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MarketScreener Homepage  >  Equities  >  Nyse  >  Party City Holdco Inc.    PRTY

PARTY CITY HOLDCO INC.

(PRTY)
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PARTY CITY HOLDCO : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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11/12/2019 | 04:28pm EST
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 approximately 900 locations
(inclusive of franchised stores), we have the only
coast-to-coast
network of party superstores in the U.S. and, through September 30, 2019,
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
expenses, 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 (loss) 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 September 30, 2019 Compared To Three Months Ended
September 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
September 30, 2019 and 2018.

                                                           Three Months Ended September 30,
                                                          2019                          2018
                                                                (Dollars in thousands)
Revenues:
Net sales                                        $  538,345         99.7 %     $ 550,840         99.6 %
Royalties and franchise fees                          1,886          0.3           2,206          0.4

Total revenues                                      540,231        100.0         553,046        100.0
Cost of sales                                       373,413         69.1         349,641         63.2
Wholesale selling expenses                           16,084          3.0          17,538          3.2
Retail operating expenses                           111,595         20.7         103,833         18.8
Franchise expenses                                    3,274          0.6             862          0.2
General and administrative expenses                  43,062          8.0          42,239          7.6
Art and development costs                             5,927          1.1           5,573          1.0
Development stage expenses                            2,728          0.5           1,622          0.3
Store impairment and restructuring charges            2,574          0.5              -            -
Goodwill impairment                                 259,100         48.0              -            -

Total expenses                                      817,757        151.4         521,308         94.3

(Loss) income from operations                      (277,526 )      (51.4 )        31,738          5.7
Interest expense, net                                29,424          5.4          27,705          5.0
Other expense, net                                    2,047          0.4    

5,696 1.0


Loss before income taxes                           (308,997 )      (57.2 )        (1,663 )       (0.3 )
Income tax (benefit) expense                        (27,252 )       (5.0 )  

777 0.1


Net loss                                           (281,745 )      (52.2 )        (2,440 )       (0.4 )
Add: Net loss attributable to redeemable
securities holder                                        -            -               (8 )       (0.0 )
Less: Net loss attributable to noncontrolling
interests                                              (212 )       (0.0 )  

(28 ) (0.0 )


Net loss attributable to common shareholders
of Party City Holdco Inc.                        $ (281,533 )      (52.1 )% 

$ (2,420 ) (0.4 )%


Net loss per share attributable to common
shareholders of Party City Holdco Inc. -
Basic                                            $    (3.02 )$   (0.03 )
Net loss per share attributable to common
shareholders of Party City Holdco Inc. -
Diluted                                          $    (3.02 )$   (0.03 )





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Revenues
Total revenues for the third quarter of 2019 were $540.2 million and were
$12.8 million, or 2.3%, lower than the third quarter of 2018. The following
table sets forth the Company's total revenues for the three months ended
September 30, 2019 and 2018.

                                                         Three Months Ended September 30,
                                                  2019                                      2018
                                   Dollars in         Percentage of          Dollars in         Percentage of
                                    Thousands         Total Revenues          Thousands         Total Revenues
Net Sales:
Wholesale                          $   383,425                   71.0 %      $   424,569                   76.8 %
Eliminations                          (214,547 )                (39.7 )%        (249,409 )                (45.1 )%

Net wholesale                          168,878                   31.3 %          175,160                   31.7 %
Retail                                 369,467                   68.4 %          375,680                   67.9 %

Total net sales                        538,345                   99.7 %          550,840                   99.6 %
Royalties and franchise fees             1,886                    0.3 %            2,206                    0.4 %

Total revenues                     $   540,231                  100.0 %      $   553,046                  100.0 %







