Company Quick10K Filing
Quick10K
Party City Holdco
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$8.05 94 $755
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
8-K 2019-06-06 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-04-12 Officers
8-K 2019-04-08 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-01 Officers, Exhibits
8-K 2018-11-08 Earnings, Other Events, Exhibits
8-K 2018-08-31 Officers
8-K 2018-08-09 Other Events, Exhibits
8-K 2018-08-06 Earnings, Officers, Exhibits
8-K 2018-08-02 Enter Agreement, Off-BS Arrangement, Shareholder Rights, Exhibits
8-K 2018-07-26 Other Events, Exhibits
8-K 2018-07-23 Earnings, Regulation FD, Exhibits
8-K 2018-06-06 Officers, Shareholder Vote
8-K 2018-05-15 Other Events, Exhibits
8-K 2018-04-12 Officers
8-K 2018-03-09 Earnings, Exhibits
8-K 2018-02-16 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-08 Regulation FD
8-K 2018-01-09 Officers
SFIX Stitch Fix 2,630
PRA Proassurance 2,120
NWN Northwest Natural Holding Company 1,950
GTN Gray Television 1,900
FWRD Forward Air 1,780
GLDD Great Lakes Dredge & Dock 696
ICAD iCAD 96
PAVM Pavmed 37
BNSO Bonso Electronics 12
APPO Alphapoint Technology 0
PRTY 2019-03-31
Note 1 - Description of Business
Note 2 - Basis of Presentation and Recently Issued Accounting Pronouncements
Note 3 - Store Impairment and Restructuring Charges
Note 4 - Inventories
Note 5 - Income Taxes
Note 6 - Changes in Accumulated Other Comprehensive Loss
Note 7 - Capital Stock
Note 8 - Segment Information
Note 9 - Commitments and Contingencies
Note 10 - Derivative Financial Instruments
Note 11 - Fair Value Measurements
Note 12 - Earnings per Share
Note 13 - Long-Term Obligations
Note 14 - Revenue From Contracts with Customers
Note 15 - Cash, Cash Equivalents and Restricted Cash
Note 16 - Leases
Note 17 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 d704198dex101.htm
EX-31.1 d704198dex311.htm
EX-31.2 d704198dex312.htm
EX-32.1 d704198dex321.htm
EX-32.2 d704198dex322.htm

Party City Holdco Earnings 2019-03-31

PRTY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d704198d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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 number 001-37344

 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 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 in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value: $0.01/share   PRTY   New York Stock Exchange

As of April 25, 2019, 93,789,991 shares of the Registrant’s common stock were outstanding.

 

 

 


Table of Contents

PARTY CITY HOLDCO INC.

Form 10-Q

March 31, 2019

TABLE OF CONTENTS

 

     Page  
PART I   

Item 1. Condensed Consolidated Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets at March  31, 2019 and December 31, 2018

     3  

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months ended March 31, 2019 and March 31, 2018

     4  

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2019 and March 31, 2018

     5  

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 and March 31, 2018

     6  

Notes to Condensed Consolidated Financial Statements

     7  

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     28  

Item 4. Controls and Procedures

     28  
PART II   

Item 1. Legal Proceedings

     30  

Item 1A. Risk Factors

     30  

Item 6. Exhibits

     30  

Signature

     31  

 

2


Table of Contents

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     March 31,
2019
    December 31,
2018
 
     (Note 2) (Unaudited)     (Note 2)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 38,999     $ 58,909  

Accounts receivable, net

     138,909       146,983  

Inventories, net

     763,341       756,038  

Prepaid expenses and other current assets

     68,735       61,905  
  

 

 

   

 

 

 

Total current assets

     1,009,984       1,023,835  

Property, plant and equipment, net

     311,990       321,044  

Operating lease asset

     779,810       —    

Goodwill

     1,659,414       1,656,950  

Trade names

     568,290       568,031  

Other intangible assets, net

     52,959       60,164  

Other assets, net

     14,813       12,323  
  

 

 

   

 

 

 

Total assets

   $ 4,397,260     $ 3,642,347  
  

 

 

   

 

 

 

LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Loans and notes payable

   $ 397,882     $ 302,751  

Accounts payable

     156,100       208,149  

Accrued expenses

     138,680       161,228  

Current portion of operating lease liability

     143,028       —    

Income taxes payable

     21,127       25,993  

Current portion of long-term obligations

     13,315       13,316  
  

 

 

   

 

 

 

Total current liabilities

     870,132       711,437  

Long-term obligations, excluding current portion

     1,618,802       1,621,963  

Long-term portion of operating lease liability

     707,364       —    

Deferred income tax liabilities, net

     165,095       174,427  

Other long-term liabilities

     13,361       87,548  
  

 

 

   

 

 

 

Total liabilities

     3,374,754       2,595,375  

Redeemable securities

     3,351       3,351  

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock (93,779,787 and 93,622,934 shares outstanding and 120,960,691 and 120,788,159 shares issued at March 31, 2019 and December 31, 2018, respectively)

     1,210       1,208  

Additional paid-in capital

     925,233       922,476  

Retained earnings

     465,056       495,777  

Accumulated other comprehensive loss

     (45,558     (49,201
  

 

 

   

 

 

 

Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury

     1,345,941       1,370,260  

Less: Common stock held in treasury, at cost (27,180,904 and 27,165,225 shares at March 31, 2019 and December 31, 2018)

     (327,086     (326,930
  

 

 

   

 

 

 

Total Party City Holdco Inc. stockholders’ equity

     1,018,855       1,043,330  

Noncontrolling interests

     300       291  
  

 

 

   

 

 

 

Total stockholders’ equity

     1,019,155       1,043,621  
  

 

 

   

 

 

 

Total liabilities, redeemable securities and stockholders’ equity

   $ 4,397,260     $ 3,642,347  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(In thousands, except share and per share data)

 

     Three Months Ended
March 31,
 
     2019     2018  

Revenues:

    

Net sales

   $ 511,102     $ 505,108  

Royalties and franchise fees

     2,014       2,716  
  

 

 

   

 

 

 

Total revenues

     513,116       507,824  

Expenses:

    

Cost of sales

     339,042       316,966  

Wholesale selling expenses

     17,961       18,787  

Retail operating expenses

     95,018       89,092  

Franchise expenses

     3,303       3,782  

General and administrative expenses

     41,925       48,665  

Art and development costs

     5,929       5,973  

Development stage expenses

     2,226       2,303  

Store impairment and restructuring charges

     18,009       —    
  

 

 

   

 

 

 

Total expenses

     523,413       485,568  
  

 

 

   

 

 

 

(Loss) income from operations

     (10,297     22,256  

Interest expense, net

     29,257       23,275  

Other expense, net

     1,254       848  
  

 

 

   

 

 

 

Loss before income taxes

     (40,808     (1,867

Income tax benefit

     (10,519     (704
  

 

 

   

 

 

 

Net loss

     (30,289     (1,163

Less: Net loss attributable to noncontrolling interests

     (71     (30
  

 

 

   

 

 

 

Net loss attributable to common shareholders of Party City Holdco Inc.

