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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, 2020

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

 

 

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

 

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 (§232.405 of this chapter) 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.

 

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  

As of May 31, 2020, 94,491,352 shares of the Registrant’s common stock were outstanding.

 

 

 

 


 

EXPLANATORY NOTE

 

On May 8, 2020, Party City Holdco Inc. (the “Company” or “Party City Holdco”) filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission (the “SEC”) indicating its reliance on the SEC’s March 25, 2020 Order (Release No. 34-88465) (the “Order”). The Order allows for the delay of certain filings required under the Securities and Exchange Act of 1934, as amended.

The Company filed the Form 8-K indicating its intension to rely on the Order permitting extensions in filings due to circumstances related to the novel coronavirus (“COVID-19”) pandemic. As stated in the Form 8-K, the Company’s operations and business have experienced disruptions due to the unprecedented conditions surrounding the spread of COVID-19 throughout North America. In particular, COVID-19 and measures implemented to reduce the spread of the virus have limited access to the Company’s facilities and disrupted its normal interactions with its accounting personnel, legal advisors, auditors and others involved in the preparation of the Quarterly Report.  Due to the factors listed above, the Company required additional time to finalize its Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2020, (the “Quarterly Report”) by the original deadline of May 13, 2020.

In light of the impact of the factors described above, the Company was unable to compile and review certain information required in order to permit it to timely file the Quarterly Report by May 13, 2020, the original filing deadline, without unreasonable effort or expense. The Company relied on the Order in furnishing the Form 8-K by the original filing deadline of the Quarterly Report.

 

 


2


 

PARTY CITY HOLDCO INC.

Form 10-Q

March 31, 2020

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

 

 

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019

 

4

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months ended March 31, 2020 and March 31, 2019

 

5

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2020 and March 31, 2019

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2020 and March 31, 2019

 

7

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

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

 

21

 

 

 

Item  3. Quantitative and Qualitative Disclosures about Market Risk

 

35

 

 

 

Item 4. Controls and Procedures

 

35

 

 

 

PART II

 

 

 

 

 

Item 1. Legal Proceedings

 

36

 

 

 

Item 1A. Risk Factors

 

36

 

 

 

Item 5. Other Information

        

37

 

 

 

Item 6. Exhibits

 

38

 

 

 

Signature

 

39

 

3


 

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Note 2)

(Unaudited)

 

 

(Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

194,433

 

 

$

34,917

 

Accounts receivable, net

 

 

116,223

 

 

 

149,109

 

Inventories, net

 

 

629,875

 

 

 

658,419

 

Prepaid expenses and other current assets

 

 

76,698

 

 

 

51,685

 

Total current assets

 

 

1,017,229

 

 

 

894,130

 

Property, plant and equipment, net

 

 

235,577

 

 

 

243,572

 

Operating lease asset

 

 

773,775

 

 

 

802,634

 

Goodwill

 

 

665,129

 

 

 

1,072,330

 

Trade names

 

 

394,221

 

 

 

530,320

 

Other intangible assets, net

 

 

41,960

 

 

 

45,060

 

Other assets, net

 

 

6,904

 

 

 

7,273

 

Total assets

 

$

3,134,795

 

 

$

3,595,319

 

LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Loans and notes payable

 

$

381,422

 

 

$

128,806

 

Accounts payable

 

 

96,383

 

 

 

152,300

 

Accrued expenses

 

 

154,847

 

 

 

150,921

 

Current portion of operating lease liability

 

 

153,614

 

 

 

155,471

 

Income taxes payable

 

 

 

 

 

35,905

 

Current portion of long-term obligations

 

 

98,588

 

 

 

71,524

 

Total current liabilities

 

 

884,854

 

 

 

694,927

 

Long-term obligations, excluding current portion

 

 

1,474,854

 

 

 

1,503,987

 

Long-term portion of operating lease liability

 

 

707,734

 

 

 

720,735

 

Deferred income tax liabilities, net

 

 

70,943

 

 

 

126,081

 

Other long-term liabilities

 

 

16,036

 

 

 

16,517

 

Total liabilities

 

 

3,154,421

 

 

 

3,062,247

 