Retail
Retail net sales during the third quarter of 2019 were $369.5 million and were
$6.2 million, or 1.7%, lower than during the third quarter of 2018. Retail net
sales at our North American Party City stores totaled $326.8 million and were
$9.5 million, or 2.8%, lower than in the third quarter of 2018 principally due
to the continued impact of the ongoing helium shortage and the closure of 34
stores in conjunction with our 2019 store optimization program. These negative
factors affecting sales were partially offset by the acquisition of six
franchise and independent stores and the opening of nine new stores during the
twelve months ended September 30, 2019, as well as the acquisition of 37
franchise stores throughout the third quarter of 2018. Global retail
e-commerce
sales totaled $36.8 million during the third quarter of 2019 and were
$2.6 million, or 7.6%, higher than during the corresponding quarter of 2018.
Sales at our temporary Halloween City stores totaled $4.8 million and were
$0.3 million or 5.7% lower than in the third quarter of 2018. Sales at other
store formats totaled $1.0 million during the third quarter of 2019.
Same-store sales for the Party City brand (including North American retail
e-commerce
sales) decreased by 2.6% during the third quarter of 2019, principally due to
the impact of the ongoing helium shortage on balloon sales.
Our North American retail
e-commerce
sales, which include our Amazon marketplace sales, increased by 11.6% compared
to the third quarter of 2018 and, when adjusting for the impact of our "buy
online,
pick-up
in store" program (such sales are included in our store sales), increased by
14.8%.
Excluding the impact of
e-commerce,
same-store sales decreased by 3.9%.
Same-store sales percentages were not affected by foreign currency as such
percentages are calculated in local currency.
Wholesale
Wholesale net sales during the third quarter of 2019 totaled $168.9 million and
were $6.3 million, or 3.6%, lower than the third quarter of 2018. Net sales to
domestic party goods retailers and distributors (including our franchisee
network) totaled $65.9 million and were $4.5 million, or 6.4%, lower than during
2018. The acquisition of six franchise and independent stores during the twelve
months ended September 30, 2019, together with the acquisition of 37 franchise
stores late in the third quarter of 2018, negatively impacted sales as
post-acquisition sales to such stores (approximately $2.5 million during the
third quarter of 2018) are now eliminated as intercompany sales. Adjusted for
the acquisitions, sales to domestic party goods retailers and distributors
decreased by approximately $2.0 million, or 2.9%, versus the third quarter of
2018. Net sales of metallic balloons to domestic distributors and retailers
(including our franchisee network) totaled $16.8 million during the third
quarter of 2019 and were $1.1 million, or 6.2%, 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 $86.2 million and were $0.7 million, or
0.8%, lower than in 2018. Foreign currency translation negatively impacted sales
by approximately $4.1 million and more than offset $3.4 million of sales growth
on a constant currency basis.
Intercompany sales to our retail affiliates totaled $214.5 million during the
third quarter of 2019 and were $34.9 million lower than during the corresponding
quarter of 2018. Intercompany sales represented 56.0% of total wholesale sales
during the third quarter of 2019 and were 2.7% lower than during the third
quarter of 2018, principally reflecting the impact of our store optimization
program, strong seasonal
in-stock
positions at our retail stores from the prior year and a reduction in sales of
metallic balloons to our retail operations. 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 third quarter of 2019 totaled $1.9 million
and were $0.3 million lower than during the third 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 September 30, 2019 and September 30, 2018.

                              Three Months Ended September 30,
                          2019                                 2018
             Dollars in       Percentage of       Dollars in       Percentage of
             Thousands          Net Sales         Thousands          Net Sales
Retail      $    128,692                34.8 %   $    151,860                40.4 %
Wholesale         36,240                21.5           49,339                28.2

Total       $    164,932                30.6 %   $    201,199                36.5 %














