Quarterly Report (10-q)

PARTY CITY HOLDCO INC.

/s/ Michael A. Correale

Michael A. Correale

Interim Chief Financial Officer

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

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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

June 30, 2019

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

For the transition period from

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

☒

☐

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

☐

☒

As of July 25, 2019, 94,437,133 shares of the Registrant’s common stock were outstanding.

Table of Contents

PARTY CITY HOLDCO INC.

Form 10-Q

June 30, 2019

TABLE OF CONTENTS


	Page

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018		3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months ended June 30, 2019 and June 30, 2018		4
Condensed Consolidated Statements of Operations and Comprehensive Income for the Six Months ended June 30, 2019 and June 30, 2018		5
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended June 30, 2019 and June 30, 2018		6
Condensed Consolidated Statements of Stockholders’ Equity for the Six Months ended June 30, 2019 and June 30, 2018		7
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2019 and June 30, 2018		8
Notes to Condensed Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		36
Item 4. Controls and Procedures		36

PART II

Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 6. Exhibits		37
Signature		38

Table of Contents

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30, 2019			December 31, 2018
	(Note 2) (Unaudited)			(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	47,131		$	58,909
Accounts receivable, net		140,070			146,983
Inventories, net		788,097			756,038
Prepaid expenses and other current assets		66,707			61,905

Total current assets		1,042,005			1,023,835
Property, plant and equipment, net		257,395			321,044
Operating lease asset		869,345			—
Goodwill		1,659,653			1,656,950
Trade names		568,014			568,031
Other intangible assets, net		49,663			60,164
Other assets, net		12,894			12,323

Total assets	$	4,458,969		$	3,642,347

LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	307,379		$	302,751
Accounts payable		159,515			208,149
Accrued expenses		151,459			161,228
Current portion of operating lease liability		145,472			—
Income taxes payable		10,279			25,993
Current portion of long-term obligations		76,251			13,316

Total current liabilities		850,355			711,437
Long-term obligations, excluding current portion		1,565,315			1,621,963
Long-term portion of operating lease liability		793,976			—
Deferred income tax liabilities, net		163,657			174,427
Other long-term liabilities		13,228			87,548

Total liabilities		3,386,531			2,595,375

Redeemable securities		3,351			3,351
Commitments and contingencies
Stockholders’ equity:
Common stock (94,501,055 and 93,622,934 shares outstanding and 121,681,959 and 120,788,159 shares issued at June 30, 2019 and December 31, 2018, respectively)		1,210			1,208
Additional paid-in capital		926,838			922,476
Retained earnings		513,130			495,777
Accumulated other comprehensive loss		(45,216	)		(49,201	)

Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury		1,395,962			1,370,260
Less: Common stock held in treasury, at cost (27,180,904 and 27,165,225 shares at June 30, 2019 and December 31, 2018)		(327,086	)		(326,930	)

Total Party City Holdco Inc. stockholders’ equity		1,068,876			1,043,330
Noncontrolling interests		211			291

Total stockholders’ equity		1,069,087			1,043,621

Total liabilities, redeemable securities and stockholders’ equity	$	4,458,969		$	3,642,347

See accompanying notes to unaudited condensed consolidated financial statements.

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PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended June 30,
	2019			2018
Revenues:
Net sales	$	561,702		$	558,101
Royalties and franchise fees		2,189			2,910

Total revenues		563,891			561,011

Cost of sales		353,056			329,477
Wholesale selling expenses		16,884			17,256
Retail operating expenses		96,143			92,094
Franchise expenses		3,236			3,980
General and administrative expenses		41,510			45,326
Art and development costs		5,712			5,732
Development stage expenses		3,012			1,695
Gain on sale/leaseback transaction		(58,381	)		—
Store impairment and restructuring charges		5,234			—

		466,406			495,560

Income from operations		97,485			65,451
Interest expense, net		30,176			25,501
Other expense, net		3,342			2,532

Income before income taxes		63,967			37,418
Income tax expense		15,962			9,370

Net income		48,005			28,048
Add: Net income attributable to redeemable securities holder		—			410
Less: Net loss attributable to noncontrolling interests		(69	)		(29	)

Net income attributable to common shareholders of Party City Holdco Inc.	$	48,074		$	28,487

Net income per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	0.52		$	0.30
Net income per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	0.51		$	0.29
Weighted-average number of common shares-Basic		93,293,176			96,453,884
Weighted-average number of common shares-Diluted		93,703,546			97,688,233
Dividends declared per share	$	0.00		$	0.00

Comprehensive income	$	48,327		$	18,825
Add: Comprehensive income attributable to redeemable securities holder		—			410
Less: Comprehensive loss attributable to noncontrolling interests		(89	)		(55	)

Comprehensive income attributable to common shareholders of Party City Holdco Inc.	$	48,416		$	19,290

See accompanying notes to unaudited condensed consolidated financial statements.

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PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except share and per share data)


	Six Months Ended June 30,
	2019			2018
Revenues:
Net sales	$	1,072,804		$	1,063,209
Royalties and franchise fees		4,203			5,626

Total revenues		1,077,007			1,068,835

Cost of sales		692,098			646,443
Wholesale selling expenses		34,845			36,043
Retail operating expenses		191,161			181,186
Franchise expenses		6,539			7,762
General and administrative expenses		83,435			93,991
Art and development costs		11,641			11,705
Development stage expenses		5,238			3,998
Gain on sale/leaseback transaction		(58,381	)		—
Store impairment and restructuring charges		23,243			—

		989,819			981,128

Income from operations		87,188			87,707
Interest expense, net		59,433			48,776
Other expense, net		4,596			3,380

Income before income taxes		23,159			35,551
Income tax expense		5,443			8,666

Net income		17,716			26,885
Add: Net income attributable to redeemable securities holder		—			410
Less: Net loss attributable to noncontrolling interests		(140	)		(59	)

Net income attributable to common shareholders of Party City Holdco Inc.	$	17,856		$	27,354

Net income per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	0.19		$	0.28
Net income per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	0.19		$	0.28
Weighted-average number of common shares-Basic		93,233,865			96,426,235
Weighted-average number of common shares-Diluted		93,791,763			97,669,309
Dividends declared per share	$	0.00		$	0.00

Comprehensive income	$	21,690		$	22,892
Add: Comprehensive income attributable to redeemable securities holder		—			410
Less: Comprehensive loss attributable to noncontrolling interests		(151	)		(73	)

Comprehensive income attributable to common shareholders of Party City Holdco Inc.	$	21,841		$	23,375

See accompanying notes to unaudited condensed consolidated financial statements.

