UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20162017
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number001-37344
Party City Holdco Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 46-0539758 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| 80 Grasslands Road Elmsford, NY | 10523 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code:
(914) 345-2020
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ||||
| Non-accelerated filer | Smaller reporting company | ☐ | ||||
| Emerging Growth Company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2016, 119,498,654November 1, 2017, 119,730,069 shares of the Registrant’s common stock were outstanding.
PARTY CITY HOLDCO INC.
Form10-Q
September 30, 20162017
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| September 30, 2016 | December 31, 2015 | September 30, 2017 | December 31, 2016 | |||||||||||||
| (Note 2) (Unaudited) | (Note 2) | (Note 2) (Unaudited) | (Note 2) | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 47,617 | $ | 42,919 | $ | 58,143 | $ | 64,610 | ||||||||
Accounts receivable, net | 177,943 | 132,287 | 169,059 | 134,091 | ||||||||||||
Inventories, net | 683,655 | 564,259 | 687,254 | 613,868 | ||||||||||||
Prepaid expenses and other current assets | 68,752 | 50,450 | 84,859 | 68,255 | ||||||||||||
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Total current assets | 977,967 | 789,915 | 999,315 | 880,824 | ||||||||||||
Property, plant and equipment, net | 282,666 | 272,420 | 298,758 | 292,904 | ||||||||||||
Goodwill | 1,580,551 | 1,562,515 | 1,631,806 | 1,572,568 | ||||||||||||
Trade names | 567,142 | 568,712 | 567,507 | 566,599 | ||||||||||||
Other intangible assets, net | 76,933 | 89,157 | 65,023 | 76,581 | ||||||||||||
Other assets, net | 5,269 | 9,684 | 12,703 | 4,502 | ||||||||||||
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Total assets | $ | 3,490,528 | $ | 3,292,403 | $ | 3,575,112 | $ | 3,393,978 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Loans and notes payable | $ | 208,056 | $ | 126,136 | $ | 241,339 | $ | 120,138 | ||||||||
Accounts payable | 189,278 | 111,616 | 169,130 | 163,415 | ||||||||||||
Accrued expenses | 162,853 | 146,319 | 184,115 | 149,683 | ||||||||||||
Income taxes payable | 48 | 8,504 | — | 46,675 | ||||||||||||
Current portion of long-term obligations | 14,235 | 14,552 | 13,064 | 13,348 | ||||||||||||
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Total current liabilities | 574,470 | 407,127 | 607,648 | 493,259 | ||||||||||||
Long-term obligations, excluding current portion | 1,638,643 | 1,646,121 | 1,534,146 | 1,539,604 | ||||||||||||
Deferred income tax liabilities | 277,358 | 276,667 | 282,376 | 278,819 | ||||||||||||
Deferred rent and other long-term liabilities | 60,166 | 49,471 | 80,389 | 65,507 | ||||||||||||
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Total liabilities | 2,550,637 | 2,379,386 | 2,504,559 | 2,377,189 | ||||||||||||
Redeemable securities | 3,000 | — | ||||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock (119,498,654 and 119,258,374 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively) | 1,195 | 1,193 | ||||||||||||||
Common stock (119,662,869 and 119,515,894 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively) | 1,197 | 1,195 | ||||||||||||||
Additional paid-in capital | 908,942 | 904,425 | 915,090 | 910,167 | ||||||||||||
Retained earnings | 72,490 | 40,189 | 188,049 | 157,666 | ||||||||||||
Accumulated other comprehensive loss | (42,736 | ) | (32,790 | ) | (36,783 | ) | (52,239 | ) | ||||||||
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Total stockholders’ equity | 939,891 | 913,017 | 1,067,553 | 1,016,789 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 3,490,528 | $ | 3,292,403 | ||||||||||||
Total liabilities, redeemable securities and stockholders’ equity | $ | 3,575,112 | $ | 3,393,978 | ||||||||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended September 30, | ||||||||
| 2016 | 2015 | |||||||
Revenues: | ||||||||
Net sales | $ | 553,382 | $ | 551,380 | ||||
Royalties and franchise fees | 3,568 | 4,027 | ||||||
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Total revenues | 556,950 | 555,407 | ||||||
Expenses: | ||||||||
Cost of sales | 356,662 | 361,530 | ||||||
Wholesale selling expenses | 14,739 | 15,465 | ||||||
Retail operating expenses | 100,746 | 102,432 | ||||||
Franchise expenses | 3,370 | 3,608 | ||||||
General and administrative expenses | 38,972 | 35,979 | ||||||
Art and development costs | 5,543 | 4,913 | ||||||
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Total expenses | 520,032 | 523,927 | ||||||
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Income from operations | 36,918 | 31,480 | ||||||
Interest expense, net | 22,424 | 29,554 | ||||||
Other (income) expense, net | (905 | ) | 79,130 | |||||
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Income (loss) before income taxes | 15,399 | (77,204 | ) | |||||
Income tax expense (benefit) | 5,219 | (32,715 | ) | |||||
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Net income (loss) | $ | 10,180 | $ | (44,489 | ) | |||
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Comprehensive income (loss) | $ | 6,028 | $ | (55,797 | ) | |||
Net income (loss) per common share-Basic | $ | 0.09 | $ | (0.37 | ) | |||
Net income (loss) per common share-Diluted | $ | 0.08 | $ | (0.37 | ) | |||
Weighted-average number of common shares-Basic | 119,406,751 | 119,253,707 | ||||||
Weighted-average number of common shares-Diluted | 120,472,297 | 119,253,707 | ||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
Three Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
Revenues: | ||||||||
Net sales | $ | 557,350 | $ | 553,382 | ||||
Royalties and franchise fees | 2,759 | 3,568 | ||||||
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Total revenues | 560,109 | 556,950 | ||||||
Expenses: | ||||||||
Cost of sales | 357,523 | 356,662 | ||||||
Wholesale selling expenses | 16,274 | 14,739 | ||||||
Retail operating expenses | 100,739 | 100,746 | ||||||
Franchise expenses | 3,636 | 3,370 | ||||||
General and administrative expenses | 37,971 | 38,972 | ||||||
Art and development costs | 5,898 | 5,543 | ||||||
Development stage expenses | 680 | — | ||||||
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Total expenses | 522,721 | 520,032 | ||||||
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Income from operations | 37,388 | 36,918 | ||||||
Interest expense, net | 23,228 | 22,424 | ||||||
Other expense (income), net | 593 | (905 | ) | |||||
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Income before income taxes | 13,567 | 15,399 | ||||||
Income tax expense | 3,483 | 5,219 | ||||||
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Net income | $ | 10,084 | $ | 10,180 | ||||
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Comprehensive income | $ | 15,329 | $ | 6,028 | ||||
Net income per common share-Basic | $ | 0.08 | $ | 0.09 | ||||
Net income per common share-Diluted | $ | 0.08 | $ | 0.08 | ||||
Weighted-average number of common shares-Basic | 119,587,339 | 119,406,751 | ||||||
Weighted-average number of common shares-Diluted | 120,912,849 | 120,472,297 | ||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 | ||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except share and per share data)
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Net sales | $ | 1,523,094 | $ | 1,500,781 | $ | 1,572,966 | $ | 1,523,094 | ||||||||
Royalties and franchise fees | 11,009 | 12,251 | 9,020 | 11,009 | ||||||||||||
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Total revenues | 1,534,103 | 1,513,032 | 1,581,986 | 1,534,103 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of sales | 952,294 | 958,667 | 978,142 | 952,294 | ||||||||||||
Wholesale selling expenses | 45,854 | 48,825 | 47,946 | 45,854 | ||||||||||||
Retail operating expenses | 278,070 | 267,975 | 281,981 | 278,070 | ||||||||||||
Franchise expenses | 10,507 | 10,597 | 10,666 | 10,507 | ||||||||||||
General and administrative expenses | 115,828 | 110,048 | 125,763 | 115,828 | ||||||||||||
Art and development costs | 16,596 | 15,369 | 17,638 | 16,596 | ||||||||||||
Development stage expenses | 7,092 | — | ||||||||||||||
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Total expenses | 1,419,149 | 1,411,481 | 1,469,228 | 1,419,149 | ||||||||||||
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Income from operations | 114,954 | 101,551 | 112,758 | 114,954 | ||||||||||||
Interest expense, net | 67,857 | 101,430 | 65,214 | 67,857 | ||||||||||||
Other (income) expense, net | (4,107 | ) | 126,519 | |||||||||||||
Other expense (income), net | 860 | (4,107 | ) | |||||||||||||
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Income (loss) before income taxes | 51,204 | (126,398 | ) | |||||||||||||
Income tax expense (benefit) | 18,903 | (50,334 | ) | |||||||||||||
Income before income taxes | 46,684 | 51,204 | ||||||||||||||
Income tax expense | 16,301 | 18,903 | ||||||||||||||
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Net income (loss) | $ | 32,301 | $ | (76,064 | ) | |||||||||||
Net income | $ | 30,383 | $ | 32,301 | ||||||||||||
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Comprehensive income (loss) | $ | 22,355 | $ | (92,980 | ) | |||||||||||
Net income (loss) per common share-Basic | $ | 0.27 | $ | (0.69 | ) | |||||||||||
Net income (loss) per common share-Diluted | $ | 0.27 | $ | (0.69 | ) | |||||||||||
Comprehensive income | $ | 45,839 | $ | 22,355 | ||||||||||||
Net income per common share-Basic | $ | 0.25 | $ | 0.27 | ||||||||||||
Net income per common share-Diluted | $ | 0.25 | $ | 0.27 | ||||||||||||
Weighted-average number of common shares-Basic | 119,340,610 | 109,470,099 | 119,546,451 | 119,340,610 | ||||||||||||
Weighted-average number of common shares-Diluted | 120,312,492 | 109,470,099 | 120,907,979 | 120,312,492 | ||||||||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
| Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||
Balance at December 31, 2015 | 119,258,374 | $ | 1,193 | $ | 904,425 | $ | 40,189 | $ | (32,790 | ) | $ | 913,017 | ||||||||||||
Net income | 32,301 | 32,301 | ||||||||||||||||||||||
Equity based compensation | 2,829 | 2,829 | ||||||||||||||||||||||
Impact of foreign exchange contracts, net of taxes | (310 | ) | (310 | ) | ||||||||||||||||||||
Exercise of stock options | 240,280 | 2 | 1,279 | 1,281 | ||||||||||||||||||||
Foreign currency adjustments | (9,636 | ) | (9,636 | ) | ||||||||||||||||||||
Excess tax benefit | 526 | 526 | ||||||||||||||||||||||
Other | (117 | ) | (117 | ) | ||||||||||||||||||||
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Balance at September 30, 2016 | 119,498,654 | $ | 1,195 | $ | 908,942 | $ | 72,490 | $ | (42,736 | ) | $ | 939,891 | ||||||||||||
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| Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||
Balance at December 31, 2016 | 119,515,894 | $ | 1,195 | $ | 910,167 | $ | 157,666 | $ | (52,239 | ) | $ | 1,016,789 | ||||||||||||
Net income | 30,383 | 30,383 | ||||||||||||||||||||||
Employee equity based compensation | 3,852 | 3,852 | ||||||||||||||||||||||
Warrant expense | 286 | 286 | ||||||||||||||||||||||
Exercise of stock options | 146,975 | 2 | 785 | 787 | ||||||||||||||||||||
Foreign currency adjustments | 16,818 | 16,818 | ||||||||||||||||||||||
Impact of foreign exchange contracts, net of taxes | (1,362 | ) | (1,362 | ) | ||||||||||||||||||||
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Balance at September 30, 2017 | 119,662,869 | $ | 1,197 | $ | 915,090 | $ | 188,049 | $ | (36,783 | ) | $ | 1,067,553 | ||||||||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash flows provided by (used in) operating activities: | ||||||||||||||||
Net income (loss) | $ | 32,301 | $ | (76,064 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
Cash flows provided by operating activities: | ||||||||||||||||
Net income | $ | 30,383 | $ | 32,301 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization expense | 61,186 | 59,567 | 62,519 | 61,186 | ||||||||||||
Amortization of deferred financing costs and original issuance discounts | 3,821 | 39,225 | 3,699 | 3,821 | ||||||||||||
Provision (credit) for doubtful accounts | 429 | (10 | ) | |||||||||||||
Deferred income tax expense (benefit) | 933 | (5,994 | ) | |||||||||||||
Provision for doubtful accounts | 432 | 429 | ||||||||||||||
Deferred income tax expense | 3,221 | 933 | ||||||||||||||
Deferred rent | 12,240 | 9,580 | 5,634 | 12,240 | ||||||||||||
Undistributed loss in unconsolidated joint venture | 380 | 377 | ||||||||||||||
Loss (gain) on sale of assets | 14 | (2,488 | ) | |||||||||||||
Equity based compensation | 2,829 | 2,094 | ||||||||||||||
Undistributed (income) loss in unconsolidated joint ventures | (92 | ) | 380 | |||||||||||||
Loss on disposal of assets | 533 | 14 | ||||||||||||||
Non-employee equity based compensation | 3,286 | — | ||||||||||||||
Employee equity based compensation | 3,852 | 2,829 | ||||||||||||||
Changes in operating assets and liabilities, net of effects of acquired businesses: | ||||||||||||||||
Increase in accounts receivable | (46,576 | ) | (50,034 | ) | (25,370 | ) | (46,576 | ) | ||||||||
Increase in inventories | (108,882 | ) | (104,968 | ) | (46,292 | ) | (108,882 | ) | ||||||||
Increase in prepaid expenses and other current assets | (15,046 | ) | (12,178 | ) | (11,299 | ) | (15,046 | ) | ||||||||
Increase (decrease) in accounts payable, accrued expenses and income taxes payable | 79,848 | (23,656 | ) | |||||||||||||
(Decrease) increase in accounts payable, accrued expenses and income taxes payable | (24,244 | ) | 79,848 | |||||||||||||
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Net cash provided by (used in) operating activities | 23,477 | (164,549 | ) | |||||||||||||