The gross profit margin on net sales at retail during the third quarter of 2019
was 34.8% or 560 basis points lower than during the corresponding quarter of
2018. The decrease was partially due to the increased costs of helium, markdowns
in conjunction with the Company's "store optimization program" (see "operating
expenses" below for further discussion) and the impact of aggressive promotional
programs during the quarter. 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) of 25.4%
during the third quarter of 2019 was comparable to the third quarter of 2018.
Our wholesale share of shelf at our Party City stores and our North American
retail
e-commerce
operations (i.e., the percentage of our retail product cost of sales supplied by
our wholesale segment) was 78.3% during the quarter or 1.1% higher than during
the third quarter of 2018.
The gross profit margin on net sales at wholesale during the third quarters of
2019 and 2018 was 21.5% and 28.2%, respectively. The decreased wholesale gross
profit margin was principally due to a significant reduction in high-margin
sales of metallic balloons and sales to franchisees (due to the store
acquisitions discussed above) and, to a lesser extent, the deleveraging of
distribution and manufacturing costs.
Operating expenses
Wholesale selling expenses were $16.1 million during the third quarter of 2019
and were $1.5 million lower than during the corresponding quarter of 2018, due
partially to the impact of foreign currency translation. Wholesale selling
expenses were 9.5% and 10.0% of net wholesale sales during the third quarters of
2019 and 2018, respectively.
Retail operating expenses during the third quarter of 2019 were $111.6 million
and were $7.8 million higher than the corresponding quarter of 2018. The
increase was principally due to increases in advertising and e-commerce expenses
as well as higher average store count, including temporary Halloween stores,
during the third quarter of 2019. Retail operating expenses were 30.2% and 27.6%
of retail sales during the third quarters of 2019 and 2018, respectively.
Franchise expenses during the third quarters of 2019 and 2018 were $3.2 million
and $0.9 million, respectively. Franchise expenses during the third quarter of
2018 reflects a
non-recurring
adjustment that lowered franchise intangible asset amortization expense.
General and administrative expenses during the third quarter of 2019 totaled
$43.1 million and were $0.8 million, or 1.9%, higher than in the third quarter
of 2018 principally due to increases in compensation and other impacts of
inflation, partially offset by the impact of foreign currency translation.
General and administrative expenses as a percentage of total revenues were 8.0%
and 7.6% during the third quarters of 2019 and 2018, respectively.
Art and development costs were $5.9 million and $5.6 million during the third
quarters of 2019 and 2018, respectively.

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Development stage expenses represent
start-up
costs related to Kazzam (see the 2018 Form
10-K
for further detail).
During the nine months ended September 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
first nine months of 2019, after careful consideration and evaluation of 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 third quarter of
2019, the Company recorded $2.6 million of labor and other costs related to
closing the stores.
Goodwill impairment charges for the three months ended September 30, 2019 were
$259.1 million. The
non-cash
pre-tax
goodwill impairment charges were the result of a sustained decline in the
Company's market capitalization. There were no goodwill impairment charges for
the three months ended September 30, 2018. See Note 4 to the condensed
consolidated financial statements for further discussion.
Interest expense, net
Interest expense, net, totaled $29.4 million during the third quarter of 2019,
compared to $27.7 million during the third quarter of 2018. The variance
principally relates to the impact of the Company's August 2018 refinancing (see
the Company's 2018 Form
10-K
for discussion of such refinancing) and higher average borrowings and rates
under our Term Loan and ABL credit facilities.
Other expense, net
For the third quarters of 2019 and 2018, other expense, net, totaled
$2.0 million and $5.7 million, respectively. During the third quarter of 2018,
other expense included costs associated with the August 2018 refinancing of our
debt portfolio.
Income tax (benefit) expense
The effective income tax rate for the three months ended September 30, 2019,
8.8%, is lower than the statutory rate primarily due the non-deductible portions
of the goodwill impairment charges noted above.

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Nine Months Ended September 30, 2019 Compared To Nine Months Ended September 30,
2018
The following table sets forth the Company's operating results and operating
results as a percentage of total revenues for the nine months ended
September 30, 2019 and 2018.

                                                           Nine Months Ended September 30,
                                                         2019                           2018
                                                               (Dollars in thousands)
Revenues:
Net sales                                      $  1,611,149         99.6 %    $ 1,614,049         99.5 %
Royalties and franchise fees                          6,089          0.4            7,832          0.5

Total revenues                                    1,617,238        100.0        1,621,881        100.0
Cost of sales                                     1,065,511         65.9          996,084         61.4
Wholesale selling expenses                           50,929          3.1           53,581          3.3
Retail operating expenses                           302,756         18.7          285,019         17.6
Franchise expenses                                    9,813          0.6            8,624          0.5
General and administrative expenses                 126,497          7.8          136,230          8.4
Art and development costs                            17,568          1.1           17,278          1.1
Development stage expenses                            7,966          0.5            5,620          0.3
Gain on sale/leaseback transaction                  (58,381 )       (3.6 )             -            -
Store impairment and restructuring charges           25,817          1.6               -            -
Goodwill impairment                                 259,100         16.0               -            -

