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, 20172018
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”, “smaller reporting company” and “smaller reporting“emerging growth 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 November 1, 2017, 119,730,069October 25, 2018, 97,177,192 shares of the Registrant’s common stock were outstanding.
PARTY CITY HOLDCO INC.
Form10-Q
September 30, 20172018
2
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
| (Note 2) (Unaudited) | (Note 2) | (Note 2) (Unaudited) | ||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 58,143 | $ | 64,610 | $ | 48,097 | $ | 54,291 | ||||||||
Accounts receivable, net | 169,059 | 134,091 | 171,428 | 140,980 | ||||||||||||
Inventories, net | 687,254 | 613,868 | 810,782 | 604,066 | ||||||||||||
Prepaid expenses and other current assets | 84,859 | 68,255 | 95,162 | 77,816 | ||||||||||||
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Total current assets | 999,315 | 880,824 | 1,125,469 | 877,153 | ||||||||||||
Property, plant and equipment, net | 298,758 | 292,904 | 319,220 | 301,141 | ||||||||||||
Goodwill | 1,631,806 | 1,572,568 | 1,661,837 | 1,619,253 | ||||||||||||
Trade names | 567,507 | 566,599 | 568,326 | 568,681 | ||||||||||||
Other intangible assets, net | 65,023 | 76,581 | 60,064 | 75,704 | ||||||||||||
Other assets, net | 12,703 | 4,502 | 12,465 | 12,824 | ||||||||||||
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Total assets | $ | 3,575,112 | $ | 3,393,978 | $ | 3,747,381 | $ | 3,454,756 | ||||||||
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LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Loans and notes payable | $ | 241,339 | $ | 120,138 | $ | 415,419 | $ | 286,291 | ||||||||
Accounts payable | 169,130 | 163,415 | 233,252 | 160,994 | ||||||||||||
Accrued expenses | 184,115 | 149,683 | 201,509 | 176,609 | ||||||||||||
Income taxes payable | — | 46,675 | — | 45,568 | ||||||||||||
Current portion of long-term obligations | 13,064 | 13,348 | 13,231 | 13,059 | ||||||||||||
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Total current liabilities | 607,648 | 493,259 | 863,411 | 682,521 | ||||||||||||
Long-term obligations, excluding current portion | 1,534,146 | 1,539,604 | 1,622,969 | 1,532,090 | ||||||||||||
Deferred income tax liabilities | 282,376 | 278,819 | ||||||||||||||
Deferred income tax liabilities, net | 171,134 | 175,836 | ||||||||||||||
Deferred rent and other long-term liabilities | 80,389 | 65,507 | 91,554 | 91,929 | ||||||||||||
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Total liabilities | 2,504,559 | 2,377,189 | 2,749,068 | 2,482,376 | ||||||||||||
Redeemable securities | 3,000 | — | 3,298 | 3,590 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
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 | ||||||||||||||
Common stock (97,147,907 and 96,380,102 shares outstanding and 120,527,474 and 119,759,669 shares issued at September 30, 2018 and December 31, 2017, respectively) | 1,205 | 1,198 | ||||||||||||||
Additionalpaid-in capital | 915,090 | 910,167 | 922,197 | 917,192 | ||||||||||||
Retained earnings | 188,049 | 157,666 | 397,452 | 372,596 | ||||||||||||
Accumulated other comprehensive loss | (36,783 | ) | (52,239 | ) | (39,353 | ) | (35,818 | ) | ||||||||
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Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury | 1,281,501 | 1,255,168 | ||||||||||||||
Less: Common stock held in treasury, at cost (23,379,567 shares at September 30, 2018 and December 31, 2017) | (286,733 | ) | (286,733 | ) | ||||||||||||
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Total Party City Holdco Inc. stockholders’ equity | 994,768 | 968,435 | ||||||||||||||
Noncontrolling interests | 247 | 355 | ||||||||||||||
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Total stockholders’ equity | 1,067,553 | 1,016,789 | 995,015 | 968,790 | ||||||||||||
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Total liabilities, redeemable securities and stockholders’ equity | $ | 3,575,112 | $ | 3,393,978 | $ | 3,747,381 | $ | 3,454,756 | ||||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
3
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
Revenues: | ||||||||
Net sales | $ | 550,840 | $ | 557,350 | ||||
Royalties and franchise fees | 2,206 | 2,759 | ||||||
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Total revenues | 553,046 | 560,109 | ||||||
Expenses: | ||||||||
Cost of sales | 349,641 | 357,523 | ||||||
Wholesale selling expenses | 17,538 | 16,274 | ||||||
Retail operating expenses | 103,833 | 100,739 | ||||||
Franchise expenses | 862 | 3,636 | ||||||
General and administrative expenses | 42,239 | 37,971 | ||||||
Art and development costs | 5,573 | 5,898 | ||||||
Development stage expenses | 1,622 | 680 | ||||||
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Total expenses | 521,308 | 522,721 | ||||||
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Income from operations | 31,738 | 37,388 | ||||||
Interest expense, net | 27,705 | 23,228 | ||||||
Other expense, net | 5,696 | 593 | ||||||
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(Loss) income before income taxes | (1,663 | ) | 13,567 | |||||
Income tax expense | 777 | 3,483 | ||||||
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Net (loss) income | (2,440 | ) | 10,084 | |||||
Add: Net loss attributable to redeemable securities holder | (8 | ) | — | |||||
Less: Net loss attributable to noncontrolling interests | (28 | ) | — | |||||
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Net (loss) income attributable to common shareholders of Party City Holdco Inc. | $ | (2,420 | ) | $ | 10,084 | |||
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Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Basic | $ | (0.03 | ) | $ | 0.08 | |||
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Diluted | $ | (0.03 | ) | $ | 0.08 | |||
Weighted-average number of common shares-Basic | 96,494,565 | 119,587,339 | ||||||
Weighted-average number of common shares-Diluted | 96,494,565 | 120,912,849 | ||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 | ||||
Comprehensive (loss) income | $ | (2,003 | ) | $ | 15,329 | |||
Add: Comprehensive loss attributable to redeemable securities holder | (8 | ) | — | |||||
Less: Comprehensive loss attributable to noncontrolling interests | (35 | ) | — | |||||
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Comprehensive (loss) income attributable to common shareholders of Party City Holdco Inc. | $ | (1,976 | ) | $ | 15,329 | |||
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4
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share and per share data)
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 | ||||
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share and per share data)
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Net sales | $ | 1,572,966 | $ | 1,523,094 | $ | 1,614,049 | $ | 1,572,966 | ||||||||
Royalties and franchise fees | 9,020 | 11,009 | 7,832 | 9,020 | ||||||||||||
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Total revenues | 1,581,986 | 1,534,103 | 1,621,881 | 1,581,986 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of sales | 978,142 | 952,294 | 996,084 | 978,142 | ||||||||||||
Wholesale selling expenses | 47,946 | 45,854 | 53,581 | 47,946 | ||||||||||||
Retail operating expenses | 281,981 | 278,070 | 285,019 | 281,981 | ||||||||||||
Franchise expenses | 10,666 | 10,507 | 8,624 | 10,666 | ||||||||||||
General and administrative expenses | 125,763 | 115,828 | 136,230 | 125,763 | ||||||||||||
Art and development costs | 17,638 | 16,596 | 17,278 | 17,638 | ||||||||||||
Development stage expenses | 7,092 | — | 5,620 | 7,092 | ||||||||||||
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Total expenses | 1,469,228 | 1,419,149 | 1,502,436 | 1,469,228 | ||||||||||||
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Income from operations | 112,758 | 114,954 | 119,445 | 112,758 | ||||||||||||
Interest expense, net | 65,214 | 67,857 | 76,481 | 65,214 | ||||||||||||
Other expense (income), net | 860 | (4,107 | ) | |||||||||||||
Other expense, net | 9,076 | 860 | ||||||||||||||
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Income before income taxes | 46,684 | 51,204 | 33,888 | 46,684 | ||||||||||||
Income tax expense | 16,301 | 18,903 | 9,443 | 16,301 | ||||||||||||
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Net income | $ | 30,383 | $ | 32,301 | 24,445 | 30,383 | ||||||||||
Add: Net income attributable to redeemable securities holder | 402 | — | ||||||||||||||
Less: Net loss attributable to noncontrolling interests | (87 | ) | — | |||||||||||||
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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 | ||||||||||||
Net income attributable to common shareholders of Party City Holdco Inc. | $ | 24,934 | $ | 30,383 | ||||||||||||
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Net income per share attributable to common shareholders of Party City Holdco Inc. – Basic | $ | 0.26 | $ | 0.25 | ||||||||||||
Net income per share attributable to common shareholders of Party City Holdco Inc. – Diluted | $ | 0.26 | $ | 0.25 | ||||||||||||
Weighted-average number of common shares-Basic | 119,546,451 | 119,340,610 | 96,449,011 | 119,546,451 | ||||||||||||
Weighted-average number of common shares-Diluted | 120,907,979 | 120,312,492 | 97,684,290 | 120,907,979 | ||||||||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Comprehensive income | $ | 20,889 | $ | 45,839 | ||||||||||||
Add: Comprehensive income attributable to redeemable securities holder | 402 | — | ||||||||||||||
Less: Comprehensive loss attributable to noncontrolling interests | (108 | ) | — | |||||||||||||
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Comprehensive income attributable to common shareholders of Party City Holdco Inc. | $ | 21,399 | $ | 45,839 | ||||||||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
5
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)thousands)
| Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury | Common Stock Held In Treasury | Total Party City Holdco Inc. Stockholders’ Equity | Non- Controlling Interests | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | 119,515,894 | $ | 1,195 | $ | 910,167 | $ | 157,666 | $ | (52,239 | ) | $ | 1,016,789 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 1,198 | $ | 917,192 | $ | 372,596 | $ | (35,818 | ) | $ | 1,255,168 | $ | (286,733 | ) | $ | 968,435 | $ | 355 | $ | 968,790 | ||||||||||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle, net (see Note 2) | — | — | (78 | ) | — | (78 | ) | — | (78 | ) | — | (78 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2017, as adjusted | $ | 1,198 | $ | 917,192 | $ | 372,518 | $ | (35,818 | ) | $ | 1,255,090 | $ | (286,733 | ) | $ | 968,357 | $ | 355 | $ | 968,712 | ||||||||||||||||||||||||||||||||||||||||
Net income | 30,383 | 30,383 | — | — | 24,532 | — | 24,532 | — | 24,532 | (87 | ) | 24,445 | ||||||||||||||||||||||||||||||||||||||||||||||||
Employee equity based compensation | 3,852 | 3,852 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to redeemable securities holder | — | — | 402 | — | 402 | — | 402 | — | 402 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option expense | — | 1,492 | — | — | 1,492 | — | 1,492 | — | 1,492 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock units – time-based | 1 | 721 | — | — | 722 | — | 722 | — | 722 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock units – performance-based | 5 | 1,477 | — | — | 1,482 | — | 1,482 | — | 1,482 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Director –non-cash compensation | — | 196 | — | — | 196 | — | 196 | — | 196 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant expense | 286 | 286 | — | 242 | — | — | 242 | — | 242 | — | 242 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 146,975 | 2 | 785 | 787 | 1 | 877 | — | — | 878 | — | 878 | — | 878 | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency adjustments | 16,818 | 16,818 | — | — | — | (4,888 | ) | (4,888 | ) | — | (4,888 | ) | (21 | ) | (4,909 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Impact of foreign exchange contracts, net of taxes | (1,362 | ) | (1,362 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of foreign exchange contracts, net | — | — | — | 1,353 | 1,353 | — | 1,353 | — | 1,353 | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance at September 30, 2017 | 119,662,869 | $ | 1,197 | $ | 915,090 | $ | 188,049 | $ | (36,783 | ) | $ | 1,067,553 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | 1,205 | $ | 922,197 | $ | 397,452 | $ | (39,353 | ) | $ | 1,281,501 | $ | (286,733 | ) | $ | 994,768 | $ | 247 | $ | 995,015 | ||||||||||||||||||||||||||||||||||||||||
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See accompanying notes to unaudited condensed consolidated financial statements.