Net cash provided by operating activities | 6,262 | 23,477 | ||||||||||||||
Cash flows used in investing activities: | ||||||||||||||||
Cash paid in connection with acquisitions, net of cash acquired | (31,820 | ) | (18,405 | ) | (72,804 | ) | (31,820 | ) | ||||||||
Capital expenditures | (57,324 | ) | (62,032 | ) | (47,916 | ) | (57,324 | ) | ||||||||
Proceeds from disposal of property and equipment | 31 | 604 | 26 | 31 | ||||||||||||
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Net cash used in investing activities | (89,113 | ) | (79,833 | ) | (120,694 | ) | (89,113 | ) | ||||||||
Cash flows provided by financing activities: | ||||||||||||||||
Repayment of loans, notes payable and long-term obligations | (28,158 | ) | (2,327,517 | ) | (25,311 | ) | (28,158 | ) | ||||||||
Proceeds from loans, notes payable and long-term obligations | 97,943 | 2,198,600 | 129,150 | 97,943 | ||||||||||||
Cash held in escrow in connection with acquisitions | 0 | (3,832 | ) | |||||||||||||
Issuance of common stock | 0 | 397,159 | ||||||||||||||
Excess tax benefit from stock options | 526 | 0 | — | 526 | ||||||||||||
Exercise of stock options | 1,281 | 30 | 787 | 1,281 | ||||||||||||
Debt issuance costs | (44 | ) | (11,248 | ) | — | (44 | ) | |||||||||
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Net cash provided by financing activities | 71,548 | 253,192 | 104,626 | 71,548 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (1,214 | ) | (2,219 | ) | 3,339 | (1,214 | ) | |||||||||
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Net increase in cash and cash equivalents | 4,698 | 6,591 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | (6,467 | ) | 4,698 | |||||||||||||
Cash and cash equivalents at beginning of period | 42,919 | 47,214 | 64,610 | 42,919 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 47,617 | $ | 53,805 | $ | 58,143 | $ | 47,617 | ||||||||
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Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid during the period | ||||||||||||||||
Interest | $ | 71,095 | $ | 127,367 | $ | 60,871 | $ | 71,095 | ||||||||
Income taxes, net of refunds | $ | 26,103 | $ | 36,675 | $ | 65,002 | $ | 26,103 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share)
Note 1 – Description of Business
Party City Holdco Inc. (the “Company” or “Party City Holdco”) is a vertically integrated supplier of decorated party goods. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Company’s retail operations include over 900 specialty retail party supply stores (including approximately 180150 franchise stores) in the United States and Canada, operating under the names Party City and Halloween City, ande-commerce websites, principally through the domain name PartyCity.com. Party City Holdco franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City.
Party City Holdco is a holding company with no operating assets or operations. The Company owns 100% of PC Nextco Holdings, LLC (“PC Nextco”), which owns 100% of PC Intermediate Holdings, Inc. (“PC Intermediate”). PC Intermediate owns 100% of Party City Holdings Inc. (“PCHI”), which owns the Company’s operating subsidiaries.
During January 2016, the Company acquired 19 franchise stores located in Arizona and New Mexico in one transaction for total consideration of approximately $26,500. Additionally, during March 2016, the Company acquired Festival S.A. (“Festival”), a manufacturer of costumes and accessories, for approximately $5,000.
Note 2 – Basis of Presentation and Recently Issued Accounting Pronouncements
The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its majority-owned and controlled entities. All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.
The majority of our retail operations define a fiscal year (“Fiscal Year”) as the52-week period or53-week period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim13-week periods following the end of the previous Fiscal Year, except in the case of a53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determined the differences between the retail operation’s Fiscal Year and Fiscal Quarters and the calendar year and calendar quarters to be insignificant.
Operating results for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2016.2017. Our business is subject to substantial seasonal variations as our retail segment has realized a significant portion of its net sales, cash flows and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, otheryear-end holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period such as movement in and the general level of raw material costs. For further information see the consolidated financial statements, and notes thereto, included in the Company’s Form10-K for the fiscal year ended December 31, 2015,2016, as filed with the Securities and Exchange Commission on March 11, 2016.16, 2017.
Recently Issued Accounting Pronouncements
In August 2016,2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The pronouncement amends the existing hedge accounting model in order to enable entities to better portray the economics of their risk management activities in their financial statements. The update is effective for the Company during the first quarter of 2019. Although the Company continues to evaluate this pronouncement, it does not believe that it will have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU2016-18, “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 Company’s consolidated financial statements.
In August 2016, the FASB issued ASU2016-15, “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 Company’s consolidated financial statements.
In March 2016, the FASB issued ASU2016-09, “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 forCompany adopted the Companypronouncement during the first quarter of 2017. The Company is in the process of evaluating the2017 and such adoption did not have a material impact of the pronouncement on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU2016-02, “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 Company’s consolidated financial statements.
In January 2016, the FASB issued ASU2016-01, “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 Company’s 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 Company’s consolidated financial statements.
In July 2015, the FASB issued ASU2015-11, “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 forCompany adopted the Companypronouncement during the first quarter of 2017. The Company is in the process of evaluating the impact of the pronouncement on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s 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, 20162017 and such adoption did not have a material impact on the Company’s 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 Company’s 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 updatenew standard is effective for the Company during the first quarter of 2018; however, early adoption is permitted.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 ofhas decided to adopt the pronouncement onusing the modified retrospective approach. Although the Company continues to evaluate the pronouncement and it might impact the accounting for certain discounts and rebates within the Company’s wholesale business, the Company does not believe that the pronouncement will have a material impact on its consolidated financial statements and its method of adoption.statements.
Note 3 – Inventories
Inventories consisted of the following:
| September 30, 2016 | December 31, 2015 | September 30, 2017 | December 31, 2016 | |||||||||||||
Finished goods | $ | 649,880 | $ | 532,606 | $ | 646,486 | $ | 581,277 | ||||||||
Raw materials | 24,329 | 21,278 | 30,395 | 23,222 | ||||||||||||
Work in process | 9,446 | 10,375 | 10,373 | 9,369 | ||||||||||||
|
|
|
| |||||||||||||
| $ | 683,655 | $ | 564,259 | $ | 687,254 | $ | 613,868 | |||||||||
|
|
|
| |||||||||||||
Inventories are valued at the lower of cost or market.net realizable value. The Company principally determines the cost of inventory using the weighted average method.
The Company estimates retail inventory shortage for the periods between physical inventory dates on astore-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.
Note 4 – Income Taxes
The effective income tax expenserate for the three andnine months ended September 30, 2017, 34.9%, is lower than the effective rate for the nine months ended September 30, 2016, was determined based upon the Company’s estimated consolidated effective income36.9%, principally due to discrete items related to uncertain tax rate for the year ending December 31, 2016.positions, stock option exercises andreturn-to-provision adjustments. The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2016 and the U.S. federal statutory rate is primarily attributable to state income taxes, unrecognized foreign tax credits and benefits on certain foreign losses,impact of such items was partially offset by a foreignthe effect of state tax rate differential and available domestic manufacturing deductions.changes on deferred tax liabilities.
Note 5 – Changes in Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss consisted of the following:
| Three Months Ended September 30, 2016 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2016 | $ | (39,500 | ) | $ | 916 | $ | (38,584 | ) | ||||
Other comprehensive loss before reclassifications, net | (3,537 | ) | (470 | ) | (4,007 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net | 0 | (145 | ) | (145 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive loss, net | (3,537 | ) | (615 | ) | (4,152 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2016 | $ | (43,037 | ) | $ | 301 | $ | (42,736 | ) | ||||
|
|
|
|
|
| |||||||
| Three Months Ended September 30, 2015 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2015 | $ | (18,589 | ) | $ | 246 | $ | (18,343 | ) | ||||
Other comprehensive (loss) income before reclassifications, net | (11,502 | ) | 211 | (11,291 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net | 0 | (17 | ) | (17 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive (loss) income, net | (11,502 | ) | 194 | (11,308 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2015 | $ | (30,091 | ) | $ | 440 | $ | (29,651 | ) | ||||
|
|
|
|
|
| |||||||
| Nine Months Ended September 30, 2016 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at December 31, 2015 | $ | (33,401 | ) | $ | 611 | $ | (32,790 | ) | ||||
Other comprehensive (loss) income before reclassifications, net | (9,636 | ) | 183 | (9,453 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net | 0 | (493 | ) | (493 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive loss, net | (9,636 | ) | (310 | ) | (9,946 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2016 | $ | (43,037 | ) | $ | 301 | $ | (42,736 | ) | ||||
|
|
|
|
|
| |||||||
| Three Months Ended September 30, 2017 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2017 | $ | (41,650 | ) | $ | (378 | ) | $ | (42,028 | ) | |||
Other comprehensive income (loss) before reclassifications | 5,297 | (281 | ) | 5,016 | ||||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income | — | 229 | 229 | |||||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive income (loss) | 5,297 | (52 | ) | 5,245 | ||||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2017 | $ | (36,353 | ) | $ | (430 | ) | $ | (36,783 | ) | |||
|
|
|
|
|
| |||||||
| Three Months Ended September 30, 2016 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2016 | $ | (39,500 | ) | $ | 916 | $ | (38,584 | ) | ||||
Other comprehensive loss before reclassifications | (3,537 | ) | (470 | ) | (4,007 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net | — | (145 | ) | (145 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive loss, net | (3,537 | ) | (615 | ) | (4,152 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2016 | $ | (43,037 | ) | $ | 301 | $ | (42,736 | ) | ||||
|
|
|
|
|
| |||||||
| Nine Months Ended September 30, 2017 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at December 31, 2016 | $ | (53,171 | ) | $ | 932 | $ | (52,239 | ) | ||||
Other comprehensive income (loss) before reclassifications, net of income tax | 16,818 | (1,077 | ) | 15,741 | ||||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax | — | (285 | ) | (285 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive income (loss) | 16,818 | (1,362 | ) | 15,456 | ||||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2017 | $ | (36,353 | ) | $ | (430 | ) | $ | (36,783 | ) | |||
|
|
|
|
|
| |||||||
Balance at December 31, 2014 Other comprehensive (loss) income before reclassifications, net Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net Net current-period other comprehensive (loss) income, net Balance at September 30, 2015 Balance at December 31, 2015 Other comprehensive (loss) income before reclassifications, net of income tax Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax Net current-period other comprehensive loss Balance at September 30, 2016 Nine Months Ended September 30, 2015 Foreign
Currency
Adjustments Impact of
Foreign
Exchange
Contracts,
Net of Taxes Total,
Net of Taxes $ (12,969 ) $ 234 $ (12,735 ) (17,122 ) 476 (16,646 ) 0 (270 ) (270 ) (17,122 ) 206 (16,916 ) $ (30,091 ) $ 440 $ (29,651 ) Nine Months Ended September 30, 2016 Foreign
Currency
Adjustments Impact of
Foreign
Exchange
Contracts,
Net of Taxes Total,
Net of Taxes $ (33,401 ) $ 611 $ (32,790 ) (9,636 ) 183 (9,453 ) — (493 ) (493 ) (9,636 ) (310 ) (9,946 ) $ (43,037 ) $ 301 $ (42,736 )
Note 6 – Capital Stock
At September 30, 2016,2017, the Company’s authorized capital stock consisted of 300,000,000 shares of $0.01 par value common stock and 15,000,000 shares of $0.01 par value preferred stock.