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PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

Three months ended June 30, 2019 and June 30, 2018:


	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 March 31, 2019	$	1,210	$	925,233	$	465,056	$	(45,558	)	$	1,345,941		$	(327,086	)	$	1,018,855		$	300		$	1,019,155
Net income (loss)		—		—		48,074		—			48,074			—			48,074			(69	)		48,005
Stock option expense		—		371		—		—			371			—			371			—			371
Restricted stock units – time-based		—		541		—		—			541			—			541			—			541
Restricted stock units – performance-based		—		476		—		—			476			—			476			—			476
Director – non-cash compensation		—		88		—		—			88			—			88			—			88
Warrant expense		—		129		—		—			129			—			129			—			129
Foreign currency adjustments		—		—		—		556			556			—			556			(20	)		536
Impact of foreign exchange contracts, net		—		—		—		(214	)		(214	)		—			(214	)		—			(214	)

Balance at June 30, 2019	$	1,210	$	926,838	$	513,130	$	(45,216	)	$	1,395,962		$	(327,086	)	$	1,068,876		$	211		$	1,069,087


	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 March 31, 2018	$	1,198	$	918,205	$	371,385	$	(30,600	)	$	1,260,188		$	(286,733	)	$	973,455		$	337		$	973,792
Net income (loss)		—		—		28,077		—			28,077			—			28,077			(29	)		28,048
Net income attributable to redeemable securities holder		—		—		410		—			410			—			410			—			410
Stock option expense		—		482		—		—			482			—			482			—			482
Restricted stock units – time-based		—		252		—		—			252			—			252			—			252
Restricted stock units – performance-based		—		593		—		—			593			—			593			—			593
Director – non-cash compensation		—		59		—		—			59			—			59			—			59
Warrant expense		—		65		—		—			65			—			65			—			65
Exercise of stock options		1		189		—		—			190			—			190			—			190
Foreign currency adjustments		—		—		—		(10,713	)		(10,713	)		—			(10,713	)		(26	)		(10,739	)
Impact of foreign exchange contracts, net		—		—		—		1,516			1,516			—			1,516			—			1,516

Balance at June 30, 2018	$	1,199	$	919,845	$	399,872	$	(39,797	)	$	1,281,119		$	(286,733	)	$	994,386		$	282		$	994,668

See accompanying notes to unaudited condensed consolidated financial statements.

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PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

Six months ended June 30, 2019 and June 30, 2018:


	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 income (loss)		—		—		17,856			—			17,856			—			17,856			(140	)		17,716
Stock option expense		—		741		—			—			741			—			741			—			741
Restricted stock units – time-based		—		933		—			—			933			—			933			—			933
Restricted stock units – performance-based		—		476		—			—			476			—			476			—			476
Director – non-cash compensation		—		165		—			—			165			—			165			—			165
Warrant expense		—		258		—			—			258			—			258			—			258
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		—		—		—			4,712			4,712			—			4,712			(11	)		4,701
Impact of foreign exchange contracts, net		—		—		—			(727	)		(727	)		—			(727	)		—			(727	)

Balance at June 30, 2019	$	1,210	$	926,838	$	513,130		$	(45,216	)	$	1,395,962		$	(327,086	)	$	1,068,876		$	211		$	1,069,087


	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		—		—		(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 income		—		—		26,944			—			26,944			—			26,944			(59	)		26,885
Net income attributable to redeemable securities holder		—		—		410			—			410			—			410			—			410
Stock option expense		—		942		—			—			942			—			942			—			942
Restricted stock units – time-based		—		252		—			—			252			—			252			—			252
Restricted stock units – performance-based		—		593		—			—			593			—			593			—			593
Director – non-cash compensation		—		59		—			—			59			—			59			—			59
Warrant expense		—		326		—			—			326			—			326			—			326
Exercise of stock options		1		481		—			—			482			—			482			—			482
Foreign currency adjustments		—		—		—			(5,307	)		(5,307	)		—			(5,307	)		(14	)		(5,321	)
Impact of foreign exchange contracts, net		—		—		—			1,328			1,328			—			1,328			—			1,328

Balance at June 30, 2018	$	1,199	$	919,845	$	399,872		$	(39,797	)	$	1,281,119		$	(286,733	)	$	994,386		$	282		$	994,668

See accompanying notes to unaudited condensed consolidated financial statements.

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PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2019			2018
Cash flows used in operating activities:
Net income	$	17,716		$	26,885
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization expense		43,225			40,812
Amortization of deferred financing costs and original issuance discounts		2,289			2,766
Provision for doubtful accounts		596			304
Deferred income tax (benefit) expense		(10,779	)		1,443
Deferred rent		—			1,155
Change in operating lease liability/asset		(21,406	)		—
Undistributed income in equity method investments		(202	)		(301	)
(Gain) loss on disposal of assets		(59,087	)		24
Store impairment and restructuring charges		19,490			—
Non-employee equity based compensation		258			365
Stock option expense		741			942
Restricted stock units expense – time-based		933			252
Restricted stock units expense – performance-based		476			593
Directors – non-cash compensation		165			59
Changes in operating assets and liabilities, net of effects of acquired businesses:
Decrease in accounts receivable		6,588			8,791
Increase in inventories		(31,145	)		(68,741	)
Increase in prepaid expenses and other current assets		(4,333	)		(9,137	)
Decrease in accounts payable, accrued expenses and income taxes payable		(71,438	)		(29,220	)

Net cash used in operating activities		(105,913	)		(23,008	)
Cash flows provided by (used in) investing activities:
Cash paid in connection with acquisitions, net of cash acquired		(545	)		(21,325	)
Capital expenditures		(31,098	)		(44,406	)
Proceeds from disposal of property and equipment		113,799			21

Net cash provided by (used in) investing activities		82,156			(65,710	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations		(148,526	)		(26,062	)
Proceeds from loans, notes payable and long-term obligations		157,440			112,293
Stock repurchases		(156	)		—
Exercise of stock options		1,088			482
Debt issuance costs		(343	)		(56	)

Net cash provided by financing activities		9,503			86,657
Effect of exchange rate changes on cash and cash equivalents		2,166			(780	)

Net decrease in cash and cash equivalents and restricted cash		(12,088	)		(2,841	)
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	$	47,131		$	51,567

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	57,503		$	49,489
Cash paid during the period for income taxes, net of refunds	$	31,924		$	46,617

See accompanying notes to unaudited condensed consolidated financial statements.