Redeemable securities

 

 

 

 

 

3,351

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock (94,491,352 and 94,461,576 shares outstanding and 121,708,422 and

   121,662,540 shares issued at March 31, 2020 and December 31, 2019, respectively)

 

 

1,211

 

 

 

1,211

 

Additional paid-in capital

 

 

933,174

 

 

 

928,573

 

Retained deficit

 

 

(578,732

)

 

 

(37,219

)

Accumulated other comprehensive loss

 

 

(47,947

)

 

 

(35,734

)

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

   treasury

 

 

307,706

 

 

 

856,831

 

Less: Common stock held in treasury, at cost (27,217,070 and 27,200,964 shares at

   March 31, 2020 and December 31, 2019, respectively)

 

 

(327,170

)

 

 

(327,086

)

Total Party City Holdco Inc. stockholders’ equity

 

 

(19,464

)

 

 

529,745

 

Noncontrolling interests

 

 

(162

)

 

 

(24

)

Total stockholders’ equity

 

 

(19,626

)

 

 

529,721

 

Total liabilities, redeemable securities and stockholders’ equity

 

$

3,134,795

 

 

$

3,595,319

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Net sales

 

$

412,461

 

 

$

511,102

 

Royalties and franchise fees

 

 

1,582

 

 

 

2,014

 

Total revenues

 

 

414,043

 

 

 

513,116

 

Cost of sales

 

 

296,757

 

 

 

339,042

 

Wholesale selling expenses

 

 

15,458

 

 

 

17,961

 

Retail operating expenses

 

 

88,166

 

 

 

95,018

 

Franchise expenses

 

 

3,309

 

 

 

3,303

 

General and administrative expenses

 

 

59,996

 

 

 

41,925

 

Art and development costs

 

 

5,322

 

 

 

5,929

 

Development stage expenses

 

 

2,029

 

 

 

2,226

 

Store impairment and restructuring charges

 

 

17,728

 

 

 

18,009

 

Goodwill and intangibles impairment

 

 

536,648

 

 

 

 

Total expenses

 

 

1,025,413

 

 

 

523,413

 

Loss from operations

 

 

(611,370

)

 

 

(10,297

)

Interest expense, net

 

 

25,120

 

 

 

29,257

 

Other expense, net

 

 

5,676

 

 

 

1,254

 

Loss before income taxes

 

 

(642,166

)

 

 

(40,808

)

Income tax benefit

 

 

(100,498

)

 

 

(10,519

)

Net loss

 

 

(541,668

)

 

 

(30,289

)

Less: Net loss attributable to noncontrolling interests

 

 

(155

)

 

 

(71

)

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

 

$

(541,513

)

 

$

(30,218

)

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

 

$

(5.80

)

 

$

(0.32

)

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

 

$

(5.80

)

 

$

(0.32

)

Weighted-average number of common shares-Basic

 

 

93,395,609

 

 

 

93,174,553

 

Weighted-average number of common shares-Diluted

 

 

93,395,609

 

 

 

93,174,553

 

Dividends declared per share

 

$

 

 

$

 

Comprehensive loss

 

$

(553,881

)

 

$

(26,637

)

Less: Comprehensive loss attributable to noncontrolling interests

 

 

(155

)

 

 

(62

)

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

 

$

(553,726

)

 

$

(26,575

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Deficit

 

 

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, 2019

 

$

1,211

 

 

$

928,573

 

 

$

(37,219

)

 

$

(35,734

)

 

$

856,831

 

 

$

(327,086

)

 

$

529,745

 

 

$

(24

)

 

$

529,721

 

Net loss

 

 

 

 

 

 

 

 

(541,513

)

 

 

 

 

 

(541,513

)

 

 

 

 

 

(541,513

)

 

 

(155

)

 

 

(541,668

)

Stock option expense

 

 

 

 

 

354

 

 

 

 

 

 

 

 

 

354

 

 

 

 

 

 

354

 

 

 

 

 

 

354

 

Restricted stock units – time – based

 

 

 

 

 

621

 

 

 

 

 

 

 

 

 

621

 

 

 

 

 

 

621

 

 

 

 

 

 

621

 