Note 7 – Segment Information
Industry Segments
The Company has two identifiable business segments. The Wholesale segment designs, manufactures, contracts for manufacturesources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Retail segment operates specialty retail party supply stores in the United States and Canada, principally under the names Party City and Halloween City, and it operatese-commerce websites, principally through the domain name Partycity.com. The Retail segment also franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City.
The Company’s industry segment data for the three months ended September 30, 20162017 and September 30, 20152016 was as follows:
| Wholesale | Retail | Consolidated | ||||||||||||||||||||||
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 381,858 | $ | 364,057 | $ | 745,915 | ||||||||||||||||||
Royalties and franchise fees | — | 2,759 | 2,759 | |||||||||||||||||||||
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| ||||||||||||||||||||||
Total revenues | 381,858 | 366,816 | 748,674 | |||||||||||||||||||||
Eliminations | (188,565 | ) | — | (188,565 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net revenues | $ | 193,293 | $ | 366,816 | $ | 560,109 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Income from operations | $ | 22,808 | $ | 14,580 | $ | 37,388 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Interest expense, net | 23,228 | |||||||||||||||||||||||
Other expense, net | 593 | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Income before income taxes | $ | 13,567 | ||||||||||||||||||||||
| ||||||||||||||||||||||||
| Wholesale | Retail | Consolidated | Wholesale | Retail | Consolidated | |||||||||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 416,387 | $ | 347,557 | $ | 763,944 | $ | 416,387 | $ | 347,557 | $ | 763,944 | ||||||||||||
Royalties and franchise fees | 0 | 3,568 | 3,568 | — | 3,568 | 3,568 | ||||||||||||||||||
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|
|
|
| |||||||||||||||||||
Total revenues | 416,387 | 351,125 | 767,512 | 416,387 | 351,125 | 767,512 | ||||||||||||||||||
Eliminations | (210,562 | ) | 0 | (210,562 | ) | (210,562 | ) | — | (210,562 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net revenues | $ | 205,825 | $ | 351,125 | $ | 556,950 | $ | 205,825 | $ | 351,125 | $ | 556,950 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations | $ | 35,532 | $ | 1,386 | $ | 36,918 | $ | 35,532 | $ | 1,386 | $ | 36,918 | ||||||||||||
|
|
|
| |||||||||||||||||||||
Interest expense, net | 22,424 | 22,424 | ||||||||||||||||||||||
Other income, net | (905 | ) | (905 | ) | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Income before income taxes | $ | 15,399 | $ | 15,399 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
| Wholesale | Retail | Consolidated | ||||||||||||||||||||||
Three Months Ended September 30, 2015 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 418,447 | $ | 339,465 | $ | 757,912 | ||||||||||||||||||
Royalties and franchise fees | 0 | 4,027 | 4,027 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total revenues | 418,447 | 343,492 | 761,939 | |||||||||||||||||||||
Eliminations | (206,532 | ) | 0 | (206,532 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net revenues | $ | 211,915 | $ | 343,492 | $ | 555,407 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Income (loss) from operations | $ | 35,860 | $ | (4,380 | ) | $ | 31,480 | |||||||||||||||||
|
| |||||||||||||||||||||||
Interest expense, net | 29,554 | |||||||||||||||||||||||
Other expense, net | 79,130 | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Loss before income taxes | $ | (77,204 | ) | |||||||||||||||||||||
| ||||||||||||||||||||||||
The Company’s industry segment data for the nine months ended September 30, 20162017 and September 30, 20152016 was as follows:
| Wholesale | Retail | Consolidated | ||||||||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 929,255 | $ | 1,103,127 | $ | 2,032,382 | ||||||||||||||||||
Royalties and franchise fees | — | 9,020 | 9,020 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total revenues | 929,255 | 1,112,147 | 2,041,402 | |||||||||||||||||||||
Eliminations | (459,416 | ) | — | (459,416 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net revenues | $ | 469,839 | $ | 1,112,147 | $ | 1,581,986 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Income from operations | $ | 49,258 | $ | 63,500 | $ | 112,758 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Interest expense, net | 65,214 | |||||||||||||||||||||||
Other expense, net | 860 | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Income before income taxes | $ | 46,684 | ||||||||||||||||||||||
| ||||||||||||||||||||||||
| Wholesale | Retail | Consolidated | Wholesale | Retail | Consolidated | |||||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 945,071 | $ | 1,043,212 | $ | 1,988,283 | $ | 945,071 | $ | 1,043,212 | $ | 1,988,283 | ||||||||||||
Royalties and franchise fees | 0 | 11,009 | 11,009 | — | 11,009 | 11,009 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total revenues | 945,071 | 1,054,221 | 1,999,292 | 945,071 | 1,054,221 | 1,999,292 | ||||||||||||||||||
Eliminations | (465,189 | ) | 0 | (465,189 | ) | (465,189 | ) | — | (465,189 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net revenues | $ | 479,882 | $ | 1,054,221 | $ | 1,534,103 | $ | 479,882 | $ | 1,054,221 | $ | 1,534,103 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations | $ | 65,669 | $ | 49,285 | $ | 114,954 | $ | 65,669 | $ | 49,285 | $ | 114,954 | ||||||||||||
|
|
|
| |||||||||||||||||||||
Interest expense, net | 67,857 | 67,857 | ||||||||||||||||||||||
Other income, net | (4,107 | ) | (4,107 | ) | ||||||||||||||||||||
|
| |||||||||||||||||||||||
Income before income taxes | $ | 51,204 | $ | 51,204 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
| Wholesale | Retail | Consolidated | ||||||||||||||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 923,717 | $ | 1,003,196 | $ | 1,926,913 | ||||||||||||||||||
Royalties and franchise fees | 0 | 12,251 | 12,251 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total revenues | 923,717 | 1,015,447 | 1,939,164 | |||||||||||||||||||||
Eliminations | (426,132 | ) | 0 | (426,132 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net revenues | $ | 497,585 | $ | 1,015,447 | $ | 1,513,032 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Income from operations | $ | 59,882 | $ | 41,669 | $ | 101,551 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Interest expense, net | 101,430 | |||||||||||||||||||||||
Other expense, net | 126,519 | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Loss before income taxes | $ | (126,398 | ) | |||||||||||||||||||||
| ||||||||||||||||||||||||
Note 8 – Commitments and Contingencies
The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
On November 18, 2015, a putative class action complaint was filed in the U.S. District Court for the Southern District of New York, naming Party City Holdco Inc. and certain executives as defendants. An Amended Complaint was filed on April 25, 2016, which named additional defendants. The Amended Complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with public filings related to the Company’s April 2015 initial public offering (“IPO”). The plaintiff seeks to represent a class of shareholders who purchased stock in the initial public offering or who can trace their shares to that offering. The complaint seeks unspecified damages and costs. The Company intends to vigorously defend itself against this action. The Company is unable, at this time, to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.
On April 5, 2016, a derivative complaint was filed in the Supreme Court for the State of New York, naming certain directors and executives as defendants, and naming the Company as a nominal defendant. The complaint seeks unspecified damages and costs, and corporate governance reforms, for alleged injury to the Company in connection with public filings related to the Company’s April 2015 IPO, compensation paid to executives, and the termination of the management agreement disclosed in the IPO-relatedinitial 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.
Note 9 – Derivative Financial Instruments
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risk managed through the use of derivative financial instruments is foreign currency exchange rate risk.
Foreign Exchange Risk Management
A portion of the Company’s cash flows is derived from transactions denominated in foreign currencies. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling, the Canadian Dollar, the Euro, the Malaysian Ringgit and the Australian Dollar, the Company enters into foreign exchange contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inventory purchases and sales. For contracts that qualify for hedge accounting, the terms of the foreign exchange contracts are such that cash flows from the contracts should be highly effective in offsetting the expected cash flows from the underlying forecasted transactions.
The foreign currency exchange contracts are reflected in the condensed consolidated balance sheets at fair value. The fair value of the foreign currency exchange contracts is the estimated amount that the counterparties would receive or pay to terminate the foreign currency exchange contracts at the reporting date, taking into account current foreign exchange spot rates. At September 30, 20162017 and December 31, 2015,2016, the Company had certain foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As these hedges were 100% effective, there was no impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings by June 2018.
The following table displays the fair values of the Company’s derivatives at September 30, 20162017 and December 31, 2015:2016:
| Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | Balance Sheet Line | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Derivative Instrument | September 30, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Exchange Contracts | (a) PP | $ | 385 | (a) PP | $ | 773 | (b) AE | $ | 288 | (b) AE | $ | 391 | (a | ) PP | $ | — | (a | ) PP | $ | 697 | (b | ) AE | $ | 355 | (b | ) AE | $ | 215 | ||||||||||||||||||||||||||||
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| (a) | PP = Prepaid expenses and other current assets |
| (b) | AE = Accrued expenses |
The following table displays the notional amounts of the Company’s derivatives at September 30, 20162017 and December 31, 2015:2016:
Derivative Instrument | September 30, 2016 | December 31, 2015 | ||||||
Foreign Exchange Contracts | $ | 21,825 | $ | 23,028 | ||||
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Derivative Instrument | September 30, 2017 | December 31, 2016 | ||||||
Foreign Exchange Contracts | $ | 6,875 | $ | 22,502 | ||||
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Note 10 – Fair Value Measurements
The provisions of FASB ASC Topic 820, “Fair Value Measurement”, define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
The following table shows assets and liabilities as of September 30, 2017 that are measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | Total as of September 30, 2017 | |||||||||||||
Noncontrolling interests liabilities | $ | — | $ | — | $ | 6,016 | $ | 6,016 | ||||||||
Derivative assets | — | — | — | — | ||||||||||||
Derivative liabilities | — | 355 | — | 355 | ||||||||||||
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 | |||||||||||||
Derivative assets | $ | 0 | $ | 385 | $ | 0 | $ | 385 | ||||||||
Derivative liabilities | 0 | 288 | 0 | 288 | ||||||||||||
The following table shows assets and liabilities as of December 31, 2015 that are measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total as of December 31, 2016 | |||||||||||||||||||||||||
Noncontrolling interests liabilities | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
Derivative assets | $ | 0 | $ | 773 | $ | 0 | $ | 773 | — | 697 | — | 697 | ||||||||||||||||||||
Derivative liabilities | 0 | 391 | 0 | 391 | — | 215 | — | 215 | ||||||||||||||||||||||||
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record other assets and liabilities at fair value on a nonrecurring basis, generally as a result of impairment charges. No impairment charges were recorded during the nine months ended September 30, 2017 or the nine months ended September 30, 2016.
The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at September 30, 20162017 because of the short-term maturities of the instruments and/or their variable rates of interest.