6
PARTY CITY HOLDCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 (Adjusted, see Note 2) | |||||||||||||
Cash flows provided by operating activities: | ||||||||||||||||
Cash flows (used in) provided by operating activities: | ||||||||||||||||
Net income | $ | 30,383 | $ | 32,301 | $ | 24,445 | $ | 30,383 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||
Depreciation and amortization expense | 62,519 | 61,186 | 57,786 | 62,519 | ||||||||||||
Amortization of deferred financing costs and original issuance discounts | 3,699 | 3,821 | 9,834 | 3,699 | ||||||||||||
Provision for doubtful accounts | 432 | 429 | 726 | 432 | ||||||||||||
Deferred income tax expense | 3,221 | 933 | 1,075 | 3,221 | ||||||||||||
Deferred rent | 5,634 | 12,240 | 3,623 | 5,634 | ||||||||||||
Undistributed (income) loss in unconsolidated joint ventures | (92 | ) | 380 | |||||||||||||
Undistributed income in unconsolidated joint ventures | (580 | ) | (92 | ) | ||||||||||||
Loss on disposal of assets | 533 | 14 | 23 | 533 | ||||||||||||
Non-employee equity based compensation | 3,286 | — | 352 | 3,286 | ||||||||||||
Employee equity based compensation | 3,852 | 2,829 | ||||||||||||||
Stock option expense | 1,492 | 3,852 | ||||||||||||||
Restricted stock units – time-based | 722 | — | ||||||||||||||
Restricted stock units – performance-based | 1,482 | — | ||||||||||||||
Director –non-cash compensation | 196 | — | ||||||||||||||
Changes in operating assets and liabilities, net of effects of acquired businesses: | ||||||||||||||||
Increase in accounts receivable | (25,370 | ) | (46,576 | ) | (32,802 | ) | (25,370 | ) | ||||||||
Increase in inventories | (46,292 | ) | (108,882 | ) | (194,419 | ) | (46,292 | ) | ||||||||
Increase in prepaid expenses and other current assets | (11,299 | ) | (15,046 | ) | (13,890 | ) | (11,382 | ) | ||||||||
(Decrease) increase in accounts payable, accrued expenses and income taxes payable | (24,244 | ) | 79,848 | |||||||||||||
Increase (decrease) in accounts payable, accrued expenses and income taxes payable | 53,744 | (24,244 | ) | |||||||||||||
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Net cash provided by operating activities | 6,262 | 23,477 | ||||||||||||||
Net cash (used in) provided by operating activities | (86,191 | ) | 6,179 | |||||||||||||
Cash flows used in investing activities: | ||||||||||||||||
Cash paid in connection with acquisitions, net of cash acquired | (72,804 | ) | (31,820 | ) | (63,840 | ) | (72,804 | ) | ||||||||
Capital expenditures | (47,916 | ) | (57,324 | ) | (65,491 | ) | (47,916 | ) | ||||||||
Proceeds from disposal of property and equipment | 26 | 31 | 22 | 26 | ||||||||||||
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Net cash used in investing activities | (120,694 | ) | (89,113 | ) | (129,309 | ) | (120,694 | ) | ||||||||
Cash flows provided by financing activities: | ||||||||||||||||
Repayment of loans, notes payable and long-term obligations | (25,311 | ) | (28,158 | ) | (417,281 | ) | (25,311 | ) | ||||||||
Proceeds from loans, notes payable and long-term obligations | 129,150 | 97,943 | 636,884 | 129,150 | ||||||||||||
Excess tax benefit from stock options | — | 526 | ||||||||||||||
Exercise of stock options | 787 | 1,281 | 878 | 787 | ||||||||||||
Debt issuance costs | — | (44 | ) | (10,343 | ) | — | ||||||||||
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Net cash provided by financing activities | 104,626 | 71,548 | 210,138 | 104,626 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 3,339 | (1,214 | ) | (772 | ) | 3,339 | ||||||||||
|
|
|
| |||||||||||||
Net (decrease) increase in cash and cash equivalents | (6,467 | ) | 4,698 | |||||||||||||
Cash and cash equivalents at beginning of period | 64,610 | 42,919 | ||||||||||||||
Net decrease in cash and cash equivalents and restricted cash | (6,134 | ) | (6,550 | ) | ||||||||||||
Cash and cash equivalents and restricted cash at beginning of period | 54,408 | 64,765 | ||||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at end of period | $ | 58,143 | $ | 47,617 | ||||||||||||
Cash and cash equivalents and restricted cash at end of period | $ | 48,274 | $ | 58,215 | ||||||||||||
|
|
|
| |||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid during the period | ||||||||||||||||
Interest | $ | 60,871 | $ | 71,095 | $ | 77,371 | $ | 60,871 | ||||||||
Income taxes, net of refunds | $ | 65,002 | $ | 26,103 | $ | 56,683 | $ | 65,002 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
PARTY CITY HOLDCO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share)
Note 1 – Description of Business
Party City Holdco Inc. (the “Company” or “Party City Holdco”) is a vertically integrated supplier of decorated party goods. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world.stationery. The Company’s retail operations include over 900 specialty retail party supply stores (including approximately 150 franchise stores) in the United States and Canada, operating under the namesname Party City, and Halloween City, ande-commerce websites, principally throughoperating under the domain name PartyCity.com. PartyPartyCity.com, and a network of approximately 250 temporary Halloween City Holdco franchises both individual stores, including approximately 50 jointly under the Halloween City and franchise areas throughoutToy City banners. In addition to the Company’s retail operations, it is also a global designer, manufacturer and distributor of decorated party supplies, with products found in over 40,000 retail outlets, including independent party supply stores, mass merchants, grocery retailers and dollar stores. The Company’s products are available in over 100 countries with the United States,Kingdom, Germany, Mexico, Australia and Puerto Rico, principally underCanada among the name Party City.largest end markets outside of the United States.
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.
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, 2017.2018. Our business is subject to substantial seasonal variations as our retail segment has historically 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, 2016,2017, as filed with the Securities and Exchange Commission on March 16, 2017.14, 2018.
Recently Issued Accounting Pronouncements
In August 2017,June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2018-07, “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”. The ASU simplifies the accounting fornon-employee share-based payments. 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 August 2017, the FASB issued ASU2017-12, “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.
8
In November 2016, the FASB issued ASU2016-18, “Statement of Cash Flows: Restricted Cash”. The pronouncement clarifies how entities should presentrequires companies to show changes in the total of cash, cash equivalents, restricted cash onand restricted cash equivalents in the statement of cash flows. The update is effective forCompany adopted the Companypronouncement, which requires retrospective application, during the first quarter of 2018. The Company is in the process of evaluating the impact of the pronouncement onsuch adoption was immaterial to the Company’s consolidated financial statements. See Note 15 for further discussion.
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 Company adopted the pronouncement during the first quarter of 20172018 and such adoption did not have a material impact 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’s current lease portfolio is primarily comprised of store leases, manufacturing and distribution facility leases and office leases. Upon adoption of this standard, the Company expects to recognize a right of use asset and liability related to substantially all of its operating lease arrangements with terms of greater than twelve months. The Company has established a cross-functional team to implement the pronouncement and the team is in the processfinalizing its implementation of evaluating the impacta new software solution and its assessment of the pronouncementpractical expedients and policy elections offered by the standard. Although the Company has not yet finalized its evaluation of the standard, or quantified an impact, it expects the adoption to have a significant impact on the Company’s consolidated financial statements.balance sheet due to the recognition of the right of use asset and liability for the Company’s operating leases.
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 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 Company adopted the pronouncement during the first quarter of 20172018 and such adoption did not have a materialhad no impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606)”. The pronouncement contains a five-step model which replaces most existing revenue recognition guidance. The new standard isbecame effective for the Company during the first quarter ofon January 1, 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 has decided to adoptadopted the pronouncement using the modified retrospective approach. AlthoughTherefore, on January 1, 2018, the Company continues to evaluate the pronouncement and it might impact theadjusted its accounting for certain discounts which are related to the timing of payments by customers of its wholesale business and rebates withinthe Company recorded a cumulative-effect adjustment which reduced retained earnings by $46. Additionally, as of such date, the Company modified its accounting for certain metallic balloon sales of its wholesale segment and started to defer the recognition of revenue on such sales, and the related costs, until the balloons have been filled with helium. As a result, the Company recorded a cumulative-effect adjustment which increased retained earnings by $8. Finally, as of such date, the Company adjusted its accounting for certain discounts on wholesale sales of seasonal product and the Company recorded a cumulative-effect adjustment which reduced retained earnings by $40. See Note 14 for further discussion of the adoption of the pronouncement and the Company’s wholesale business, the Company does not believe that the pronouncement will have a material impact on its consolidated financial statements.revenue recognition policy.
Note 3 – Inventories
Inventories consisted of the following:
| September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
Finished goods | $ | 646,486 | $ | 581,277 | $ | 760,923 | $ | 562,809 | ||||||||
Raw materials | 30,395 | 23,222 | 33,686 | 30,346 | ||||||||||||
Work in process | 10,373 | 9,369 | 16,173 | 10,911 | ||||||||||||
|
|
|
| |||||||||||||
| $ | 687,254 | $ | 613,868 | $ | 810,782 | $ | 604,066 | |||||||||
|
|
|
| |||||||||||||
Inventories are valued at the lower of cost or net realizable value. The Company principally determines the cost of inventory using the weighted average method.
The Company estimates retail inventory shortageshrinkage for the periodsperiod 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.
9
Note 4 – Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law. The effectiveAct significantly changed U.S. tax law, including lowering the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, and implementing aone-time “deemed repatriation” tax on unremitted earnings accumulated innon-U.S. jurisdictions since 1986 (the “Transition Tax”). Due to the complexities of accounting for the Act, the SEC issued Staff Accounting Bulletin (“SAB”) No. 118 which allows entities to include a provisional estimate of the impact of the Act in its financial statements. Therefore, based on currently available information, during the fourth quarter of 2017, the Company recorded a provisional estimate of the impact of the Act, which included an income tax benefit of $90,965 related to the remeasurement of its domestic net deferred tax liabilities and deferred tax assets due to the lower U.S. corporate tax rate. Additionally, during the fourth quarter of 2017, the Company recorded a net income tax expense of $1,132 as its provisional estimate of the Transition Tax related to the deemed repatriation of unremitted earnings of foreign subsidiaries. The Company did not adjust these estimates during the first nine months of 2018.
While these amounts represent the Company’s best estimates of the impacts of the reduction in the federal corporate income tax rate and the deemed repatriation Transition Tax, the final impacts of the Act may differ from the Company’s estimates due to, among other things, changes in the Company’s interpretations and assumptions, additional guidance to be issued by the IRS, and actions the Company may take. As provided in SAB 118, any adjustments to these provisional amounts will be recorded as they are identified during the measurement period, which ends no later than December 22, 2018.
Additionally, the Act subjects a U.S. shareholder to current tax on “global intangiblelow-taxed income” (“GILTI”) of its controlled foreign corporations. GILTI is based on the excess of the aggregate of a U.S. shareholder’s pro rata share of net income of its controlled foreign corporations over a specified return. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the provisions. Therefore, during the nine months ended September 30, 2017, 34.9%, is lower than2018, the Company has included an estimate of the tax on GILTI as a period cost in its full-year estimated effective rate for the nine months ended September 30, 2016, 36.9%, principally due to discrete items related to uncertain tax positions, stock option exercises andreturn-to-provision adjustments. The impact of such items was partially offset by the effect of stateincome tax rate changesand it has not accounted for any tax on GILTI in its deferred tax liabilities.balances.