   $ (30,218   $ (1,133
  

 

 

   

 

 

 

Net loss per share attributable to common shareholders of Party City Holdco Inc.–Basic

   $ (0.32   $ (0.01

Net loss per share attributable to common shareholders of Party City Holdco Inc.–Diluted

   $ (0.32   $ (0.01

Weighted-average number of common shares-Basic

     93,174,553       96,398,585  

Weighted-average number of common shares-Diluted

     93,174,553       96,398,585  

Dividends declared per share

   $ 0.00     $ 0.00  

Comprehensive (loss) income

   $ (26,637   $ 4,067  

Less: comprehensive loss attributable to noncontrolling interests

     (62     (18
  

 

 

   

 

 

 

Comprehensive (loss) income attributable to common shareholders of Party City Holdco Inc.

   $ (26,575   $ 4,085  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

     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, 2018

   $ 1,208      $ 922,476      $ 495,777     $ (49,201   $ 1,370,260     $ (326,930   $ 1,043,330     $ 291     $ 1,043,621  

Cumulative effect of change in accounting principle, net (see Note 2)

     —          662        (503     —         159       —         159       —         159  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018, as adjusted

   $ 1,208      $ 923,138      $ 495,274     $ (49,201   $ 1,370,419     $ (326,930   $ 1,043,489     $ 291     $ 1,043,780  

Net loss

     —          —          (30,218     —         (30,218     —         (30,218     (71     (30,289

Stock option expense

     —          370        —         —         370       —         370       —         370  

Restricted stock units – time-based

     —          392        —         —         392       —         392       —         392  

Director – non-cash compensation

     —          77        —         —         77       —         77       —         77  

Warrant expense

     —          129        —         —         129       —         129       —         129  

Exercise of stock options

     2        1,086        —               1,088       —         1,088       —         1,088  

Acquired non-controlling interest

     —          41        —         —         41       —         41       71       112  

Treasury stock purchases

     —          —          —         —         —         (156     (156     —         (156

Foreign currency adjustments

     —          —          —         4,156       4,156       —         4,156       9       4,165  

Impact of foreign exchange contracts, net

     —          —          —         (513     (513     —         (513     —         (513
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

   $ 1,210      $ 925,233      $ 465,056     $ (45,558   $ 1,345,941     $ (327,086   $ 1,018,855     $ 300     $ 1,019,155  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     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, 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
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 loss

     —          —          (1,133     —         (1,133     —         (1,133     (30     (1,163

Stock option expense

     —          460        —         —         460       —         460       —         460  

Warrant expense

     —          261        —         —         261       —         261       —         261  

Exercise of stock options

            292        —               292       —         292       —         292  

Foreign currency adjustments

     —          —          —         5,406       5,406       —         5,406       12       5,418  

Impact of foreign exchange contracts, net

     —          —          —         (188     (188     —         (188     —         (188
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

   $ 1,198      $ 918,205      $ 371,385     $ (30,600   $ 1,260,188     $ (286,733   $ 973,455     $ 337     $ 973,792  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Cash flows used in operating activities:

    

Net loss

   $ (30,289   $ (1,163

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization expense

     21,341       20,557  

Amortization of deferred financing costs and original issuance discounts

     1,143       1,556  

Provision for doubtful accounts

     371       350  

Deferred income tax (benefit) expense

     (9,383     178  

Deferred rent

     —         368  

Change in operating lease liability/asset

     (19,693     —    

Undistributed income in equity method investments

     (198     (211

Loss on disposal of assets

     94       22  

Store impairment and restructuring charges

     18,009       —    

Non-employee equity based compensation

     129       261  

Stock option expense

     370       460  

Restricted stock units expense – time-based

     392       —    

Directors – non-cash compensation

     77       —    

Changes in operating assets and liabilities, net of effects of acquired businesses:

    

Decrease in accounts receivable

     8,022       11,243  

Increase in inventories

     (6,426     (11,696

Increase in prepaid expenses and other current assets

     (7,935     (923

Decrease in accounts payable, accrued expenses and income taxes payable

     (76,911     (46,192
  

 

 

   

 

 

 

Net cash used in operating activities

     (100,887     (25,190

Cash flows used in investing activities:

    

Cash paid in connection with acquisitions, net of cash acquired

     (545     (17,021

Capital expenditures

     (12,393     (17,906

Proceeds from disposal of property and equipment

     10       21  
  

 

 

   

 

 

 

Net cash used in investing activities

     (12,928     (34,906

Cash flows provided by financing activities:

    

Repayment of loans, notes payable and long-term obligations

     (23,495     (27,609

Proceeds from loans, notes payable and long-term obligations

     114,260       87,370  

Stock repurchases

     (156     —    

Exercise of stock options

     1,088       292  

Debt issuance costs

     —         (56
  

 

 

   

 

 

 

Net cash provided by financing activities

     91,697       59,997  

Effect of exchange rate changes on cash and cash equivalents

     2,216       671  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents and restricted cash

     (19,902     572  

Cash and cash equivalents and restricted cash at beginning of period

     59,219       54,408  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of period

   $ 39,317     $ 54,980  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 42,482     $ 28,780  

Cash paid during the period for income taxes, net of refunds

   $ 3,708     $ 5,342  

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


Table of Contents

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. The Company’s retail operations include over 900 specialty retail party supply stores (including franchise stores) in the United States and Canada, operating under the name Party City, e-commerce websites, principally operating under the domain name PartyCity.com, and a network of approximately 250—300 temporary Halloween City stores. 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, e-commerce merchandisers and dollar stores. The Company’s products are available in over 100 countries with the United Kingdom, Canada, Germany, Mexico and Australia among the 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 most of 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 intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.

The majority of our retail operations define a fiscal year (“Fiscal Year”) as the 52-week period or 53-week period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim 13-week periods following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determined the differences between the retail 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, 2019. 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, other year-end holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period such as movement in and the general level of raw material costs.

Recently Issued Accounting Pronouncements

In 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 for non-employee share-based payments. The Company adopted the update during the first quarter of 2019. The pronouncement requires companies to record the impact of adoption, if any, as a cumulative-effect adjustment to retained earnings as of the adoption date. Therefore, on January 1, 2019, the Company decreased retained earnings by $503. Additionally, the Company increased additional paid-in capital by $662 and recorded a $159 deferred income tax asset.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The pronouncement amends the existing hedge accounting model in order to enable entities to better portray the economics of their risk management activities in their financial statements. The Company adopted the update during the first quarter of 2019 and such adoption had no impact on the Company’s consolidated financial statements.