The carrying amount and fair value of the Company’s borrowings under its $1,340,000 senior secured term loan facility (“Term Loan Credit Agreement”) and its $350,000 of 6.125% senior notes (“Senior Notes”) are as follows:
| September 30, 2016 | September 30, 2017 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Term Loan Credit Agreement | $ | 1,307,026 | $ | 1,331,575 | $ | 1,198,750 | $ | 1,220,406 | ||||||||
Senior Notes | 344,339 | 363,125 | 345,162 | 364,809 | ||||||||||||
The fair values of the Term Loan Credit Agreement and the Senior Notes represent Level 2 fair value measurements as the debt instruments trade in inactive markets.
The carrying amounts for other long-term debt approximated fair value at September 30, 20162017 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.
During August 2015, the Company acquired 75% of the operations of Accurate Custom Injection Molding Inc. (“ACIM”). Based on the terms of the acquisition agreement, the Company will acquire the remaining 25% interest in ACIM over the next eightseven years and the Company’s liability for the estimated purchase price of such interest was $405$0 at September 30, 2016.2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During March 2015,2017, the Company acquired all85% of the common stock of Travis Designs Limited (“Travis”)Granmark, S.A. de C.V., a United Kingdom-based entity with costume designMexican manufacturer and sourcing capabilities. Thewholesaler of party goods. See Note 13 for further discussion of the acquisition. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 15% interest over the next five years and it has recorded a liability for the estimated purchase price includes contingent consideration, based on the sales of the business acquired through the end of 2016. As ofsuch interest, $3,342 at September 30, 2016, the liability was $1,102.2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During July 2017, the Company acquired 60% of Print Appeal, Inc. (“Print Appeal”). See Note 13 for further discussion of the acquisition. Based on the terms of the acquisition agreement, the Company will acquire the remaining 40% interest in Print Appeal over the next six years and the Company’s liability for the estimated purchase price of such interest was $2,674 at September 30, 2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
Note 11 – Earnings Per Share
Basic earnings per share are computed by dividing net income available for common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options and warrants as if they were exercised.
A reconciliation between basic and diluted income (loss) per share is as follows:
| Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 | |||||||||||||
Net income (loss) | $ | 10,180 | $ | (44,489 | ) | $ | 32,301 | $ | (76,064 | ) | ||||||
Weighted average shares - Basic | 119,406,751 | 119,253,707 | 119,340,610 | 109,470,099 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | 1,065,546 | 0 | 971,882 | 0 | ||||||||||||
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Weighted average shares - Diluted | 120,472,297 | 119,253,707 | 120,312,492 | 109,470,099 | ||||||||||||
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Net income (loss) per common share - Basic | $ | 0.09 | $ | (0.37 | ) | $ | 0.27 | $ | (0.69 | ) | ||||||
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Net income (loss) per common share - Diluted | $ | 0.08 | $ | (0.37 | ) | $ | 0.27 | $ | (0.69 | ) | ||||||
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| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Net income | $ | 10,084 | $ | 10,180 | $ | 30,383 | $ | 32,301 | ||||||||
Weighted average shares—Basic | 119,587,339 | 119,406,751 | 119,546,451 | 119,340,610 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Warrants | — | — | — | — | ||||||||||||
Stock options | 1,325,510 | 1,065,546 | 1,361,528 | 971,882 | ||||||||||||
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Weighted average shares—Diluted | 120,912,849 | 120,472,297 | 120,907,979 | 120,312,492 | ||||||||||||
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Net income per common share—Basic | $ | 0.08 | $ | 0.09 | $ | 0.25 | $ | 0.27 | ||||||||
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Net income per common share—Diluted | $ | 0.08 | $ | 0.08 | $ | 0.25 | $ | 0.27 | ||||||||
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During both the three and nine months ended September 30, 20162017 and September 30, 2015, 2,276,6952016, 2,370,106 stock options and 4,544,9642,276,695 stock options, respectively, were excluded from the calculation of net income (loss)per common share – diluted as they were anti-dilutive. Additionally, during the three months ended September 30, 2017 and September 30, 2016, 596,000 warrants and 0 warrants, respectively, were excluded from the calculation of net income per common share – diluted as they were anti-dilutive. During the nine months ended September 30, 2017 and September 30, 2016, 2,370,106 stock options and 2,276,695 stock options, respectively, were excluded from the calculation of net income per common share – diluted as they were anti-dilutive. Additionally, during the nine months ended September 30, 2017 and September 30, 2016, 596,000 warrants and 0 warrants, respectively, were excluded from the calculation of net income per common share – diluted as they were anti-dilutive.
Note 12 – Long-Term Obligations
Long-term obligations at September 30, 20162017 and December 31, 20152016 consisted of the following:
| September 30, 2016 | December 31, 2015 | September 30, 2017 | December 31, 2016 | |||||||||||||
Term Loan Credit Agreement | $ | 1,307,026 | $ | 1,314,538 | $ | 1,198,750 | $ | 1,205,496 | ||||||||
Capital lease obligations | 1,513 | 2,414 | 3,298 | 2,912 | ||||||||||||
Senior Notes | 344,339 | 343,721 | 345,162 | 344,544 | ||||||||||||
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Total long-term obligations | 1,652,878 | 1,660,673 | 1,547,210 | 1,552,952 | ||||||||||||
Less: current portion | (14,235 | ) | (14,552 | ) | (13,064 | ) | (13,348 | ) | ||||||||
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Long-term obligations, excluding current portion | $ | 1,638,643 | $ | 1,646,121 | $ | 1,534,146 | $ | 1,539,604 | ||||||||
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Note 13 — Subsequent Event– Acquisitions
During October 2016,January 2017, the Company amendedacquired 18 franchise stores, which are located mostly in Louisiana and Alabama, for total consideration of approximately $15,000. The Company is in the process of finalizing purchase accounting.
During March 2017, the Company acquired 85% of the common stock of Granmark, S.A. de C.V. (“Granmark”), a Mexican manufacturer and wholesaler of party goods, for total consideration of approximately $22,000 (exclusive of $5,600 of cash acquired). On the acquisition date, Granmark had $6,456 of debt outstanding under various revolving credit facilities. The majority of the balance was repaid during the first quarter of 2017. The Company is in the process of finalizing purchase accounting. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 15% interest over a three to five year period and it has recorded a liability for the estimated purchase price of such interest, $3,342 at September 30, 2017.
Also, during March 2017, the Company acquired an additional 18 franchise stores, which are located in North Carolina and South Carolina, for total consideration of approximately $31,000. The Company is in the process of finalizing purchase accounting.
During April 2017, the Company paid approximately $3,500 for a 28% ownership interest in Punchbowl, Inc., a provider of digital greeting cards and digital invitations. The Company is accounting for the investment under the equity method of accounting.
During July 2017, the Company acquired 60% of the common stock of Print Appeal, Inc., a wholesaler of personalized cups, napkins, and other items, for total consideration of approximately $2,800. The Company is in the process of finalizing purchase accounting. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 40% interest over a four to six year period and it has recorded a liability for the estimated purchase price of such interest, $2,674 at September 30, 2017.
Note 14 – Organizational Restructuring
On March 15, 2017, the Company and its Term Loan Credit Agreement. PriorChairman of the Board of Directors (“the Board”), Gerald Rittenberg, entered into a Transition and Consulting Agreement under which Mr. Rittenberg’s employment as Executive Chairman of the Company terminated effective March 31, 2017. Beginning on April 1, 2017 and continuing through December 31, 2020, unless earlier terminated as provided for in the agreement (the “Consulting Period”), Mr. Rittenberg will serve on a part-time basis asa non-employee senior adviser to the executionCompany. Additionally, Mr. Rittenberg will remain as Chairman of the amendment in October 2016,Board through the Company borrowed $100,000 under its $540,000 asset-based revolving credit facility (which has end of his existing director term (the Company’s 2018 annual meeting of shareholders) and, subsequently, he will be nominated by the Board to serve asa seasonal increase to $640,000 during a certain periodnon-employee member of each calendar year) (“ABL Facility”) and usedsuch Board throughout the proceeds to make a voluntary prepayment of a portionremainder of the outstanding balance underConsulting Period.
Under the Term Loan Credit Agreement. Then,Transition and Consulting Agreement, Mr. Rittenberg will receive payments from April 1, 2017 through December 31, 2017 in amounts equal to his base salary had he remained employed as Executive Chairman during such period (i.e., pay at 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%an annual rate equal to 2.00% and the applicable margin for LIBOR borrowings was lowered from 3.25% to 3.00%$2,090). Additionally, the LIBOR floor was lowered from 1.00%he will remain eligible to 0.75%.
The amended agreement providesreceive an annual bonus for two pricing options: (i) an ABR for any day, a rate per annum equal to the greater of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.5%, (c) the adjusted LIBOR rate plus 1% and (d) 1.75% or (ii) the LIBOR rate, with a LIBOR floor of 0.75%, in each case plus an applicable margin. The amendment provides that the term loans are subject to a 1.00% prepayment premium if voluntarily repaid within six months from the date of the amendment. Otherwise, the term loans may be voluntarily prepaid at any time without premium or penalty, other than customary breakage costs with respect to loansfull-year 2017 based on the LIBOR rate.terms of the Company’s 2017 bonus plan and the terms of his previous employment agreement (a target amount equal to 80% of his 2017 base salary). Further, during 2018, Mr. Rittenberg will receive severance payments aggregating $2,049, which will be made in four equal quarterly installments. Finally, beginning on January 1, 2018 and for the remainder of the Consulting Period, Mr. Rittenberg will receive payments equal to $40 per month in consideration for his consulting services.
Additionally, under the Transition and Consulting Agreement, during the Consulting Period, Mr. Rittenberg’s existing unvested stock options will remain eligible to vest in accordance with their original terms and Mr. Rittenberg’s existing vested stock options will remain outstanding (also, in accordance with their original terms).
As a result of the Transition and Consulting Agreement, the Company recorded a $4,296 severance charge in general and administrative expenses during the nine months ended September 30, 2017. Such amount represents: (1) the amount that he will be paid from April 1, 2017 – December 31, 2017 that is above and beyond the fair value ($40 per month) of his consulting services during such period, $1,207, (2) an estimate of his bonus for the period from April 1, 2017 – December 31, 2017, $1,040, and (3) the severance to be paid during 2018, $2,049. Throughout the Consulting Period, the Company will record $40 per month in general and administrative expenses, such amount representing the fair value of his consulting services.
Additionally, as a result of the Transition and Consulting Agreement: (1) allowing Mr. Rittenberg’s existing unvested stock options to continue vesting (such options would have been forfeited had he left the Company) and (2) allowing his existing vested stock options to remain outstanding (had he left the Company, he would have only had 60 days to exercise vested options), during the three months ended March 31, 2017 the Company recorded a $1,362 charge in general and administrative expenses due to the modification of such options.
Also, during the nine months ended September 30, 2017, the Company recorded a $3,195 severance charge related to the restructuring of its Retail segment. Of such amount, $2,291 was recorded in retail operating expenses and $904 was recorded in general and administrative expenses. The Company incurred $626majority of costs, principally banker fees, in conjunction with the amendment.severance was paid during the second quarter of 2017.
Note 15 – Kazzam, LLC
During the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), 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.
Although the Company currently only owns 30% of Kazzam’s equity, the Company has concluded that: a) Kazzam is a variable interest entity as it has insufficient equity at risk and b) the Company is its primary beneficiary. Therefore, the Company has consolidated Kazzam into the Company’s financial statements. Further, as the Company is currently funding all of Kazzam’sstart-up activities via a loan to Kazzam (which will be repaid when the venture is profitable), the Company is recording 100% of Kazzam’s operating results in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive income.
