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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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References throughout this document to the “Company” include Party City Holdco Inc. and its subsidiaries. In this document the words
“we,” “our,” “ours” and “us” refer only to the Company and its subsidiaries and not to any other person.
Business Overview
Our Company
We are the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of
decorated party goods globally by revenue. With over 900 locations (inclusive of approximately 150 franchised stores), we have the only
coast-to-coast
network of party
superstores in the U.S. and Canada that make it easy and fun to enhance special occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. We also operate
multiple
e-commerce
sites, principally under the domain name PartyCity.com, and during the Halloween selling season we open a network of approximately 250 - 300 temporary stores under the Halloween City
banner.
In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of
decorated party supplies, with products found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers and dollar stores. Our products are available in over 100 countries with the United
Kingdom (“U.K.”), Germany, Mexico and Australia among the largest end markets for our products outside of the U.S..
During the
first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity for the purpose of designing, developing and launching an online exchange platform for party-related services. The website
will allow consumers to select, schedule and pay for various services (including entertainment, activities and food) all through a single portal.
How We Assess the Performance of Our Company
In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail
and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as adjusted net income (loss), adjusted net income (loss) per common share –
diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to “Financial Measures—Adjusted EBITDA,”
“Financial Measures—Adjusted Net Income (Loss)” and “Financial Measures—Adjusted Net Income (Loss) Per Common Share – Diluted” below.
Segments
Our retail
operations generate revenue primarily through the sale of Amscan, Designware, Anagram, Costumes USA and other party supplies through Party City, Halloween City and PartyCity.com. During 2016, approximately 77% of the product that was sold by our
retail operations was supplied by our wholesale operations.
Our wholesale revenues are generated from the sale of party goods for all
occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores, including our franchise stores, other party goods
retailers, mass merchants, independent card stores, dollar stores and other retailers and distributors throughout the world.
Intercompany
sales between the Wholesale and the Retail segment are eliminated, and the wholesale profits on intercompany sales are deferred and realized at the time the merchandise is sold to the retail consumer. For segment reporting purposes, certain general
and administrative expenses and art and development costs are allocated based on total revenues.
18
Financial Measures
Revenues.
Revenues from retail store operations are recognized at point of sale. We estimate future retail sales returns and record a
provision in the period in which the related sales are recorded based on historical information.
E-commerce
sales are recorded on a FOB destination basis and include shipping revenues. Retail sales are
reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Additionally, fees paid by franchisees when franchise stores are opened are recognized upon the completion of our performance requirements
and the opening of the franchise store.
Revenues from our wholesale operations represent the sale of our products to third parties, less
rebates, discounts and other allowances. The terms of our wholesale sales are generally FOB shipping point, and revenue is recognized when goods are shipped. We estimate reductions to revenues for volume-based rebate programs and subsequent credits
at the time sales are recognized. Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.
Comparable Retail Same-Store Sales.
The growth in same-store sales represents the percentage change in same-store sales in the period
presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to
the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a
store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as
same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retail
e-commerce
sales.
Cost of Sales.
Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods
and the direct cost of purchased goods, inventory shrinkage at both retail and wholesale, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs and outbound freight to get goods to our wholesale
customers. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale operations. Retail cost of sales also includes inventory shrinkage,
inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retail
e-commerce
business.
Our cost of sales increases in higher volume periods as the direct costs of
manufactured and purchased goods, inventory shrinkage and freight are generally tied to net sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of
our products may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the
countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an
on-going
basis in order to identify slow-moving goods.
Wholesale Selling Expenses.
Wholesale selling expenses include the costs associated with our wholesale sales and marketing
efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent, travel and other operating costs.
Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes
increase.
Retail Operating Expenses.
Retail operating expenses include all of the costs associated with retail store operations,
excluding occupancy-related costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to net sales.
Franchise Expenses.
Franchise expenses include the costs associated with operating our franchise network, including salaries and
benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with royalties and franchise fees.
General and Administrative Expenses.
General and administrative expenses include all operating costs not included elsewhere in the
statement of operations and comprehensive income (loss). These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees
and data-processing costs. These expenses generally do not vary proportionally with net sales.
19
Art and Development Costs.
Art and development costs include the costs associated with art
production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
Development Stage Expenses.
Represents
start-up
activities related to Kazzam, LLC. See footnote
15 of the consolidated financial statements in Item 1 for further discussion.
Adjusted EBITDA.
We define EBITDA as net income
(loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance.
We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers calculate Adjusted EBITDA in the same manner. We believe
that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that
we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and
(iii) because the credit facilities use Adjusted EBITDA to measure compliance with certain covenants.
Adjusted Net Income
(Loss).
Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization,
non-cash
purchase accounting adjustments, amortization of deferred
financing costs and original issue discounts, refinancing charges, equity based compensation and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a
consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.
Adjusted
Net Income (Loss) Per Common Share – Diluted.
Adjusted net income (loss) per common share – diluted represents adjusted net income (loss) divided by the Company’s diluted weighted average common shares outstanding. We present the
metric because we believe it assists investors in comparing our per share performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.