 

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In February 2016, the FASB issued ASU 2016-02, “Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by companies’ leases. The Company’s lease portfolio is primarily comprised of store leases, manufacturing and distribution facility leases, warehouse leases and office leases. Most of the leases are operating leases. The Company’s finance leases are not material to its consolidated financial statements.

The Company adopted the new lease standard during the first quarter of 2019 and, to the extent required by the pronouncement, recognized a right of use asset and liability for all of its operating lease arrangements with terms of greater than twelve months. See the Company’s March 31, 2019 consolidated balance sheet for the impact of such adoption.

The pronouncement provided companies with a transition option under which they could opt to continue to apply legacy lease guidance in comparative periods. The Company elected such option. The Company’s December 31, 2018 consolidated balance sheet includes a $74,464 deferred rent liability in other long-term liabilities and a $7,170 deferred rent liability in accrued expenses. In the Company’s March 31, 2019 consolidated balance sheet, such amounts reduce the operating lease asset. Additionally, in the Company’s December 31, 2018 consolidated balance sheet, other intangible assets, net, includes a $3,904 intangible asset related to favorable leases. In the Company’s March 31, 2019 consolidated balance sheet, such asset is included in the operating lease asset. Further, in the Company’s December 31, 2018 consolidated balance sheet, prepaid expenses and other current assets includes a $2,552 asset related to capitalized broker costs. In the Company’s March 31, 2019 consolidated balance sheet, such capitalized costs are included in the operating lease asset.

The pronouncement had no impact on the Company’s consolidated statement of operations and comprehensive loss and it did not impact the Company’s compliance with its debt covenants. Additionally, the standard requires companies to make certain disclosures. See Note 16.

Note 3 – Store Impairment and Restructuring Charges

During the three months ended March 31, 2019, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). Each year, the Company typically closes approximately 10 Party City stores as part of its typical network rationalization process and in response to ongoing consumer, market and economic changes that naturally arise in the business. During the three months ended March 31, 2019, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 45 stores which are primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In conjunction with the store optimization program, during the first quarter of 2019, the Company recorded the following charges:

 

     Three Months
Ended March 31,

2019
 

Inventory reserves

   $ 17,629  

Operating lease asset impairment

     13,209  

Property, plant and equipment impairment

     4,139  

Severance

     661  
  

 

 

 

Total

   $ 35,638  
  

 

 

 

Such amounts represent the Company’s best estimate of the total charges that are expected to be recorded for such items. When the Company closes the stores, it will record charges for common area maintenance, insurance and taxes to be paid subsequent to such closures in accordance with the stores’ lease agreements. However, such amounts are expected to be immaterial. Additionally, the Company will incur costs while cleaning the stores and returning them to their original condition. Such costs are also expected to be immaterial.

The fair values of the operating lease assets and property, plant and equipment were determined based on estimated future discounted cash flows for such assets using market participant assumptions, including data on the ability to sub-lease the stores. The fair value for the operating lease assets was $7,426 and the fair value for the property, plant and equipment was immaterial. Such fair values represent level 3 measurements.

The charge for inventory reserves related to both an estimate of the inventory that will be disposed following the closures of the stores and an estimate of inventory that will be sold below cost prior to such closures. The charge for inventory reserves was recorded in cost of sales in the Company’s statement of operations and comprehensive loss. The other charges were recorded in Store impairment and restructuring charges in the Company’s statement of operations and comprehensive loss.

None of the severance had been paid as of March 31, 2019.

 

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The Company cannot guarantee that it will be able to achieve the anticipated benefits from the store optimization program. If the Company is unable to achieve such benefits, its results of operations and financial condition could be affected.

Note 4 – Inventories

Inventories consisted of the following:

 

     March 31,
2019
     December 31,
2018
 

Finished goods

   $ 712,781      $ 706,327  

Raw materials

     32,724        33,423  

Work in process

     17,836        16,288  
  

 

 

    

 

 

 
   $ 763,341      $ 756,038  
  

 

 

    

 

 

 

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 shrinkage for the period between physical inventory dates on a store-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.

Note 5 – Income Taxes

The effective income tax rate for the three months ended March 31, 2019, 25.8%, is higher than the statutory rate of 21.0% primarily due to the impact of state taxes on the Company’s estimated effective income tax rate for full-year 2019.

Note 6 – Changes in Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss consisted of the following:

 

     Three Months Ended March 31, 2019  
     Foreign
Currency
Adjustments
     Impact of
Foreign
Exchange
Contracts,
Net of
Taxes
     Total,
Net of
Taxes
 

Balance at December 31, 2018

   $ (50,056    $ 855      $ (49,201

Other comprehensive income before reclassifications, net of income tax

     4,156        62        4,218  

Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax

     —          (575      (575
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     4,156        (513      3,643  
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2019

   $ (45,900    $ 342      $ (45,558
  

 

 

    

 

 

    

 

 

 

 

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     Three Months Ended March 31, 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 income (loss) before reclassifications, net of income tax

     5,406        (428      4,978  

Loss reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax

     —          240        240  
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     5,406        (188      5,218  
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2018

   $ (30,204    $ (396    $ (30,600
  

 

 

    

 

 

    

 

 

 

Note 7 – Capital Stock

At March 31, 2019, 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 8 – 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 and Halloween City, and it operates e-commerce websites, principally through the domain name Partycity.com. The Retail segment also franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City. The Company’s industry segment data for the three months ended March 31, 2019 and March 31, 2018 was as follows:

 

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     Wholesale      Retail      Consolidated  

Three Months Ended March 31, 2019

        

Revenues:

        

Net sales

   $ 290,301      $ 378,153      $ 668,454  

Royalties and franchise fees

     —          2,014        2,014  
  

 

 

    

 

 

    

 

 

 

Total revenues

     290,301        380,167        670,468  

Eliminations

     (157,352      —          (157,352
  

 

 

    

 

 

    

 

 

 

Net revenues

   $ 132,949      $ 380,167      $ 513,116  
  

 

 

    

 

 

    

 

 

 

Income (loss) from operations

   $ 2,223      $ (12,520    $ (10,297
  

 

 

    

 

 

    

Interest expense, net

           29,257  

Other expense, net

           1,254  
        

 

 

 

Loss before income taxes

         $ (40,808
        

 

 

 

 

     Wholesale      Retail      Consolidated  

Three Months Ended March 31, 2018

        

Revenues:

        

Net sales

   $ 277,827      $ 363,576      $ 641,403  

Royalties and franchise fees

     —          2,716        2,716  
  

 

 

    

 

 

    

 

 

 

Total revenues

     277,827        366,292        644,119  

Eliminations

     (136,295      —          (136,295
  

 

 

    

 

 

    

 

 

 

Net revenues

   $ 141,532      $ 366,292      $ 507,824  
  

 

 

    

 

 

    

 

 

 

Income from operations

   $ 5,348      $ 16,908      $ 22,256  
  

 

 

    

 

 

    

Interest expense, net

           23,275  

Other expense, net

           848  
        

 

 

 

Loss before income taxes

         $ (1,867
        

 

 

 

During the three months ended March 31, 2019, the Company adopted ASU 2016-02, “Leases”. See Notes 2 and 16 for further discussion. As of March 31, 2019, the operating lease asset for the Company’s Retail segment was $723,835 and the operating lease asset for the Company’s Wholesale segment was $55,975. During the quarter, there were no other material changes to the total assets of the segments.