Note 5 – Changes in Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss consisted of the following:
| 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, 2018 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at June 30, 2018 | $ | (40,917 | ) | $ | 1,120 | $ | (39,797 | ) | ||||
Other comprehensive income before reclassifications | 419 | 217 | 636 | |||||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss | — | (192 | ) | (192 | ) | |||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive income | 419 | 25 | 444 | |||||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2018 | $ | (40,498 | ) | $ | 1,145 | $ | (39,353 | ) | ||||
|
|
|
|
|
| |||||||
| 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 | ) | ||||
|
|
|
|
|
| |||||||
| 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 | ) | |||
|
|
|
|
|
| |||||||
10
| Nine Months Ended September 30, 2018 | ||||||||||||
| Foreign Currency Adjustments | Impact of Foreign Exchange Contracts, Net of Taxes | Total, Net of Taxes | ||||||||||
Balance at December 31, 2017 | $ | (35,610 | ) | $ | (208 | ) | $ | (35,818 | ) | |||
Other comprehensive (loss) income before reclassifications, net of income tax | (4,888 | ) | 1,188 | (3,700 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax | — | 165 | 165 | |||||||||
|
|
|
|
|
| |||||||
Net current-period other comprehensive (loss) income | (4,888 | ) | 1,353 | (3,535 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2018 | $ | (40,498 | ) | $ | 1,145 | $ | (39,353 | ) | ||||
|
|
|
|
|
| |||||||
| 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, 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, 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, 2017,2018, 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, sources and distributes decorated 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, Halloween City and HalloweenToy 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, 20172018 and September 30, 20162017 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 | |||||||||
|
|
|
|
|
| |||||||
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 | ||||||||||
Three Months Ended September 30, 2016 | ||||||||||||
Revenues: | ||||||||||||
Net sales | $ | 416,387 | $ | 347,557 | $ | 763,944 | ||||||
Royalties and franchise fees | — | 3,568 | 3,568 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 416,387 | 351,125 | 767,512 | |||||||||
Eliminations | (210,562 | ) | — | (210,562 | ) | |||||||
|
|
|
|
|
| |||||||
Net revenues | $ | 205,825 | $ | 351,125 | $ | 556,950 | ||||||
|
|
|
|
|
| |||||||
Income from operations | $ | 35,532 | $ | 1,386 | $ | 36,918 | ||||||
|
|
|
| |||||||||
Interest expense, net | 22,424 | |||||||||||
Other income, net | (905 | ) | ||||||||||
|
| |||||||||||
Income before income taxes | $ | 15,399 | ||||||||||
|
| |||||||||||
11
| Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended September 30, 2018 | ||||||||||||
Revenues: | ||||||||||||
Net sales | $ | 424,569 | $ | 375,680 | $ | 800,249 | ||||||
Royalties and franchise fees | — | 2,206 | 2,206 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 424,569 | 377,886 | 802,455 | |||||||||
Eliminations | (249,409 | ) | — | (249,409 | ) | |||||||
|
|
|
|
|
| |||||||
Net revenues | $ | 175,160 | $ | 377,886 | $ | 553,046 | ||||||
|
|
|
|
|
| |||||||
Income from operations | $ | 15,501 | $ | 16,237 | $ | 31,738 | ||||||
|
|
|
| |||||||||
Interest expense, net | 27,705 | |||||||||||
Other expense, net | 5,696 | |||||||||||
|
| |||||||||||
Loss before income taxes | $ | (1,663 | ) | |||||||||
|
| |||||||||||
| 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 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 381,858 | 366,816 | 748,674 | |||||||||
Eliminations | (188,565 | ) | 0 | (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 income, net | 593 | |||||||||||
|
| |||||||||||
Income before income taxes | $ | 13,567 | ||||||||||
|
| |||||||||||
The Company’s industry segment data for the nine months ended September 30, 20172018 and September 30, 20162017 was as follows:
| Wholesale | Retail | Consolidated | ||||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 988,129 | $ | 1,150,609 | $ | 2,138,738 | ||||||||||||||||||
Royalties and franchise fees | — | 7,832 | 7,832 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total revenues | 988,129 | 1,158,441 | 2,146,570 | |||||||||||||||||||||
Eliminations | (524,689 | ) | — | (524,689 | ) | |||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net revenues | $ | 463,440 | $ | 1,158,441 | $ | 1,621,881 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Income from operations | $ | 31,997 | $ | 87,448 | $ | 119,445 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Interest expense, net | 76,481 | |||||||||||||||||||||||
Other expense, net | 9,076 | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Income before income taxes | $ | 33,888 | ||||||||||||||||||||||
| ||||||||||||||||||||||||
| Wholesale | Retail | Consolidated | Wholesale | Retail | Consolidated | |||||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 929,255 | $ | 1,103,127 | $ | 2,032,382 | $ | 929,255 | $ | 1,103,127 | $ | 2,032,382 | ||||||||||||
Royalties and franchise fees | — | 9,020 | 9,020 | — | 9,020 | 9,020 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total revenues | 929,255 | 1,112,147 | 2,041,402 | 929,255 | 1,112,147 | 2,041,402 | ||||||||||||||||||
Eliminations | (459,416 | ) | — | (459,416 | ) | (459,416 | ) | — | (459,416 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net revenues | $ | 469,839 | $ | 1,112,147 | $ | 1,581,986 | $ | 469,839 | $ | 1,112,147 | $ | 1,581,986 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations | $ | 49,258 | $ | 63,500 | $ | 112,758 | $ | 49,258 | $ | 63,500 | $ | 112,758 | ||||||||||||
|
|
|
| |||||||||||||||||||||
Interest expense, net | 65,214 | 65,214 | ||||||||||||||||||||||
Other expense, net | 860 | 860 | ||||||||||||||||||||||
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Income before income taxes | $ | 46,684 | $ | 46,684 | ||||||||||||||||||||
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Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net sales | $ | 945,071 | $ | 1,043,212 | $ | 1,988,283 | ||||||||||||||||||
Royalties and franchise fees | — | 11,009 | 11,009 | |||||||||||||||||||||
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Total revenues | 945,071 | 1,054,221 | 1,999,292 | |||||||||||||||||||||
Eliminations | (465,189 | ) | — | (465,189 | ) | |||||||||||||||||||
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Net revenues | $ | 479,882 | $ | 1,054,221 | $ | 1,534,103 | ||||||||||||||||||
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Income from operations | $ | 65,669 | $ | 49,285 | $ | 114,954 | ||||||||||||||||||
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Interest expense, net | 67,857 | |||||||||||||||||||||||
Other income, net | (4,107 | ) | ||||||||||||||||||||||
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Income before income taxes | $ | 51,204 | ||||||||||||||||||||||
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Note 8 – Commitments and Contingencies
The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.
On April 5, 2016, a derivative complaint was filed in the Supreme Court for the State of New York, naming certain directors and executives as defendants, and naming the Company as a nominal defendant. The complaint seeks unspecified damages and costs, and corporate governance reforms, for alleged injury to the Company in connection with public filings related to the Company’s April 2015 IPO, compensation paid to executives, and the termination of the management agreement disclosed in the initial public offering-related public filings. The Company intends to vigorously defend itself against this action. The Company is unable, at this time, to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.
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 riskrisks managed through the use of derivative financial instruments isare interest rate risk and foreign currency exchange rate risk.
Interest Rate Risk Management
As part of the Company’s risk management strategy, the Company periodically uses interest rate swap agreements to hedge the variability of cash flows on floating rate debt obligations. Accordingly, interest rate swap agreements are reflected in the consolidated balance sheets at fair value and the related gains and losses on these contracts are deferred in equity and recognized in interest expense over the same period in which the related interest payments being hedged are recognized in income. The Company did not utilize interest rate swap agreements during the nine months ended September 30, 2018 and the nine months ended September 30, 2017.
Foreign Exchange Risk Management
A portion of the Company’s cash flows isare 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, and the Mexican Peso, 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, 20172018 and December 31, 2016,2017, 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 wereare 100% effective, there wasis no current impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings by June 2018.2019.
The following table displays the fair values of the Company’s derivatives at September 30, 20172018 and December 31, 2016:2017:
| 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, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Exchange Contracts | (a | ) PP | $ | — | (a | ) PP | $ | 697 | (b | ) AE | $ | 355 | (b | ) AE | $ | 215 | (a | ) PP | $ | 728 | (a | ) PP | $ | 95 | (b | ) AE | $ | — | (b | ) AE | $ | 99 | ||||||||||||||||||||||||||||||||
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| (a) | PP = Prepaid expenses and other current assets |
| (b) | AE = Accrued expenses |
13
The following table displays the notional amounts of the Company’s derivatives at September 30, 20172018 and December 31, 2016:2017:
Derivative Instrument | September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | ||||||||||||
Foreign Exchange Contracts | $ | 6,875 | $ | 22,502 | $ | 10,743 | $ | 21,672 | ||||||||
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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:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
During 2017, the Company acquired a 28% ownership interest in Punchbowl, Inc. (“Punchbowl”), a provider of digital greeting cards and digital invitations. At such time, the Company provided Punchbowl’s other investors with the ability to “put” their interest in Punchbowl to the Company at a future date. The Company is adjusting such put liability to fair value on a recurring basis. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During 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. As part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology received an ownership interest in Kazzam. The interest has been recorded as redeemable securities in the mezzanine of the Company’s consolidated balance sheet as, in the future, Ampology has the right to cause the Company to purchase the interest. The mezzanine liability is adjusted to fair value on a recurring basis. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
The following table shows assets and liabilities as of September 30, 2018 that are measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | Total as of September 30, 2018 | |||||||||||||
Derivative assets | $ | — | $ | 728 | $ | — | $ | 728 | ||||||||
Derivative liabilities | — | — | — | — | ||||||||||||
Kazzam liability | — | — | 3,298 | 3,298 | ||||||||||||
Punchbowl put liability | — | — | 299 | 299 | ||||||||||||
The following table shows assets and liabilities as of December 31, 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 | ||||||||||||
Derivative assets Derivative liabilities Kazzam liability Punchbowl put liability Level 1 Level 2 Level 3 Total as of
December 31,
2017 $ — $ 95 $ — $ 95 — 99 — 99 — — 3,590 3,590 — — 2,122 2,122
The following table showsmajority of theCompany’s non-financial instruments, which include goodwill, intangible assets, inventories and liabilities as of December 31, 2016 thatproperty, plant and equipment, are measurednot required to be carried at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | Total as of December 31, 2016 | |||||||||||||
Noncontrolling interests liabilities | $ | — | $ | — | $ | — | $ | — | ||||||||
Derivative assets | — | 697 | — | 697 | ||||||||||||
Derivative liabilities | — | 215 | — | 215 | ||||||||||||
In addition to assetsbasis. However, if certain triggering events occur (or at least annually for goodwill and liabilities that are recorded at fair value on indefinite-lived intangible assets),a recurring basis, the Companynon-financial instrument is required to record other assets and liabilities atbe evaluated for impairment. If the Company determines thatthe non-financial instrument is impaired, the Company would be required to write downthe non-financial instrument to its 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.
value. 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, 20172018 because of the short-term maturities of the instruments and/or their variable rates of interest.
14
The carrying amountamounts and fair valuevalues of the Company’s borrowings under its senior secured term loan facility (“the Term Loan Credit Agreement”)Agreement and its $350,000 of 6.125% senior notes (“Senior Notes”)as of September 30, 2018 are as follows:
| September 30, 2017 | September 30, 2018 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Term Loan Credit Agreement | $ | 1,198,750 | $ | 1,220,406 | $ | 792,664 | $ | 808,084 | ||||||||
Senior Notes | 345,162 | 364,809 | ||||||||||||||
Senior Notes – due 2023 | 345,986 | 355,282 | ||||||||||||||
Senior Notes – due 2026 | 493,897 | 505,755 | ||||||||||||||
The fair values of the Term Loan Credit Agreement and the Senior Notessenior 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, 20172018 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.
During August 2015, the Company acquired 75% of the operations of Accurate Custom Injection Molding Inc. (“ACIM”). Based on the terms of the acquisition agreement, the Company will acquire the remaining 25% interest in ACIM over the next seven years and the Company’s liability for the estimated purchase price of such interest was $0 at September 30, 2017. The liability represents a Level 3 fair value measurement as it is based on unobservable inputs.
During March 2017, the Company acquired 85% of the common stock of Granmark, S.A. de C.V., a Mexican manufacturer and wholesaler of party goods. See Note 13 for further discussion of the acquisition. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 15% interest over the next five years and it has recorded a liability for the estimated purchase price of such interest, $3,342 at September 30, 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 forattributable to common stockholdersshareholders of Party City Holdco Inc. 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.exercised, and restricted stock units, as if they vested.
A reconciliation between basic and diluted income per share is as follows:
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
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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| Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||||
Net (loss) income attributable to common shareholders of Party City Holdco Inc. | $ | (2,420 | ) | $ | 10,084 | $ | 24,934 | $ | 30,383 | |||||||
Weighted average shares – Basic | 96,494,565 | 119,587,339 | 96,449,011 | 119,546,451 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Warrants | — | — | — | — | ||||||||||||
Restricted stock units | — | — | 9,004 | — | ||||||||||||
Stock options | — | 1,325,510 | 1,226,275 | 1,361,528 | ||||||||||||
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Weighted average shares – Diluted | 96,494,565 | 120,912,849 | 97,684,290 | 120,907,979 | ||||||||||||
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Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Basic | $ | (0.03 | ) | $ | 0.08 | $ | 0.26 | $ | 0.25 | |||||||
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Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Diluted | $ | (0.03 | ) | $ | 0.08 | $ | 0.26 | $ | 0.25 | |||||||
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During the three months ended September 30, 20172018 and September 30, 2016, 2,370,1062017, 4,157,559 stock options and 2,276,6952,370,106 stock options, respectively, were excluded from the calculation of net incomediluted earnings per common share – diluted as they were anti-dilutive. Additionally, during the three months ended September 30, 20172018 and September 30, 2016,2017, 596,000 warrants and 0596,000 warrants, respectively, were excluded from the calculation of net incomediluted earnings per common share – diluted as they were anti-dilutive. Further, during the three months ended September 30, 2018 and September 30, 2017, 191,033 restricted stock units and 0 restricted stock units, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
During the nine months ended September 30, 20172018 and September 30, 2016, 2,370,1062017, 2,354,244 stock options and 2,276,6952,370,106 stock options, respectively, were excluded from the calculation of net incomediluted earnings per common share – diluted as they were anti-dilutive. Additionally, during both the nine months ended September 30, 2018 and 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 incomediluted earnings per common share – diluted as they were anti-dilutive. Further, during both the nine months ended September 30, 2018 and the nine months ended September 30, 2017, 0 restricted stock units were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
15
Note 12 – Long-Term Obligations
Long-term obligations at September 30, 20172018 and December 31, 20162017 consisted of the following:
| September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
Term Loan Credit Agreement | $ | 1,198,750 | $ | 1,205,496 | $ | 792,664 | $ | 1,196,505 | ||||||||
Capital lease obligations | 3,298 | 2,912 | 3,653 | 3,276 | ||||||||||||
Senior Notes | 345,162 | 344,544 | ||||||||||||||
Senior Notes - due 2026 | 493,897 | — | ||||||||||||||
Senior Notes - due 2023 | 345,986 | 345,368 | ||||||||||||||
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Total long-term obligations | 1,547,210 | 1,552,952 | 1,636,200 | 1,545,149 | ||||||||||||
Less: current portion | (13,064 | ) | (13,348 | ) | (13,231 | ) | (13,059 | ) | ||||||||
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Long-term obligations, excluding current portion | $ | 1,534,146 | $ | 1,539,604 | $ | 1,622,969 | $ | 1,532,090 | ||||||||
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Term Loan Credit Agreement Amendment
During February 2018, the Company amended its Term Loan Credit Agreement. At the time of the amendment, all outstanding term loans were replaced with new term loans for the same principal amount. The applicable margin for ABR borrowings was lowered from 2.00% to 1.75% and the applicable margin for LIBOR borrowings was lowered from 3.00% to 2.75%. Additionally, based on the terms of the amendment, the ABR and LIBOR margins will drop to 1.50% and 2.50%, respectively, if the Company’s Senior Secured Leverage Ratio, as defined by the agreement, falls below 3.2 to 1.0.