Results of Operations
Three Months
Ended September 30, 2017 Compared To Three Months Ended September 30, 2016
The following table sets forth the
Company’s operating results and operating results as a percentage of total revenues for the three months ended September 30, 2017 and 2016.
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|
|
|
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Three Months Ended September 30,
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2017
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2016
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(Dollars in thousands)
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Revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales
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$
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557,350
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|
|
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99.5
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%
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$
|
553,382
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|
|
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99.4
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%
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|
Royalties and franchise fees
|
|
|
2,759
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|
|
|
0.5
|
|
|
|
3,568
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|
|
|
0.6
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenues
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560,109
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|
|
|
100.0
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|
|
|
556,950
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|
|
|
100.0
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|
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Expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of sales
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357,523
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|
|
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63.8
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|
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|
356,662
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64.0
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Wholesale selling expenses
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16,274
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|
|
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2.9
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|
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14,739
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|
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2.7
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Retail operating expenses
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100,739
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|
|
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18.0
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|
|
|
100,746
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|
|
|
18.1
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Franchise expenses
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3,636
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|
|
|
0.6
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|
|
|
3,370
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|
|
|
0.6
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|
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General and administrative expenses
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37,971
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6.8
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|
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38,972
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7.0
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Art and development costs
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5,898
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1.1
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|
|
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5,543
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|
|
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1.0
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Development stage expenses
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|
|
680
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|
|
|
0.1
|
|
|
|
—
|
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|
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0.0
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total expenses
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|
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522,721
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|
|
|
93.3
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|
|
|
520,032
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|
|
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93.4
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|
|
|
|
|
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|
|
|
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|
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Income from operations
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37,388
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|
|
|
6.7
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|
|
|
36,918
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|
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6.6
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Interest expense, net
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23,228
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4.1
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|
|
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22,424
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|
|
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4.0
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Other expense (income), net
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593
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|
|
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0.1
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|
|
|
(905
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)
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|
|
(0.2
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes
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13,567
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|
|
|
2.4
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|
|
|
15,399
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|
|
|
2.8
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|
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Income tax expense
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|
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3,483
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|
|
|
0.6
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|
|
|
5,219
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|
|
|
1.0
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|
|
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|
|
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|
|
|
|
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Net income
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$
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10,084
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|
|
1.8
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%
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|
$
|
10,180
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|
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1.8
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%
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|
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Net income per common share – Basic
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$
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0.08
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$
|
0.09
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Net income per common share – Diluted
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$
|
0.08
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$
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0.08
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20
Revenues
Total revenues for the third quarter of 2017 were $560.1 million and were $3.2 million, or 0.6%, higher than the third quarter of
2016. The following table sets forth the Company’s total revenues for the three months ended September 30, 2017 and 2016.
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|
|
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Three Months Ended September 30,
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2017
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2016
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Dollars in
Thousands
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Percentage of
Total Revenues
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Dollars in
Thousands
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Percentage of
Total Revenues
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|
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Net Sales:
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|
|
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|
|
|
|
|
|
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|
|
|
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Wholesale
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$
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381,858
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68.2
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%
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$
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416,387
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74.8
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%
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Eliminations
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(188,565
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)
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(33.7
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)%
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(210,562
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)
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|
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(37.8
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)%
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|
|
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|
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Net wholesale
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193,293
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34.5
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%
|
|
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205,825
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|
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37.0
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%
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Retail
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364,057
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65.0
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%
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|
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347,557
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|
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62.4
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total net sales
|
|
|
557,350
|
|
|
|
99.5
|
%
|
|
|
553,382
|
|
|
|
99.4
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%
|
|
Royalties and franchise fees
|
|
|
2,759
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|
|
|
0.5
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%
|
|
|
3,568
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|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
560,109
|
|
|
|
100.0
|
%
|
|
$
|
556,950
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Retail net sales during the third quarter of 2017 were $364.1 million and increased $16.5 million, or 4.7%, compared to the third
quarter of 2016. Retail net sales at our Party City stores totaled $324.8 million and were $19.2 million, or 6.3%, higher than 2016 as franchise store acquisitions and new store growth were partially offset by negative same-store sales
(see below for further detail). During the twelve months ended September 30, 2017, we acquired 36 franchise stores and 1 independent store, opened 28 new stores and closed 8 stores. Global retail
e-commerce
sales totaled $34.1 million during the third quarter of 2017 and were $1.7 million, or 4.7%, lower than during the corresponding quarter of 2016. The North American
e-commerce
sales that are included in our Party City brand comp decreased by 9.9% during the third quarter (see below for further detail). Sales at our temporary Halloween City stores were $5.2 million during
the third quarter of 2017 or $1.0 million lower than the corresponding quarter of 2016 due, in part, to stores opening later than last year.
Same-store sales for the Party City brand (including North American retail
e-commerce
sales) decreased
by 2.6% during the third quarter of 2017, principally due to the adverse effects of Hurricanes Harvey and Irma, which negatively impacted brand comp sales by approximately 140 basis points.