During the three months ended March 31, 2019, the Company initiated a store optimization program under which the Company plans to close approximately 45 Party City stores during the course of 2019. In conjunction with the program, during the first quarter of 2019, the Company’s Retail segment recorded $35,638 of charges. See Note 3 for further detail.

Note 9 – 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.

Note 10 – 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 risks managed through the use of derivative financial instruments are 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 three months ended March 31, 2019 and the three months ended March 31, 2018.

 

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Foreign Exchange Risk Management

A portion of the Company’s cash flows are 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, 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. At March 31, 2019 and December 31, 2018, the Company had foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As these hedges are 100% effective, there is no current impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings by June 2020.

The following table displays the fair values of the Company’s derivatives at March 31, 2019 and December 31, 2018:

 

     Derivative Assets      Derivative Liabilities  
     Balance
Sheet
Line
    Fair
Value
     Balance
Sheet
Line
    Fair
Value
     Balance
Sheet
Line
    Fair
Value
     Balance
Sheet
Line
    Fair
Value
 

Derivative Instrument

   March 31, 2019      December 31, 2018      March 31, 2019      December 31, 2018  

Foreign Exchange Contracts

     (a ) PP    $ 170        (a ) PP    $ 115        (b ) AE    $ 11        (b ) AE    $ 0  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

(a)

PP = Prepaid expenses and other current assets

(b)

AE = Accrued expenses

The following table displays the notional amounts of the Company’s derivatives at March 31, 2019 and December 31, 2018:

 

Derivative Instrument

   March 31,
2019
     December 31,
2018
 

Foreign Exchange Contracts

   $ 10,467      $ 10,942  
  

 

 

    

 

 

 

Note 11 – Fair Value Measurements

The provisions of ASC Topic 820, “Fair Value Measurement”, define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

 

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. On a recurring

 

12


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basis, the liability is adjusted to the greater of the current fair value or the original fair value at the time at which the ownership interest was issued (adjusted for any subsequent changes in the ownership interest percentage). As of both March 31, 2019 and December 31, 2018, the original value was greater and, therefore, the liabilities are not included in the table below.

The following table shows assets and liabilities as of March 31, 2019 that are measured at fair value on a recurring basis:

 

     Level 1      Level 2      Level 3      Total as of
March 31,
2019
 

Derivative assets

   $ —        $ 170      $ —        $ 170  

Derivative liabilities

     —          11        —          11  

Punchbowl put liability

     —          —          326        326  

The following table shows assets and liabilities as of December 31, 2018 that are measured at fair value on a recurring basis:

 

     Level 1      Level 2      Level 3      Total as of
December 31,
2018
 

Derivative assets

   $ —        $ 115      $ —        $ 115  

Derivative liabilities

     —          —          —          —    

Punchbowl put liability

     —          —          316        316  

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, lease assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value. During the three months ended March 31, 2019, the Company initiated a store optimization program under which it plans to close approximately 45 Party City stores during the course of 2019. In conjunction with the program, during the first quarter of 2019, the Company recorded impairment charges for its property, plant and equipment and operating lease assets. See Note 3 for further detail.

The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at March 31, 2019 because of the short-term maturities of the instruments and/or their variable rates of interest.

The carrying amounts and fair values of borrowings under the Term Loan Credit Agreement and the Company’s senior notes as of March 31, 2019 are as follows:

 

     March 31, 2019  
     Carrying
Amount
     Fair
Value
 

Term Loan Credit Agreement

   $ 787,766      $ 789,965  

6.125% Senior Notes – due 2023

     346,397        356,563  

6.625% Senior Notes – due 2026

     494,331        499,375  

The fair values of the Term Loan Credit Agreement and the senior notes represent Level 2 fair value measurements as the debt instruments trade in inactive markets. The carrying amounts for other long-term debt approximated fair value at March 31, 2019 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.

Note 12 – Earnings Per Share

Basic earnings per share are computed by dividing net income attributable to common shareholders 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, and restricted stock units, as if they vested.

 

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A reconciliation between basic and diluted income per share is as follows:

 

     Three Months
Ended
March 31,
2019
     Three Months
Ended
March 31,
2018
 

Net loss attributable to common shareholders of Party City Holdco Inc.

   $ (30,218    $ (1,133

Weighted average shares – Basic

     93,174,553        96,398,585  

Effect of dilutive securities:

     

Warrants

     —          —    

Restricted stock units

     —          —    

Stock options

     —          —    
  

 

 

    

 

 

 

Weighted average shares – Diluted

     93,174,553        96,398,585  
  

 

 

    

 

 

 

Net loss per share attributable to common shareholders of Party City Holdco Inc. – Basic

   $ (0.32    $ (0.01
  

 

 

    

 

 

 

Net loss per share attributable to common shareholders of Party City Holdco Inc. – Diluted

   $ (0.32    $ (0.01
  

 

 

    

 

 

 

During the three months ended March 31, 2019 and March 31, 2018, 3,613,408 stock options and 4,275,789 stock options, respectively, were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. Additionally, during the three months ended March 31, 2019 and March 31, 2018, 596,000 warrants and 596,000 warrants, respectively, were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. Further, during the three months ended March 31, 2019 and March 31, 2018, 142,130 restricted stock units and 0 restricted stock units, respectively, were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive.