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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

-week

period or

-week

period ended on the Saturday nearest December

st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim

-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

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 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 pronouncement is effective for the Company during the first quarter of 2020. The Company is still evaluating the impact of the ASU on its consolidated financial statements.

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 June 30, 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 June 30, 2019 consolidated balance sheet, such accounts 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 and prepaid expenses and other current assets includes a $2,552 asset related to capitalized broker costs. In the Company’s June 30, 2019 consolidated balance sheet, such assets are included in the operating lease asset.

The pronouncement had no impact on the Company’s consolidated statement of operations and comprehensive income (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 17.

Note 3 – Store Impairment and Restructuring Charges

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 six months ended June 30, 2019,

the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”) and,

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 55 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 three and six months ended June 30, 2019, the Company recorded the following charges:


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Inventory reserves	$	3,656	$	21,285
Operating lease asset impairment		940		14,149
Property, plant and equipment impairment		541		4,680
Labor and other costs incurred closing stores		3,753		3,753
Severance		—		661

Total	$	8,890	$	44,528

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 continue to incur costs while moving inventory, 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 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 income (loss). The other charges were recorded in Store impairment and restructuring charges in the Company’s statement of operations and comprehensive income (loss).

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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 – 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 three months ended June 30, 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 income.

Under the terms of the lease agreements, the Company will pay 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 is included 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 $12,080 of proceeds as a finance lease and has recorded such amount in long-term obligations in its June 30, 2019 condensed consolidated balance sheet.

In conjunction with the sale/leaseback transaction, during June 2019, 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 requires 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 debt.

Note 5 – Inventories

Inventories consisted of the following:


	June 30, 2019		December 31, 2018
Finished goods	$	738,404	$	706,327
Raw materials		33,030		33,423
Work in process		16,663		16,288

	$	788,097	$	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 6 – Income Taxes

The effective income tax rate for the six months ended June 30, 2019, 23.5%, 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.

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Note 7 – Changes in Accumulated Other Comprehensive Loss

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


	Three Months Ended June 30, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at March 31, 2019	$	(45,900	)	$	342		$	(45,558	)
Other comprehensive income (loss) before reclassifications, net of tax		556			(3	)		553
Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax		—			(211	)		(211	)

Net current-period other comprehensive income (loss)		556			(214	)		342

Balance at June 30, 2019	$	(45,344	)	$	128		$	(45,216	)


	Three Months Ended June 30, 2018
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at March 31, 2018	$	(30,204	)	$	(396	)	$	(30,600	)
Other comprehensive (loss) income before reclassifications		(10,713	)		1,398			(9,315	)
Loss reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income		—			118			118

Net current-period other comprehensive (loss) income		(10,713	)		1,516			(9,197	)

Balance at June 30, 2018	$	(40,917	)	$	1,120		$	(39,797	)


	Six Months Ended June 30, 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 tax		4,712			60			4,772
Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax		—			(787	)		(787	)

Net current-period other comprehensive income (loss)		4,712			(727	)		3,985

Balance at June 30, 2019	$	(45,344	)	$	128		$	(45,216	)

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	Six Months Ended June 30, 2018
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2017	$	(35,610	)	$	(208	)	$	(35,818	)
Other comprehensive (loss) income before reclassifications, net of income tax		(5,307	)		971			(4,336	)
Loss reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax		—			357			357

Net current-period other comprehensive (loss) income		(5,307	)		1,328			(3,979	)

Balance at June 30, 2018	$	(40,917	)	$	1,120		$	(39,797	)

Note 8 – Capital Stock

At June 30, 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 9 – 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 June 30, 2019 and June 30, 2018 was as follows:

During June 2019, the Company’s Wholesale segment 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. The aggregate sale price was $

128,000

and, during the three months ended June 30, 2019, the Company’s Wholesale segment recorded a $58,381 gain on the sale in the Company’s condensed consolidated statement of operations and comprehensive income. See Note 4 for further detail.

During the three and six months ended June 30, 2019, the Company executed a store optimization program under which the Company plans to close approximately 55 Party City stores during the course of 2019. In conjunction with the program, during the three months and six months ended June 30, 2019, the Company’s Retail segment recorded charges of $8,890 and $44,528, respectively. See Note 3 for further detail.

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	Wholesale			Retail		Consolidated
Three Months Ended June 30, 2019
Revenues:
Net sales	$	289,067		$	423,157	$	712,224
Royalties and franchise fees		—			2,189		2,189

Total revenues		289,067			425,346		714,413
Eliminations		(150,522	)		—		(150,522	)

Net revenues	$	138,545		$	425,346	$	563,891

Income from operations	$	60,297		$	37,188	$	97,485

Interest expense, net							30,176
Other expense, net							3,342

Income before income taxes						$	63,967


	Wholesale			Retail		Consolidated
Three Months Ended June 30, 2018
Revenues:
Net sales	$	285,733		$	411,353	$	697,086
Royalties and franchise fees		—			2,910		2,910

Total revenues		285,733			414,263		699,996
Eliminations		(138,985	)		—		(138,985

Net revenues	$	146,748		$	414,263	$	561,011

Income from operations	$	11,148		$	54,303	$	65,451

Interest expense, net							25,501
Other expense, net							2,532

Income before income taxes						$	37,418

The Company’s industry segment data for the six months ended June 30, 2019 and June 30, 2018 was as follows:


	Wholesale			Retail		Consolidated
Six Months Ended June 30, 2019
Revenues:
Net sales	$	579,368		$	801,310	$	1,380,678
Royalties and franchise fees		—			4,203		4,203

Total revenues		579,368			805,513		1,384,881
Eliminations		(307,874	)		—		(307,874	)

Net revenues	$	271,494		$	805,513	$	1,077,007

Income from operations	$	62,520		$	24,668	$	87,188

Interest expense, net							59,433
Other expense, net							4,596

Income before income taxes						$	23,159


	Wholesale			Retail		Consolidated
Six Months Ended June 30, 2018
Revenues:
Net sales	$	563,560		$	774,929	$	1,338,489
Royalties and franchise fees		—			5,626		5,626

Total revenues		563,560			780,555		1,344,115
Eliminations		(275,280	)		—		(275,280	)

Net revenues	$	288,280		$	780,555	$	1,068,835

Income from operations	$	16,496		$	71,211	$	87,707

Interest expense, net							48,776
Other expense, net							3,380

Income before income taxes						$	35,551

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During the three months ended March 31, 2019, the Company adopted ASU

2016-02,

“Leases”. See Notes 2 and 17 for further discussion. As of June 30, 2019, the operating lease asset for the Company’s Retail segment was $722,090 and the operating lease asset for the Company’s Wholesale segment was $147,256.