Additionally, as part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology has received a 70% ownership interest in Kazzam and a warrant to acquire 596,000 shares of Party City Holdco Inc. stock. During the nine months ended September 30, 2017, Kazzam recognized $3,000 of expense related to the fair value of the 70% interest. Additionally, during such period, Kazzam recorded $286 of expense related to the warrant. The amounts were recorded in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive income. The 70% interest has been recorded as redeemable securities in the Company’s consolidated balance sheet as, in the future, Ampology has the right to cause the Company to purchase the interest. The warrant has an exercise price of $15.60 and a fair value of $2,544, which is being amortized over four years.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
References throughout this document to the “Company” include Party City Holdco Inc. and its subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its subsidiaries and not to any other person.
Business Overview
Our Company
We are the leading party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. With over 900 locations (inclusive of approximately 180150 franchised stores), we have the onlycoast-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. DuringWe also operate multiplee-commerce sites, principally under the domain name PartyCity.com, and during the Halloween selling season we also operateopen 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 EBITDA, adjusted net income (loss) and, adjusted net income (loss) per common share – diluted.diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) toand adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss), please seerefer 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 2015,2016, approximately 75%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 and gift stores, dollar stores and other retailers and distributors throughout the world.
Intercompany sales between the Wholesale and the Retail segment are eliminated, and the wholesale profits on intercompany sales are deferred and realized at the time the merchandise is sold to the retail consumer. For segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.
Financial Measures
Revenues. Revenues from retail store operations are recognized at point of sale. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information.E-commerce sales are recorded on a free-on-board (“FOB”)FOB destination basis and include shipping revenues. Retail sales are reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Additionally, fees paid by franchisees when franchise stores are opened are recognized upon the completion of the Company’sour 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 retaile-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 retaile-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 anon-going basis in order to identify slow-moving goods.
Wholesale Selling Expenses. Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom rent, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes increase.
Retail Operating Expenses. Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to net sales.
Franchise Expenses.Franchise expenses include the costs associated with operating our franchise network, including salaries and benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with royalties and franchise fees.
General and Administrative Expenses. General and administrative expenses include all operating costs not included elsewhere in the statement of operations and comprehensive income (loss). These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees and data-processing costs. These expenses generally do not vary proportionally with net sales.
Art and Development Costs. Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
Development Stage Expenses. Representsstart-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, 20162017 Compared To Three Months Ended September 30, 20152016
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, 20162017 and 2015.2016.
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Net sales | $ | 553,382 | 99.4 | % | $ | 551,380 | 99.3 | % | $ | 557,350 | 99.5 | % | $ | 553,382 | 99.4 | % | ||||||||||||||||
Royalties and franchise fees | 3,568 | 0.6 | 4,027 | 0.7 | 2,759 | 0.5 | 3,568 | 0.6 | ||||||||||||||||||||||||
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Total revenues | 556,950 | 100.0 | 555,407 | 100.0 | 560,109 | 100.0 | 556,950 | 100.0 | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
Cost of sales | 356,662 | 64.0 | 361,530 | 65.1 | 357,523 | 63.8 | 356,662 | 64.0 | ||||||||||||||||||||||||
Wholesale selling expenses | 14,739 | 2.7 | 15,465 | 2.8 | 16,274 | 2.9 | 14,739 | 2.7 | ||||||||||||||||||||||||
Retail operating expenses | 100,746 | 18.1 | 102,432 | 18.4 | 100,739 | 18.0 | 100,746 | 18.1 | ||||||||||||||||||||||||
Franchise expenses | 3,370 | 0.6 | 3,608 | 0.6 | 3,636 | 0.6 | 3,370 | 0.6 | ||||||||||||||||||||||||
General and administrative expenses | 38,972 | 7.0 | 35,979 | 6.5 | 37,971 | 6.8 | 38,972 | 7.0 | ||||||||||||||||||||||||
Art and development costs | 5,543 | 1.0 | 4,913 | 0.9 | 5,898 | 1.1 | 5,543 | 1.0 | ||||||||||||||||||||||||
Development stage expenses | 680 | 0.1 | — | 0.0 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total expenses | 520,032 | 93.4 | 523,927 | 94.3 | 522,721 | 93.3 | 520,032 | 93.4 | ||||||||||||||||||||||||
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Income from operations | 36,918 | 6.6 | 31,480 | 5.7 | 37,388 | 6.7 | 36,918 | 6.6 | ||||||||||||||||||||||||
Interest expense, net | 22,424 | 4.0 | 29,554 | 5.3 | 23,228 | 4.1 | 22,424 | 4.0 | ||||||||||||||||||||||||
Other (income) expense, net | (905 | ) | (0.2 | ) | 79,130 | 14.3 | ||||||||||||||||||||||||||
Other expense (income), net | 593 | 0.1 | (905 | ) | (0.2 | ) | ||||||||||||||||||||||||||
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Income (loss) before income taxes | 15,399 | 2.8 | (77,204 | ) | (13.9 | ) | ||||||||||||||||||||||||||
Income tax expense (benefit) | 5,219 | 1.0 | (32,715 | ) | (5.9 | ) | ||||||||||||||||||||||||||
Income before income taxes | 13,567 | 2.4 | 15,399 | 2.8 | ||||||||||||||||||||||||||||
Income tax expense | 3,483 | 0.6 | 5,219 | 1.0 | ||||||||||||||||||||||||||||
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Net income (loss) | $ | 10,180 | 1.8 | % | $ | (44,489 | ) | (8.0 | )% | |||||||||||||||||||||||
Net income | $ | 10,084 | 1.8 | % | $ | 10,180 | 1.8 | % | ||||||||||||||||||||||||
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Net income (loss) per common share – Basic | $ | 0.09 | $ | (0.37 | ) | |||||||||||||||||||||||||||
Net income (loss) per common share – Diluted | $ | 0.08 | $ | (0.37 | ) | |||||||||||||||||||||||||||
Net income per common share – Basic | $ | 0.08 | $ | 0.09 | ||||||||||||||||||||||||||||
Net income per common share – Diluted | $ | 0.08 | $ | 0.08 | ||||||||||||||||||||||||||||
Revenues
Total revenues for the third quarter of 20162017 were $557.0$560.1 million and were $1.5$3.2 million, or 0.3%0.6%, higher than the third quarter of 2015.2016. The following table sets forth the Company’s total revenues for the three months ended September 30, 20162017 and 2015.2016.
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
| Dollars in Thousands | Percentage of Total Revenues | Dollars in Thousands | Percentage of Total Revenues | Dollars in Thousands | Percentage of Total Revenues | Dollars in Thousands | Percentage of Total Revenues | |||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||
Wholesale | $ | 416,387 | 74.8 | % | $ | 418,447 | 75.3 | % | $ | 381,858 | 68.2 | % | $ | 416,387 | 74.8 | % | ||||||||||||||||
Eliminations | (210,562 | ) | (37.8 | )% | (206,532 | ) | (37.1 | )% | (188,565 | ) | (33.7 | )% | (210,562 | ) | (37.8 | )% | ||||||||||||||||
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Net wholesale | 205,825 | 37.0 | % | 211,915 | 38.2 | % | 193,293 | 34.5 | % | 205,825 | 37.0 | % | ||||||||||||||||||||
Retail | 347,557 | 62.4 | % | 339,465 | 61.1 | % | 364,057 | 65.0 | % | 347,557 | 62.4 | % | ||||||||||||||||||||
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Total net sales | 553,382 | 99.4 | % | 551,380 | 99.3 | % | 557,350 | 99.5 | % | 553,382 | 99.4 | % | ||||||||||||||||||||
Royalties and franchise fees | 3,568 | 0.6 | % | 4,027 | 0.7 | % | 2,759 | 0.5 | % | 3,568 | 0.6 | % | ||||||||||||||||||||
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Total revenues | $ | 556,950 | 100.0 | % | $ | 555,407 | 100.0 | % | $ | 560,109 | 100.0 | % | $ | 556,950 | 100.0 | % | ||||||||||||||||
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Retail
Retail net sales during the third quarter of 20162017 were $347.6$364.1 million and increased $8.1$16.5 million, or 2.4%4.7%, compared to the third quarter of 2015.2016. Retail net sales at our Party City stores totaled $305.6$324.8 million and were $11.7$19.2 million, or 4.0%6.3%, higher than the third quarter of 2015, reflecting increased2016 as franchise store countacquisitions and positivenew store growth were partially offset by negative same-store sales.sales (see below for further detail). During the twelve months ended September��September 30, 2016,2017, we acquired 2336 franchise stores and 1 independent store, opened 2428 new stores and closed 148 stores. Global retaile-commerce sales totaled $35.8$34.1 million during the three months ended September 30, 2016third quarter of 2017 and were $0.2$1.7 million, or 0.6%4.7%, lower than during the three months ended September 30, 2015. Global retail corresponding quarter of 2016. The North Americane-commerce sales were negatively impactedthat are included in our Party City brand comp decreased by $1.0 million as9.9% during the U.S. Dollar strengthened in comparison to the British Pound Sterling.third quarter (see below for further detail). Sales at our temporary Halloween City stores were $6.2$5.2 million during the third quarter of 20162017 or $3.4$1.0 million lower than the corresponding quarter of 2015. The decrease was principally2016 due, in part, to the Company making a strategic decision to open fewer Halloween City stores during the 2016 Halloween selling season in response to the impact of Halloween falling on a Monday this year, as opposed to on a Saturdayopening later than last year.
Same-store sales for the Party City brand (including North American retaile-commerce sales) increaseddecreased by 1.2%2.6% during the third quarter of 2016; as a 2.8% increase in average transaction dollar size was partially offset2017, principally due to the adverse effects of Hurricanes Harvey and Irma, which negatively impacted brand comp sales by a 1.6% decrease in transaction count. approximately 140 basis points.
Excluding the impact ofe-commerce, same-store sales increaseddecreased by 0.4%1.8% as a 2.5% increase in average transaction dollar size, principally due to less promotional activity in our retail stores, opportunistic price increases and improved mix, was partially offset by a 2.1%2.2% decrease in transaction count. The North American retail e-commerce sales included in our same store sales for the Party City brand comp increased by 8.6% as a 10.3% increase in transaction count was partially offset by a 1.7%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 retaile-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 increaseremainder of the decrease in e-commerce transaction count reflects improvedlower traffic as customer conversion (the percentagelevels were consistent with the corresponding quarter of website visitors who purchase product from the site), principally due to enhanced digital marketing, expanded product assortment and increased promotional activity.prior year. The decrease in average transaction dollar size was principally reflects thedue to increased promotional activity mostly related to free shippingas units per transaction increased by approximately 3% versus the third quarter of product. 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 20162017 totaled $205.8$193.3 million and were $6.1$12.5 million, or 2.9%6.1%, lower than during the third quarter of 2015.2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $106.3$80.8 million and were $8.0$18.3 million, or 7.0%18.5%, lower than in the third quarter of 2015.during 2016. The decrease was principallypartially due to our acquisition of 2336 franchise stores during December 2015 and January 2016,the first quarter of 2017; as post-acquisition sales to such stores (approximately $6$10 million during the third quarter of 2015)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 weredecreased by approximately $2$1 million lower than during the third quarter of 2015 principally due to the continuedde-emphasis and reorganizationproduct-line refinement of our Grasslands Road gift division.business. Net sales of metallic balloons to domestic distributors and retailers and(including our franchisee networknetwork) totaled $18.5$19.2 million induring the third quarter of 20162017 and were $0.3$0.7 million, or 1.6%3.8%, higher than during the thirdcorresponding quarter of 2015.2016. Our international sales (which
(which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $81.0$93.3 million and were $1.6$5.1 million, or 2.0%5.8%, higher than in 2016. Our growth was largely driven by the third quarteracquisition of 2015 despite a $7.2 million negative impact from foreign currency translation. The translation impact was principally due to the U.S. Dollar strengtheningGranmark S.A. de C.V. (“Granmark”) in comparison to the British Pound Sterling. International sales increased versus the corresponding quarterQ1 of 2015 primarily due to higher costumes sales (impact of approximately $4 million, principally intothis year, as well as continued strong performance in the U.K. market), increased sales of garments and accessories (impact of approximately $2 million, also principally into the U.K. market) and higher sales of latex balloons (impact of approximately $1 million).German markets.