As the Term Loan Credit Agreement is a loan syndication, the Company assessed, on acreditor-by-creditor basis, whether the refinancing should be accounted for as an extinguishment for each creditor and, during the first quarter of 2018, the Companywrote-off $186 of existing deferred financing costs, a $102 capitalized original issue discount and $58 of capitalized call premium. The write-offs were recorded in other expense in the Company’s consolidated statement of income and comprehensive income. The remaining deferred financing costs, original issue discount and capitalized call premium will continue to be amortized over the life of the Term Loan Credit Agreement, using the effective interest method. Additionally, in conjunction with the amendment, the Company incurred $856 of banker and legal fees, $800 of which were recorded in other expense during the first quarter of 2018. The rest of the costs are being amortized over the life of the debt. The write-offs of the deferred financing costs, original issuance discount and call premium were included in amortization of deferred financing costs and original issuance discount in the Company’s consolidated statement of cash flows.
August 2018 Refinancing
During August 2018, the Company executed a refinancing of its debt portfolio and issued $500,000 of new senior notes at an interest rate of 6.625%. The notes will mature in August 2026. The Company used the proceeds from the notes to: (i) reduce the outstanding balance under its existing ABL Facility, which is included in loans and notes payable on the Company’s condensed consolidated balance sheet, by $90,000 and (ii) voluntarily prepay $400,000 of the outstanding balance under its existing Term Loan Credit Agreement. Additionally, as part of the refinancing, the Company extended the maturity of the ABL Facility to August 2023.
As the partial prepayment of the Term Loan Credit Agreement was in accordance with the terms of such agreement, at the time of such prepayment the Companywrote-off apro-rata portion of the existing capitalized deferred financing costs and original issuance discounts, $1,824, for investors who did not participate in the new notes. Such amount was recorded in other expense in the Company’s consolidated statement of operations and comprehensive income and included in amortization of deferred financing costs and original issuance discounts in the Company’s consolidated statement of cash flows.
To the extent that investors in the Term Loan Credit Agreement participated in the new notes, the Company assessed whether the refinancing should be accounted for as an extinguishment on acreditor-by-creditor basis andwrote-off $968 of existing deferred financing costs and original issuance discounts. Such amount was recorded in other expense in the Company’s consolidated statement of operations and comprehensive income and included in amortization of deferred financing costs and original issuance discounts in the Company’s consolidated statement of cash flows.
Additionally, in conjunction with the issuance of the notes, the Company incurred third-party fees (principally banker fees). To the extent that such fees related to investors for whom their original debt was not extinguished, the Company expensed the portion of such fees, $2,270 in aggregate, that related to such investors. Such amount was recorded in other expense in the Company’s consolidated statement of operations and comprehensive income and included in financing activities in the Company’s consolidated statement of cash flows. The remainder of the third-party fees, $6,230, have been capitalized and will be amortized over the remaining life of the debt using the effective interest method.
Further, in conjunction with the extension of the ABL Facility, the Company compared the borrowing capacities of thepre-amendment facility and the post-amendment facility, on acreditor-by-creditor basis, and concluded that $29 of existing deferred
16
financing costs should bewritten-off. Such amount was recorded in other expense in the Company’s consolidated statement of operations and comprehensive income and included in amortization of deferred financing costs and original issuance discounts in the Company’s consolidated statement of cash flows. The remaining capitalized costs, and $986 of new third-party costs incurred in conjunction with the extension, are being amortized over the revised term of the ABL Facility.
Senior Notes – due 2026
Interest on the new notes is payable semi-annually in arrears on February 1st and August 1st of each year.
The notes are guaranteed, jointly and severally, on a senior basis by each of Party City Holdings Inc.’s existing and future domestic subsidiaries. The notes and the guarantees are general unsecured senior obligations and are effectively subordinated to all other secured debt to the extent of the assets securing such secured debt.
The indenture governing the notes contains certain covenants limiting, among other things and subject to certain exceptions, Party City Holdings Inc.’s ability to:
incur additional indebtedness or issue certain disqualified stock and preferred stock;
pay dividends or distributions, redeem or repurchase equity;
prepay subordinated debt or make certain investments;
engage in transactions with affiliates;
consolidate, merge or transfer all or substantially all of PCHI’s assets;
create liens; and
transfer or sell certain assets.
The indenture governing the notes also contains certain customary affirmative covenants and events of default.
On or after August 1, 2021, the Company may redeem the notes, in whole or in part, at the following (expressed as a percentage of the principal amount to be redeemed):
Twelve-month period beginning on August 1, | Percentage | |||
2021 | 103.313 | % | ||
2022 | 101.656 | % | ||
2023 and thereafter | 100.000 | % | ||
In addition, the Company may redeem up to 40% of the aggregate principal amount outstanding on or before August 1, 2021 with the cash proceeds from certain equity offerings at a redemption price of 106.625% of the principal amount. The Company may also redeem some or all of the notes before August 1, 2021 at a redemption price of 100% of the principal amount plus a premium that is defined in the indenture.
Also, if the Company experiences certain types of change in control, as defined, the Company may be required to offer to repurchase the notes at 101% of their principal amount.
Note 13 – Acquisitions
During January 2017,March 2018, the Company acquired 1811 franchise stores, which are located mostly in Louisiana and Alabama,Maryland, for total cash consideration of approximately $15,000.$14,000. The Company is in the process of finalizing purchase accounting.
Additionally, during March 2018, the Company entered into an agreement to acquire 11 independent stores, which are located in Texas, for total consideration of approximately $6,000. The Company will take control of the stores one at a time over a period of approximately one year. The Company is in the process of finalizing purchase accounting for the stores for which it has already taken control.
During MarchJuly 2018, the Company acquired an additional 16 franchise stores, which are located in Pennsylvania, for total cash consideration of approximately $18,800. The Company is in the process of finalizing purchase accounting.
Also, during September 2018, the Company acquired an additional 21 franchise stores, which are located in Minnesota, North Dakota and Texas, for total cash consideration of approximately $22,900. The Company is in the process of finalizing purchase accounting.
17
During the three months ended September 30, 2018, the Company recorded anon-recurring $2,638 reduction to franchise intangible asset amortization expense as a result of recent franchise store acquisitions. Such amount was recorded in franchise expenses in the Company’s consolidated statement of operations and comprehensive income.
During 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.goods. Based on the terms of the acquisition agreement, the Company is required to acquire the remaining 15% interest over a three to five year periodthe next four years and it has recorded a liability for the estimated purchase price of such interest, $3,342$3,021 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.2018.
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 towill acquire the remaining 40% interest in Print Appeal over a four to six year periodthe next five years and it has recorded athe Company’s liability for the estimated purchase price of such interest $2,674was $2,312 at September 30, 2017.2018.
Note 14 – Organizational RestructuringRevenue from Contracts with Customers
On March 15, 2017,In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606)”. The pronouncement contains a five-step model which replaces most existing revenue recognition guidance. The Company and its Chairman ofadopted 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 Company. Additionally, Mr. Rittenberg will remain as Chairman of the Board through the 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 non-employee member of such Board throughout the remainder of the Consulting Period.
Under the Transition and Consulting Agreement, Mr. Rittenberg will receive payments from April 1, 2017 through December 31, 2017 in amounts equal to his base salary had he remained employed as Executive Chairman during such period (i.e., pay at an annual rate equal to $2,090). Additionally, he will remain eligible to receive an annual bonus for full-year 2017 based on the terms of the 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, beginningstandard on January 1, 2018 via a modified retrospective approach and recognized the cumulative effect of the adoption as an adjustment to January 1, 2018 retained earnings.
Revenue Transactions - Retail
Revenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retaile-commerce sales are recognized when the consumer receives the product as control transfers upon delivery. Due to its extensive history operating as the largest party goods retailer in North America, the Company has sufficient history with which to estimate future retail sales returns and it uses the expected value method to estimate such activity.
The transaction price 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 majority of the severance was paid duringCompany’s retail sales is based on either: 1) the second quarteritem’s stated price or 2) the stated price adjusted for the impact of 2017.
Note 15 – Kazzam, LLC
Duringa coupon which can only be applied to such transaction. To the first quarter of 2017,extent that the Company charges customers for freight costs one-commerce sales, the Company records such amounts in revenue. The Company has chosen the pronouncement’s policy election which allows it to exclude all sales taxes and Ampology,value-added taxes from revenue.
Under the terms of its agreements with its franchisees, the Company provides both: 1) brand value (via significant advertising spend) and 2) support with respect to planograms, in exchange for a subsidiaryroyalty fee that ranges from 4% to 6% of Trivergence, reached an agreement to formthe franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded. Additionally, although the Company anticipates that future franchise store openings will be limited, when a franchisee opens 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.
Althoughstore, the Company currently only owns 30% of Kazzam’s equity,receives and records aone-time fee which is earned by the Company has concluded that: a) Kazzam is a variable interest entity as it has insufficient equity at riskfor its assistance with site selection and b)development of the Company is its primary beneficiary. Therefore,new location. Both the Company has consolidated Kazzam intosales-based royalty fee and the Company’s financial statements. Further, as the Company is currently funding all of Kazzam’sstart-upone-time activities via a loan to Kazzam (which will be repaid when the venture is profitable), the Company is recording 100% of Kazzam’s operating resultsfee are recorded in “development stage expenses”royalties and franchise fees in the Company’s consolidated statement of operations and comprehensive income.
Revenue Transactions - Wholesale
For most of the Company’s wholesale sales, control transfers upon the Company’s shipment of the product as: 1) legal title transfers on such date and 2) the Company has a present right to payment at such time. Wholesale sales returns are not significant as the Company generally only accepts the return of goods that were shipped to the customer in error or that were damaged when received by the customer. Additionally, due to its extensive history operating as a leading party goods wholesaler, the Company has sufficient history with which to estimate future sales returns and it uses the expected value method to estimate such activity.
In most cases, the determination of the transaction price is straight-forward as it is fixed based on the contract and/or purchase order. However, a limited number of customers receive volume-based rebates. Additionally, certain customers receive small discounts for early payment (generally 1% of the transaction price). Based on the business’ long history as a leading party goods wholesaler, the Company has sufficient history with which to estimate variable consideration for such volume-based rebates and early payment discounts. To the extent that the Company charges customers for freight costs, the Company records such amounts in revenue. The Company has chosen the pronouncement’s policy election which allows it to exclude all sales taxes and value-added taxes from revenue.
The majority of the sales for the Company’s wholesale business are due within 30 to 120 days from the transfer of control of the product and substantially all of the sales are collected within a year from such transfer. For all transactions for which the Company expects to collect the transaction price within a year from the transfer of control, the Company applies one of the pronouncement’s practical expedients and does not adjust the consideration for the effects of a significant financing component.
Judgments
Although most of the Company’s revenue transactions consist of fixed transaction prices and the transfer of control at either the point of sale (for retail) or when the product is shipped (for wholesale), certain transactions involve a limited number of judgments.
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For transactions for which control transfers to the customer when the freight carrier delivers the product to the customer, the Company estimates the date of such receipt based on historical shipping times. Additionally, the Company utilizes historical data to estimate sales returns, volume-based rebates and discounts for early payments by customers. Due to its extensive history operating as a leading party goods retailer and wholesaler, the Company has sufficient history with which to estimate such amounts.
Other Revenue Topics
During the three and nine months ended September 30, 2018 and September 30, 2017, impairment losses recognized on receivables and contract assets arising from the Company’s contracts with customers were immaterial.
As a significant portion of the Company’s revenue is either: 1) part of Ampology’s compensationa contract with an original expected duration of one year or less or 2) related to sales-based royalties promised in exchange for designing, developinglicenses of intellectual property, the Company has elected to apply the optional exemptions in paragraphs ASC606-10-50-14 through ASC606-10-50-14A.
Additionally, the Company has elected to apply the practical expedient which allows companies to recognize the incremental costs of obtaining a contract as an expense if the amortization period of the asset that the entity otherwise would have recognized would have been one year or less.