Excluding the impact of
e-commerce,
same-store sales decreased by 1.8% as a 2.2% decrease in
transaction count was partially offset by a 0.4% increase in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted same-store sales by approximately 130 basis points.
The North American retail
e-commerce
sales included in our Party City brand comp decreased by 9.9% due
to a 9.1% decrease in transaction count and a 0.8% decrease in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted the percentage by approximately 140 basis points. The remainder of the decrease in transaction
count reflects lower traffic as customer conversion levels were consistent with the corresponding quarter of the prior year. The decrease in average transaction dollar size was principally due to increased promotional activity as units per
transaction increased by approximately 3% versus the third quarter of 2016.
Same-store sales percentages were not affected by foreign
currency as such percentages are calculated in local currency.
Wholesale
Wholesale net sales during the third quarter of 2017 totaled $193.3 million and were $12.5 million, or 6.1%, lower than the third
quarter of 2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $80.8 million and were $18.3 million, or 18.5%, lower than during 2016. The decrease was partially due to our
acquisition of 36 franchise stores during the first quarter of 2017; as post-acquisition sales to such stores (approximately $10 million during the third quarter of 2016) are now eliminated as intercompany sales. Additionally, sales to existing
franchisees decreased versus the corresponding quarter of 2016, principally due to carryover inventory from the 2016 Halloween selling season. Further, gift product sales decreased by approximately $1 million due to the continued
de-emphasis
and product-line refinement of our Grasslands Road gift business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $19.2 million
during the third quarter of 2017 and were $0.7 million, or 3.8%, higher than during the corresponding quarter of 2016. Our international sales
21
(which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $93.3 million and were $5.1 million, or 5.8%, higher than in 2016. Our growth was
largely driven by the acquisition of Granmark S.A. de C.V. (“Granmark”) in Q1 of this year, as well as continued strong performance in the U.K. and German markets.
Intercompany sales to our retail affiliates totaled $188.6 million during the third quarter of 2017 and were $22.0 million, or
10.4%, lower than during the corresponding quarter of 2016. Intercompany sales represented 49.4% of total wholesale sales during the third quarter of 2017, compared to 50.6% during 2016. The decrease in intercompany sales was due to carryover
inventory from the 2016 Halloween selling season. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the third quarter of 2017 totaled $2.8 million and were $0.8 million lower than during the third
quarter of 2016 principally due to the acquisition of 36 franchise stores during the first quarter of 2017.
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended September 30, 2017 and September 30, 2016.
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Retail
|
|
$
|
141,334
|
|
|
|
38.8
|
%
|
|
$
|
133,177
|
|
|
|
38.3
|
%
|
|
Wholesale
|
|
|
58,493
|
|
|
|
30.3
|
|
|
|
63,543
|
|
|
|
30.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
199,827
|
|
|
|
35.9
|
%
|
|
$
|
196,720
|
|
|
|
35.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross profit margin on net sales at retail during the third quarter of 2017 was 38.8%. Such percentage was
50 basis points higher than during the third quarter of 2016. The benefits of increased share of shelf (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) and reduced product costs were partially offset by
increased promotional activities. Our wholesale share of shelf at our Party City stores and our North American retail
e-commerce
operations increased from 75.1% during the third quarter of 2016 to 78.0% during
the third quarter of 2017.
The gross profit on net sales at wholesale during 2017 and 2016 was 30.3% and 30.9%, respectively. The
decrease was principally due to sales mix (including increased international sales) and
de-leveraging
of our fixed distribution costs due to the lower overall sales levels.
Operating expenses
Wholesale
selling expenses were $16.3 million during the third quarter of 2017 and $14.7 million during the corresponding quarter of 2016. The increase was due to approximately $1.5 million of selling costs at Granmark (acquired in March 2017).
Wholesale selling expenses were 8.4% and 7.2% of net wholesale sales during the third quarters of 2017 and 2016, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the third quarter of 2017 were $100.7 million and were principally consistent with the third quarter of
2016. The impact of the higher store count (discussed above) was offset by further realized savings associated with improved labor productivity and efficiency in our stores and slightly lower advertising costs. Retail operating expenses were 27.7%
and 29.0% of net retail sales during the third quarters of 2017 and 2016, respectively.
Franchise expenses during the third quarters of
2017 and 2016 were $3.6 million and $3.4 million, respectively.
General and administrative expenses during the third quarter of
2017 totaled $38.0 million and were $1.0 million, or 2.6%, lower than in the third quarter of 2016. Lower executive compensation was partially offset by inflationary cost increases. General and administrative expenses as a percentage of
total revenues were 6.8% and 7.0% during the third quarters of 2017 and 2016, respectively.
Art and development costs were
$5.9 million and $5.5 million during the third quarters of 2017 and 2016, respectively.
22
Development stage expenses represent
start-up
costs
related to Kazzam (see footnote 15 to the Company’s consolidated financial statements for further detail).