Total expenses                                    1,807,576        111.8        1,502,436         92.6

(Loss) income from operations                      (190,338 )      (11.8 )        119,445          7.4
Interest expense, net                                88,857          5.5           76,481          4.7
Other expense, net                                    6,643          0.4            9,076          0.6

(Loss) income before income taxes                  (285,838 )      (17.7 )         33,888          2.1
Income tax (benefit) expense                        (21,809 )       (1.4 )          9,443          0.6

Net (loss) income                                  (264,029 )      (16.3 )         24,445          1.5
Add: Net income attributable to redeemable
securities holder                                        -            -               402          0.0
Less: Net loss attributable to
noncontrolling interests                               (352 )       (0.0 )  

(87 ) 0.0


Net (loss) income attributable to common
shareholders of Party City Holdco Inc.         $   (263,677 )       16.3 %  

$ 24,934 1.5 %


Net (loss) income per share attributable to
common shareholders of Party City Holdco
Inc. - Basic                                   $      (2.83 )$      0.26
Net (loss) income per share attributable to
common shareholders of Party City Holdco
Inc. - Diluted                                 $      (2.83 )$      0.26









Revenues
Total revenues for the first nine months of 2019 were $1,617.2 million and were
$4.6 million lower than the first nine months of 2018. The following table sets
forth the Company's total revenues for the nine months ended September 30, 2019
and 2018.

                                                         Nine Months Ended September 30,
                                                  2019                                      2018
                                   Dollars in         Percentage of          Dollars in         Percentage of
                                    Thousands         Total Revenues          Thousands         Total Revenues
Net Sales:
Wholesale                          $   962,793                   61.4 %      $   988,129                   60.9 %
Eliminations                          (522,421 )                (34.2 )%        (524,689 )                (32.3 )%

Net wholesale                          440,372                   27.2 %          463,440                   28.6 %
Retail                               1,170,777                   72.4 %        1,150,609                   70.9 %

Total net sales                      1,611,149                   99.6 %        1,614,049                   99.5 %
Royalties and franchise fees             6,089                    0.4 %            7,832                    0.5 %

Total revenues                     $ 1,617,238                  100.0 %      $ 1,621,881                  100.0 %















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Retail
Retail net sales during the first nine months of 2019 were $1,170.8 million and
increased $20.2 million or 1.8% compared to the first nine months of 2018.
Retail net sales at our North American Party City stores totaled
$1,060.3 million and were $16.9 million, or 1.6%, higher than 2018, principally
due to the acquisition of six franchise and independent stores and the opening
of nine new stores during the twelve months ended September 30, 2019, as well as
the acquisition of 37 franchise stores late in the third quarter of 2018. These
positive factors were partially offset by the closure of 34 stores in the second
and third quarters, in conjunction with our 2019 store optimization program and
the continued impact of the ongoing helium shortage. Global retail
e-commerce
sales totaled $104.0 million during the first nine months of 2019 and were
$1.9 million, or 1.9%, higher than during the corresponding period of 2018.
Sales at our temporary Halloween City stores totaled $4.8 million and were
$0.3 million or 5.7% lower than during the first nine months of 2018. Sales at
other store formats totaled $1.7 million during the first nine months of 2019.
Same-store sales for the Party City brand (including North American retail
e-commerce
sales) decreased by 2.0% during the first nine months of 2019, principally due
to impact of the ongoing helium shortage on balloon sales.
Our North American retail
e-commerce
sales, which include our Amazon marketplace sales, increased by $2.7 million or
3.2% compared to the first nine months of 2018 and, when adjusting for the
impact of our "buy online,
pick-up
in store" program (such sales are included in our store sales), increased by
16.0%.
Excluding the impact of
e-commerce,
same-store sales decreased by 2.4%.
Same-store sales percentages were not affected by foreign currency as such
percentages are calculated in local currency.
Wholesale
Wholesale net sales during the first nine months of 2019 totaled $440.4 million
and were $23.1 million, or 5.0% lower than during the first nine months of 2018.
Net sales to domestic party goods retailers and distributors (including our
franchisee network) totaled $176.5 million and were $9.3 million, or 5.0% lower
than during 2018. The decrease was partially due to our acquisition of six
franchise and independent stores during the twelve months ended September 30,
2019, together with the acquisition of 37 franchise stores throughout the third
quarter of 2018; as post-acquisition sales to such stores (approximately
$13.7 million during the first nine months of 2018) are now eliminated as
intercompany sales. Adjusted for the acquisitions, sales to domestic party goods
retailers and distributors increased by approximately $4.4 million or 2.3%. Net
sales of metallic balloons to domestic distributors and retailers (including our
franchisee network) totaled $54.7 million during the first nine months of 2019
and were $6.7 million, or 10.9%, 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 $209.1 million and were $7.1 million, or 3.3%, lower than
in 2018. Foreign currency translation negatively impacted sales by approximately
$10.0 million and more than offset $2.9 million in sales growth on a constant
currency basis.
Intercompany sales to our retail affiliates totaled $522.4 million during the
nine months ended September 30, 2019 and were $2.3 million lower than during the
corresponding period of 2018. Intercompany sales represented 55.6% of total
wholesale sales during the first nine months of 2019, compared to 53.1% during
the comparable period of 2018. The increase in percentage was principally due to
the impact of franchise/independent store acquisitions, partially offset by the
impact of strong season
in-stock
positions from the prior year and a reduction in sales of metallic balloons to
our retail operations. 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 nine months ended September 30, 2019
totaled $6.1 million and were $1.7 million lower than during the comparable
period of 2018 principally due to the acquisition of franchise stores.