Note 10 – 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 11 – 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 six months ended June 30, 2019 and the six months ended June 30, 2018.

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 June 30, 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 June 30, 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

June 30, 2019

December 31, 2018

June 30, 2019

December 31, 2018

Foreign Exchange Contracts

) PP

115

) AE

—

(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 June 30, 2019 and December 31, 2018:


Derivative Instrument	June 30, 2019		December 31, 2018
Foreign Exchange Contracts	$	6,200	$	10,942

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Note 12 – 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. Additionally, at such time, the Company received the ability to “call” the interest of the other investors. During the three months ended June 30, 2019, the option was terminated and the Company wrote off its asset related to the call option and reversed its liability related to the put option and recorded a net charge of $

1,890

in “other expense, net” in the Company’s condensed consolidated statement of operations and comprehensive income. Prior to such time, the Company had been adjusting the put liability to fair value on a recurring basis. The liability represented a Level 3 fair value measurement as it was 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 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 June 30, 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 June 30, 2019 that are measured at fair value on a recurring basis:


	Level 1		Level 2		Level 3		Total as of June 30, 2019
Derivative assets	$	—	$	58	$	—	$	58
Derivative liabilities		—		7		—		7

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 six months ended June 30, 2019, the Company initiated a store optimization program under which it plans to close approximately 55 Party City stores during the course of 2019. In conjunction with the program, during the six months ended June 30, 2019, the Company recorded impairment charges for its property, plant and equipment and operating lease assets. See Note 3 for further detail.

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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 June 30, 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 June 30, 2019 are as follows:


	June 30, 2019
	Carrying Amount		Fair Value
Term Loan Credit Agreement	$	784,994	$	787,913
6.125% Senior Notes – due 2023		346,603		352,625
6.625% Senior Notes – due 2026		494,524		485,000

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 June 30, 2019 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.

Note 13 – 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.

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


	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018		Six Months Ended June 30, 2019		Six Months Ended June 30, 2018
Net income attributable to common shareholders of Party City Holdco Inc.	$	48,074	$	28,487	$	17,856	$	27,354
Weighted average shares - Basic		93,293,176		96,453,884		93,233,865		96,426,235
Effect of dilutive securities:
Warrants		—		—		—		—
Restricted stock units		19,228		—		23,628		—
Stock options		391,142		1,234,350		534,270		1,243,074

Weighted average shares - Diluted		93,703,546		97,688,233		93,791,763		97,669,309

Net income per share attributable to common shareholders of Party City Holdco Inc. - Basic	$	0.52	$	0.30	$	0.19	$	0.28

Net income per share attributable to common shareholders of Party City Holdco Inc. - Diluted	$	0.51	$	0.29	$	0.19	$	0.28

During the three months ended June 30, 2019 and June 30, 2018, 2,118,443 stock options and 2,494,428 stock options, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Additionally, during the three months ended June 30, 2019 and June 30, 2018, 596,000 warrants and 596,000 warrants, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Further, during the three months ended June 30, 2019 and June 30, 2018, 199,978 restricted stock units and 201,270 restricted stock units, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

During the six months ended June 30, 2019 and June 30, 2018, 2,118,443 stock options and 2,494,428 stock options, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Additionally, during the six months ended June 30, 2019 and June 30, 2018, 596,000 warrants and 596,000 warrants, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Further, during the six months ended June 30, 2019 and June 30, 2018, 199,978 restricted stock units and 201,270 restricted stock units, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

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Note 14 –

Current and

Long-Term Obligations

Long-term obligations at June 30, 2019 and December 31, 2018 consisted of the following:


	June 30, 2019			December 31, 2018
Term Loan Credit Agreement	$	784,994		$	791,135
6.125% Senior Notes – due 2023		346,603			346,191
6.625% Senior Notes – due 2026		494,524			494,138

Finance lease obligations		15,445			3,815
Total long-term obligations		1,641,566			1,635,279
Less: current portion		(76,251	)		(13,316	)

Long-term obligations, excluding current portion	$	1,565,315		$	1,621,963

Prior to April 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 June 2019, in conjunction with a sale/leaseback transaction, the Company amended its Term Loan Credit Agreement and financed its Los Lunas, New Mexico facility via a finance lease, which is included in the table above. See Note 4 for further detail.

Note 15 – Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2019 and June 30, 2018:


	Three Months Ended June 30, 2019		Three Months Ended June 30, 2018		Six Months Ended June 30, 2019		Six Months Ended June 30, 2018
Retail Net Sales:
North American Party City Stores	$	387,308	$	376,222	$	733,448	$	707,067
Global E-commerce		35,364		35,131		67,172		67,862
Other		485		—		690		—

Total Retail Net Sales	$	423,157	$	411,353	$	801,310	$	774,929
Royalties and Franchise Fees		2,189		2,910		4,203		5,626

Total Retail Revenue	$	425,346	$	414,263	$	805,513	$	780,555

Wholesale Net Sales:
Domestic	$	74,766	$	79,397	$	148,587	$	158,956
International		63,779		67,351		122,907		129,324

Total Wholesale Net Sales	$	138,545	$	146,748	$	271,494	$	288,280
Total Consolidated Revenue	$	563,891	$	561,011	$	1,077,007	$	1,068,835

Note 16 – Cash, Cash Equivalents and Restricted Cash

The Company’s June 30, 2019 consolidated balance sheet included $47,131 of cash and cash equivalents and $0 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 June 30, 2018 consolidated balance sheet included $51,461 of cash and cash equivalents and $106 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.

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

Note 17 – 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.

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.

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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.

Quantitative Disclosures

During the three months and six months ended June 30, 2019, the Company’s operating lease cost was $49,152 and $97,447, respectively. 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 and six months ended June 30, 2019 was $8,645 and $17,186, respectively.

During the three and six months ended June 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $48,937 and $115,451, respectively.

During the three and six months ended June 30, 2019,

right-of-use

assets obtained in exchange for new operating lease liabilities were $125,645 and $156,867, respectively.

As of June 30, 2019, the weighted-average remaining lease term for operating leases was 7 years and the weighted-average discount rate for operating leases was 6.8%.