Interest expense, net
Interest expense, net, totaled $23.2 million during the third quarter of 2017, compared to $22.4 million during the third quarter of
2016. The increase principally relates to adjustments to the Company’s minority interest liabilities for Print Appeal and ACIM (see footnote 10 to the Company’s consolidated financial statements for further detail). The adjustments were
partially offset by the impact of a $100 million prepayment of the Company’s Term Loan Credit Agreement during the Company’s October 2016 refinancing; as well as the impact of the credit spread on such debt being reduced by 25 basis
points at such time.
Other expense (income), net
For the third quarter of 2017, other expense, net, totaled $0.6 million.
For the third quarter of 2016, other income, net, totaled $0.9 million. Such amount principally represented foreign currency transaction
gains.
Income tax expense
The effective income tax rate for the three months ended September 30, 2017, 25.7%, is lower than the effective rate for the three months
ended September 30, 2016, 33.9%, principally due to discrete items related to uncertain tax positions, stock option exercises and
return-to-provision
adjustments.
The impact of such items was partially offset by the effect of state tax rate changes on deferred tax liabilities.
Nine Months
Ended September 30, 2017 Compared To Nine Months Ended September 30, 2016
The following table sets forth the
Company’s operating results and operating results as a percentage of total revenues for the nine months ended September 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,572,966
|
|
|
|
99.4
|
%
|
|
$
|
1,523,094
|
|
|
|
99.3
|
%
|
|
Royalties and franchise fees
|
|
|
9,020
|
|
|
|
0.6
|
|
|
|
11,009
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,581,986
|
|
|
|
100.0
|
|
|
|
1,534,103
|
|
|
|
100.0
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
978,142
|
|
|
|
61.8
|
|
|
|
952,294
|
|
|
|
62.1
|
|
|
Wholesale selling expenses
|
|
|
47,946
|
|
|
|
3.0
|
|
|
|
45,854
|
|
|
|
2.9
|
|
|
Retail operating expenses
|
|
|
281,981
|
|
|
|
17.8
|
|
|
|
278,070
|
|
|
|
18.1
|
|
|
Franchise expenses
|
|
|
10,666
|
|
|
|
0.7
|
|
|
|
10,507
|
|
|
|
0.7
|
|
|
General and administrative expenses
|
|
|
125,763
|
|
|
|
7.9
|
|
|
|
115,828
|
|
|
|
7.6
|
|
|
Art and development costs
|
|
|
17,638
|
|
|
|
1.1
|
|
|
|
16,596
|
|
|
|
1.1
|
|
|
Development stage expenses
|
|
|
7,092
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,469,228
|
|
|
|
92.9
|
|
|
|
1,419,149
|
|
|
|
92.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
112,758
|
|
|
|
7.1
|
|
|
|
114,954
|
|
|
|
7.5
|
|
|
Interest expense, net
|
|
|
65,214
|
|
|
|
4.1
|
|
|
|
67,857
|
|
|
|
4.4
|
|
|
Other expense (income), net
|
|
|
860
|
|
|
|
0.1
|
|
|
|
(4,107
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
46,684
|
|
|
|
3.0
|
|
|
|
51,204
|
|
|
|
3.3
|
|
|
Income tax expense
|
|
|
16,301
|
|
|
|
1.0
|
|
|
|
18,903
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,383
|
|
|
|
1.9
|
%
|
|
$
|
32,301
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Basic
|
|
$
|
0.25
|
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
|
Net income per common share – Diluted
|
|
$
|
0.25
|
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
23
Revenues
Total revenues for the first nine months of 2017 were $1,582.0 million and were $47.9 million, or 3.1%, higher than the corresponding
period of 2016. The following table sets forth the Company’s total revenues for the nine months ended September 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Total Revenues
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
929,255
|
|
|
|
58.7
|
%
|
|
$
|
945,071
|
|
|
|
61.6
|
%
|
|
Eliminations
|
|
|
(459,416
|
)
|
|
|
(29.0
|
)%
|
|
|
(465,189
|
)
|
|
|
(30.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net wholesale
|
|
|
469,839
|
|
|
|
29.7
|
%
|
|
|
479,882
|
|
|
|
31.3
|
%
|
|
Retail
|
|
|
1,103,127
|
|
|
|
69.7
|
%
|
|
|
1,043,212
|
|
|
|
68.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,572,966
|
|
|
|
99.4
|
%
|
|
|
1,523,094
|
|
|
|
99.3
|
%
|
|
Royalties and franchise fees
|
|
|
9,020
|
|
|
|
0.6
|
%
|
|
|
11,009
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,581,986
|
|
|
|
100.0
|
%
|
|
$
|
1,534,103
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Retail net sales during the first nine months of 2017 were $1,103.1 million and increased $59.9 million, or 5.7%, compared to the
first nine months of 2016. Retail net sales at our Party City stores totaled $993.7 million and were $59.4 million, or 6.4%, higher than 2016 as franchise store acquisitions and new store growth were partially offset by negative same-store
sales (see below for further detail). During the twelve months ended September 30, 2017, we acquired 36 franchise stores and 1 independent store, opened 28 new stores and closed 8 stores. Global retail
e-commerce
sales totaled $104.2 million during the first nine months of 2017 and were $1.5 million, or 1.5%, higher than during the corresponding period of 2016, driven by strong international
e-commerce
sales. Sales at our temporary Halloween City stores were $5.2 million during the period or $1.0 million lower than the corresponding period of 2016 partially due to the fact that we opened
stores later this year than a year ago.