Note 13 – Long-Term Obligations

Long-term obligations at March 31, 2019 and December 31, 2018 consisted of the following:

 

     March 31,
2019
     December 31,
2018
 

Term Loan Credit Agreement

   $ 787,766      $ 791,135  

6.125% Senior Notes – due 2023

     346,397        346,191  

6.625% Senior Notes – due 2026

     494,331        494,138  

Capital lease obligations

     3,623        3,815  
  

 

 

    

 

 

 

Total long-term obligations

     1,632,117        1,635,279  

Less: current portion

     (13,315      (13,316
  

 

 

    

 

 

 

Long-term obligations, excluding current portion

   $ 1,618,802      $ 1,621,963  
  

 

 

    

 

 

 

 

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Table of Contents

Note 14 – Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2019 and March 31, 2018:

 

     Three Months
Ended
March 31,
2019
     Three Months
Ended
March 31,
2018
 

Retail Net Sales:

     

Party City Stores

   $ 346,140      $ 330,845  

Global E-commerce

     31,808        32,731  

Other

     205        —    
  

 

 

    

 

 

 

Total Retail Net Sales

   $ 378,153      $ 363,576  

Royalties and Franchise Fees

     2,014        2,716  
  

 

 

    

 

 

 

Total Retail Revenue

   $ 380,167      $ 366,292  
  

 

 

    

 

 

 

Wholesale Net Sales:

     

Domestic

   $ 73,821      $ 79,559  

International

     59,128        61,973  
  

 

 

    

 

 

 

Total Wholesale Net Sales

   $ 132,949      $ 141,532  
  

 

 

    

 

 

 

Total Consolidated Revenue

   $ 513,116      $ 507,824  
  

 

 

    

 

 

 

Note 15 – Cash, Cash Equivalents and Restricted Cash

The Company’s March 31, 2019 consolidated balance sheet included $38,999 of cash and cash equivalents and $318 of restricted cash and the Company’s December 31, 2018 consolidated balance sheet included $58,909 of cash and cash equivalents and $310 of restricted cash.

The Company’s March 31, 2018 consolidated balance sheet included $54,831 of cash and cash equivalents and $149 of restricted cash and the Company’s December 31, 2017 consolidated balance sheet included $54,291 of cash and cash equivalents and $117 of restricted cash.

Restricted cash is recorded in Prepaid expenses and other current assets.

Note 16 – Leases

In February 2016, the FASB issued ASU 2016-02, “Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by the companies’ leases. The update was effective for the Company during the first quarter of 2019.

The FASB has provided companies with a transition option under which they can opt to continue to apply the legacy guidance, including its disclosure requirements, in the comparative periods presented in the year during which they adopt the new lease standard. Entities that elect the option only make annual disclosures for the comparative periods as legacy guidance does not require interim disclosures. The Company has elected this transition option.

Practical Expedients/Policy Elections

Under the new standard, companies may elect the following practical expedients, which must be elected as a package and applied consistently to all leases:

1. An entity need not reassess whether any expired or existing contracts are or contain leases.

2. An entity need not reassess the lease classification for any expired or existing leases.

3. An entity need not reassess initial direct costs for any existing leases.

The Company elected this package of practical expedients.

Under the new standard, an entity may also elect a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets. The Company did not elect this practical expedient.

 

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Additionally, under the new standard, lessees can make an accounting policy election (by class of underlying asset to which the right of use relates) to apply accounting similar to legacy accounting to leases that meet the new standard’s definition of a “short-term lease” (a lease that, at the commencement date, has a lease term of twelve months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). The Company has made this election for all classes of underlying assets.

Further, the new standard provides a practical expedient that permits lessees to make an accounting policy election (by class of underlying asset) to account for each separate lease component of a contract and its associated non-lease components as a single lease component. The Company has elected this expedient for all asset classes, with the exception of its real estate.

Lease Population

The Company’s lease portfolio is primarily comprised of real estate leases for its permanent Party City stores. The Company also leases manufacturing facilities, distribution facilities, warehouse space and office space. Additionally, the Company enters into short leases (generally less than four months) in order to operate its temporary stores. Further, the Company enters into leases of equipment, copiers, printers and automobiles.

Substantially all of the Company’s leases are operating leases.

The Company’s finance leases are immaterial. The right-of-use asset for the Company’s finance leases is included in Property, plant and equipment, net on the Company’s consolidated balance sheet. The liabilities for the Company’s finance leases are included in Current portion of long-term obligations and Long-term obligations, excluding current portion, on the Company’s consolidated balance sheet.

The Company’s sub-leases are also immaterial.

Variable Lease Payments

A limited number of the Company’s store leases require rent to be paid based on sales levels. The Company’s cost for such leases is immaterial. Variable lease consideration is not included in lease payments until the contingency is resolved.

Additionally, for most store leases, the Company pays variable taxes and insurance.

Renewal Options

Many of the Company’s store leases, and certain of the Company’s other leases, contain renewal options. However, the renewal periods are generally not included in the right-of-use assets and lease liabilities for such leases as exercise of the options is not reasonably certain.

Discount Rates

The Company is unable to determine the discount rates that are implicit in its operating leases. Therefore, for such leases, the Company is utilizing its incremental borrowing rate.

For leases that existed as of January 1, 2019, the Company determined the applicable incremental borrowing rates for such leases based on the remaining lease terms for the leases as of such date.

 

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Quantitative Disclosures

During the three months ended March 31, 2019, the Company’s operating lease cost was $48,295. Such amount excludes impairment charges recorded in conjunction with the Company’s store optimization program (see Note 3).

The Company’s variable lease cost during the three months ended March 31, 2019 was $8,541.

During the three months ended March 31, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $66,514.

During the three months ended March 31, 2019, right-of-use assets obtained in exchange for new operating lease liabilities were $31,222 and cash outflows related to operating leases were $19,693.

As of March 31, 2019, the weighted-average remaining lease term for operating leases was 5 years and the weighted-average discount rate for operating leases was 6.8%.

As of March 31, 2019, the future cash flows for the Company’s operating leases were:

 

Nine months ended December 31, 2019

   $ 135,230  

2020

     187,911  

2021

     170,658  

2022

     152,117  

2023

     123,938  

Thereafter

     314,034  
  

 

 

 

Total Undiscounted Cash Flows

   $ 1,083,888  

Less: Interest

     (233,496
  

 

 

 

Total Operating Lease Liability

     850,392  

Less: Current Portion of Operating Lease Liability

     (143,028
  

 

 

 

Long-Term Portion of Operating Lease Liability

   $ 707,364  
  

 

 

 

Note 17 – Subsequent Event

As of March 31, 2019, the Company had a $540,000 asset-based revolving credit facility (with a seasonal increase to $640,000 during a certain period of each calendar year) (“ABL Facility”), which matures during August 2023 (subject to a springing maturity at an earlier date if the maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50,000.

During April 2019, the Company amended the ABL Facility. Such amendment removed the seasonal component and made the facility a $640,000 facility on a year-round basis.

During May 2019, the Company signed a letter of agreement for a new source of helium which, subject to final execution of a definitive contract, should provide for additional quantities of helium for the next two and a half 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 omni-channel 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 franchised stores), we have the only coast-to-coast network of party superstores in the U.S. and Canada and such stores make it easy and fun to enhance special occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. We also operate multiple e-commerce sites, principally under the domain name PartyCity.com. Further, we open a network of approximately 250 - 300 temporary Halloween City stores.

In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party products, with items found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores. Our products are available in over 100 countries with the United Kingdom, Canada, Germany, Mexico and Australia among the largest end markets for our products outside of the 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 – Adjusted EBITDA,” “Financial Measures – Adjusted Net Income (Loss)” and “Financial Measures – Adjusted Net Income (Loss) Per Common Share – Diluted” below.