Director – non-cash compensation

 

 

 

 

 

75

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

 

75

 

 

 

 

 

 

75

 

Warrant expense (see Note 19 –

   Kazzam, LLC)

 

 

 

 

 

1,033

 

 

 

 

 

 

 

 

 

1,033

 

 

 

 

 

 

1,033

 

 

 

 

 

 

1,033

 

Acquired non-controlling interest

 

 

 

 

 

2,518

 

 

 

 

 

 

 

 

 

2,518

 

 

 

 

 

 

2,518

 

 

 

17

 

 

 

2,535

 

Treasury Stock purchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(84

)

 

 

(84

)

 

 

 

 

 

(84

)

Foreign currency adjustments

 

 

 

 

 

 

 

 

 

 

 

(12,201

)

 

 

(12,201

)

 

 

 

 

 

(12,201

)

 

 

 

 

 

(12,201

)

Impact of foreign exchange

   contracts, net

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

(12

)

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Balance at March 31, 2020

 

$

1,211

 

 

$

933,174

 

 

$

(578,732

)

 

$

(47,947

)

 

$

307,706

 

 

$

(327,170

)

 

$

(19,464

)

 

$

(162

)

 

$

(19,626

)

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

(Deficit)

 

 

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

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows used in operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(541,668

)

 

$

(30,289

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

17,752

 

 

 

21,341

 

Amortization of deferred financing costs and original issuance discounts

 

 

1,202

 

 

 

1,143

 

Provision for doubtful accounts

 

 

1,119

 

 

 

371

 

Deferred income tax benefit

 

 

(54,991

)

 

 

(9,383

)

Change in operating lease liability/asset

 

 

(389

)

 

 

(19,693

)

Undistributed income in equity method investments

 

 

(144

)

 

 

(198

)

Loss on disposal of assets

 

 

40

 

 

 

94

 

Non-cash adjustment for store impairment and restructuring charges

 

 

16,277

 

 

 

18,009

 

Goodwill and intangibles impairment

 

 

536,648

 

 

 

 

Non-employee equity-based compensation (see Note 19 – Kazzam, LLC)

 

 

1,033

 

 

 

129

 

Stock option expense

 

 

354

 

 

 

370

 

Restricted stock unit expense – time-based

 

 

621

 

 

 

392

 

Directors – non-cash compensation

 

 

75

 

 

 

77

 

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

 

 

 

 

 

 

 

 

Decrease in accounts receivable

 

 

27,635

 

 

 

8,022

 

Decrease (increase) in inventories

 

 

23,205

 

 

 

(6,426

)

Increase in prepaid expenses and other current assets

 

 

(26,661

)

 

 

(7,935

)

Decrease in accounts payable, accrued expenses and income taxes

   payable

 

 

(76,138

)

 

 

(76,911

)

Net cash used in operating activities

 

 

(74,030

)

 

 

(100,887

)

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Cash paid in connection with acquisitions, net of cash acquired

 

 

 

 

 

(545

)

Capital expenditures

 

 

(10,726

)

 

 

(12,393

)

Proceeds from disposal of property and equipment

 

 

7

 

 

 

10

 

Net cash used in investing activities

 

 

(10,719

)

 

 

(12,928

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Repayment of loans, notes payable and long-term obligations

 

 

(3,932

)

 

 

(23,495

)

Proceeds from loans, notes payable and long-term obligations

 

 

253,030

 

 

 

114,260

 

Stock repurchases

 

 

(85

)

 

 

(156

)

Exercise of stock options

 

 

 

 

 

1,088

 

Net cash provided by financing activities

 

 

249,013

 

 

 

91,697

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(4,863

)

 

 

2,216

 

Net decrease in cash and cash equivalents and restricted cash

 

 

159,401

 

 

 

(19,902

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

35,176

 

 

 

59,219

 

Cash and cash equivalents and restricted cash at end of period

 

$

194,577

 

 

$

39,317

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

35,927

 

 

$

42,484

 

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

 

$

11,368

 

 

$

3,708

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7


 