Same-store sales for the Party City brand (including North American retail
e-commerce
sales) decreased by 0.3%, largely a result of the adverse impact of Hurricanes Harvey and Irma, which adversely impacted brand comp sales by approximately 50 basis points.
Excluding the impact of
e-commerce,
same-store sales decreased by 0.3% as a 0.9% decrease in
transaction count was partially offset by a 0.6% increase in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted same-store sales by approximately 40 basis points.
The North American retail
e-commerce
sales included in our Party City brand comp increased by 0.1% as
a 2.9% increase in transaction count was mostly offset by a decrease in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted the percentage by approximately 50 basis points. The increase in
e-commerce
transaction count reflects higher customer conversion levels versus the same period of last year. The decrease in average transaction dollar size principally relates to lower units, largely a reflection
of lower free-freight promotional thresholds.
Same-store sales percentages were not affected by foreign currency as such percentages are
calculated in local currency.
Wholesale
Wholesale net sales during the first nine months of 2017 totaled $469.8 million and were $10.0 million, or 2.1%, lower than during
2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $204.4 million and were $32.3 million, or 13.6%, lower than during the first nine months of 2016. The decrease was principally
due to our acquisition of 36 franchise stores during the first quarter of 2017; as post-acquisition sales to such stores (approximately $19 million during the first nine months of 2016) are now eliminated as intercompany sales. Additionally,
sales to existing franchisees decreased versus the corresponding period of 2016, principally due to carryover inventory from the 2016 Halloween selling season. Further, gift product sales decreased by approximately $3 million due to the
continued
de-emphasis
and product-line refinement of our Grasslands Road gift business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled
$62.4 million during the first nine months of 2017 and were $3.7 million, or 6.3%, higher than during the corresponding period of 2016 primarily due to stronger Valentine’s Day sales, in part due to the timing of certain shipments.
Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $203.0 million and were $18.6 million, or 10.1%, higher than in 2016, despite a $4.9 million negative impact
from foreign currency translation during the first nine months of 2017. This growth was attributable to two acquisitions and further expansion of our
store-in-store
concept with key retailers.
24
Intercompany sales to our retail affiliates totaled $459.4 million during the first nine
months of 2017 and were $5.8 million, or 1.2%, lower than during the corresponding period of 2016. Intercompany sales represented 49.4% of total wholesale sales during the first nine months of 2017, compared to 49.2% during 2016. The decrease
in intercompany sales was due to carryover inventory from the 2016 Halloween selling season. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial
statements.
Royalties and franchise fees
Royalties and franchise fees for the first nine months of 2017 totaled $9.0 million and were $2.0 million, or 18.1%, lower than
during the first nine months of 2016 principally due to the acquisition of 36 franchise stores during the first quarter of 2017.
Gross Profit
The following table sets forth the Company’s gross profit for the nine months ended September 30, 2017 and
September 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Dollars in
Thousands
|
|
|
Percentage of
Net Sales
|
|
|
Retail
|
|
$
|
447,787
|
|
|
|
40.6
|
%
|
|
$
|
419,283
|
|
|
|
40.2
|
%
|
|
Wholesale
|
|
|
147,037
|
|
|
|
31.3
|
|
|
|
151,517
|
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
594,824
|
|
|
|
37.8
|
%
|
|
$
|
570,800
|
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross profit margin on net sales at retail during the first nine months of 2017 was 40.6%. Such percentage
was 40 basis points higher than during the corresponding period of 2016. The benefits of increased share of shelf (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) and reduced product costs were
partially offset by increased promotional activities. Our wholesale share of shelf at our Party City stores and our North American retail
e-commerce
operations increased from 75.9% during the first nine months
of 2016 to 78.0% during the first nine months of 2017.
The gross profit on net sales at wholesale during 2017 and 2016 was 31.3% and
31.6%, respectively. The decrease was principally due to the strengthening of the U.S. Dollar and its unfavorable impact on certain of our international subsidiaries that purchase product in U.S. Dollars and sell in local currency. Benefits
associated with continued improvements in our sourcing efforts were offset by the impact of sales mix (including increased international sales) and
de-leveraging
of our fixed distribution costs due to the
lower overall sales levels.
Operating expenses
Wholesale selling expenses were $47.9 million during the first nine months of 2017 and $45.9 million during the corresponding period
of 2016. Approximately $3 million of selling costs at Granmark (acquired in March 2017) and inflationary cost increases were partially offset by favorable foreign currency translation ($0.7 million) and lower intangible asset amortization.
Wholesale selling expenses were 10.2% and 9.6% of net wholesale sales during the first nine months of 2017 and 2016, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the first nine months of 2017 were $282.0 million and were $3.9 million, or 1.4%, higher than
during the first nine months of 2016. The impact of the increased store count (discussed above) and inflationary cost increases were mostly offset by realized savings associated with improved labor productivity and efficiency in our stores and lower
advertising expenses. Retail operating expenses were 25.6% and 26.7% of net retail sales during the first nine months of 2017 and 2016, respectively.