Segments

Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Designware, Anagram and Costumes USA brand names through Party City, Halloween City and PartyCity.com. During 2018, 79% of the product that was sold by our retail segment was supplied by our wholesale segment and 23% of the product that was sold by our retail segment was self-manufactured.

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 and gift stores, dollar stores and e-commerce merchandisers.

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. 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. Retail e-commerce sales are recognized 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. Retail sales are reported net of taxes collected.

Under the terms of our agreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and 2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded.

For 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 only accept the return of 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 we use the expected value method to estimate such activity.

 

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Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.

Comparable Retail Same-Store Sales. The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retail e-commerce sales.

Cost of Sales. Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, 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 segment. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retail e-commerce business.

Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to net sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an on-going basis in order to identify slow-moving goods.

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. These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees and data-processing costs. These expenses generally do not vary proportionally with net sales.

Art and Development Costs. Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.

Development Stage Expenses. Development stage expenses represent start-up activities related to Kazzam, LLC (“Kazzam”).

 

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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, 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 March 31, 2019 Compared To Three Months Ended March 31, 2018

The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the three months ended March 31, 2019 and 2018.

 

     Three Months Ended March 31,  
     2019     2018  
     (Dollars in thousands)  

Revenues:

          

Net sales

   $ 511,102        99.6   $ 505,108        99.5

Royalties and franchise fees

     2,014        0.4       2,716        0.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

     513,116        100.0       507,824        100.0  

Expenses:

          

Cost of sales

     339,042        66.1       316,966        62.4  

Wholesale selling expenses

     17,961        3.5       18,787        3.7  

Retail operating expenses

     95,018        18.5       89,092        17.5  

Franchise expenses

     3,303        0.6       3,782        0.7  

General and administrative expenses

     41,925        8.2       48,665        9.6  

Art and development costs

     5,929        1.2       5,973        1.2  

Development stage expenses

     2,226        0.4       2,303        0.5  

Store impairment and restructuring charges

     18,009        3.5               
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

     523,413        102.0       485,568        95.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

(Loss) income from operations

     (10,297      (2.0     22,256        4.4  

Interest expense, net

     29,257        5.7       23,275        4.6  

Other expense, net

     1,254        0.2       848        0.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss before income taxes

     (40,808      (7.9     (1,867      (0.4

Income tax benefit

     (10,519      (2.0     (704      (0.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

     (30,289      (5.9     (1,163      (0.2

Less: Net loss attributable to noncontrolling interests

     (71      (0.0     (30      (0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss attributable to common shareholders of Party City Holdco Inc.

   $ (30,218      (5.9 )%    $ (1,133      (0.2 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss per share attributable to common shareholders of Party City Holdco Inc. – Basic

   $ (0.32      $ (0.01   

Net loss per share attributable to common shareholders of Party City Holdco Inc. – Diluted

   $ (0.32      $ (0.01   

Revenues

Total revenues for the first quarter of 2019 were $513.1 million and were $5.3 million, or 1.0%, higher than the first quarter of 2018. The following table sets forth the Company’s total revenues for the three months ended March 31, 2019 and 2018.

 

     Three Months Ended March 31,  
     2019     2018  
     Dollars in
Thousands
     Percentage of
Total Revenues
    Dollars in
Thousands
     Percentage of
Total Revenues
 

Net Sales:

          

Wholesale

   $ 290,301        56.6   $ 277,827        54.7

Eliminations

     (157,352      (30.7 )%      (136,295      (26.8 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net wholesale

     132,949        25.9     141,532        27.9

Retail

     378,153        73.7     363,576        71.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

     511,102        99.6     505,108        99.5

Royalties and franchise fees

     2,014        0.4     2,716        0.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 513,116        100.0   $ 507,824        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Retail

Retail net sales during the first quarter of 2019 were $378.2 million and increased $14.6 million, or 4.0%, compared to the first quarter of 2018. Retail net sales at our Party City stores totaled $346.1 million and were $15.3 million, or 4.6%, higher than 2018 principally due to the acquisition of franchise and independent stores. During the twelve months ended March 31, 2019, we acquired 46 franchise and independent stores and opened 14 new stores. Global retail e-commerce sales totaled $31.8 million during the first quarter of 2019 and were $0.9 million, or 2.8%, lower than during the corresponding quarter of 2018 due to the impact of “buy online, pick-up in store” sales (which are included in our store sales, see below for further detail). Sales at other store formats totaled $0.2 million during the first quarter of 2019.

Same-store sales for the Party City brand (including North American retail e-commerce sales) decreased by 1.4% during the first quarter of 2019, principally due to the ongoing helium shortage and its impact on balloon sales. A benefit from the timing of certain seasonal sales was offset by the impact of severe weather.

The North American e-commerce sales that are included in our Party City brand comp decreased by 1.1% during the quarter. However, they increased by 19.1% when adjusting for the impact of our “buy online, pick-up in store” program (such sales are included in our store sales).

Excluding the impact of e-commerce, same-store sales decreased by 1.4%.

Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.

Wholesale

Wholesale net sales during the first quarter of 2019 totaled $132.9 million and were $8.6 million, or 6.1%, lower than the first quarter of 2018. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $54.3 million and were $4.0 million, or 6.9%, lower than during 2018. The decrease was entirely due to our acquisition of 46 franchise and independent stores during the twelve months ended March 31, 2019; as post-acquisition sales to such stores (approximately $6.5 million during the first quarter of 2018) are now eliminated as intercompany sales. Adjusted for the acquisitions, sales to domestic party goods retailers and distributors increased by approximately $2.5 million. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $19.5 million during the first quarter of 2019 and were $1.8 million, or 8.4%, lower than during the corresponding quarter of 2018 principally due to the ongoing helium shortage. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $59.1 million and were $2.8 million, or 4.6%, lower than in 2018. The impact of foreign currency translation, which negatively impacted sales by approximately $3.5 million, was partially offset by strong sales in continental Europe.

Intercompany sales to our retail affiliates totaled $157.4 million during the first quarter of 2019 and were $21.1 million higher than during the corresponding quarter of 2018. Intercompany sales represented 54.2% of total wholesale sales during the first quarter of 2019, compared to 49.1% during the first quarter of 2018. The increase was principally due to the acquisition of franchise/independent stores and the timing of shipments. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

Royalties and franchise fees

Royalties and franchise fees for the first quarter of 2019 totaled $2.0 million and were $0.7 million lower than during the first quarter of 2018 principally due to the acquisition of franchise stores.

Gross Profit

The following table sets forth the Company’s gross profit for the three months ended March 31, 2019 and March 31, 2018.

