,426
|
|
|
$
|
553,382
|
|
|
$
|
743,292
|
|
Royalties and franchise fees
|
|
|
3,454
|
|
|
|
3,987
|
|
|
|
3,568
|
|
|
|
5,996
|
|
Gross profit
|
|
|
166,519
|
|
|
|
207,561
|
|
|
|
196,720
|
|
|
|
345,199
|
|
Income from operations
|
|
|
19,556
|
|
|
|
58,480
|
|
|
|
36,918
|
|
|
|
159,130
|
|
Net (loss) income
|
|
|
(394
|
)
|
|
|
22,515
|
|
|
|
10,180
|
|
|
|
85,176
|
|
Net (loss) income per common share Basic
|
|
$
|
(0.00
|
)
|
|
$
|
0.19
|
|
|
$
|
0.09
|
|
|
$
|
0.71
|
|
Net (loss) income per common share Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended,
|
|
2015:
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
458,195
|
|
|
$
|
491,206
|
|
|
$
|
551,380
|
|
|
$
|
774,341
|
|
Royalties and franchise fees
|
|
|
3,910
|
|
|
|
4,314
|
|
|
|
4,027
|
|
|
|
7,160
|
|
Gross profit
|
|
|
163,921
|
|
|
|
188,343
|
|
|
|
189,850
|
|
|
|
362,124
|
|
Income from operations
|
|
|
24,004
|
|
|
|
46,067
|
|
|
|
31,480
|
|
|
|
170,668
|
|
Net (loss) income
|
|
|
(8,525
|
)
|
|
|
(23,050
|
)(a)
|
|
|
(44,489
|
)(b)
|
|
|
86,523
|
|
Net (loss) income per common share Basic
|
|
$
|
(0.09
|
)
|
|
$
|
(0.20
|
)(a)
|
|
$
|
(0.37
|
)(b)
|
|
$
|
0.73
|
|
Net (loss) income per common share Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.20
|
)(a)
|
|
$
|
(0.37
|
)(b)
|
|
$
|
0.72
|
|
(a)
|
During the three months ended June 30, 2015, the Company consummated an initial public offering of its common stock. The net proceeds of the offering were used to, among other things, fully redeem the Nextco Notes
and pay a management agreement termination fee to affiliates of THL and Advent (see Note 10).
|
(b)
|
During the three months ended September 30, 2015, the Company refinanced its debt. See Note 10 for further discussion.
|
Note 17 Fair Value Measurements
The provisions of ASC Topic 820, Fair Value Measurement, define fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair
value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
|
|
|
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.
|
96
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
|
|
|
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 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
|
|
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 as of
December 31,
2015
|
|
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 December 31, 2016 because of the short-term maturities of the instruments and/or their variable rates of interest.
The carrying amounts and fair values of borrowings under the Term Loan Credit Agreement and the Senior Notes as of December 31, 2016 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
Term Loan Credit Agreement
|
|
$
|
1,205,496
|
|
|
$
|
1,232,710
|
|
Senior Notes
|
|
|
344,544
|
|
|
|
366,625
|
|
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 December 31, 2016 based on the discounted future cash flows of each instrument at rates currently offered
for similar debt instruments of comparable maturity.
Note 18 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 risks
managed through the use of derivative financial instruments are interest rate risk and foreign currency exchange rate risk.
97
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
Interest Rate Risk Management
As part of the Companys risk management strategy, the Company periodically uses interest rate swap agreements to hedge the variability of
cash flows on floating rate debt obligations. Accordingly, interest rate swap agreements are reflected in the consolidated balance sheets at fair value and the related gains and losses on these contracts are deferred in equity and recognized in
interest expense over the same period in which the related interest payments being hedged are recognized in income. The fair value of an interest rate swap agreement is the estimated amount that the counterparty would receive or pay to terminate the
swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparty. The Company did not utilize interest rate swap agreements during the years ended December 31,
2016, December 31, 2015 or December 31, 2014.