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three months ended September 30, 2018 and launchingSeptember 30, 2017 and the exchange platform, Ampology has receivednine months ended September 30, 2018 and September 30, 2017:
| Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||||
Retail Net Sales: | ||||||||||||||||
Party City Stores | $ | 336,355 | $ | 324,766 | $ | 1,043,422 | $ | 993,652 | ||||||||
GlobalE-commerce | 34,221 | 34,130 | 102,083 | 104,314 | ||||||||||||
Temporary Stores | 5,104 | 5,161 | 5,104 | 5,161 | ||||||||||||
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Total Retail Net Sales | $ | 375,680 | $ | 364,057 | $ | 1,150,609 | $ | 1,103,127 | ||||||||
Royalties and Franchise Fees | 2,206 | 2,759 | 7,832 | 9,020 | ||||||||||||
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Total Retail Revenue | $ | 377,886 | $ | 366,816 | $ | 1,158,441 | $ | 1,112,147 | ||||||||
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Wholesale Net Sales: | ||||||||||||||||
Domestic | $ | 88,287 | $ | 98,801 | $ | 247,243 | $ | 264,496 | ||||||||
International | 86,873 | 94,492 | 216,197 | 205,343 | ||||||||||||
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Total Wholesale Net Sales | $ | 175,160 | $ | 193,293 | $ | 463,440 | $ | 469,839 | ||||||||
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Total Consolidated Revenue | $ | 553,046 | $ | 560,109 | $ | 1,621,881 | $ | 1,581,986 | ||||||||
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Financial Statement Impact of Adopting the Pronouncement
All of the Company’s revenue is recognized from contracts with customers and, therefore, is subject to the pronouncement.
The Company adopted the pronouncement using a 70% ownership interestmodified retrospective approach and applied the guidance to all contracts as of January 1, 2018. On such date, the Company reduced its retained earnings by $78, reduced its accounts receivable by $141, increased its inventory by $11, reduced its accrued expenses by $26, increased its deferred tax asset by $28 and increased its income taxes payable by $2. The cumulative adjustment principally related to certain discounts within the Company’s wholesale business.
Additionally, the adoption of the pronouncement impacted the Company’s financial statements for the three and nine months ended September 30, 2018 as it decreasedpre-tax income by $5 during the three month period and increasedpre-tax income by $34 during the nine month period.
Note 15 – Cash, Cash Equivalents and Restricted Cash
In November 2016, the FASB issued ASU2016-18, “Statement of Cash Flows: Restricted Cash”. The pronouncement requires companies to show changes in Kazzamthe total of cash, cash equivalents, restricted cash and restricted cash equivalents in their statement of cash flows. The Company adopted the pronouncement, which requires retrospective application, during the first quarter of 2018.
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As a warrant to acquire 596,000 sharesresult, the Company’s statement of Party City Holdco Inc. stock. Duringcash flows for 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 securitiesadjusted to include $155 of restricted cash at December 31, 2016 and $72 of restricted cash at September 30, 2017. The restricted cash, which principally relates to funds that are required to be spent on advertising, is included in “prepaid expenses and other current assets” in the Company’s consolidated balance sheet as,sheet. Therefore, in the future, AmpologyCompany’s adjusted consolidated statement of cash flows for the nine months ended September 30, 2017, the change in “prepaid expenses and other current assets” has been adjusted from a cash outflow of $11,299 to a cash outflow of $11,382.
The Company’s September 30, 2018 consolidated balance sheet included $48,097 of cash and cash equivalents and $177 of restricted cash and the right to cause the Company to purchase the interest. The warrant has an exercise priceCompany’s December 31, 2017 consolidated balance sheet included $54,291 of $15.60cash and a fair valuecash equivalents and $117 of $2,544, whichrestricted cash. Restricted cash is being amortized over four years.
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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 decorated party goods retailer by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. With over 900 locations (inclusive of approximately 150 franchised stores), we have the 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. We also operate multiplee-commerce sites, principally under the domain name PartyCity.com, and during the Halloween selling seasonPartyCity.com. Further, we open a network of approximately 250 - 300 temporary Halloween City stores, including approximately 50 jointly under the Halloween City banner.and Toy City banners.
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, Australia and AustraliaCanada 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.United States.
How We Assess the Performance of Our Company
In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as adjusted net income (loss), adjusted net income (loss) per common share – diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to “Financial Measures—Measures - Adjusted EBITDA,” “Financial Measures—Measures - Adjusted Net Income (Loss)” and “Financial Measures—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, PartyCity.com, Halloween City and PartyCity.com.Toy City. During 2016,2017, approximately 77%80% 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 decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores, including our franchise stores, other party goods retailers, mass merchants, independent card stores, dollar stores and other retailers and distributors throughout the world.
Intercompany sales between the Wholesale and the Retail segment are eliminated, and the wholesale profits on intercompany sales are deferred and realized at the time the merchandise is sold to the retail consumer. For segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.
Financial Measures
Revenues. RevenuesRevenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retaile-commerce sales are recognized at point of sale.when the consumer receives the product as control transfers upon delivery. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information.E-commerce sales are recorded on a FOB destination basis and include shipping revenues. Retail sales are reported net of taxes collected. Franchise royalties are recognized based on reported franchise retail sales. Additionally, fees paid by franchisees when franchise stores are opened are recognized upon
Under the completionterms of our performance requirementsagreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and the opening2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchise store.franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded.
Revenues from our wholesale operations represent the sale of our products to third parties, less rebates, discounts and other allowances. The termsFor most of our wholesale sales, control transfers upon the shipment of the product as: 1) legal title transfers on such date and 2) we have a present right to payment at such time. Wholesale sales returns are not significant as we generally FOB shipping point,only accept the return of
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goods that were shipped to the customer in error or that were damaged when received by the customer. Additionally, due to our extensive history operating as a leading party goods wholesaler, we have sufficient history with which to estimate future sales returns and revenue is recognized when goods are shipped. Wewe use the expected value method to estimate reductions to revenues for volume-based rebate programs and subsequent credits at the time sales are recognized. such activity.
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.
Cost of sales related to sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.
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.
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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 12017 Form10-K 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.
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Results of Operations
Three Months Ended September 30, 20172018 Compared To Three Months Ended September 30, 20162017
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, 20172018 and 2016.2017.
| Three Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Net sales | $ | 557,350 | 99.5 | % | $ | 553,382 | 99.4 | % | ||||||||
Royalties and franchise fees | 2,759 | 0.5 | 3,568 | 0.6 | ||||||||||||
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Total revenues | 560,109 | 100.0 | 556,950 | 100.0 | ||||||||||||
Expenses: | ||||||||||||||||
Cost of sales | 357,523 | 63.8 | 356,662 | 64.0 | ||||||||||||
Wholesale selling expenses | 16,274 | 2.9 | 14,739 | 2.7 | ||||||||||||
Retail operating expenses | 100,739 | 18.0 | 100,746 | 18.1 | ||||||||||||
Franchise expenses | 3,636 | 0.6 | 3,370 | 0.6 | ||||||||||||
General and administrative expenses | 37,971 | 6.8 | 38,972 | 7.0 | ||||||||||||
Art and development costs | 5,898 | 1.1 | 5,543 | 1.0 | ||||||||||||
Development stage expenses | 680 | 0.1 | — | 0.0 | ||||||||||||
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Total expenses | 522,721 | 93.3 | 520,032 | 93.4 | ||||||||||||
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Income from operations | 37,388 | 6.7 | 36,918 | 6.6 | ||||||||||||
Interest expense, net | 23,228 | 4.1 | 22,424 | 4.0 | ||||||||||||
Other expense (income), net | 593 | 0.1 | (905 | ) | (0.2 | ) | ||||||||||
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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 | $ | 10,084 | 1.8 | % | $ | 10,180 | 1.8 | % | ||||||||
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Net income per common share – Basic | $ | 0.08 | $ | 0.09 | ||||||||||||
Net income per common share – Diluted | $ | 0.08 | $ | 0.08 | ||||||||||||
Revenues: Net sales Royalties and franchise fees Total revenues Expenses: Cost of sales Wholesale selling expenses Retail operating expenses Franchise expenses General and administrative expenses Art and development costs Development stage expenses Total expenses Income from operations Interest expense, net Other expense, net (Loss) income before income taxes Income tax expense Net (loss) income Add: Net loss attributable to redeemable securities holder Less: Net loss attributable to noncontrolling interests Net (loss) income attributable to common shareholders of Party City Holdco Inc. Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Basic Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Diluted Three Months Ended September 30, 2018 2017 (Dollars in thousands) $ 550,840 99.6 % $ 557,350 99.5 % 2,206 0.4 2,759 0.5 553,046 100.0 560,109 100.0 349,641 63.2 357,523 63.8 17,538 3.2 16,274 2.9 103,833 18.8 100,739 18.0 862 0.2 3,636 0.6 42,239 7.6 37,971 6.8 5,573 1.0 5,898 1.1 1,622 0.3 680 0.1 521,308 94.3 522,721 93.3 31,738 5.7 37,388 6.7 27,705 5.0 23,228 4.1 5,696 1.0 593 0.1 (1,663 ) (0.3 ) 13,567 2.4 777 0.1 3,483 0.6 (2,440 ) (0.4 ) 10,084 1.8 (8 ) (0.0 ) — 0.0 (28 ) (0.0 ) — 0.0 $ (2,420 ) (0.4 )% $ 10,084 1.8 % $ (0.03 ) $ 0.08 $ (0.03 ) $ 0.08
Revenues
Total revenues for the third quarter of 20172018 were $560.1$553.0 million and were $3.2$7.1 million, or 0.6%1.3%, higherlower than the third quarter of 2016.2017. The following table sets forth the Company’s total revenues for the three months ended September 30, 20172018 and 2016.2017.
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
| 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 | $ | 381,858 | 68.2 | % | $ | 416,387 | 74.8 | % | $ | 424,569 | 76.8 | % | $ | 381,858 | 68.2 | % | ||||||||||||||||
Eliminations | (188,565 | ) | (33.7 | )% | (210,562 | ) | (37.8 | )% | (249,409 | ) | (45.1 | )% | (188,565 | ) | (33.7 | )% | ||||||||||||||||
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Net wholesale | 193,293 | 34.5 | % | 205,825 | 37.0 | % | 175,160 | 31.7 | % | 193,293 | 34.5 | % | ||||||||||||||||||||
Retail | 364,057 | 65.0 | % | 347,557 | 62.4 | % | 375,680 | 67.9 | % | 364,057 | 65.0 | % | ||||||||||||||||||||
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Total net sales | 557,350 | 99.5 | % | 553,382 | 99.4 | % | 550,840 | 99.6 | % | 557,350 | 99.5 | % | ||||||||||||||||||||
Royalties and franchise fees | 2,759 | 0.5 | % | 3,568 | 0.6 | % | 2,206 | 0.4 | % | 2,759 | 0.5 | % | ||||||||||||||||||||
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Total revenues | $ | 560,109 | 100.0 | % | $ | 556,950 | 100.0 | % | $ | 553,046 | 100.0 | % | $ | 560,109 | 100.0 | % | ||||||||||||||||
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Retail
Retail net sales during the third quarter of 20172018 were $364.1$375.7 million and increased $16.5$11.6 million, or 4.7%3.2%, compared to the third quarter of 2016.2017. Retail net sales at our Party City stores totaled $324.8$336.4 million and were $19.2$11.6 million, or 6.3%3.6%, higher than 2016 as2017
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principally due to the acquisition of franchise store acquisitions and new store growth were partially offset by negative same-store sales (see below for further detail).independent stores. During the twelve months ended September 30, 2017,2018, we acquired 3665 franchise and independent stores, and 1 independent store, opened 2814 new stores and closed 811 stores. Global retaile-commerce sales totaled $34.1$34.2 million during the third quarter of 20172018 and were $1.7 million, or 4.7%, lower than duringprincipally consistent with the corresponding quarter of 2016. The North Americane-commerce sales that are included in our Party City brand comp decreased by 9.9% during the third quarter (see below for further detail).2017. Sales at our temporary Halloween City and Toy City stores totaled $5.1 million and were $5.2 million duringalso consistent with the third quarter of 2017, or $1.0 million lowerdespite operating 23 fewer stores than the corresponding quarter of 2016 due, in part, to stores opening later than last year.a year ago.
Same-store sales for the Party City brand (including North American retaile-commerce sales) decreased by 2.6%1.0% during the third quarter of 2017, principally due to the adverse effects of Hurricanes Harvey and Irma, which negatively impacted brand comp sales by approximately 140 basis points.
2018. Excluding the impact ofe-commerce, same-store sales decreased by 1.8% as a 2.2% decrease in transaction count was partially offset by a 0.4% increase in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted same-store sales by approximately 130 basis points.
1.1%. The North American retaile-commerce sales that are included in our Party City brand comp decreased by 9.9% due to a 9.1% decrease in transaction count and a 0.8% decrease in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted the percentage by approximately 140 basis points. The remainder of the decrease in transaction count reflects lower traffic as customer conversion levels were consistent with the corresponding quarter of the prior year. The decrease in average transaction dollar size was principally due to increased promotional activity as units per transaction increased by approximately 3% versus the third quarter of 2016.