 

     Three Months Ended March 31,  
     2019     2018  
     Dollars in
Thousands
     Percentage of
Net Sales
    Dollars in
Thousands
     Percentage of
Net Sales
 

Retail

   $ 136,018        36.0   $ 146,835        40.4

Wholesale

     36,042        27.1       41,307        29.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 172,060        33.7   $ 188,142        37.2
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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The gross profit margin on net sales at retail during the first quarter of 2019 was 36.0%. Such percentage was 440 basis points lower than during the corresponding quarter of 2018. The decrease was entirely due to provisions against inventory recorded in conjunction with a “store optimization program” (see “operating expenses” below for further discussion). Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) increased from 26.8% during the first quarter of 2018 to 27.6% during the first quarter of 2019. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 78.1% during the quarter and was consistent with the first quarter of 2018.

The gross profit on net sales at wholesale during the first quarters of 2019 and 2018 was 27.1% and 29.2%, respectively. The decrease was principally due to unfavorable sales mix (partially due to decreased high-margin sales to franchisees due to the store acquisitions discussed above) and the impact of foreign currency on product costs.

Operating expenses

Wholesale selling expenses were $18.0 million during the first quarter of 2019 and $18.8 million during the corresponding quarter of 2018. The decrease was primarily due to the impact of foreign currency translation. Wholesale selling expenses were 13.5% and 13.3% of net wholesale sales during the first quarters of 2019 and 2018, respectively.

Retail operating expenses during the first quarter of 2019 were $95.0 million and were $5.9 million higher than the corresponding quarter of 2018. The increase was principally due to the higher store count (discussed above) and the impact of inflation. Retail operating expenses were 25.1% and 24.5% of retail sales during the first quarters of 2019 and 2018, respectively.

Franchise expenses during the first quarters of 2019 and 2018 were $3.3 million and $3.8 million, respectively.

General and administrative expenses during the first quarter of 2019 totaled $41.9 million and were $6.7 million, or 13.8%, lower than in the first quarter of 2018. The decrease was principally due to the first quarter of 2018 including non-recurring consulting and severance costs. General and administrative expenses as a percentage of total revenues were 8.2% and 9.6% during the first quarters of 2019 and 2018, respectively.

Art and development costs were $5.9 million and $6.0 million during the first quarters of 2019 and 2018, respectively.

Development stage expenses of $2.2 million represent start-up costs related to Kazzam (see the 2018 Form 10-K for further detail).

During the three months ended March 31, 2019, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). Each year, the Company typically closes approximately 10 Party City stores as part of its typical network rationalization process and in response to ongoing consumer, market and economic changes that naturally arise in the business. During the three months ended March 31, 2019, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 45 stores which are primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In conjunction with the store optimization program, during the first quarter of 2019, the Company recorded a $13.2 million impairment charge for its operating lease asset, a $4.1 million impairment charge for property, plant and equipment and $0.7 million of severance.

Interest expense, net

Interest expense, net, totaled $29.3 million during the first quarter of 2019, compared to $23.3 million during the first quarter of 2018. The variance principally relates to the impact of increasing LIBOR rates on our Term Loan Credit Agreement and our ABL Facility and the impact of the Company’s August 2018 refinancing.

Other expense, net

For the first quarters of 2019 and 2018, other expense, net, totaled $1.3 million and $0.8 million, respectively.

Income tax benefit

The effective income tax rate for the three months ended March 31, 2019, 25.8%, is higher than the statutory rate primarily due to state taxes.

 

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Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted

The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items. The Company presents the measures because the Company believes they assist investors in comparing the Company’s performance across reporting periods on a consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per common share – diluted are helpful benchmarks to evaluate its operating performance.

Adjusted EBITDA, adjusted net income, and adjusted net income per common share – diluted have limitations as analytical tools. Some of these limitations are:

 

   

they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, the Company’s working capital needs;

 

   

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s indebtedness;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;

 

   

non-cash compensation is and will remain a key element of the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;

 

   

they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and

 

   

other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative measure.

Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted net

 

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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:

 

(Dollars in thousands)    Three Months Ended
March 31, 2019
    Three Months Ended
March 31, 2018
 

Net loss

   $ (30,289   $ (1,163

Interest expense, net

     29,257       23,275  

Income taxes

     (10,519     (704

Depreciation and amortization

     21,341       20,557  
  

 

 

   

 

 

 

EBITDA

     9,790       41,965  

Non-cash purchase accounting adjustments

     1,001       (556

Store impairment and restructuring charges (a)

     35,638        

Other restructuring, retention and severance (b)

     1,388       2,611  

Deferred rent (c)

     (1,150     368  

Closed store expense (d)

     591       1,812  

Foreign currency gains, net

     (293     (63

Stock option expense (e)

     370       460  

Non-employee equity based compensation (f)

     129       261  

Undistributed income in equity method investments

     (198     (211

Corporate development expenses (g)

     2,845       2,574  

Non-recurring consulting charges (h)

           4,750  

Refinancing charges (i)

           1,146  

Restricted stock units – time-based (j)

     392        

Non-recurring legal settlements/costs

     732        

Other

     247       31  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 51,482     $ 55,148  
  

 

 

   

 

 

 

 

(Dollars in thousands, except per share amounts)    Three Months Ended
March 31,
2019
    Three Months Ended
March 31,
2018
 

Loss before income taxes

   $ (40,808   $ (1,867

Intangible asset amortization

     3,429       3,663  

Non-cash purchase accounting adjustments

     1,317       (705

Amortization of deferred financing costs and original

issuance discounts (i)

     1,143       1,556  

Store impairment and restructuring charges (a)

     35,638        

Non-employee equity based compensation (f)

     129       261  

Refinancing charges (i)

           800  

Non-recurring consulting charges (h)

           4,750  

Stock option expense (e)

     370       460  
  

 

 

   

 

 

 

Adjusted income before income taxes

     1,218       8,918  

Adjusted income tax expense (k)

     115       2,036  
  

 

 

   

 

 

 

Adjusted net income

   $ 1,103     $ 6,882  
  

 

 

   

 

 

 

Adjusted net income per common share – diluted

   $ 0.01     $ 0.07  
  

 

 

   

 

 

 

Weighted-average number of common shares-diluted

     93,879,979       97,650,385  

 

  (a)

During the three months ended March 31, 2019, the Company initiated a store optimization program under which it plans to close approximately 45 Party City stores during the course of 2019. In conjunction with the program, during the first quarter of 2019, the Company recorded the following charges: inventory reserves: $17,629, operating lease asset impairment: $13,209, property, plant and equipment impairment: $4,139 and severance: $661. The charge for inventory reserves was recorded in cost of sales in the Company’s statement of operations and comprehensive loss. The other charges were recorded in Store impairment and restructuring charges in the Company’s statement of operations and comprehensive loss. See Note 3 in Item 1 for further discussion.