Franchise expenses during the first nine months of 2017 and 2016 were $10.7 million and $10.5 million, respectively.
General and administrative expenses during the first nine months of 2017 totaled $125.8 million and were $9.9 million, or 8.6%,
higher than in the first nine months of 2016. In conjunction with the Transition and Consulting Agreement disclosed in Note 14 to our consolidated financial statements, during the first nine months of 2017 we recorded a $5.7 million severance
charge, $1.4 million of which related to equity-based compensation. Additionally, as part of a retail restructuring (also disclosed in Note 14), during the first nine months of 2017 we recorded $0.9 million of severance expense for
employees of our retail segment. The remainder of the variance versus the first nine months of 2016 was principally due to inflationary cost increases and administrative costs at Granmark (acquired in March 2017). General and administrative expenses
as a percentage of total revenues increased from 7.6% in 2016 to 7.9% in 2017 due to the severance.
25
Art and development costs were $17.6 million and $16.6 million during the first nine
months of 2017 and 2016, respectively. Such amounts represent 1.1% of total revenues in both periods.
Development stage expenses
represent
start-up
costs related to Kazzam (see footnote 15 to the Company’s consolidated financial statements for further detail).
Interest expense, net
Interest
expense, net, totaled $65.2 million during the first nine months of 2017, compared to $67.9 million during the first nine months of 2016. The decrease principally reflects a $100 million prepayment of the Company’s Term Loan
Credit Agreement during the Company’s October 2016 refinancing; as well as the impact of the credit spread on such debt being reduced by 25 basis points at such time.
Other expense (income), net
For
the first nine months of 2017, other expense, net, totaled $0.9 million.
During the corresponding period of 2016, other income, net,
totaled $4.1 million. Such amount included $6.9 million of foreign currency transaction gains, primarily the impact of the change in the U.S. Dollar from December 31, 2015 to September 30, 2016 and the corresponding
re-measurement
of the U.S. dollar-denominated receivables and payables of our foreign operations.
Income tax
expense
The effective income tax rate for the nine months ended September 30, 2017, 34.9%, is lower than the effective rate
for the nine months ended September 30, 2016, 36.9%, principally due to discrete items related to uncertain tax positions, stock option exercises and
return-to-provision
adjustments. The impact of such items was partially offset by the effect of state tax rate changes on deferred tax liabilities.
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted
The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share—diluted as supplemental measures of its
operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that
the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset
amortization,
non-cash
purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity based compensation, and impairment charges. Adjusted net income per common
share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these
adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the
adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be
unaffected by unusual or
non-recurring
items. The Company presents the measures because the Company believes they assist investors in comparing the Company’s performance across reporting periods on a
consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to
evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per
common share—diluted are helpful benchmarks to evaluate its operating performance.
Adjusted EBITDA, adjusted net income, and
adjusted net income per common share—diluted have limitations as analytical tools. Some of these limitations are:
|
|
•
|
|
they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;
|
|
|
•
|
|
they do not reflect changes in, or cash requirements for, the Company’s working capital needs;
|
26
|
|
•
|
|
adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s indebtedness;
|
|
|
•
|
|
although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not
reflect any cash requirements for such replacements;
|
|
|
•
|
|
non-cash
compensation is and will remain a key element of the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when
evaluating its core operating performance for a particular period;
|
|
|
•
|
|
they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and
|
|
|
•
|
|
other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative
measure.