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 the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As of March 31, 2020 the Company’s retail operations include 854 specialty retail party supply stores (including franchise stores) throughout the United States and Mexico operating under the names Party City and Halloween City, and e-commerce websites, including through the domain name PartyCity.com and others.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. In response to COVID-19, to safeguard the health and safety of its team members and customers, the Company temporarily closed all of its corporate retail stores as of March 18, 2020. During the temporary store closures, the Company offered curbside pickup and the Company’s e-commerce site, www.partycity.com, remained fully operational. However, quarantines, stay-at-home orders and related measures had significantly reduced consumer spending as well as customer demand for our products. In addition, these restrictions and other dislocations caused by the outbreak have disrupted, and may continue to disrupt, our planning, branding and administrative functions, as well as that of our suppliers, transporters and customers. 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, 2020. 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 and the uncertainty surrounding the impact of the COVID-19 pandemic.

Recently Issued and Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The new guidance improves and clarifies the fair value measurement disclosure requirements of ASC 820. The new disclosure requirements include the disclosure of the changes in unrealized gains or losses included in other comprehensive (loss)

8


 

income for recurring Level 3 fair value measurements held at the end of the reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance was effective for fiscal years beginning after December 15, 2019. This ASU had no significant impact on the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued 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.

In January 2017 the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity will consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  The Company adopted ASU No. 2017-04 during the first quarter of 2019 and such adoption had no impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”.  The ASU changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU requires that an entity measure and recognize expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company has adopted this guidance effective January 1, 2020, prospectively, with respect to its receivables, and the adoption and application of this standard did not have a material impact to the consolidated financial statements during the first quarter.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. Judgment is required in assessing the ultimate realization of these receivables, including consideration of the Company’s history of receivable write-offs, the level of past due accounts and the economic status of the Company’s customers. In an effort to identify adverse trends relative to customer economic status, the Company assesses the financial health of the markets it operates in and performs periodic credit evaluations of its customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses. At March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $5,342 and $4,786, respectively.

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 its operating lease arrangements with terms of greater than twelve months. 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 annual disclosures, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

9


 

Note 3 – Store Impairment and Restructuring Charges

Each year, the Company typically closes approximately ten 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. The Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). 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 stores, which are primarily located in close proximity to other Party City stores. In 2019, 55 stores were identified for closure, out of which 35 stores were closed in 2019 and 20 stores were closed in January 2020. In addition, 21 stores were identified in 2020 for closure at a future date. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company evaluated the recoverability of long lived assets at the open stores and recorded an impairment charge associated with the operating lease asset and property, plant and equipment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19. In conjunction with the store optimization program and store impairment, during the three months ended March 31, 2020 and 2019, the Company recorded the following charges:   

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Inventory reserves

 

$

11,696

 

 

$

17,629

 

Operating lease asset impairment

 

 

14,212

 

 

 

13,209

 

Property, plant and equipment impairment

 

 

2,065

 

 

 

4,139

 

Labor and other costs incurred closing stores

 

 

1,451

 

 

 

 

Severance

 

 

 

 

 

661

 

Total

 

$

29,424

 

 

$

35,638

 

 

Amounts disclosed above represent the Company’s best estimate of the total charges that are expected to be recorded. As the Company closes the stores, it records 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 immaterial. Additionally, the Company incurs costs while moving inventory, cleaning the stores and returning them to their original condition. Such costs are also 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 charge for inventory reserves is related to inventory that is disposed of following the closures of the stores and inventory that is 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.

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 – Goodwill and Intangibles Impairment

The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of October 1 or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.

During the three months ended March 31, 2020, the Company identified intangible assets’ impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of March 31, 2020. The interim impairment tests were performed using an income approach. The Company recognized non-cash pre-tax goodwill impairment charges at March 31, 2020 of $253,110 and $148,326 against the goodwill associated with its retail and wholesale reporting units, respectively.

10


 

There was no goodwill impairment charge for the three months ended March 31, 2019.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment charge of $131,287 and $3,925 on its Party City and Halloween City tradenames, respectively. During 2019, there was no impairment on the Party City trade name and the Company recorded a Halloween City trade name impairment charge of $6,575.