 

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  (b)

Amounts expensed in the first quarter of 2018 principally relate to costs incurred while moving one of the Company’s domestic manufacturing facilities to a new location.

  (c)

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. During the first quarter of 2019, the Company adopted ASC 842. Under the standard, the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items is now incorporated in the Company’s operating lease asset.

  (d)

Charges incurred related to closing and relocating stores in the ordinary course of business.

  (e)

Represents non-cash charges related to stock options.

  (f)

Principally represents shares of Kazzam awarded to Ampology as compensation for Ampology’s services. See the 2018 Form 10-K for further discussion.

  (g)

Primarily represents start-up costs for Kazzam (see the 2018 Form 10-K for further discussion) and third-party costs related to acquisitions (principally legal and diligence expenses).

  (h)

Non-recurring consulting charges related to the Company’s retail operations.

  (i)

During February 2018, the Company amended the Term Loan Credit Agreement. In conjunction with the amendment, the Company wrote-off capitalized deferred financing costs, original issue discounts and call premiums. The 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. Further, in conjunction with the amendment, the Company expensed investment banking and legal fees. These amounts are included in “Refinancing charges” in the tables above.

  (j)

Non-cash charges for restricted stock units that vest based on service conditions.

  (k)

Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.

Liquidity

The Company’s indebtedness principally consists of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) $350 million of 6.125% senior notes and (iii) $500 million of 6.625% senior notes. Additionally, the Company has a $640 million asset-based revolving credit facility (“ABL Facility”) that it draws down on as necessary (see the consolidated statement of cash flows in Item 1).

We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.

Cash Flow

Net cash used in operating activities totaled $100.9 million and $25.2 million during the three months ended March 31, 2019 and 2018, respectively. The variance was principally due to the timing of rent payments for the Company’s stores, increased interest payments and a decrease in accounts payable as a result of the timing of inventory payments. Net cash flows used in operating activities before changes in operating assets and liabilities were $17.6 million during the first three months of 2019, compared to positive cash flows of $22.4 million during the corresponding period of 2018. Changes in operating assets and liabilities during the first three months of 2019 and 2018 resulted in the use of cash of $83.3 million and $47.6 million, respectively.

Net cash used in investing activities totaled $12.9 million during the three months ended March 31, 2019, as compared to $34.9 million during the three months ended March 31, 2018. Capital expenditures during the three months ended March 31, 2019 and 2018 were $12.4 million and $17.9 million, respectively. Retail capital expenditures totaled $8.5 million during 2019. Wholesale capital expenditures during 2019 totaled $3.9 million.

Net cash provided by financing activities was $91.7 million during the three months ended March 31, 2019 and $60.0 million during the first quarter of 2018. The variance was principally due to borrowings under the ABL Facility in order to fund the increased cash used in operating activities.

 

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As of March 31, 2019, the Company had a $540 million asset-based revolving credit facility (with a seasonal increase to $640 million during a certain period of each calendar year), which matures during August 2023 (subject to a springing maturity at an earlier date if the maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50 million. As of March 31, 2019, the Company had approximately $116 million of availability under the ABL Facility, after considering borrowing base restrictions. During April 2019, the Company amended the facility. Such amendment removed the seasonal component and made the facility a $640 million facility on a year-round basis.

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, 2018 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Off Balance Sheet Arrangements

We had no off balance sheet arrangements during the three months ended March 31, 2019 and the year ended December 31, 2018.

Seasonality

Wholesale Operations

Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the quarter.

Retail Operations

Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent, year-end holiday sales.

Cautionary Note Regarding Forward-Looking Statements

From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the section titled “Risk Factors” included in our Annual Report on Form 10-K filed with the SEC on February 28, 2019. 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;

 

   

helium shortages;

 

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our ability to appropriately respond to changing merchandise trends and consumer preferences;

 

   

successful implementation of our store growth strategy;

 

   

decreases in our Halloween sales;

 

   

unexpected or unfavorable consumer responses to our promotional or merchandising programs;

 

   

failure to comply with existing or future laws relating to our marketing programs, e-commerce initiatives and the use of consumer information;

 

   

disruption to the transportation system or increases in transportation costs;

 

   

product recalls or product liability;

 

   

economic slowdown affecting consumer spending and general economic conditions;

 

   

loss or actions of third party vendors and loss of the right to use licensed material;

 

   

disruptions at our manufacturing facilities;

 

   

failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;

 

   

our international operations subjecting us to additional risks;

 

   

potential litigation and claims;

 

   

lack of available additional capital;

 

   

our inability to retain or hire key personnel;

 

   

risks associated with leasing substantial amounts of space;

 

   

failure of existing franchisees to conduct their business in accordance with agreed upon standards;

 

   

adequacy of our information systems, order fulfillment and distribution facilities;

 

   

our ability to adequately maintain the security of our electronic and other confidential information;

 

   

our inability to successfully identify and integrate acquisitions;

 

   

adequacy of our intellectual property rights;

 

   

risks related to our substantial indebtedness; and

 

   

the other factors set forth under “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on February 28, 2019.

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, 2018 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of March 31, 2019. Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be

 

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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 in Rules 13a-15(f) and 15d-15(f) under the Act) during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II-OTHER INFORMATION

Item 1. Legal Proceedings

Information in response to this Item is incorporated herein by reference from Note 9, Commitments and Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Item 6. Exhibits

 

3.1    Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Party City Holdco Inc.’s Form 8-K dated April 21, 2015)
3.2    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Party City Holdco Inc.’s Form 8-K dated April 21, 2015)
10.1*    Second Amendment to ABL Credit Agreement, dated as of March  4, 2019, by and among Party City Holdings Inc., Party City Corporation, PC Intermediate Holdings, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, and each of the Persons party thereto as ABL Revolving Lenders
10.2    Third Amendment to ABL Credit Agreement, dated as of April  8, 2019, by and among Party City Holdings Inc., Party City Corporation, PC Intermediate Holdings, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, and each of the Persons party thereto as ABL Revolving Lenders (incorporated by reference to Exhibit 10.1 to Party City Holdco Inc.’s Form 8-K dated April 11, 2019)
31.1*    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule  15d-14(a) of the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule  15d-14(a) of the Securities Exchange Act of 1934, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*    Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018; (ii) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three month periods ended March 31, 2019 and March 31, 2018; (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three month periods ended March 31, 2019 and March 31, 2018; (iv) Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2019 and March 31, 2018; and (v) Notes to the Condensed Consolidated Financial Statements.
   Management contract of compensatory plan or arrangement
*    Filed herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

      PARTY CITY HOLDCO INC.
    By:   /s/ Michael A. Correale
      Michael A. Correale
     

Interim Chief Financial Officer

(on behalf of the Registrant and as Principal Financial Officer)

Date: May 9, 2019

 

 

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