As of June 30, 2019, the future cash flows for the Company’s operating leases were:


Six months ended December 31, 2019	$	89,895
2020		201,578
2021		185,305
2022		165,815
2023		137,724
Thereafter		477,022

Total Undiscounted Cash Flows	$	1,257,339
Less: Interest		(317,891	)

Total Operating Lease Liability		939,448
Less: Current Portion of Operating Lease Liability		(145,472	)

Long-Term Portion of Operating Lease Liability	$	793,976

Note 18 – Subsequent Event

During August 2019, the Company reached an agreement with a Canadian-based retailer under which the retailer will acquire the Company’s Canadian-based Party City stores for

174,000

Canadian Dollars and, simultaneously, enter into a

-year supply agreement to purchase product from the Company for such stores and the Canadian-based retailer’s other stores. The transaction is expected to close by October 1, 2019. The proceeds from the sale will be used to paydown debt.

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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, including rent at distribution facilities, 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 June 30, 2019 Compared To Three Months Ended June 30, 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 June 30, 2019 and 2018.


	Three Months Ended June 30,
	2019					2018
	(Dollars in thousands)
Revenues:
Net sales	$	561,702		99.6	%	$	558,101		99.5	%
Royalties and franchise fees		2,189		0.4			2,910		0.5

Total revenues		563,891		100.0			561,011		100.0

Cost of sales		353,056		62.6			329,477		58.7
Wholesale selling expenses		16,884		3.0			17,256		3.1
Retail operating expenses		96,143		17.0			92,094		16.4
Franchise expenses		3,236		0.6			3,980		0.7
General and administrative expenses		41,510		7.4			45,326		8.1
Art and development costs		5,712		1.0			5,732		1.0
Development stage expenses		3,012		0.5			1,695		0.3
Gain on sale/leaseback transaction		(58,381	)	(10.4	)		—		—
Store impairment and restructuring charges		5,234		0.9			—		—

		466,406		82.7			495,560		88.3

Income from operations		97,485		17.3			65,451		11.7
Interest expense, net		30,176		5.4			25,501		4.5
Other expense, net		3,342		0.6			2,532		0.5

Income before income taxes		63,967		11.3			37,418		6.7
Income tax expense		15,962		2.8			9,370		1.7

Net income		48,005		8.5			28,048		5.0
Add: Net income attributable to redeemable securities holder		—		—			410		0.1
Less: Net loss attributable to noncontrolling interests		(69	)	(0.0	)		(29	)	(0.0	)

Net income attributable to common shareholders of Party City Holdco Inc.	$	48,074		8.5	%	$	28,487		5.1	%

Net income per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	0.52				$	0.30
Net income per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	0.51				$	0.29

Revenues

Total revenues for the second quarter of 2019 were $563.9 million and were $2.9 million, or 0.5%, higher than the second quarter of 2018. The following table sets forth the Company’s total revenues for the three months ended June 30, 2019 and 2018.


	Three Months Ended June 30,
	2019						2018
	Dollars in Thousands			Percentage of Total Revenues			Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	289,067			51.3	%	$	285,733			50.9	%
Eliminations		(150,522	)		(26.7	)%		(138,985	)		(24.8	)%

Net wholesale		138,545			24.6	%		146,748			26.2	%
Retail		423,157			75.0	%		411,353			73.3	%

Total net sales		561,702			99.6	%		558,101			99.5	%
Royalties and franchise fees		2,189			0.4	%		2,910			0.5	%

Total revenues	$	563,891			100.0	%	$	561,011			100.0	%

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Retail

Retail net sales during the second quarter of 2019 were $423.2 million and increased $11.8 million, or 2.9%, compared to the second quarter of 2018. Retail net sales at our North American Party City stores totaled $387.3 million and were $11.1 million, or 2.9%, higher than 2018 principally due to the acquisition of franchise and independent stores. During the twelve months ended June 30, 2019, we acquired 44 franchise and independent stores, opened 16 new stores and closed 9 stores. Global retail

e-commerce

sales totaled $35.4 million during the second quarter of 2019 and were $0.3 million, or 0.8%, higher than during the corresponding quarter of 2018. Sales at other store formats totaled $0.5 million during the second quarter of 2019.

Same-store sales for the Party City brand (including North American retail

e-commerce

sales) decreased by 2.1% during the second quarter of 2019, principally due to the ongoing helium shortage and its impact on balloon sales. The North American

e-commerce

sales that are included in our Party City brand comp decreased by 1.5% during the quarter. However, they increased by 14.7% 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 2.1%.

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

Wholesale

Wholesale net sales during the second quarter of 2019 totaled $138.5 million and were $8.2 million, or 5.6%, lower than the second quarter of 2018. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $56.3 million and were $0.8 million, or 1.4%, lower than during 2018. The acquisition of 44 franchise and independent stores during the twelve months ended June 30, 2019 negatively impacted sales as post-acquisition sales to such stores (approximately $4.5 million during the second quarter of 2018) are now eliminated as intercompany sales. Adjusted for the acquisitions, sales to domestic party goods retailers and distributors increased by approximately $3.7 million, or 6.7%, versus the second quarter of 2018. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $18.4 million during the second quarter of 2019 and were $3.8 million, or 17.2%, 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 $63.8 million and were $3.6 million, or 5.3%, lower than in 2018. The decrease was principally due to the impact of foreign currency translation, which negatively impacted sales by approximately $2.5 million.

Intercompany sales to our retail affiliates totaled $150.5 million during the second quarter of 2019 and were $11.5 million higher than during the corresponding quarter of 2018. Intercompany sales represented 52.1% of total wholesale sales during the second quarter of 2019, compared to 48.6% during the second quarter of 2018. The increase was principally due to the acquisition of franchise/independent stores. 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 second quarter of 2019 totaled $2.2 million and were $0.7 million lower than during the second 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 June 30, 2019 and June 30, 2018.


	Three Months Ended June 30,
	2019					2018
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	172,051		40.7	%	$	183,915		44.7	%
Wholesale		36,595		26.4			44,709		30.5

Total	$	208,646		37.1	%	$	228,624		41.0	%

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The gross profit margin on net sales at retail during the second quarter of 2019 was 40.7%. Such percentage was 400 basis points lower than during the corresponding quarter of 2018. The decrease was partially due to markdowns in conjunction with the Company’s “store optimization program” and provisions against inventory recorded in conjunction with such program (see “operating expenses” below for further discussion). Additionally, the decrease was partially due to a flow through of higher freight and distribution costs for product acquired from the Company’s wholesale operations during the second half of 2018 as the China tariffs caused

non-recurring

logistical challenges. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) decreased from 27.6% during the second quarter of 2018 to 27.1% during the second 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 77.6% during the quarter and was slightly lower than the second quarter of 2018.