|
Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share –
diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income
and adjusted net income per common share – diluted only on a supplemental basis. The reconciliations from net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,084
|
|
|
$
|
10,180
|
|
|
$
|
30,383
|
|
|
$
|
32,301
|
|
|
Interest expense, net
|
|
|
23,228
|
|
|
|
22,424
|
|
|
|
65,214
|
|
|
|
67,857
|
|
|
Income taxes
|
|
|
3,483
|
|
|
|
5,219
|
|
|
|
16,301
|
|
|
|
18,903
|
|
|
Depreciation and amortization
|
|
|
20,694
|
|
|
|
20,015
|
|
|
|
62,519
|
|
|
|
61,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
57,489
|
|
|
|
57,838
|
|
|
|
174,417
|
|
|
|
180,247
|
|
|
Non-cash
purchase accounting adjustments
|
|
|
1,500
|
|
|
|
—
|
|
|
|
6,350
|
|
|
|
3,689
|
|
|
Restructuring, retention and severance (a)
|
|
|
212
|
|
|
|
92
|
|
|
|
8,839
|
|
|
|
254
|
|
|
Deferred rent (b)
|
|
|
2,719
|
|
|
|
7,095
|
|
|
|
5,634
|
|
|
|
12,240
|
|
|
Closed store expense (c)
|
|
|
1,285
|
|
|
|
971
|
|
|
|
4,164
|
|
|
|
2,927
|
|
|
Foreign currency losses (gains), net
|
|
|
36
|
|
|
|
(1,767
|
)
|
|
|
(1,684
|
)
|
|
|
(6,945
|
)
|
|
Employee equity based compensation (d)
|
|
|
630
|
|
|
|
948
|
|
|
|
3,852
|
|
|
|
2,829
|
|
|
Non-employee
equity based compensation (e)
|
|
|
21
|
|
|
|
—
|
|
|
|
3,286
|
|
|
|
—
|
|
|
Undistributed loss (income) in unconsolidated joint ventures
|
|
|
134
|
|
|
|
113
|
|
|
|
(92
|
)
|
|
|
380
|
|
|
Corporate development (f)
|
|
|
1,634
|
|
|
|
683
|
|
|
|
6,078
|
|
|
|
1,895
|
|
|
Hurricane-related costs
|
|
|
385
|
|
|
|
—
|
|
|
|
385
|
|
|
|
—
|
|
|
Other
|
|
|
84
|
|
|
|
61
|
|
|
|
562
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
66,129
|
|
|
$
|
66,034
|
|
|
$
|
211,791
|
|
|
$
|
197,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Three Months
Ended
September 30,
2016
|
|
|
Nine Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2016
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
13,567
|
|
|
$
|
15,399
|
|
|
$
|
46,684
|
|
|
$
|
51,204
|
|
|
Intangible asset amortization
|
|
|
3,879
|
|
|
|
4,049
|
|
|
|
11,704
|
|
|
|
12,182
|
|
|
Non-cash
purchase accounting adjustments (g)
|
|
|
2,241
|
|
|
|
(102
|
)
|
|
|
8,165
|
|
|
|
4,991
|
|
|
Amortization of deferred financing costs and original issuance discounts
|
|
|
1,240
|
|
|
|
1,277
|
|
|
|
3,699
|
|
|
|
3,821
|
|
|
Restructuring, retention and severance (a)
|
|
|
(323
|
)
|
|
|
—
|
|
|
|
7,491
|
|
|
|
—
|
|
|
Non-employee
equity based compensation (e)
|
|
|
21
|
|
|
|
—
|
|
|
|
3,286
|
|
|
|
—
|
|
|
Hurricane-related costs
|
|
|
385
|
|
|
|
—
|
|
|
|
385
|
|
|
|
—
|
|
|
Employee equity based compensation (d)
|
|
|
630
|
|
|
|
948
|
|
|
|
3,852
|
|
|
|
2,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income before income taxes
|
|
|
21,640
|
|
|
|
21,571
|
|
|
|
85,266
|
|
|
|
75,027
|
|
|
Adjusted income tax expense (h)
|
|
|
6,467
|
|
|
|
7,568
|
|
|
|
30,713
|
|
|
|
27,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
15,173
|
|
|
$
|
14,003
|
|
|
$
|
54,553
|
|
|
$
|
47,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per common share –diluted
|
|
$
|
0.13
|
|
|
$
|
0.12
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares-diluted
|
|
|
120,912,849
|
|
|
|
120,472,297
|
|
|
|
120,907,979
|
|
|
|
120,312,492
|
|
27
|
(a)
|
The “restructuring, retention and severance” amounts in the adjusted net income table relate entirely to an organizational restructuring which took place during the first quarter of 2017 and which consisted
of: a) the Company entering into a Transition and Consulting Agreement with Gerry Rittenberg and b) a restructuring of the Company’s retail segment. See Note 14 for further discussion. The “restructuring, retention and severance”
amounts in the adjusted EBITDA table also include additional restructuring, retention and severance charges incurred by the Company and excluded from the definition of adjusted EBITDA in the Company’s credit facilities (see above for a
discussion of the Company’s use of adjusted EBITDA).
|
|
(b)
|
The deferred rent adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items.
|
|
(c)
|
Charges incurred related to closing underperforming stores.
|
|
(d)
|
The first quarter of 2017 includes a $1,362 stock option modification charge for Gerald Rittenberg. See Note 14 for further discussion.
|
|
(e)
|
Principally represents shares of Kazzam awarded to Ampology as compensation for Ampology’s services. See Note 15 for further discussion.
|
|
(f)
|
Primarily represents
start-up
costs for Kazzam (see Note 15 for further discussion) and third-party costs related to acquisitions (principally legal expenses).
|
|
(g)
|
On July 27, 2012, PC Merger Sub, Inc., which was our wholly-owned indirect subsidiary, merged into Party City Holdings Inc. (“PCHI”), with PCHI being the surviving entity (the “Transaction”). As
a result of the Transaction, the Company applied the acquisition method of accounting and increased the value of certain property, plant and equipment. The impact of such adjustments on depreciation expense increased the Company’s expenses.