Intercompany sales to our retail affiliates totaled $210.6$188.6 million during the third quarter of 20162017 and were $4.0$22.0 million, or 2.0% higher10.4%, lower than during the corresponding quarter of 2015.2016. Intercompany sales represented 50.6%49.4% of total wholesale sales during the third quarter of 2016,2017, compared to 49.4%50.6% during the corresponding quarter of 2015.2016. The increasedecrease in intercompany sales was principally due to the impact of the higher company store count (as discussed above under “-Retail”) and the increasing share of shelf (as noted below under “-Gross Profit”) being partially offset by certain shipments of Halloween product shiftingcarryover inventory from the third quarter of 2015 to the second quarter of 2016.2016 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 2016 were $3.62017 totaled $2.8 million and were $0.5$0.8 million lower than during the third quarter of 20152016 principally due to acquiring 23the acquisition of 36 franchise stores during December 2015 and January 2016.the first quarter of 2017.
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended September 30, 20162017 and September 30, 2015.2016.
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
| Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | |||||||||||||||||||||||||
Retail | $ | 133,177 | 38.3 | % | $ | 127,871 | 37.7 | % | $ | 141,334 | 38.8 | % | $ | 133,177 | 38.3 | % | ||||||||||||||||
Wholesale | 63,543 | 30.9 | 61,979 | 29.2 | 58,493 | 30.3 | 63,543 | 30.9 | ||||||||||||||||||||||||
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Total | $ | 196,720 | 35.5 | % | $ | 189,850 | 34.4 | % | $ | 199,827 | 35.9 | % | $ | 196,720 | 35.5 | % | ||||||||||||||||
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The gross profit margin on net sales at retail during the third quarter of 20162017 was 38.3% or 6038.8%. Such percentage was 50 basis points higher than induring the third quarter of 2015.2016. The increase in margin was principally driven by: 1) an increase in our wholesalebenefits of increased share of shelf at our Party
City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) from 73.5% during the third quarterand reduced product costs were partially offset by increased promotional activities. Our wholesale share of 2015 toshelf at our Party City stores and our North American retaile-commerce operations increased from 75.1% during the third quarter of 2016 2) reduced promotional activity in our retail stores and 3) favorable mix. These positive drivers were partially offset by higher occupancy costs andto 78.0% during the impactthird quarter of the strengthening of the U.S. Dollar on our international retail operations that purchase product denominated in U.S. Dollars and sell in local currency (approximately $0.5 million impact).2017.
The gross profit on net sales at wholesale during the third quarters of2017 and 2016 was 30.3% and 2015 was 30.9% and 29.2%, respectively. The increase in margindecrease was primarily driven by reduced product costsprincipally due to sales mix (including increased international sales) and the favorable impact on gross margin rate associated with lower sales of licensed products, partially offset by the strengthening of the U.S. Dollar and its unfavorable impact on certainde-leveraging of our international subsidiaries that purchase product denominated in U.S. Dollars and sell in local currency (approximately $1 million impact).fixed distribution costs due to the lower overall sales levels.
Operating expenses
Wholesale selling expenses totaled $14.7were $16.3 million induring the third quarter of 20162017 and were $0.7$14.7 million or 4.7%, lower than during the corresponding quarter of 2015 principally2016. The increase was due to the impactapproximately $1.5 million of foreign currency translation.selling costs at Granmark (acquired in March 2017). Wholesale selling expenses were 7.2%8.4% and 7.3%7.2% of net wholesale sales during the third quarters of 2017 and 2016, and 2015, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the third quarter of 20162017 were $100.7 million and were $1.7 million, or 1.6%, lower than duringprincipally consistent with the third quarter of 2015.2016. The decreaseimpact of the higher store count (discussed above) was principally due tooffset by further realized savings associated with improved labor productivity and efficiency in our stores in part as a result of the costs associated with last year’s reset activities.and slightly lower advertising costs. Retail operating expenses were 29.0%27.7% and 30.2%29.0% of net retail sales during the third quarters of 20162017 and 2015,2016, respectively.
Franchise expenses during the third quarters of 2017 and 2016 and 2015 were $3.4$3.6 million and $3.6$3.4 million, respectively.
General and administrative expenses during the third quarter of 20162017 totaled $39.0$38.0 million and were $3.0$1.0 million, or 8.3%2.6%, higherlower than in the third quarter of 2015. The increase2016. Lower executive compensation was principally due topartially offset by inflationary cost increasesincreases. General and higher professional fees (partially related to costs incurred in connection with Sarbanes-Oxley compliance procedures).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 $5.5$5.9 million and $4.9$5.5 million during the third quarters of 2017 and 2016, and 2015, respectively. The increase was principally due
Development stage expenses representstart-up costs related to increased head count and other costs incurred in orderKazzam (see footnote 15 to support the expansion of Halloween and other retail programs.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 compared to $29.6 million duringrefinancing; 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 2015. The decrease reflects the reduction in interest rates following the Company’s August 2015 debt refinancing.
Other (income)2017, other expense, net,
Other (income) expense, net generally includes foreign currency transaction (gains) losses, corporate development expenses and (gains) losses from unconsolidated joint ventures. totaled $0.6 million.
For the third quarter of 2016, other income, net, totaled $0.9 million. Such amount included $1.8 million ofprincipally represented foreign currency transaction gains.
For the third quarter of 2015, otherIncome tax expense net, totaled $79.1 million, all of which related to the refinancing of the Company’s debt. During
The effective income tax rate for the three months ended September 30, 2015,2017, 25.7%, is lower than the Company redeemed its $700 million of 8.875% senior notes (“Old Senior Notes”) and refinanced its existing $1,125 million senior secured term loan facility (“Old Term Loan Credit Agreement”) and $400 million asset-based revolving credit facility (“Old ABL Facility”) with new indebtedness consisting of: (i) a $1,340 million senior secured term loan facility (“Term Loan Credit Agreement”), (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a certain period of each calendar year) (“ABL Facility”) and (iii) $350 million of 6.125% senior notes (“Senior Notes”). The redemption price for the Old Senior Notes was 6.656 % of the principal amount, $46.6 million. The Company recorded such amount in other expense, net. Additionally, in conjunction with the refinancing, the Company wrote-off $22.7 million of previously capitalized deferred financing costs, original issuance discounts and call premiums and also recorded such amount in other expense, net. Further, in conjunction with the refinancing of the term loans, the Company incurred banker and legal fees, $9.8 million of which was recorded in other expense, net.
Income tax expense (benefit)
The income tax expenseeffective rate for the three months ended September 30, 2016, was determined based upon the Company’s estimated consolidated effective income33.9%, principally due to discrete items related to uncertain tax rate for the year ending December 31, 2016.
positions, stock option exercises andreturn-to-provision adjustments. The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2016, as determined asimpact of September 30, 2016, and the U.S. federal statutory rate is primarily attributable to state income taxes, unrecognized foreign tax credits and benefits on certain foreign losses,such items was partially offset by a foreignthe effect of state tax rate differential and available domestic manufacturing deductions.changes on deferred tax liabilities.
Nine Months Ended September 30, 20162017 Compared To Nine Months Ended September 30, 20152016
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, 20162017 and 2015.2016.
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Net sales | $ | 1,523,094 | 99.3 | % | $ | 1,500,781 | 99.2 | % | $ | 1,572,966 | 99.4 | % | $ | 1,523,094 | 99.3 | % | ||||||||||||||||
Royalties and franchise fees | 11,009 | 0.7 | 12,251 | 0.8 | 9,020 | 0.6 | 11,009 | 0.7 | ||||||||||||||||||||||||
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Total revenues | 1,534,103 | 100.0 | 1,513,032 | 100.0 | 1,581,986 | 100.0 | 1,534,103 | 100.0 | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
Cost of sales | 952,294 | 62.1 | 958,667 | 63.4 | 978,142 | 61.8 | 952,294 | 62.1 | ||||||||||||||||||||||||
Wholesale selling expenses | 45,854 | 2.9 | 48,825 | 3.2 | 47,946 | 3.0 | 45,854 | 2.9 | ||||||||||||||||||||||||
Retail operating expenses | 278,070 | 18.1 | 267,975 | 17.7 | 281,981 | 17.8 | 278,070 | 18.1 | ||||||||||||||||||||||||
Franchise expenses | 10,507 | 0.7 | 10,597 | 0.7 | 10,666 | 0.7 | 10,507 | 0.7 | ||||||||||||||||||||||||
General and administrative expenses | 115,828 | 7.6 | 110,048 | 7.3 | 125,763 | 7.9 | 115,828 | 7.6 | ||||||||||||||||||||||||
Art and development costs | 16,596 | 1.1 | 15,369 | 1.0 | 17,638 | 1.1 | 16,596 | 1.1 | ||||||||||||||||||||||||
Development stage expenses | 7,092 | 0.4 | — | 0.0 | ||||||||||||||||||||||||||||
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Total expenses | 1,419,149 | 92.5 | 1,411,481 | 93.3 | 1,469,228 | 92.9 | 1,419,149 | 92.5 | ||||||||||||||||||||||||
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Income from operations | 114,954 | 7.5 | 101,551 | 6.7 | 112,758 | 7.1 | 114,954 | 7.5 | ||||||||||||||||||||||||
Interest expense, net | 67,857 | 4.4 | 101,430 | 6.7 | 65,214 | 4.1 | 67,857 | 4.4 | ||||||||||||||||||||||||
Other (income) expense, net | (4,107 | ) | (0.2 | ) | 126,519 | 8.4 | ||||||||||||||||||||||||||
Other expense (income), net | 860 | 0.1 | (4,107 | ) | (0.2 | ) | ||||||||||||||||||||||||||
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Income (loss) before income taxes | 51,204 | 3.3 | (126,398 | ) | (8.4 | ) | ||||||||||||||||||||||||||
Income tax expense (benefit) | 18,903 | 1.2 | (50,334 | ) | (3.4 | ) | ||||||||||||||||||||||||||
Income before income taxes | 46,684 | 3.0 | 51,204 | 3.3 | ||||||||||||||||||||||||||||
Income tax expense | 16,301 | 1.0 | 18,903 | 1.2 | ||||||||||||||||||||||||||||
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Net income (loss) | $ | 32,301 | 2.1 | % | $ | (76,064 | ) | (5.0 | )% | |||||||||||||||||||||||
Net income | $ | 30,383 | 1.9 | % | $ | 32,301 | 2.1 | % | ||||||||||||||||||||||||
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Net income (loss) per common share – Basic | $ | 0.27 | $ | (0.69 | ) | |||||||||||||||||||||||||||
Net income (loss) per common share – Diluted | $ | 0.27 | $ | (0.69 | ) | |||||||||||||||||||||||||||
Net income per common share – Basic | $ | 0.25 | $ | 0.27 | ||||||||||||||||||||||||||||
Net income per common share – Diluted | $ | 0.25 | $ | 0.27 | ||||||||||||||||||||||||||||
Revenues
Total revenues for the first nine months ended September 30, 2016of 2017 were $1,534.1$1,582.0 million and were $21.1$47.9 million, or 1.4%3.1%, higher than the corresponding period of 2015.2016. The following table sets forth the Company’s total revenues for the nine months ended September 30, 20162017 and 2015.2016.