The gross profit on net sales at wholesale during the second quarters of 2019 and 2018 was 26.4% and 30.5%, respectively. The decrease was principally due to lower high-margin sales of metallic balloons and sales to franchisees (due to the store acquisitions discussed above), as well as the impact of foreign currency on product costs.

Operating expenses

Wholesale selling expenses were $16.9 million during the second quarter of 2019 and were $0.4 million lower than during the corresponding quarter of 2018. Wholesale selling expenses were 12.2% and 11.8% of net wholesale sales during the second quarters of 2019 and 2018, respectively.

Retail operating expenses during the second quarter of 2019 were $96.1 million and were $4.0 million higher than the corresponding quarter of 2018. The increase was principally due to the higher store count (discussed above). Retail operating expenses were 22.7% and 22.4% of retail sales during the second quarters of 2019 and 2018, respectively.

Franchise expenses during the second quarters of 2019 and 2018 were $3.2 million and $4.0 million, respectively.

General and administrative expenses during the second quarter of 2019 totaled $41.5 million and were $3.8 million, or 8.4%, lower than in the second quarter of 2018. The decrease for the second quarter of 2019 was principally due to

non-recurring

consulting costs incurred during the second quarter of 2018. General and administrative expenses as a percentage of total revenues were 7.4% and 8.1% during the second quarters of 2019 and 2018, respectively.

Art and development costs were $5.7 million during the second quarters of 2019 and 2018.

Development stage expenses represent

start-up

costs related to Kazzam (see the 2018 Form

10-K

for further detail).

During June 2019, the Company reported a $58.4 million gain from the sale and leaseback of its main distribution center in Chester, New York and its metallic balloons manufacturing facility in Eden Prairie, Minnesota. The aggregate sale price for the three properties was $128.0 million. Simultaneous with the sale, the Company entered into twenty year leases for each of the facilities.

During the six months ended June 30, 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 six months ended June 30, 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 55 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 second quarter of 2019, the Company recorded a $0.9 million impairment charge for its operating lease asset, a $0.5 million impairment charge for property, plant and equipment and $3.8 million of labor and other costs related to closing the stores.

Interest expense, net

Interest expense, net, totaled $30.2 million during the second quarter of 2019, compared to $25.5 million during the second 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 (see the Company’s 2018 Form

10-K

for discussion of such refinancing).

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Other expense, net

For the second quarters of 2019 and 2018, other expense, net, totaled $3.3 million and $2.5 million, respectively.

Income tax expense

The effective income tax rate for the three months ended June 30, 2019, 25.0%, is higher than the statutory rate primarily due to state taxes.

Six Months Ended June 30, 2019 Compared To Six Months Ended June 30, 2018

The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the six months ended June 30, 2019 and 2018.


	Six Months Ended June 30,
	2019					2018
	(Dollars in thousands)
Revenues:
Net sales	$	1,072,804		99.6	%	$	1,063,209		99.5	%
Royalties and franchise fees		4,203		0.4			5,626		0.5

Total revenues		1,077,007		100.0			1,068,835		100.0

Cost of sales		692,098		64.3			646,443		60.5
Wholesale selling expenses		34,845		3.2			36,043		3.4
Retail operating expenses		191,161		17.7			181,186		17.0
Franchise expenses		6,539		0.6			7,762		0.7
General and administrative expenses		83,435		7.7			93,991		8.8
Art and development costs		11,641		1.1			11,705		1.1
Development stage expenses		5,238		0.5			3,998		0.4
Gain on sale/leaseback transaction		(58,381	)	(5.4	)		—		—
Store impairment and restructuring charges		23,243		2.2			—		—

		989,819		91.9			981,128		91.8

Income from operations		87,188		8.1			87,707		8.2
Interest expense, net		59,433		5.5			48,776		4.6
Other expense, net		4,596		0.4			3,380		0.3

Income before income taxes		23,159		2.2			35,551		3.3
Income tax expense		5,443		0.5			8,666		0.8

Net income		17,716		1.6			26,885		2.5
Add: Net income attributable to redeemable securities holder		—		—			410		0.0
Less: Net loss attributable to noncontrolling interests		(140	)	(0.0	)		(59	)	(0.0	)

Net income attributable to common shareholders of Party City Holdco Inc.	$	17,856		1.7	%	$	27,354		2.6	%

Net income per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	0.19				$	0.28
Net income per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	0.19				$	0.28

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Revenues

Total revenues for the first six months of 2019 were $1,077.0 million and were $8.2 million, or 0.8%, higher than the first half of 2018. The following table sets forth the Company’s total revenues for the six months ended June 30, 2019 and 2018.


	Six Months Ended June 30,
	2019						2018
	Dollars in Thousands			Percentage of Total Revenues			Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	579,368			53.8	%	$	563,560			52.7	%
Eliminations		(307,874	)		(28.6	)%		(275,280	)		(25.8	)%

Net wholesale		271,494			25.2	%		288,280			27.0	%
Retail		801,310			74.4	%		774,929			72.5	%

Total net sales		1,072,804			99.6	%		1,063,209			99.5	%
Royalties and franchise fees		4,203			0.4	%		5,626			0.5	%

Total revenues	$	1,077,007			100.0	%	$	1,068,835			100.0	%

Retail

Retail net sales during the first six months of 2019 were $801.3 million and increased $26.4 million, or 3.4%, compared to the first six months of 2018. Retail net sales at our North American Party City stores totaled $733.4 million and were $26.3 million, or 3.7%, higher than 2018 principally due to the acquisition of franchise and independent stores. During the twelve months ended June 30, 2019, we acquired 44 franchise and independent stores, opened 16 new stores and closed 9 stores. Global retail

e-commerce

sales totaled $67.2 million during the first half of 2019 and were $0.8 million, or 1.1%, lower than during the corresponding period of 2018. Sales at other store formats totaled $0.7 million during the first six months of 2019.

Same-store sales for the Party City brand (including North American retail

e-commerce

sales) decreased by 1.7% during the first six months of 2019, principally due to an ongoing helium shortage and its impact on balloon sales. The North American

e-commerce

sales that are included in our Party City brand comp decreased by 1.3% during the period. However, they increased by 16.6% 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 1.8%.