2017. However, they increased by 19.2% when adjusting for the impact of our “buy online,pick-up in store” program (as such sales are included in our store sales). 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 20172018 totaled $193.3$175.2 million and were $12.5$18.1 million, or 6.1%9.4%, lower than the third quarter of 2016.2017. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $80.8$70.4 million and were $18.3$9.2 million, or 18.5%11.6%, lower than during 2016.2017. The decrease was partially due, in part, to our acquisition of 3665 franchise and independent stores during the first quarter of 2017;twelve months ended September 30, 2018; as post-acquisition sales to such stores (approximately $10$6.9 million during the third quarter of 2016)2017) are now eliminated as intercompany sales. Additionally, sales to existing franchisees decreased versus the corresponding quarter of 2016, principally due to carryover inventory from the 2016 Halloween selling season. Further, gift product sales decreased by approximately $1 million due to the continuedde-emphasis and product-line refinement of our Grasslands Road gift business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $19.2$17.9 million during the third quarter of 20172018 and were $0.7$1.3 million, or 3.8%6.8%, higherlower than during the corresponding quarter of 2016.2017 principally due to the franchise store acquisitions and certain seasonal shipments shifting into the fourth quarter of 2018. Our international sales
(which (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $93.3$86.9 million and were $5.1$7.6 million, or 5.8%8.1%, higherlower than in 2016. Our growth was largely driven2017. Foreign currency translation negatively impacted sales by the acquisition of Granmark S.A. de C.V. (“Granmark”) in Q1 of this year, as well asapproximately $2 million. Additionally, continued strong performance in the U.K.German and German markets.Australian markets was more than offset by lower sales of costumes and garments/accessories into the U.K.
Intercompany sales to our retail affiliates totaled $188.6$249.4 million during the third quarter of 20172018 and were $22.0$60.8 million or 10.4%, lowerhigher than during the corresponding quarter of 2016.2017 principally due to 2017 intercompany sales being impacted by carryover inventory from the 2016 Halloween selling season. Additionally, the increase was partially due to the higher corporate store count. Intercompany sales represented 49.4%58.7% of total wholesale sales during the third quarter of 2017,2018, compared to 50.6%49.4% during 2016. The decrease in intercompany sales was due to carryover inventory from the 2016 Halloween selling season.third quarter of 2017. 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 20172018 totaled $2.8$2.2 million and were $0.8$0.6 million lower than during the third quarter of 2016 principally2017 due to the acquisition of 36 franchise stores during the first quarter of 2017.stores.
Gross Profit
The following table sets forth the Company’s gross profit for the three months ended September 30, 20172018 and September 30, 2016.2017.
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
| 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 | $ | 141,334 | 38.8 | % | $ | 133,177 | 38.3 | % | $ | 151,860 | 40.4 | % | $ | 141,334 | 38.8 | % | ||||||||||||||||
Wholesale | 58,493 | 30.3 | 63,543 | 30.9 | 49,339 | 28.2 | 58,493 | 30.3 | ||||||||||||||||||||||||
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Total | $ | 199,827 | 35.9 | % | $ | 196,720 | 35.5 | % | $ | 201,199 | 36.5 | % | $ | 199,827 | 35.9 | % | ||||||||||||||||
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The gross profit margin on net sales at retail during the third quarter of 20172018 was 38.8%40.4%. Such percentage was 50160 basis points higher than during the thirdcorresponding quarter of 2016.2017. The benefitsincrease was principally due to a higher POS margin and the continued realization of increasedproductivity initiatives positively impacting occupancy costs. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales suppliedmanufactured by our wholesale operations)segment) increased from 24.4% during the third quarter of 2017 to 25.3% during the third quarter of 2018, driven by higher sales of metallic balloons and reduced product costs were partially offset by increased promotional activities.the scaling of recent acquisitions in our wholesale business. Our wholesale share of shelf at our Party City stores and our North American retaile-commerce operations increased from 75.1%(i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 77.2% during the quarter and was lower than during the third quarter of 20162017, 78.0%, due largely to 78.0% during the third quarter of 2017.product mix.
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The gross profit on net sales at wholesale during the third quarters of 2018 and 2017 was 28.2% and 2016 was 30.3% and 30.9%, respectively. The decrease was principally due to sales mix (including increased international sales)inflationary pressures in both distribution andde-leveraging of our fixed distribution labor costs due to the lower overall sales levels.and rising commodity costs.
Operating expenses
Wholesale selling expenses were $16.3$17.5 million during the third quarter of 20172018 and $14.7$16.3 million during the corresponding quarter of 2016.2017. The increase of $1.3 million was primarily due to approximately $1.5 million of sellingwage inflation and slightly higher costs at Granmark (acquired in Marchduring 2017). Wholesale selling expenses were 8.4% and 7.2% of net wholesale sales during the third quarters of 2017 and 2016, respectively. See above for a discussion of the decrease in net wholesale sales.
Retail operating expenses during the third quarter of 20172018 were $100.7$103.8 million and were principally consistent with$3.1 million, or 3.1%, higher than the thirdcorresponding quarter of 2016.2017. The impact of the higher store count (discussed above) wasand the impact of wage inflation were partially offset by further realized savings associated with improved labor productivity and efficiency in our stores and slightly lower advertising costs.stores. Retail operating expenses were 27.7%27.6% and 29.0%27.7% of net retail sales during the third quarters of 20172018 and 2016,2017, respectively.
Franchise expenses during the third quarters of 2018 and 2017 were $0.9 million and 2016 were $3.6 million, and $3.4 million, respectively. The decrease was due to anon-recurring reduction to franchise intangible asset amortization expense as a result of recent franchise store acquisitions.
General and administrative expenses during the third quarter of 20172018 totaled $38.0$42.2 million and were $1.0$4.3 million, or 2.6%11.2%, lowerhigher than in the third quarter of 2016. Lower2017. The variance was primarily due to increased share-based compensation,non-recurring executive compensation was partially offset by inflationary cost increases.severance charges and the impact of inflation. General and administrative expenses as a percentage of total revenues were 6.8%7.6% and 7.0%6.8% during the third quarters of 20172018 and 2016,2017, respectively.
Art and development costs were $5.9$5.6 million and $5.5$5.9 million during the third quarters of 2018 and 2017, and 2016, respectively.
Development stage expenses representstart-up costs related to Kazzam (see footnote 15 to the Company’s consolidated financial statements2017 Form10-K for further detail)detail and a discussion of the charges recorded during 2017).
Interest expense, net
Interest expense, net, totaled $27.7 million during the third quarter of 2018, compared to $23.2 million during the third quarter of 2017, compared to $22.4 million during the third quarter of 2016.2017. The increasevariance principally relates to adjustmentsthe impact of increasing LIBOR rates on our Term Loan Credit Agreement and our ABL Facility, increased borrowings under our ABL Facility due to share repurchases during the fourth quarter of 2017 and the impact of the Company’s minority interest liabilities for Print Appeal and ACIMAugust 2018 refinancing (see footnote 10Note 12 to the Company’s consolidated financial statements above for further detail). The adjustments were partially offset by the impact of a $100 million prepayment of the Company’s Term Loan Credit Agreement during the Company’s October 2016 refinancing; as well as the impact of the credit spread on such debt being reduced by 25 basis points at such time.
Other expense, (income), net
For the third quarter of 2017,2018, other expense, net, totaled $0.6$5.7 million.
ForDuring August 2018, the third quarterCompany executed a refinancing of 2016, other income, net, totaled $0.9 million. Such amount principally represented foreign currency transaction gains.its debt portfolio and issued $500 million of new senior notes at an interest rate of 6.625%. The notes will mature in August 2026. The Company used the proceeds from the notes to: (i) reduce the outstanding balance under its existing ABL Facility by $90 million and (ii) voluntarily prepay $400 million of the outstanding balance under its existing Term Loan Credit Agreement. Additionally, as part of the refinancing, the Company extended the maturity of the ABL Facility to August 2023. As the partial prepayment of the Term Loan Credit Agreement was in accordance with the terms of such agreement, at the time of such prepayment the Companywrote-off apro-rata portion of the existing capitalized deferred financing costs and original issuance discounts, $1.8 million, for investors who did not participate in the new notes. To the extent that investors in the Term Loan Credit Agreement participated in the new notes, the Company assessed whether the refinancing should be accounted for as an extinguishment on acreditor-by-creditor basis andwrote-off $1.0 million of existing deferred financing costs and original issuance discounts. Additionally, in conjunction with the issuance of the notes, the Company incurred third-party fees (principally banker fees). To the extent that such fees related to investors for whom their original debt was not extinguished, the Company expensed the portion of such fees, $2.3 million in aggregate, that related to such investors.
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Income tax expense
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law. The effectiveAct significantly changed U.S. tax law, including lowering the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Due to the complexities of accounting for the three months ended September 30,Act, the SEC issued Staff Accounting Bulletin No. 118 which allows entities to include a provisional estimate of the impact of the Act in its financial statements. Therefore, based on currently available information, during the fourth quarter of 2017, 25.7%, is lower than the effective rate forCompany recorded a provisional estimate of the three months ended September 30, 2016, 33.9%, principallyimpact of the Act, which included an income tax benefit related to the remeasurement of its domestic net deferred tax liabilities and deferred tax assets due to discrete items related to uncertainthe lower U.S. corporate tax positions, stock option exercises andreturn-to-provision adjustments.rate. The impactCompany did not adjust the estimate during the third quarter of such items was partially offset by the effect of state tax rate changes on deferred tax liabilities.2018.
Nine Months Ended September 30, 20172018 Compared To Nine Months Ended September 30, 20162017
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, 20172018 and 2016.2017.
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Net sales | $ | 1,572,966 | 99.4 | % | $ | 1,523,094 | 99.3 | % | $ | 1,614,049 | 99.5 | % | $ | 1,572,966 | 99.4 | % | ||||||||||||||||
Royalties and franchise fees | 9,020 | 0.6 | 11,009 | 0.7 | 7,832 | 0.5 | 9,020 | 0.6 | ||||||||||||||||||||||||
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Total revenues | 1,581,986 | 100.0 | 1,534,103 | 100.0 | 1,621,881 | 100.0 | 1,581,986 | 100.0 | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
Cost of sales | 978,142 | 61.8 | 952,294 | 62.1 | 996,084 | 61.4 | 978,142 | 61.8 | ||||||||||||||||||||||||
Wholesale selling expenses | 47,946 | 3.0 | 45,854 | 2.9 | 53,581 | 3.3 | 47,946 | 3.0 | ||||||||||||||||||||||||
Retail operating expenses | 281,981 | 17.8 | 278,070 | 18.1 | 285,019 | 17.6 | 281,981 | 17.8 | ||||||||||||||||||||||||
Franchise expenses | 10,666 | 0.7 | 10,507 | 0.7 | 8,624 | 0.5 | 10,666 | 0.7 | ||||||||||||||||||||||||
General and administrative expenses | 125,763 | 7.9 | 115,828 | 7.6 | 136,230 | 8.4 | 125,763 | 7.9 | ||||||||||||||||||||||||
Art and development costs | 17,638 | 1.1 | 16,596 | 1.1 | 17,278 | 1.1 | 17,638 | 1.1 | ||||||||||||||||||||||||
Development stage expenses | 7,092 | 0.4 | — | 0.0 | 5,620 | 0.3 | 7,092 | 0.4 | ||||||||||||||||||||||||
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Total expenses | 1,469,228 | 92.9 | 1,419,149 | 92.5 | 1,502,436 | 92.6 | 1,469,228 | 92.9 | ||||||||||||||||||||||||
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Income from operations | 112,758 | 7.1 | 114,954 | 7.5 | 119,445 | 7.4 | 112,758 | 7.1 | ||||||||||||||||||||||||
Interest expense, net | 65,214 | 4.1 | 67,857 | 4.4 | 76,481 | 4.7 | 65,214 | 4.1 | ||||||||||||||||||||||||
Other expense (income), net | 860 | 0.1 | (4,107 | ) | (0.2 | ) | ||||||||||||||||||||||||||
Other expense, net | 9,076 | 0.6 | 860 | 0.1 | ||||||||||||||||||||||||||||
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Income before income taxes | 46,684 | 3.0 | 51,204 | 3.3 | 33,888 | 2.1 | 46,684 | 3.0 | ||||||||||||||||||||||||
Income tax expense | 16,301 | 1.0 | 18,903 | 1.2 | 9,443 | 0.6 | 16,301 | 1.0 | ||||||||||||||||||||||||
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Net income | $ | 30,383 | 1.9 | % | $ | 32,301 | 2.1 | % | 24,445 | 1.5 | 30,383 | 1.9 | ||||||||||||||||||||
Add: Net income attributable to redeemable securities holder | 402 | 0.0 | — | 0.0 | ||||||||||||||||||||||||||||
Less: Net loss attributable to noncontrolling interests | (87 | ) | (0.0 | ) | — | 0.0 | ||||||||||||||||||||||||||
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Net income per common share – Basic | $ | 0.25 | $ | 0.27 | ||||||||||||||||||||||||||||
Net income per common share – Diluted | $ | 0.25 | $ | 0.27 | ||||||||||||||||||||||||||||
Net income attributable to common shareholders of Party City Holdco Inc. | $ | 24,934 | 1.5 | % | $ | 30,383 | 1.9 | % | ||||||||||||||||||||||||
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Net income per share attributable to common shareholders of Party City Holdco Inc. - Basic | $ | 0.26 | $ | 0.25 | ||||||||||||||||||||||||||||
Net income per share attributable to common shareholders of Party City Holdco Inc. - Diluted | $ | 0.26 | $ | 0.25 | ||||||||||||||||||||||||||||
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Revenues
Total revenues for the first nine months of 20172018 were $1,582.0$1,621.9 million and were $47.9$39.9 million, or 3.1%2.5%, higher than the corresponding period of 2016.2017. The following table sets forth the Company’s total revenues for the nine months ended September 30, 20172018 and 2016.2017.