These property, plant and equipment depreciation amounts are included in
“Non-cash
purchase accounting adjustments” for purposes of calculating “adjusted net income,” but are excluded from
“Non-cash
purchase accounting adjustments” for purposes of calculating adjusted EBITDA since they are included in depreciation expense.
|
|
(h)
|
Represents income tax expense/benefit after excluding the specific tax impacts for each of the
pre-tax
adjustments. The tax impacts for each of the adjustments were determined by
applying to the
pre-tax
adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
|
Liquidity
During 2015, the Company
replaced its then-existing debt with indebtedness consisting of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to
$640 million during a certain period of each calendar year) (“ABL Facility”) and (iii) $350 million of 6.125% senior notes.
We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of
liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from
operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Cash Flow
Net cash provided by
operating activities totaled $6.3 million and $23.5 million during the nine months ended September 30, 2017 and 2016, respectively. Net cash flows provided by operating activities before changes in operating assets and liabilities
were $113.5 million during the first nine months of 2017, compared to $114.1 million during 2016. Changes in operating assets and liabilities during the first nine months of 2017 and 2016 resulted in the use of cash of $107.2 million
and $90.6 million, respectively. The use of cash was higher during 2017 principally due to increased income tax payments due to the Company’s increased profitability.
Net cash used in investing activities totaled $120.7 million during the nine months ended September 30, 2017, as compared to
$89.1 million during the nine months ended September 30, 2016. Investing activities during 2017 included $72.8 million paid in connection with acquisitions, principally related to franchise stores and Granmark (see Note 13 to the
consolidated financial statements for further detail). Capital expenditures during the nine months ended September 30, 2017 and 2016 were $47.9 million and $57.3 million, respectively. Retail capital expenditures totaled
$25.1 million during 2017 and principally related to store conversions and information technology-related expenditures. Wholesale capital expenditures during 2017 totaled $22.8 million and primarily related to printing plates and dies, as
well as machinery and equipment at the Company’s manufacturing operations and main distribution center.
28
Net cash provided by financing activities was $104.6 million during the nine months ended
September 30, 2017, as compared to $71.5 million during the corresponding period of 2016. Borrowings were higher during 2017 principally due to the acquisitions.
At September 30, 2017, the Company had approximately $372 million of availability under its ABL Facility, after considering
borrowing base restrictions.
Contractual Obligations
Other than as described above under “Liquidity and Capital Resources”, there were no material changes to our future minimum
contractual obligations as of December 31, 2016 as previously disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2016.
Off Balance Sheet Arrangements
We had no
off balance sheet arrangements during the three months ended September 30, 2017 and the year ended December 31, 2016.
Seasonality
Wholesale Operations
Despite a
concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been
limited. However, due to Halloween, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors
result in slightly higher accounts receivable balances during the quarter.
Retail Operations
Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its
revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent,
year-end
holiday sales.
Cautionary Note Regarding Forward-Looking Statements
From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,”
“anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking
statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability
under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These
risks, as well as other risks and uncertainties, are detailed in the section titled “Risk Factors” included in our Annual Report on Form
10-K
filed with the SEC on March 16, 2017. Moreover, we
operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances
discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of
the date of this filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among
others, could cause actual results to differ materially from those described in the forward-looking statements:
|
|
•
|
|
our ability to compete effectively in a competitive industry;
|
|
|
•
|
|
fluctuations in commodity prices;
|
|
|
•
|
|
our ability to appropriately respond to changing merchandise trends and consumer preferences;
|
|
|
•
|
|
successful implementation of our store growth strategy;
|
29
|
|
•
|
|
decreases in our Halloween sales;
|
|
|
•
|
|
unexpected or unfavorable consumer responses to our promotional or merchandising programs;
|
|
|
•
|
|
failure to comply with existing or future laws relating to our marketing programs,
e-commerce
initiatives and the use of consumer information;
|
|
|
•
|
|
disruption to the transportation system or increases in transportation costs;
|
|
|
•
|
|
product recalls or product liability;
|
|
|
•
|
|
economic slowdown affecting consumer spending and general economic conditions;
|
|
|
•
|
|
loss or actions of third party vendors and loss of the right to use licensed material;
|
|
|
•
|
|
disruptions at our manufacturing facilities;
|
|
|
•
|
|
failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;
|
|
|
•
|
|
our international operations subjecting us to additional risks;
|
|
|
•
|
|
potential litigation and claims;
|
|
|
•
|
|
lack of available additional capital;
|
|
|
•
|
|
our inability to retain or hire key personnel;
|
|
|
•
|
|
risks associated with leasing substantial amounts of space;
|
|
|
•
|
|
failure of existing franchisees to conduct their business in accordance with agreed upon standards;
|
|
|
•
|
|
adequacy of our information systems, order fulfillment and distribution facilities;
|
|
|
•
|
|
our ability to adequately maintain the security of our electronic and other confidential information;
|
|
|
•
|
|
our inability to successfully identify and integrate acquisitions;
|
|
|
•
|
|
adequacy of our intellectual property rights;
|
|
|
•
|
|
risks related to our substantial indebtedness; and
|
|
|
•
|
|
the other factors set forth under “Risk Factors” in our Annual Report on Form
10-K,
filed with the SEC on March 16, 2017.
|
Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this filing to
conform these statements to actual results or to changes in our expectations.
You should read this filing with the understanding that our
actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.