| Nine Months Ended September 30, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Dollars in Thousands | Percentage of Total Revenues | Dollars in Thousands | Percentage of Total Revenues | |||||||||||||
Net Sales: | ||||||||||||||||
Wholesale | $ | 945,071 | 61.6 | % | $ | 923,717 | 61.1 | % | ||||||||
Eliminations | (465,189 | ) | (30.3 | )% | (426,132 | ) | (28.2 | )% | ||||||||
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Net wholesale | 479,882 | 31.3 | % | 497,585 | 32.9 | % | ||||||||||
Retail | 1,043,212 | 68.0 | % | 1,003,196 | 66.3 | % | ||||||||||
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| |||||||||
Total net sales | 1,523,094 | 99.3 | % | 1,500,781 | 99.2 | % | ||||||||||
Royalties and franchise fees | 11,009 | 0.7 | % | 12,251 | 0.8 | % | ||||||||||
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| |||||||||
Total revenues | $ | 1,534,103 | 100.0 | % | $ | 1,513,032 | 100.0 | % | ||||||||
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Net Sales: Wholesale Eliminations Net wholesale Retail Total net sales Royalties and franchise fees Total revenues Nine Months Ended September 30, 2017 2016 Dollars in
Thousands Percentage of
Total Revenues Dollars in
Thousands Percentage of
Total Revenues $ 929,255 58.7 % $ 945,071 61.6 % (459,416 ) (29.0 )% (465,189 ) (30.3 )% 469,839 29.7 % 479,882 31.3 % 1,103,127 69.7 % 1,043,212 68.0 % 1,572,966 99.4 % 1,523,094 99.3 % 9,020 0.6 % 11,009 0.7 % $ 1,581,986 100.0 % $ 1,534,103 100.0 %
Retail
Retail net sales during the first nine months ended September 30, 2016of 2017 were $1,043.2$1,103.1 million and increased $40.0$59.9 million, or 4.0%5.7%, compared to the corresponding periodfirst nine months of 2015.2016. Retail net sales at our Party City stores totaled $934.3$993.7 million and were $37.3$59.4 million, or 4.2%6.4%, higher than the corresponding period of 2015,2016 as increasedfranchise store countacquisitions and positive same-store salesnew store growth were partially offset by the impact of foreign currency translation.negative same-store sales (see below for further detail). During the twelve months ended September 30, 2016,2017, we acquired 2336 franchise stores and 1 independent store, opened 2428 new stores and closed 148 stores. A strengthening of the U.S. Dollar, in comparison to the Canadian Dollar, negatively impacted our CanadianGlobal retaile-commerce sales totaled $104.2 million during the first nine months of 2016 by $2.5 million. Global retail e-commerce sales totaled $102.72017 and were $1.5 million, or 1.5%, higher than during the nine months ended September 30,corresponding period of 2016, and were $6.1 million, or 6.3% higher than the nine months ended September 30, 2015. The North American retail e-commerce sales included in our same store sales for the Party City brand comp increaseddriven by 11.8% during the period (see below for further detail). This positive factor was partially offset by a $1.8 million decrease in strong internationale-commerce sales due to the strengthening of the U.S. Dollar in comparison to the British Pound Sterling. sales. Sales at our temporary Halloween City stores were $6.2$5.2 million during 2016the period or $3.4$1.0 million lower than the corresponding period of 2015. The decrease was principally2016 partially due to the Company making a strategic decision to open fewer Halloween Cityfact that we opened stores during the 2016 Halloween selling season in response to the impact of Halloween falling on a Mondaylater this year as opposed to onthan a Saturday last year.year ago.
Same-store sales for the Party City brand (including North American retaile-commerce sales) increaseddecreased by 1.3% during0.3%, largely a result of the first nine monthsadverse impact of 2016; as a 2.3% increase in average transaction dollar size was partially offsetHurricanes Harvey and Irma, which adversely impacted brand comp sales by a 1.0% decrease in transaction count. approximately 50 basis points.
Excluding the impact ofe-commerce, same-store sales increaseddecreased by 0.3% as a 1.8% increase in average transaction dollar size was partially offset by a 1.5%0.9% decrease in transaction count. The increase in average transaction dollar size was principally due to opportunistic price increases and improved mix. The North American retail e-commerce sales included in our same store sales for the Party City brand comp increased by 11.8% as a 12.5% increase in transaction count was partially offset by a 0.7%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 retaile-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 ine-commerce transaction count reflects improvedhigher customer conversion (the percentagelevels versus the same period of website visitors who purchase product from the site), principally due to enhanced digital marketing, expanded product assortment and increased promotional activity.last year. The decrease in average transaction dollar size principally relates to the increasedlower units, largely a reflection of lower free-freight promotional activity, mostly related to free shipping of product. 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 20162017 totaled $479.9$469.8 million and were $17.7$10.0 million, or 3.6%2.1%, lower than during the first nine months of 2015.2016. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $247.3$204.4 million and were $23.3$32.3 million, or 8.6%13.6%, lower than during the corresponding periodfirst nine months of 2015.2016. The decrease was principally due to our acquisition of 2336 franchise stores during December 2015 and January 2016;the first quarter of 2017; as post-acquisition sales to such stores (approximately $14$19 million during the first nine months of 2015)2016) are now eliminated as intercompany sales. The decrease was also partiallyAdditionally, sales to existing franchisees decreased versus the corresponding period of 2016, principally due to lowercarryover inventory from the 2016 Halloween selling season. Further, gift product sales (approximately $7decreased by approximately $3 million impact) due to the continuedde-emphasis and reorganizationproduct-line refinement of our Grasslands Road gift division. These factors were partially offset by the August 2015 acquisition of Accurate Custom Injection Molding Inc. positively impacting sales during the first nine months of 2016 by approximately $3 million.business. Net sales of metallic balloons to domestic distributors and retailers and(including our franchisee networknetwork) totaled $58.8$62.4 million during the first nine months of 20162017 and were $1.3$3.7 million, or 2.2% lower6.3%, higher than during the corresponding period of 2015 as certain2016 primarily due to stronger Valentine’s Day sales, shifted into December 2015 (the corresponding sales forin part due to the previous Valentine’s Day occurred in January 2015).timing of certain shipments. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $173.8$203.0 million and were $6.9$18.6 million, or 4.1%10.1%, higher than the corresponding period of 2015,in 2016, despite an $11.3a $4.9 million negative impact from foreign currency translation during 2016. International sales increased versus the corresponding periodfirst nine months of 2015 primarily due2017. This growth was attributable to higher costumes sales (impacttwo acquisitions and further expansion of approximately $4 million, principally into the U.K. market), increased sales of garments and accessories (impact of approximately $3 million, also principally into the U.K. market), the success of a new ourstore-in-store program concept with a mass merchandiser in Australia (impact of approximately $2 million), increased sales in Europe due to the 2016 European football championships (impact of approximately $2 million) and higher sales of latex balloons (impact of approximately $1 million).key retailers.
Intercompany sales to our retail affiliates totaled $465.2$459.4 million during the first nine months of 20162017 and were $39.1$5.8 million, or 9.2%1.2%, higherlower than during the corresponding period of 2015.2016. Intercompany sales represented 49.2%49.4% of total wholesale sales during the first nine months of 2016,2017, compared to 46.1%49.2% during the corresponding period of 2015.2016. The increasedecrease in intercompany sales was principally due to carryover inventory from the impact of the higher company store count (as discussed above under “-Retail”), the increasing share of shelf (as noted below under “-Gross Profit”), and higher shipments of summer/luau product.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 2016 were $11.02017 totaled $9.0 million and were $1.2$2.0 million, or 18.1%, lower than during the first nine months of 20152016 principally due to acquiringthe acquisition of 36 franchise stores during December 2015 and January 2016.the first quarter of 2017.
Gross Profit
The following table sets forth the Company’s gross profit for the nine months ended September 30, 20162017 and September 30, 2015.2016.
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
| Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | Dollars in Thousands | Percentage of Net Sales | |||||||||||||||||||||||||
Retail | $ | 419,283 | 40.2 | % | $ | 394,607 | 39.3 | % | $ | 447,787 | 40.6 | % | $ | 419,283 | 40.2 | % | ||||||||||||||||
Wholesale | 151,517 | 31.6 | 147,507 | 29.6 | 147,037 | 31.3 | 151,517 | 31.6 | ||||||||||||||||||||||||
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Total | $ | 570,800 | 37.5 | % | $ | 542,114 | 36.1 | % | $ | 594,824 | 37.8 | % | $ | 570,800 | 37.5 | % | ||||||||||||||||
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The gross profit margin on net sales at retail during the first nine months of 20162017 was 40.2%, or 9040.6%. Such percentage was 40 basis points higher than during the corresponding period of 2015.2016. The increase in margin was principally driven by an increase in our wholesalebenefits of increased share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale operations) from 73.6% during the first nine monthsand reduced product costs were partially offset by increased promotional activities. Our wholesale share of 2015 toshelf at our Party City stores and our North American retaile-commerce operations increased from 75.9% during the first nine months of 2016.2016 to 78.0% during the first nine months of 2017.
The gross profit on net sales at wholesale during the first nine months of2017 and 2016 was 31.3% and 2015 was 31.6% and 29.6%, respectively. The increase in margindecrease was primarily driven by reduced product costs and the favorable impact on gross margin rate associated with lower sales of licensed products. These positive factors were partially offset byprincipally due to the strengthening of the U.S. Dollar and its unfavorable impact on certain of our international subsidiaries that purchase product denominated in U.S. Dollars and sell in local currency. Benefits associated with continued improvements in our sourcing efforts were offset by the impact of sales mix (including increased international sales) andde-leveraging of our fixed distribution costs due to the lower overall sales levels.
Operating expenses
Wholesale selling expenses totaled $45.9were $47.9 million induring the first nine months of 20162017 and were $3.0$45.9 million or 6.1%, lower than induring the corresponding period of 2015. The decrease was principally due to2016. Approximately $3 million of selling costs at Granmark (acquired in March 2017) and inflationary cost savings associated with the reorganization of our gift sales group (discussed above) and, to a lesser extent, the $1.0 million impact ofincreases were partially offset by favorable foreign currency translation at international subsidiaries.($0.7 million) and lower intangible asset amortization. Wholesale selling expenses were 9.6%10.2% and 9.8%9.6% of net wholesale sales during the first nine months of 2017 and 2016, and 2015, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the first nine months of 20162017 were $278.1$282.0 million and were $10.1$3.9 million, or 3.8%1.4%, higher than during the corresponding period of 2015. The increase was principally due to higher store payroll costs (driven by the higher store count) and higher advertising costs in support of our new campaign which was launched in the second quarterfirst nine months of 2016. Foreign currency translation at international subsidiaries reduced retail operating expensesThe impact of the increased store count (discussed above) and inflationary cost increases were mostly offset by $0.8 millionrealized savings associated with improved labor productivity and efficiency in comparison to 2015.our stores and lower advertising expenses. Retail operating expenses were 25.6% and 26.7% of net retail sales during both the first nine months of 2017 and 2016, and the first nine months of 2015.respectively.
Franchise expenses during the first nine months of 2017 and 2016 and 2015 were $10.5$10.7 million and $10.6$10.5 million, respectively.
General and administrative expenses during the first nine months of 20162017 totaled $115.8$125.8 million and were $5.8$9.9 million, or 5.3%8.6%, higher than in 2015.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 increaseremainder of the variance versus the first nine months of 2016 was principally due to inflationary cost increases higher professional fees (partially related toand administrative costs incurredat Granmark (acquired in connection with Sarbanes-Oxley compliance procedures) and higher stock-based compensation expense. Foreign currency translation at international subsidiaries reduced generalMarch 2017). General and administrative expenses by $1.2 millionas a percentage of total revenues increased from 7.6% in comparison2016 to 2015.7.9% in 2017 due to the severance.
Art and development costs were $16.6$17.6 million and $15.4$16.6 million during the first nine months of 2017 and 2016, and 2015, respectively. The increase was principally dueSuch amounts represent 1.1% of total revenues in both periods.
Development stage expenses representstart-up costs related to increased head count and other costs incurred in orderKazzam (see footnote 15 to support the expansion of Halloween and other retail programs.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 compared to $101.4 million duringrefinancing; 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 2015. The decrease principally reflects the reduction in interest rates following the Company’s third quarter 2015 debt refinancing and the repayment of the $350.0 million PIK notes (the “Nextco Notes”), which were fully redeemed during the second quarter 2015 with proceeds from the Company’s initial public offering.
Other (income) expense, net
Other (income) expense, net generally includes foreign currency transaction (gains) losses, corporate development expenses and (gains) losses from unconsolidated joint ventures.
For the nine months ended September 30, 2016, other income, net, totaled $4.1 million. Such amount included $6.9 million of foreign currency transaction gains, primarily the impact of the change in the U.S. Dollar from December 31, 2015 to September 30, 2016 and the correspondingre-measurement of the U.S. dollar-denominated receivables and payables of our foreign operations.