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 six months of 2019 totaled $271.5 million and were $16.8 million, or 5.8%, lower than the first half of 2018. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $110.6 million and were $4.8 million, or 4.1%, lower than during 2018. The decrease was entirely due to our acquisition of 44 franchise and independent stores during the twelve months ended June 30, 2019; as post-acquisition sales to such stores (approximately $11.3 million during the first half of 2018) are now eliminated as intercompany sales. Adjusted for the acquisitions, sales to domestic party goods retailers and distributors increased by approximately $6.5 million or 5.6%. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $38.0 million during the first half of 2019 and were $5.6 million, or 12.8%, lower than during the corresponding period 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 $122.9 million and were $6.4 million, or 5.0%, lower than in 2018 with foreign currency translation negatively impacting sales by approximately $6 million.

Intercompany sales to our retail affiliates totaled $307.9 million during the first half of 2019 and were $32.6 million higher than during the corresponding period of 2018. Intercompany sales represented 53.1% of total wholesale sales during the first half of 2019, compared to 48.8% during the first half of 2018. The increase was principally due to the acquisition of franchise/independent stores. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

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Royalties and franchise fees

Royalties and franchise fees for the first half of 2019 totaled $4.2 million and were $1.4 million lower than during the first half of 2018 principally due to the acquisition of franchise stores.

Gross Profit

The following table sets forth the Company’s gross profit for the six months ended June 30, 2019 and June 30, 2018.


	Six Months Ended June 30,
	2019					2018
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	308,069		38.4	%	$	330,750		42.7	%
Wholesale		72,637		26.8			86,016		29.8

Total	$	380,706		35.5	%	$	416,766		39.2	%

The gross profit margin on net sales at retail during the first six months of 2019 was 38.4%. Such percentage was 430 basis points lower than during the corresponding period of 2018. The decrease was principally due to markdowns in conjunction with the Company’s “store optimization program” and provisions against inventory recorded in conjunction with such program (see “operating expenses” below for further discussion). Additionally, the decrease was partially due to a flow through of higher freight and distribution costs for product acquired from the Company’s wholesale operations during the second half of 2018 as the China tariffs caused

non-recurring

logistical challenges. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) increased from 27.2% during the first half of 2018 to 27.3% during the first half 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 77.8% during the period and was principally consistent with the first half of 2018.

The gross profit on net sales at wholesale during the first six months of 2019 and 2018 was 26.8% and 29.8%, respectively. The decrease was principally due to lower high-margin sales of metallic balloons and sales to franchisees (due to the store acquisitions discussed above), as well as the impact of foreign currency on product costs.

Operating expenses

Wholesale selling expenses were $34.8 million during the first half of 2019 and were $1.2 million lower than during the corresponding period of 2018. The decrease was primarily due to the impact of foreign currency translation. Wholesale selling expenses were 12.8% and 12.5% of net wholesale sales during the first halves of 2019 and 2018, respectively.

Retail operating expenses during the first six months of 2019 were $191.2 million and were $10.0 million, or 5.5%, higher than the corresponding period of 2018. The increase was principally due to the higher store count (discussed above) and the impact of inflation. Retail operating expenses were 23.9% and 23.4% of retail sales during the first six months of 2019 and 2018, respectively.

Franchise expenses during the first six months of 2019 and 2018 were $6.5 million and $7.8 million, respectively. The decrease was principally due to the franchise acquisitions discussed above.

General and administrative expenses during the first six months of 2019 totaled $83.4 million and were $10.6 million, or 11.2%, lower than in the first six months of 2018. The decrease for the first six months of 2019 was principally due to

non-recurring

consulting costs incurred during 2018. General and administrative expenses as a percentage of total revenues were 7.7% and 8.8% during the first six months of 2019 and 2018, respectively.

Art and development costs were $11.6 million and $11.7 million during the first six months of 2019 and 2018, respectively.

Development stage expenses represent

start-up

costs related to Kazzam (see the 2018 Form

10-K

for further detail).

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During the six months ended June 30, 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 six months ended June 30, 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 55 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 six months of 2019, the Company recorded a $14.1 million impairment charge for its operating lease asset, a $4.7 million impairment charge for property, plant and equipment, $3.8 million of labor and other costs related to closing the stores and $0.7 million of severance.

Interest expense, net

Interest expense, net, totaled $59.4 million during the first half of 2019, compared to $48.8 million during the first six months 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 (see the Company’s 2018 Form

10-K

for discussion of such refinancing).

Other expense, net

For the first six months of 2019 and 2018, other expense, net, totaled $4.6 million and $3.4 million, respectively.

Income tax expense

The effective income tax rate for the six months ended June 30, 2019, 23.5%, is higher than the statutory rate primarily due to state taxes.

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

The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization,

non-cash

purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual 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;

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• although depreciation and amortization are

non-cash

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

•

non-cash

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

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

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

Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted only on a supplemental basis. The reconciliations from net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as follows:


	Three Months Ended June 30, 2019			Three Months Ended June 30, 2018			Six Months Ended June 30, 2019			Six Months Ended June 30, 2018
(Dollars in thousands)
Net income	$	48,005		$	28,048		$	17,716		$	26,885
Interest expense, net		30,176			25,501			59,433			48,776
Income taxes		15,962			9,370			5,443			8,666
Depreciation and amortization		21,884			20,255			43,225			40,812

EBITDA		116,027			83,174			125,817			125,139
Non-cash purchase accounting adjustments		1,756			1,098			2,757			542
Store impairment and restructuring charges (a)		10,628			—			46,266			—
Other restructuring, retention and severance (b)		3,933			(457	)		5,321			2,154
Deferred rent (c)		(338	)		787			(1,488	)		1,155
Closed store expense (d)		507			793			1,098			2,605
Foreign currency losses/(gains), net		133			505			(160	)		442
Stock option expense (e)		371			482			741			942
Non-employee equity based compensation (f)		129			104			258			365
Undistributed income in equity method investments		(4	)		(90	)		(202	)		(301	)
Corporate development expenses (g)		4,349			2,778			7,194			5,352
Non-recurring consulting charges (h)		—			6,869			—			11,619
Refinancing charges (i)		—			—			—			1,146
Restricted stock units – time-based (j)		541			252			933			252
Restricted stock units – performance-based (k)		476			593			476			593
Non-recurring legal settlements/costs		869			—			1,601			—
Gain on sale/leaseback transaction (l)		(58,381	)		—			(58,381	)		—
Other		44			(282	)		291			(251	)