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
| 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 | $ | 929,255 | 58.7 | % | $ | 945,071 | 61.6 | % | $ | 988,129 | 60.9 | % | $ | 929,255 | 58.7 | % | ||||||||||||||||
Eliminations | (459,416 | ) | (29.0 | )% | (465,189 | ) | (30.3 | )% | (524,689 | ) | (32.3 | )% | (459,416 | ) | (29.0 | )% | ||||||||||||||||
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Net wholesale | 469,839 | 29.7 | % | 479,882 | 31.3 | % | 463,440 | 28.6 | % | 469,839 | 29.7 | % | ||||||||||||||||||||
Retail | 1,103,127 | 69.7 | % | 1,043,212 | 68.0 | % | 1,150,609 | 70.9 | % | 1,103,127 | 69.7 | % | ||||||||||||||||||||
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Total net sales | 1,572,966 | 99.4 | % | 1,523,094 | 99.3 | % | 1,614,049 | 99.5 | % | 1,572,966 | 99.4 | % | ||||||||||||||||||||
Royalties and franchise fees | 9,020 | 0.6 | % | 11,009 | 0.7 | % | 7,832 | 0.5 | % | 9,020 | 0.6 | % | ||||||||||||||||||||
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Total revenues | $ | 1,581,986 | 100.0 | % | $ | 1,534,103 | 100.0 | % | $ | 1,621,881 | 100.0 | % | $ | 1,581,986 | 100.0 | % | ||||||||||||||||
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Retail
Retail net sales during the first nine months of 20172018 were $1,103.1$1,150.6 million and increased $59.9$47.5 million, or 5.7%4.3%, compared to the first nine monthscorresponding period of 2016.2017. Retail net sales at our Party City stores totaled $993.7$1,043.4 million and were $59.4$49.8 million, or 6.4%5.0%, higher than 2016 as2017 due to the acquisition of franchise and independent stores and increased same store acquisitions and new store growth were partially offset by negative same-store sales, (see below for further detail).reflecting the favorable impact of a shift in the calendar related to the timing of certain New Year’s Eve sales, which shifted into the first quarter of fiscal 2018. During the twelve months ended September 30, 2017,2018, we acquired 3665 franchise and independent stores, and 1 independent store, opened 2814 new stores and closed 811 stores. Global retaile-commerce sales totaled $104.2$102.1 million during the first nine months of 20172018 and were $1.5$2.2 million, or 1.5%2.1%, higherlower than during the corresponding period of 2016, driven by strong international2017. The North Americane-commerce sales.sales that are included in our Party City brand comp decreased by 4.3% during the period. However, they increased by 9.5% when adjusting for the impact of our “buy online,pick-up in store” program (as such sales are included in our store sales). Sales at our temporary Halloween City and Toy City stores totaled $5.1 million and were $5.2 million during the period or $1.0 million lower than the corresponding period of 2016 partially due to the fact that we openedconsistent with 2017, despite operating 23 fewer stores later this year than a year ago.
Same-store sales for the Party City brand (including North American retaile-commerce sales) decreasedincreased by 0.3%, largely a result0.5% during the first nine months of the adverse impact of Hurricanes Harvey and Irma, which adversely impacted brand comp sales by approximately 50 basis points.
2018. Excluding the impact ofe-commerce, same-store sales decreased by 0.3% as a 0.9% decrease in transaction count was partially offset by a 0.6% increase in average transaction dollar size. Hurricane Harvey and Hurricane Irma adversely impacted same-store sales by approximately 40 basis points.
The North American 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 higher customer conversion levels versus the same period of last year. The decrease in average transaction dollar size principally relates to lower units, largely a reflection of lower free-freight promotional thresholds.
0.9%. 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 20172018 totaled $469.8$463.4 million and were $10.0$6.4 million, or 2.1%1.4%, lower than during 2016.the first nine months of 2017. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $204.4$185.8 million and were $32.3$16.2 million, or 13.6%8.0%, lower than during the first nine months of 2016.2017. The decrease was principally due, in part, to our acquisition of 3665 franchise and independent stores during the first quarter of 2017;twelve months ended September 30, 2018; as post-acquisition sales to such stores (approximately $19$13 million during the first nine months of 2016)2017) are now eliminated as intercompany sales. Additionally, sales to existing franchisees decreased versus the corresponding period of 2016, principally due to carryover inventory from the 2016 Halloween selling season. Further, gift product sales decreased by approximately $3 million due to the continuedde-emphasis and product-line refinement of our Grasslands Road gift business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $62.4$61.4 million during the first nine months of 20172018 and were $3.7$1.1 million or 6.3%, higherlower than during the corresponding period of 2016 primarily due to stronger2017 as certain Valentine’s Day sales, in part due toshipments accelerated into the timingfourth quarter of certain shipments.2017 (during the 2017 Valentine’s Day season the corresponding shipments took place during the first quarter of 2017). Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $203.0$216.2 million and were $18.6$10.9 million, or 10.1%5.3%, higher than in 2016, despite a $4.9 million negative2017. The increase was driven by continued strong performance in the German market, the acquisition of Granmark S.A. de C.V. (“Granmark”) in March 2017 and the impact fromof foreign currency translation during the first nine months of 2017. This growth was attributable to two acquisitions and further expansion of ourstore-in-store concept with key retailers.(approximately $5 million).
Intercompany sales to our retail affiliates totaled $459.4$524.7 million during the first nine months of 20172018 and were $5.8$65.3 million or 1.2%, lowerhigher than during the corresponding period of 2016.the prior year, principally due to 2017 intercompany sales being impacted by carryover inventory from the 2016 Halloween selling season. Additionally, the increase was partially due to the higher corporate store count. Intercompany sales represented 49.4%53.1% of total wholesale sales during the first nine months of 2017,2018, compared to 49.2%49.4% during 2016. The decrease in intercompany sales was due to carryover inventory from the 2016 Halloween selling season.first nine months of 2017. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
28
Royalties and franchise fees
Royalties and franchise fees for the first nine months of 20172018 totaled $9.0$7.8 million and were $2.0$1.2 million or 18.1%, lower than during the first nine months of 2016 principally2017 due to the acquisition of 36 franchise stores during the first quarter of 2017.stores.
Gross Profit
The following table sets forth the Company’s gross profit for the nine months ended September 30, 20172018 and September 30, 2016.2017.
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
| 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 | $ | 447,787 | 40.6 | % | $ | 419,283 | 40.2 | % | $ | 482,609 | 41.9 | % | $ | 447,787 | 40.6 | % | ||||||||||||||||
Wholesale | 147,037 | 31.3 | 151,517 | 31.6 | 135,356 | 29.2 | % | 147,037 | 31.3 | |||||||||||||||||||||||
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Total | $ | 594,824 | 37.8 | % | $ | 570,800 | 37.5 | % | $ | 617,965 | 38.3 | % | $ | 594,824 | 37.8 | % | ||||||||||||||||
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The gross profit margin on net sales at retail during the first nine months of 20172018 was 40.6%41.9%. Such percentage was 40130 basis points higher than during the corresponding period of 2016.2017. The benefitsincrease was principally due to the continued realization of productivity initiatives positively impacting occupancy costs, a higher POS margin, the benefit of leverage associated with increased sales and increased manufacturing share of shelf (i.e., the percentage of our retail product cost of sales suppliedmanufactured by our wholesale operations)segment). Our manufacturing share of shelf increased from 25.1% during the first nine months of 2017 to 26.6% during the corresponding period of 2018, driven by higher sales of metallic balloons and reduced product costs were partially offset by increased promotional activities.the scaling up of recent acquisitions in our wholesale business. Our wholesale share of shelf at our Party City stores and our North American retaile-commerce operations increased from 75.9%(i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 77.8% during the first nine months of 2016 to 78.0% during the first nine months ofperiod and was principally consistent with 2017.
The gross profit on net sales at wholesale during the first nine months of 2018 and 2017 was 29.2% and 2016 was 31.3% and 31.6%, respectively. The decrease was principally due to the strengthening of the U.S. Dollarhigher logistics and its unfavorable impact on certain of our international subsidiaries that purchase product in U.S. Dollars and sell in local currency. Benefits associated with continued improvements in our sourcing efforts were offset by the impact of sales mix (including increased international sales) andde-leveraging of our fixed distribution costs, due to the lower overallrising commodity costs and sales levels.mix.
Operating expenses
Wholesale selling expenses were $47.9$53.6 million during the first nine months of 20172018 and $45.9$47.9 million during the corresponding period of 2016. Approximately $32017. The increase of $5.6 million, ofor 11.7%, was primarily due to selling costs at Granmark (acquired in March 2017) and inflationary cost increases were partially offset by favorable, the impact of foreign currency translation ($0.7(approximately $1 million) and lower intangible asset amortization. Wholesale selling expenses were 10.2% and 9.6%the impact of net wholesale sales during the first nine months of 2017 and 2016, respectively. See above for a discussion of the decrease in net wholesale sales.wage inflation.
Retail operating expenses during the first nine months of 20172018 were $282.0$285.0 million and were $3.9$3.0 million, or 1.4%1.1%, higher than during the first nine monthscorresponding period of 2016.2017. The impact of the increasedhigher store count (discussed above), increased advertising spend and inflationary cost increasesthe impact of wage inflation were mostly offset by lower labor costs realized savings associated with improved laboras a result of increased productivity and efficiency in our stores and lower advertising expenses.stores. Retail operating expenses were 25.6%24.8% and 26.7%25.6% of net retail sales during the first nine months of 2018 and 2017, and 2016, respectively. The decrease was mostly due to the improved labor productivity.
Franchise expenses during the first nine months of 2018 and 2017 were $8.6 million and 2016 were $10.7 million, and $10.5 million, respectively. The decrease was due to anon-recurring reduction to franchise intangible asset amortization expense as a result of recent franchise store acquisitions.
General and administrative expenses during the first nine months of 20172018 totaled $125.8$136.2 million and were $9.9$10.5 million, or 8.6%8.3%, higher than in the first nine months of 2016. In conjunction with2017. Increasedone-time third-party consultant costs and the impact of inflation were partially offset by the first quarter of 2017 including severance charges related to a Transition and Consulting Agreement disclosed in Note 14 to our consolidated financial statements, duringwhich the first nine months of 2017 we recorded a $5.7 million severance charge, $1.4 million of which related to equity-based compensation. Additionally, as part of a retail restructuring (also disclosed in Note 14), during the first nine months of 2017 we recorded $0.9 million of severance expense for employees of our retail segment. The remainder of the variance versus the first nine months of 2016 was principally due to inflationary cost increases and administrative costs at Granmark (acquired in March 2017).Company entered into with Gerald Rittenberg. General and administrative expenses as a percentage of total revenues increased from 7.6% in 2016 towere 8.4% and 7.9% induring the first nine months of 2018 and 2017, due to the severance.respectively.
Art and development costs were $17.6 million and $16.6$17.3 million during the first nine months of 20172018 and 2016, respectively. Such amounts represent 1.1%were $0.4 million lower than the first nine months of total revenues in both periods.2017.
Development stage expenses representstart-up costs related to Kazzam (see footnote 15 to the Company’s consolidated financial statements2017 Form10-K for further detail)detail and a discussion of the charges recorded during 2017).
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Interest expense, net
Interest expense, net, totaled $76.5 million during the first nine months of 2018, compared to $65.2 million during the first nine months of 2017, compared2017. The variance principally relates to $67.9 million during the first nine monthsimpact of 2016. The decrease principally reflects a $100 million prepayment of the Company’sincreasing LIBOR rates on our Term Loan Credit Agreement and our ABL Facility, increased borrowings under our ABL Facility due to share repurchases during the Company’s October 2016 refinancing; as well asfourth quarter of 2017 and, to a lesser extent, the impact of the credit spread on such debt being reduced by 25 basis points at such time.Company’s August 2018 refinancing (see Note 12 to the Company’s consolidated financial statements above for further detail).