Note 5 – Sale/Leaseback Transaction

In June 2019, the Company sold its main distribution center in Chester, New York, its metallic balloons manufacturing facility in Eden Prairie, Minnesota and its injection molded plastics manufacturing facility in Los Lunas, New Mexico. Simultaneously, the Company entered into twenty-year leases for each of the facilities. The aggregate sale price was $128,000 and, during the year ended December 31, 2019, the Company recorded a $58,381 gain on the sale, net of transaction costs, in the Company’s condensed consolidated statement of operations and comprehensive loss.

Under the terms of the lease agreements, the Company pays total rent of $8,320 during the first year and the annual rent will increase by 2% thereafter.

The Chester and Eden Prairie leases are being accounted for as operating leases and the sale of such properties resulted in the gain above.

However, for the Los Lunas property, the present value of the lease payments is greater than substantially all of the fair value of the assets. Therefore, the lease is a finance lease and sale accounting treatment is prohibited. As such, the Company is accounting for the proceeds as a financing lease. As of March 31, 2020, $11,944 is recorded as a part of a Finance lease.

In conjunction with the sale/leaseback transaction, the Company amended its Term Loan Credit Agreement.  The amendment required the Company to use half of the proceeds from the transaction, net of costs, to paydown part of the outstanding balance under such debt agreement.  Additionally, the amendment required the Company to pay an immaterial “consent fee” to the lenders.  As the Term Loan Credit Agreement is a loan syndication, the Company assessed, on a creditor-by-creditor basis, whether the amendment should be accounted for as an extinguishment or a modification. The Company concluded that, for each creditor, the amendment should be accounted for as a modification. Therefore, no capitalized deferred financing costs or original issuance discounts were written off in conjunction with the amendment.

During June 2019, the Company used proceeds from the sale (net of costs) of $125,864 to paydown outstanding Term Loan debt of $62,770 with the balance used to paydown the ABL Facility. See Note 16 – Current and Long-Term Obligations.

Note 6 – Disposition of Assets

On October 1, 2019, the Company sold its Canadian-based Party City stores to a Canadian-based retailer for $131,711 and entered into a 10-year supply agreement under which the acquirer agreed to purchase product from the Company for such Party City stores, as well as the acquirer’s other stores.  The Company expects to use $85 million of the net proceeds to paydown principal on the Term Loan, see Note 16 – Current and Long-Term Obligations. 

Note 7 – Inventories

Inventories consisted of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Finished goods

 

$

583,662

 

 

$

606,036

 

Raw materials

 

 

30,795

 

 

 

34,259

 

Work in process

 

 

15,418

 

 

 

18,124

 

 

 

$

629,875

 

 

$

658,419

 

 

11


 

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 8 – Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“the CARES Act”) was signed into law.  The CARES Act is a $2 trillion legislative package intended to provide economic relief to companies impacted by the COVID-19 pandemic, and it enacted a number of Internal Revenue Code modifications which are of particular benefit to the Company, including: 5-year net operating loss carryback, temporary relaxation of the limitations on interest deductions, qualified improvement property eligible for bonus depreciation, employee retention tax credits and deferral of payment of payroll tax.

The effective income tax rate for the three months ended March 31, 2020 of 15.7% is different from the statutory rate of 21.0% primarily due to the non-deductible portions of goodwill impairment charges (see Note 4 – Goodwill and Intangibles Impairment above for further discussion), state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

Note 9 – Changes in Accumulated Other Comprehensive Loss

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

 

 

 

Three Months Ended March 31, 2020

 

 

 

Foreign

Currency

Adjustments

 

 

Impact of

Foreign

Exchange

Contracts,

Net of Taxes

 

 

Total,

Net of Taxes

 

Balance at December 31, 2019

 

$

(37,434

)

 

$

1,700

 

 

$

(35,734

)

Other comprehensive (loss) income before reclassifications,

   net of tax

 

 

(12,201

)

 

 

11

 

 

 

(12,190

)

Gains reclassified from accumulated other comprehensive

   loss to the condensed consolidated statement of operations

   and comprehensive loss, net of income tax

 

 

 

 

 

(23

)

 

 

(23

)

Net current-period other comprehensive loss

 

 

(12,201

)

 

 

(12