Adjusted EBITDA	$	81,040		$	96,606		$	132,522		$	151,754

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	Three Months Ended June 30, 2019			Three Months Ended June 30, 2018		Six Months Ended June 30, 2019			Six Months Ended June 30, 2018
(Dollars in thousands, except per share amounts)
Income before income taxes	$	63,967		$	37,418	$	23,159		$	35,551
Intangible asset amortization		3,546			3,705		6,975			7,368
Non-cash purchase accounting adjustments		2,459			1,668		3,776			963
Amortization of deferred financing costs and original issuance discounts (i)		1,146			1,210		2,289			2,766
Store impairment and restructuring charges (a)		10,628			—		46,266			—
Other restructuring charges (b)		3,085			—		3,085			—
Non-employee equity based compensation (f)		129			104		258			365
Refinancing charges (i)		36			—		36			800
Non-recurring consulting charges (h)		—			6,869		—			11,619
Stock option expense (e)		371			482		741			942
Gain on sale/leaseback transaction (l)		(58,381	)		—		(58,381	)		—
Restricted stock units - performance-based (k)		476			593		476			593

Adjusted income before income taxes		27,462			52,049		28,680			60,967
Adjusted income tax expense (m)		7,227			12,813		7,342			14,849

Adjusted net income	$	20,235		$	39,236	$	21,338		$	46,118

Adjusted net income per common share – diluted	$	0.22		$	0.40	$	0.23		$	0.47

Weighted-average number of common shares-diluted		93,703,546			97,688,233		93,791,763			97,669,309

(a)

During the six months ended June 30, 2019, the Company initiated a store optimization program under which it plans to close approximately 55 Party City stores during the course of 2019. In conjunction with the program, during the first six months of 2019, the Company recorded the following charges: inventory reserves: $21,285, operating lease asset impairment: $14,149, labor and other costs related to closing the stores: $3,753, property, plant and equipment impairment: $4,680 and severance: $661. The charge for inventory reserves was recorded in cost of sales in the Company’s statement of operations and comprehensive income (loss). The other charges were recorded in store impairment and restructuring charges in the Company’s statement of operations and comprehensive income (loss). See Note 3 in Item 1 for further discussion. Additionally, during the process of liquidating the inventory in such stores, the Company lost margin of approximately $1,738.

(b)	Amounts expensed during 2019 principally relate to executive severance and the write-off of inventory for a section of the Company’s Party City stores that is being restructured.

(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)	Non-cash charges for restricted stock units that vest based on performance conditions.

(l)

During June 2019, the Company reported a $58,381 gain from the sale and leaseback of its main distribution center in Chester, New York and its metallic balloons manufacturing facility in Eden Prairie, Minnesota. The aggregate sale price for the three properties was $128,000. Simultaneous with the sale, the Company entered into twenty year leases for each of the facilities.

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(m)

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 provide assurance, 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 $105.9 million and $23.0 million during the six months ended June 30, 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 $5.6 million during the first six months of 2019, compared to positive cash flows of $75.3 million during the corresponding period of 2018. Changes in operating assets and liabilities during the first six months of 2019 and 2018 resulted in the use of cash of $100.3 million and $98.3 million, respectively.

Net cash provided by investing activities totaled $82.2 million during the six months ended June 30, 2019, as compared to $65.7 million used during the six months ended June 30, 2018. During June 2019, the Company sold and leased back its main distribution center in Chester, New York and its metallic balloons manufacturing facility in Eden Prairie, Minnesota. The net sale price for the properties is included in “Proceeds from disposal of property and equipment” in the Company’s condensed consolidated statement of cash flows. See Note 4 to the Company’s consolidated financial statements for further detail. Capital expenditures during the six months ended June 30, 2019 and 2018 were $31.1 million and $44.4 million, respectively. Retail capital expenditures totaled $17.1 million during 2019. Wholesale capital expenditures during 2019 totaled $14.0 million.

Net cash provided by financing activities was $9.5 million during the six months ended June 30, 2019 and $86.7 million during the first half of 2018. The variance was principally due to less of a need to borrow funds during 2019 due to proceeds from the sale of certain properties (see above).

As of June 30, 2019, the Company had approximately $296 million of availability under the ABL Facility, after considering borrowing base restrictions.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein.

We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly

re-evaluated

and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.

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Goodwill

Goodwill is reviewed for potential impairment on an annual basis or more frequently if circumstances indicate a possible impairment. For purposes of testing goodwill for impairment, reporting units are determined by identifying individual components within our organization which constitute a business for which discrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our operating segments, wholesale and retail, represent our reporting units for the purposes of our goodwill impairment test.

If it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of the reporting unit using a combination of a market approach and an income approach. If such carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to such excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.

During the second quarter of 2019, the Company identified an impairment indicator associated with its market capitalization and performed an interim impairment test on the $509 million of goodwill at its wholesale reporting unit and the $1,151 million of goodwill at its retail reporting unit. The interim impairment test, which was performed using a combination of a market approach and an income approach, concluded that the fair value of the wholesale reporting unit and the retail reporting unit exceeded carrying value by approximately 10% and 20%, respectively. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record impairment charges for the goodwill of such reporting units.

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 six months ended June 30, 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

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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;

•

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.

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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 June 30, 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 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 June 30, 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		Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Party City Holdco Inc.’s Form 8-K dated June 7, 2019)

3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Party City Holdco Inc.’s Form 8-K dated June 7, 2019)

10.1		Purchase and Sale Agreement, dated June 28, 2019, by and between Spirit Realty, L.P. and Amscan Inc., Anagram eden Prairie Property Holdings LLC, and Amscan NM Land, LLC (incorporated by reference to Exhibit 10.1 to Party City Holdco Inc.’s Form 8-K dated July 3, 2019)

10.2		Master Lease Agreement, dated June 28, 2019, by and between Spirit Realty, L.P. and Party City Holdings, Inc. (incorporated by reference to Exhibit 10.2 to Party City Holdco Inc.’s Form 8-K dated July 3, 2019)

10.3		Third Amendment to Term Loan Credit Agreement, dated as of June 28, 2019, by and among Party City Holdings Inc., Party City Corporation, PC Intermediate Holdings, Inc., Deutsche Bank AG New York Branch, as Administrative Agent, and each of the Lenders party thereto (incorporated by reference to Exhibit 10.3 to Party City Holdco Inc.’s Form 8-K dated July 3, 2019)

10.4		Fourth Amendment to ABL Credit Agreement, dated as of June 28, 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 Lenders party thereto (incorporated by reference to Exhibit 10.4 to Party City Holdco Inc.’s Form 8-K dated July 3, 2019)

10.5 †*		Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan

10.6 †*		Form of Restricted Stock Award Agreement under Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan

10.7 †*		Form of Restricted Stock Unit Award Agreement under Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan

10.8 †*		Form of Non-Employee Director Restricted Stock Unit Award Agreement under Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan

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.INS*		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

†	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.