Other expense, (income), net
For the first nine months of 2017,2018, other expense, net, totaled $0.9$9.1 million.
During August 2018, the corresponding periodCompany executed a refinancing of 2016, other income, net, totaled $4.1 million. Such amount included $6.9its debt portfolio and issued $500 million of foreign currency transaction gains, primarilynew senior notes at an interest rate of 6.625%. The notes will mature in August 2026. The Company used the impactproceeds from the notes to: (i) reduce the outstanding balance under its existing ABL Facility by $90 million and (ii) voluntarily prepay $400 million of the changeoutstanding balance under its existing Term Loan Credit Agreement. Additionally, as part of the refinancing, the Company extended the maturity of the ABL Facility to August 2023. As the partial prepayment of the Term Loan Credit Agreement was in accordance with the terms of such agreement, at the time of such prepayment the Companywrote-off apro-rata portion of the existing capitalized deferred financing costs and original issuance discounts, $1.8 million, for investors who did not participate in the U.S. Dollar from December 31, 2015 to September 30, 2016new notes. To the extent that investors in the Term Loan Credit Agreement participated in the new notes, the Company assessed whether the refinancing should be accounted for as an extinguishment on acreditor-by-creditor basis andwrote-off $1.0 million of existing deferred financing costs and original issuance discounts. Additionally, in conjunction with the correspondingre-measurementissuance of the U.S. dollar-denominated receivables and payablesnotes, the Company incurred third-party fees (principally banker fees). To the extent that such fees related to investors for whom their original debt was not extinguished, the Company expensed the portion of our foreign operations.such fees, $2.3 million in aggregate, that related to such investors.
Income tax expense
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law. The Act significantly changed U.S. tax law, including lowering the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Due to the complexities of accounting for the Act, the SEC issued Staff Accounting Bulletin No. 118 which allows entities to include a provisional estimate of the impact of the Act in its financial statements. Therefore, based on currently available information, during the fourth quarter of 2017, the Company recorded a provisional estimate of the impact of the Act, which included an income tax benefit related to the remeasurement of its domestic net deferred tax liabilities and deferred tax assets due to the lower U.S. corporate tax rate. The Company did not adjust the estimate during the first nine months of 2018.
The effective income tax rate for the nine months ended September 30, 2017, 34.9%2018, 27.9%, is lowerhigher than the effectivestatutory rate for the nine months ended September 30, 2016, 36.9%, principallyprimarily due to discrete items related to uncertain tax positions, stock option exercisesstate andreturn-to-provision adjustments. The impact of such items was partially offset by the effect of state tax rate changes on deferred tax liabilities. foreign taxes.
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted
The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share—diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization,non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual 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—diluted are helpful benchmarks to evaluate its operating performance.
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Adjusted EBITDA, adjusted net income, and adjusted net income per common share—share - diluted have limitations as analytical tools. Some of these limitations are:
they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for, the Company’s working capital needs;
although depreciation and amortization arenon-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
non-cash compensation is and will remain a key element of the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;
they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and
other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative measure.
Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted only on a supplemental basis. The reconciliations from net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as follows:
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
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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 | ||||||||||||
| Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||||
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Net (loss) income | $ | (2,440 | ) | $ | 10,084 | $ | 24,445 | $ | 30,383 | |||||||
Interest expense, net | 27,705 | 23,228 | 76,481 | 65,214 | ||||||||||||
Income taxes | 777 | 3,483 | 9,443 | 16,301 | ||||||||||||
Depreciation and amortization | 16,974 | 20,694 | 57,786 | 62,519 | ||||||||||||
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EBITDA | 43,016 | 57,489 | 168,155 | 174,417 | ||||||||||||
Non-cash purchase accounting adjustments | 2,154 | 1,500 | 2,696 | 6,350 | ||||||||||||
Restructuring, retention and severance (a) | 951 | 212 | 3,105 | 8,839 | ||||||||||||
Deferred rent (b) | 2,468 | 2,719 | 3,623 | 5,634 | ||||||||||||
Closed store expense (c) | 825 | 1,285 | 3,430 | 4,164 | ||||||||||||
Foreign currency (gains) losses, net | (314 | ) | 36 | 128 | (1,684 | ) | ||||||||||
Stock option expense (d) | 550 | 630 | 1,492 | 3,852 | ||||||||||||
Restricted stock units expense – time-based (e) | 470 | — | 722 | — | ||||||||||||
Restricted stock units expense – performance-based (f) | 889 | — | 1,482 | — | ||||||||||||
Non-employee equity based compensation (g) | (13 | ) | 21 | 352 | 3,286 | |||||||||||
Undistributed (income) loss in unconsolidated joint ventures | (279 | ) | 134 | (580 | ) | (92 | ) | |||||||||
Corporate development (h) | 3,057 | 1,634 | 8,409 | 6,078 | ||||||||||||
Non-recurring consulting charges (i) | 624 | — | 12,243 | — | ||||||||||||
Refinancing charges (j) | 5,091 | — | 6,237 | — | ||||||||||||
Other | (44 | ) | 469 | (295 | ) | 947 | ||||||||||
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Adjusted EBITDA | $ | 59,445 | $ | 66,129 | $ | 211,199 | $ | 211,791 | ||||||||
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| Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||||
| (Dollars in thousands, except per share amounts) | ||||||||||||||||
(Loss) Income before income taxes | $ | (1,663 | ) | $ | 13,567 | $ | 33,888 | $ | 46,684 | |||||||
Intangible asset amortization | 591 | 3,879 | 7,959 | 11,704 | ||||||||||||
Non-cash purchase accounting adjustments | 1,659 | 2,241 | 2,622 | 8,165 | ||||||||||||
Amortization of deferred financing costs and original issuance discounts (j) | 6,268 | 1,240 | 9,834 | 3,699 | ||||||||||||
Executive severance (a) | 809 | (323 | ) | 809 | 4,296 | |||||||||||
Non-employee equity based compensation (g) | (13 | ) | 21 | 352 | 3,286 | |||||||||||
Hurricane-related costs | — | 385 | — | 385 | ||||||||||||
Restructuring (a) | — | — | — | 3,195 | ||||||||||||
Non-recurring consulting charges (i) | 624 | — | 12,243 | — | ||||||||||||
Stock option expense (d) | 550 | 630 | 1,492 | 3,852 | ||||||||||||
Restricted stock units expense - performance-based (f) | 889 | — | 1,482 | — | ||||||||||||
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Adjusted income before income taxes | 9,714 | 21,640 | 70,681 | 85,266 | ||||||||||||
Adjusted income tax expense (k) | 2,364 | 6,467 | 17,213 | 30,713 | ||||||||||||
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Adjusted net income | $ | 7,350 | $ | 15,173 | $ | 53,468 | $ | 54,553 | ||||||||
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Adjusted net income per common share – diluted | $ | 0.08 | $ | 0.13 | $ | 0.55 | $ | 0.45 | ||||||||
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Weighted-average number of common shares-diluted | 97,714,252 | 120,912,849 | 97,684,290 | 120,907,979 | ||||||||||||
| (a) | On March 15, 2017, |
| (b) | The deferred rent adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items. |
| (c) | Principally charges incurred related to closing underperforming stores. |
| (d) | Representsnon-cash charges related to stock |
| (e) | Non-cash charges for restricted stock units that vest based on service conditions. |
| (f) | Non-cash charges for restricted stock units that vest based on performance conditions. |
| (g) | Principally represents shares of Kazzam awarded to Ampology as compensation for Ampology’s services. See |
| (h) | Primarily representsstart-up costs for Kazzam (see |
Primarilynon-recurring consulting charges related to the |
| (j) | During August 2018, the Company executed a refinancing of its debt portfolio and issued $500 million of new senior notes at an interest rate of 6.625%. |
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| Company expensed the portion of such fees, $2.3 million in aggregate, that related to such investors. Such amounts are included in |
Additionally, during February 2018, the Company amended the Term Loan Credit Agreement. In conjunction with the amendment, the Companywrote-off $0.3 million of capitalized deferred financing costs, original issue discounts and call premiums. Further, in conjunction with the February 2018 amendment, the Company expensed $0.8 million of investment banking and legal fees. Such amounts are included in “Refinancing Charges” in the “Adjusted EBITDA” table above and in “Amortization of Deferred Financing Costs and Original Issuance Discounts” in the “Adjusted Net Income” table above.
| (k) | 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
During 2015, the Company replaced its then-existing debt withThe Company’s indebtedness consistingprincipally consists 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 and (iv) $500 million of 6.625% senior notes.
We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Cash Flow
Net cash provided byused in operating activities totaled $6.3 million and $23.5$86.2 million during the nine months ended September 30, 2017 and 2016, respectively.2018. Net cash provided by operating activities totaled $6.2 million during the nine months ended September 30, 2017. Net cash flows provided by operating activities before changes in operating assets and liabilities were $101.2 million during 2018, compared to $113.5 million during the first nine months of 2017, compared to $114.1 million during 2016.2017. Changes in operating assets and liabilities during the first nine months of2018 and 2017 and 2016 resulted in the use of cash of $107.2$187.4 million and $90.6$107.3 million, respectively. The use of cash was highergreater during 20172018 principally due to increased income tax payments due2017 benefitting from Halloween carryover inventory from the 2016 Halloween selling season and, to the Company’s increased profitability.a lesser extent, higher interest payments.
Net cash used in investing activities totaled $129.3 million during the nine months ended September 30, 2018, as compared to $120.7 million during the nine months ended September 30, 2017, as compared to $89.1 million during the nine months ended September 30, 2016.2017. Investing activities during 20172018 included $72.8$63.8 million paid in connection with acquisitions, principally related to franchise stores and Granmark (see Note 13 to the consolidated financial statements for further detail). Capital expenditures during the nine months ended September 30, 2018 and 2017 and 2016 were $47.9$65.5 million and $57.3$47.9 million, respectively. Retail capital expenditures totaled $25.1$39.1 million during 20172018 and principally related to initiatives for improving store conversionsperformance, investments in new stores and information technology-related expenditures.spending on store conversions. Wholesale capital expenditures during 20172018 totaled $22.8$26.4 million and primarily related to printing plates and dies, as well as machinery and equipment at the Company’s manufacturing operations and main distribution center.
Net cash provided by financing activities was $210.1 million and $104.6 million during the nine months ended September 30, 2018 and September 30, 2017, as compared to $71.5 million during the corresponding period of 2016. Borrowings were higher during 2017 principallyrespectively. The increase in net cash provided by financing activities was necessary due to the acquisitions.higher cash used in operating activities (see above for further detail).
At September 30, 2017,2018, the Company had approximately $372$197 million of availability under its ABL Facility, after considering borrowing base restrictions.
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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, 20162017 as previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2016.2017.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during the threenine months ended September 30, 20172018 and the year ended December 31, 2016.2017.
Seasonality
Wholesale Operations
Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the quarter.
Retail Operations
Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent,year-end holiday sales.
Cautionary Note Regarding Forward-Looking Statements
From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the section titled “Risk Factors” included in our Annual Report on Form10-K filed with the SEC on March 16, 2017.14, 2018 and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of the date of this filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:
our ability to compete effectively in a competitive industry;
fluctuations in commodity prices;
our ability to appropriately respond to changing merchandise trends and consumer preferences;
successful implementation of our store growth strategy;
unexpected or unfavorable consumer responses to our promotional or merchandising programs;
failure to comply with existing or future laws relating to our marketing programs,e-commerce initiatives and the use of consumer information;
disruption to the transportation system or increases in transportation costs;
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product recalls or product liability;
economic slowdown affecting consumer spending and general economic conditions;
loss or actions of third party vendors and loss of the right to use licensed material;
disruptions at our manufacturing facilities;
failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;
our international operations subjecting us to additional risks;
potential litigation and claims;
lack of available additional capital;
our inability to retain or hire key personnel;
risks associated with leasing substantial amounts of space;
failure of existing franchisees to conduct their business in accordance with agreed upon standards;
adequacy of our information systems, order fulfillment and distribution facilities;
our ability to adequately maintain the security of our electronic and other confidential information;
our inability to successfully identify and integrate acquisitions;
adequacy of our intellectual property rights;
risks related to our substantial indebtedness; and
the other factors set forth under “Risk Factors” in our Annual Report on Form10-K, filed with the SEC on March 16, 2017.14, 2018.
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, 20162017 as previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2016.2017.
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, 2017.2018. 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, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PARTII-OTHER INFORMATION
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.
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, 2016.2017, filed with the SEC on March 14, 2018, except as noted below.
Concentration of ownership by investment funds affiliated with Thomas H. Lee Partners, L.P. (“THL”) could limit other stockholders’ ability to influence the outcome of key transactions, including a change of control.
THL beneficially owns approximately 37% of our outstanding common stock as of September 30, 2018. As a result, THL will be able to exert a significant degree of influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, THL may effectively control matters submitted to a vote of our stockholders without the consent of our other stockholders, may have the power to prevent a change in our control and could take other actions that might be favorable to them.
| * | Filed herewith. |
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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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