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 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 December 31, 2016
and 2015, the Company had 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 are 100% effective, there is no current
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 December 31, 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
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Foreign Exchange Contracts
|
|
|
(a
|
) PP
|
|
$
|
697
|
|
|
|
(a
|
) PP
|
|
$
|
773
|
|
|
|
(b
|
) AE
|
|
$
|
215
|
|
|
|
(b
|
) AE
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
PP = Prepaid expenses and other current assets
|
(b)
|
AE = Accrued expenses
|
98
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
The following table displays the notional amounts of the Companys derivatives at
December 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
Derivative Instrument
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Foreign Exchange Contracts
|
|
$
|
22,502
|
|
|
$
|
23,028
|
|
|
|
|
|
|
|
|
|
|
Note 19 Changes in Accumulated Other Comprehensive (Loss) Income
The changes in accumulated other comprehensive (loss) income attributable to Party City Holdco Inc. consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 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 (loss) income before reclassifications, net of income tax
|
|
|
(19,770
|
)
|
|
|
1,080
|
|
|
|
(18,690
|
)
|
Amounts reclassified from accumulated other comprehensive loss to the consolidated statement of
income and comprehensive income, net of income tax
|
|
|
0
|
|
|
|
(759
|
)
|
|
|
(759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive (loss) income
|
|
|
(19,770
|
)
|
|
|
321
|
|
|
|
(19,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
(53,171
|
)
|
|
$
|
932
|
|
|
$
|
(52,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 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 of income tax
|
|
|
(20,432
|
)
|
|
|
675
|
|
|
|
(19,757
|
)
|
Amounts reclassified from accumulated other comprehensive loss to the consolidated statement of
income and comprehensive loss, net of income tax
|
|
|
0
|
|
|
|
(298
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive (loss) income
|
|
|
(20,432
|
)
|
|
|
377
|
|
|
|
(20,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(33,401
|
)
|
|
$
|
611
|
|
|
$
|
(32,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
PARTY CITY HOLDCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
Foreign
Currency
Adjustments
|
|
|
Impact of
Foreign
Exchange
Contracts,
Net of Taxes
|
|
|
Total, Net
of Taxes
|
|
Balance at December 31, 2013
|
|
$
|
5,738
|
|
|
$
|
(330
|
)
|
|
$
|
5,408
|
|
Other comprehensive (loss) income before reclassifications, net of income tax
|
|
|
(18,707
|
)
|
|
|
336
|
|
|
|
(18,371
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated
statement of income and comprehensive income, net of income tax
|
|
|
0
|
|
|
|
228
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive (loss) income
|
|
|
(18,707
|
)
|
|
|
564
|
|
|
|
(18,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(12,969
|
)
|
|
$
|
234
|
|
|
$
|
(12,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20 Subsequent Events
During January 2017, the Company acquired 18 franchise stores, which are located mostly in Louisiana and Alabama, for total consideration of
approximately $15,000.
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, for total consideration of approximately $22,000. 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.
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.
100
SCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARTY CITY HOLDCO INC.
(Parent company only)
CONDENSED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Other assets (principally investment in and amounts due from wholly-owned subsidiaries)
..
|
|
$
|
1,016,789
|
|
|
$
|
913,017
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,016,789
|
|
|
$
|
913,017
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
0
|
|
|
$
|
0
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value; 119,515,894 and 119,258,374 shares issued and outstanding at
December 31, 2016 and December 31, 2015, respectively)
|
|
|
1,195
|
|
|
|
1,193
|
|
Additional paid-in capital
|
|
|
910,167
|
|
|
|
904,425
|
|
Retained earnings
|
|
|
157,666
|
|
|
|
40,189
|
|
Accumulated other comprehensive loss
|
|
|
(52,239
|
)
|
|
|
(32,790
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,016,789
|
|
|
|
913,017
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,016,789
|
|
|
$
|
913,017
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed financial statements.
101
PARTY CITY HOLDCO INC. (Parent company only)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Income tax benefit
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,918
|
|
Equity in net income of subsidiaries
|
|
|
117,477
|
|
|
|
10,459
|
|
|
|
50,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
117,477
|
|
|
$
|
10,459
|
|
|
$
|
56,123
|
|
Other comprehensive loss
|
|
|
(19,449
|
)
|
|
|
(20,055
|
)
|
|
|
(18,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
98,028
|
|
|
$
|
(9,596
|
)
|
|
$
|
37,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed financial statements.
102
PARTY CITY HOLDCO INC. (Parent company only)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
117,477
|
|
|
$
|
10,459
|
|
|
$
|
56,123
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of subsidiaries
|
|
|
(117,477
|
)
|
|
|
(10,459
|
)
|
|
|
(50,205
|
)
|
Change in due to/from affiliates and income taxes payable
|
|
|
(1,373
|
)
|
|
|
(397,189
|
)
|
|
|
(6,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(1,373
|
)
|
|
|
(397,189
|
)
|
|
|
(1,080
|
)
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
0
|
|
|
|
397,159
|
|
|
|
0
|
|
Exercise of stock options
|
|
|
1,373
|
|
|
|
30
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,373
|
|
|
|
397,189
|
|
|
|
1,080
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Cash and cash equivalents at beginning of period
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed financial statements.
103
PARTY CITY HOLDCO INC. (Parent company only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1
Basis of presentation and description of registrant
Party City Holdco Inc. (Party City Holdco) Schedule I Condensed
Financial Information provides all parent company information that is required to be presented in accordance with the SEC rules and regulations for financial statement schedules. The consolidated financial statements of Party City Holdco are
included elsewhere. The parent-company financial statements should be read in conjunction with the consolidated financial statements and the notes thereto.
Party City Holdco conducts no separate operations and acts only as a holding company. Its share of the net income of its unconsolidated
subsidiaries is included in its statements of income using the equity method.
Since all material stock requirements, dividends and
guarantees of the registrant have been disclosed in the consolidated financial statements, the information is not required to be repeated in this schedule.
Note 2 Dividends from subsidiaries
No cash dividends were paid to Party City Holdco by its subsidiaries during the years included in these financial statements.
104