ForIncome tax expense
The effective income tax rate for the nine months ended September 30, 2015, other expense, net, totaled $126.5 million, $79.1 million of which related to2017, 34.9%, is lower than the third quarter refinancing of the Company’s debt and $46.3 million of which related to the Company’s initial public offering.
During the three months ended September 30, 2015, the Company redeemed its Old Senior Notes and refinanced its Old Term Loan Credit Agreement and Old ABL Facility with new indebtedness consisting of: (i) a $1,340 million senior secured term loan facility, (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a certain period of each calendar year) and (iii) $350 million of 6.125% senior notes. The redemption price for the Old Senior Notes was 6.656 % of the principal amount, $46.6 million. The Company recorded such amount in other expense, net. Additionally, in conjunction with the refinancing, the Company wrote-off $22.7 million of previously capitalized deferred financing costs, original issuance discounts and call premiums and also recorded such amount in other expense, net. Further, in conjunction with the refinancing of the term loans, the Company incurred banker and legal fees, $9.8 million of which was recorded in other expense, net.
During April 2015, in conjunction with the Company’s initial public offering, the Company paid a 2% prepayment penalty, or $7.0 million, in order to redeem its Nextco Notes, and paid a management agreement termination fee of $30.7 million to affiliates of THL and Advent. Additionally, in conjunction with the redemption of the Nextco Notes, the Company wrote off $8.6 million of capitalized debt issuance costs and original issuance discounts.
Income tax expense (benefit)
The income tax expenseeffective rate for the nine months ended September 30, 2016, was determined based upon the Company’s estimated consolidated effective income36.9%, principally due to discrete items related to uncertain tax rate for the year ending December 31, 2016.
positions, stock option exercises andreturn-to-provision adjustments. The difference between the estimated consolidated effective income tax rate for the year ending December 31, 2016, as determined asimpact of September 30, 2016, and the U.S. federal statutory rate is primarily attributable to state income taxes, unrecognized foreign tax credits and benefits on certain foreign losses,such items was partially offset by a foreignthe effect of state tax rate differential and available domestic manufacturing deductions.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 - share—diluted as supplemental measures of ourits 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, refinancing charges, equity based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The 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 ornon-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 - 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:
Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted only on a supplemental basis. The reconciliations from net income (loss) to each of adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as follows:
| Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Net income (loss) | $ | 10,180 | $ | (44,489 | ) | $ | 32,301 | $ | (76,064 | ) | ||||||
Interest expense, net | 22,424 | 29,554 | 67,857 | 101,430 | ||||||||||||
Income taxes | 5,219 | (32,715 | ) | 18,903 | (50,334 | ) | ||||||||||
Depreciation and amortization | 20,015 | 19,766 | 61,186 | 59,567 | ||||||||||||
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EBITDA | 57,838 | (27,884 | ) | 180,247 | 34,599 | |||||||||||
Non-cash purchase accounting adjustments | — | 224 | 3,689 | 5,979 | ||||||||||||
Management fee (a) | — | — | — | 31,627 | ||||||||||||
Restructuring, retention and severance | 92 | 166 | 254 | 2,311 | ||||||||||||
Refinancing charges (b) | — | 79,011 | — | 94,607 | ||||||||||||
Deferred rent (c) | 7,095 | 5,479 | 12,240 | 9,580 | ||||||||||||
Store closing expenses (d) | 971 | 335 | 2,927 | 903 | ||||||||||||
Foreign currency (gains) losses, net | (1,767 | ) | (978 | ) | (6,945 | ) | 1,782 | |||||||||
Equity based compensation | 948 | 970 | 2,829 | 2,094 | ||||||||||||
Undistributed non-cash loss in unconsolidated joint venture | 113 | 342 | 380 | 377 | ||||||||||||
Gain on sale of assets (e) | — | — | — | (2,660 | ) | |||||||||||
Corporate development expenses (f) | 683 | 414 | 1,895 | 1,543 | ||||||||||||
Other | 61 | 167 | 118 | (51 | ) | |||||||||||
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Adjusted EBITDA | $ | 66,034 | $ | 58,246 | $ | 197,634 | $ | 182,691 | ||||||||
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| Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 | |||||||||||||
| (Dollars in thousands, except per share amounts) | ||||||||||||||||
Income (loss) before income taxes | $ | 15,399 | $ | (77,204 | ) | $ | 51,204 | $ | (126,398 | ) | ||||||
Intangible asset amortization | 4,049 | 4,700 | 12,182 | 14,216 | ||||||||||||
Non-cash purchase accounting adjustments (g) | (102 | ) | 955 | 4,991 | 8,430 | |||||||||||
Amortization of deferred financing costs and original issuance discounts (b) | 1,277 | 24,774 | 3,821 | 39,225 | ||||||||||||
Management fee (a) | — | — | — | 31,627 | ||||||||||||
Refinancing charges (b) | — | 58,338 | — | 65,338 | ||||||||||||
Equity based compensation | 948 | 970 | 2,829 | 2,094 | ||||||||||||
Gain on sale of assets (e) | — | — | — | (2,660 | ) | |||||||||||
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Adjusted income before income taxes | 21,571 | 12,533 | 75,027 | 31,872 | ||||||||||||
Adjusted income tax expense (h) | 7,568 | 623 | 27,918 | 8,645 | ||||||||||||
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Adjusted net income | $ | 14,003 | $ | 11,910 | $ | 47,109 | $ | 23,227 | ||||||||
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Adjusted net income per common share – diluted | $ | 0.12 | $ | 0.10 | $ | 0.39 | $ | 0.21 | ||||||||
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Weighted-average number of common shares-diluted | 120,472,297 | 120,386,423 | 120,312,492 | 110,503,035 | ||||||||||||
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
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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 | ||||||||||||
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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 | ||||||||||||
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Adjusted EBITDA | $ | 66,129 | $ | 66,034 | $ | 211,791 | $ | 197,634 | ||||||||
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| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
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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 | ||||||||||||
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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 | ||||||||||||
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Adjusted net income | $ | 15,173 | $ | 14,003 | $ | 54,553 | $ | 47,109 | ||||||||
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Adjusted net income per common share –diluted | $ | 0.13 | $ | 0.12 | $ | 0.45 | $ | 0.39 | ||||||||
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Weighted-average number of common shares-diluted | 120,912,849 | 120,472,297 | 120,907,979 | 120,312,492 | ||||||||||||
| (a) |
| 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. |
| Charges incurred related to closing |
| (d) | The first quarter of 2017 includes a $1,362 stock option modification charge for Gerald Rittenberg. See Note 14 for further discussion. |
| (e) |
| (f) |
| (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 |
| (h) | Represents income tax expense/benefit after excluding the specific tax impacts for each of thepre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to thepre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded. |
Liquidity and Capital Resources
During 2015, the Company redeemedreplaced its $700 million of 8.875% senior notes and refinanced its existing $1,125 million senior secured term loan facility and $400 million asset-based revolving credit facilitythen-existing debt with new indebtedness consisting of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a certain period of each calendar year) (“ABL Facility”) and (iii) $350 million of 6.125% senior notes.
During October 2016, the Company amended its Term Loan Credit Agreement. Prior to the execution of the amendment in October 2016, the Company borrowed $100 million under its ABL Facility and used the proceeds to make a voluntary prepayment of a portion of the outstanding balance under the Term Loan Credit Agreement. Then, at the time of the amendment, the applicable margin for ABR borrowings under the Term Loan Credit Agreement was lowered from 2.25% to 2.00% and the applicable margin for LIBOR borrowings was lowered from 3.25% to 3.00%. Additionally, the LIBOR floor was lowered from 1.00% to 0.75%.
We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Cash Flow
Net cash provided by operating activities totaled $6.3 million and $23.5 million during the first nine months of 2016. Net cash used in operating activities totaled $164.5 million during the first nine months of 2015.ended September 30, 2017 and 2016, respectively. Net cash flows provided by operating activities before changes in operating assets and liabilities were $114.1$113.5 million during the first nine months of 2016 and $26.32017, compared to $114.1 million during the first nine months of 2015. The increase in net cash flows provided by operating activities before changes in operating assets and liabilities was due to improved profitability in 2016; principally driven by 2015 including refinancing costs and a management agreement termination fee (see “Results of Operations” above for further discussion) and 2016 including lower interest expense. Interest expense decreased due to the redemption of the Nextco Notes, which were fully redeemed during the second quarter of 2015 with proceeds from the Company’s initial public offering, and the reduction in interest rates following the Company’s third quarter 2015 debt refinancing.2016. Changes in operating assets and liabilities during the first nine months of 20162017 and 20152016 resulted in the use of cash of $90.6$107.2 million and $190.8$90.6 million, respectively. The varianceuse of cash was higher during 2017 principally due to lower interest payments (discussed above) andincreased income tax payments in 2016. Income tax payments were lower in 2016 as taxable income decreased in 2015 due to non-recurring payments related to the initial public offering and the debt refinancing.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, as compared to $79.8 million during the nine months ended September 30, 2015.2016. Investing activities during 20162017 included $31.8$72.8 million paid in connection with the acquisitions, ofprincipally related to franchise stores and a costumes manufacturer.Granmark (see Note 13 to the consolidated financial statements for further detail). Capital expenditures during the nine months ended September 30, 2017 and 2016 and 2015 were $57.3$47.9 million and $62.0$57.3 million, respectively. Retail capital expenditures totaled $39.1$25.1 million during 20162017 and principally related to store conversions and new stores.information technology-related expenditures. Wholesale capital expenditures during 2017 totaled $18.2$22.8 million and primarily related to printing plates and dies, as well as machinery and equipment at the Company’s manufacturing operations.operations and main distribution center.
Net cash provided by financing activities was $71.5$104.6 million during the nine months ended September 30, 2016,2017, as compared to $253.2$71.5 million during the corresponding period of 2015. Net borrowings2016. Borrowings were lowerhigher during 20162017 principally due to the lower interest and income tax payments (noted above) and 2015 including refinancing costs and the management agreement termination fee.acquisitions.
At September 30, 2016,2017, the Company had approximately $405$372 million of availability under its ABL Facility, after considering borrowing base restrictions. During October 2016, the Company borrowed $100 million under the ABL Facility in order to make a voluntary prepayment of a portion of the outstanding balance under the Term Loan Credit Agreement.
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, 20152016 as previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2015.2016.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during the ninethree months ended September 30, 20162017 and the year ended December 31, 2015.2016.
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, and Christmas, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, the promotional activities of our wholesale business, including special dating terms, particularly with respect to Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the third quarter.
Retail Operations
Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent,year-end holiday sales.
Cautionary Note Regarding Forward-Looking Statements
From time to time, including in this filing and, in particular, the section captioned “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 Form10-K filed with the SEC on March 11, 2016.16, 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:
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.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no material changes in our market risks since December 31, 20152016 as previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2015.2016.
| Item 4. | Controls and Procedures |
We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of September 30, 2016.2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in our internal control over financial reporting (as defined inRules 13a-15(f) and15d-15(f) under the Act) during the quarter ended September 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. | Legal Proceedings |
Information in response to this Item is incorporated herein by reference from Note 8, Commitments and Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form10-Q.
| Item 1A. | Risk Factors |
There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form10-K for the year ended December 31, 2015.2016.
| Item 6. | Exhibits |
| 3.1 | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Party City Holdco Inc.’s Form8-K dated April 21, 2015) | |
| 3.2 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Party City Holdco Inc.’s Form8-K dated April 21, 2015) | |
| 31.1 | Certification of Chief Executive Officer pursuant toRule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant toRule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | Interactive Data Files pursuant to Rule 405 ofRegulation S-T: (i) Condensed Consolidated Balance Sheets at September 30, | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report onForm 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| PARTY CITY HOLDCO INC. | ||||||||
| By: | /s/ Daniel J. Sullivan | |||||||
| Daniel J. Sullivan | ||||||||
| Date:November | Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) | |||||||
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