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Gross Profit
The following table sets forth the Company's gross profit for the nine months
ended September 30, 2019 and September 30, 2018.

                               Nine Months Ended September 30,
                          2019                                 2018
             Dollars in       Percentage of       Dollars in       Percentage of
             Thousands          Net Sales         Thousands          Net Sales
Retail      $    436,761                37.3 %   $    482,609                41.9 %
Wholesale        108,877                24.7          135,356                29.2

Total       $    545,638                33.9 %   $    617,965                38.3 %














The gross profit margin on net sales at retail during the first nine months of
2019 was 37.3%. Such percentage was 460 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) and the impact of an aggressive coupon
program during the third quarter of 2019. 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) was
26.7% during the period, or 10 basis points higher than during the during the
first nine months of 2018. Our wholesale share of shelf at our Party City stores
and our North American retail
e-commerce
operations (i.e., the percentage of our retail product cost of sales supplied by
our wholesale segment) was 78.0% during the period, or 20 basis points higher
than the nine months ended September 30, 2018.
The gross profit on net sales at wholesale during the first nine months of 2019
and 2018 was 24.7% and 29.2%, respectively. The decrease was principally due to
the decrease in high-margin sales of metallic balloons and lower sales to
franchisees (due to the store acquisitions discussed above).
Operating expenses
Wholesale selling expenses were $50.9 million during the first nine months of
2019 and were $2.7 million or 4.9% lower than during the corresponding period of
2018, due partially to the impact of foreign currency translation. Wholesale
selling expenses were 11.6% of net wholesale sales during each of the first nine
months of 2019 and 2018.
Retail operating expenses during the first nine months of 2019 were
$302.8 million and were $17.7 million, or 6.2%, higher than the corresponding
period of 2018. The increase was principally due to higher average store count
during the first nine months of 2019 as well as an increase in advertising,
e-commerce and information technology related expenses compared to the
corresponding period in 2018. Retail operating expenses were 25.9% and 24.8% of
retail sales during the first nine months of 2019 and 2018, respectively.
Franchise expenses during the first nine months of 2019 and 2018 were
$9.8 million and $8.6 million, respectively. Franchise expenses for 2018 reflect
a third quarter
non-recurring
adjustment that lowered franchise intangible asset amortization expense.
General and administrative expenses during the first nine months of 2019 totaled
$126.5 million and were $9.7 million, or 7.1%, lower than in the first nine
months of 2018. The decrease for the first nine months of 2019 was principally
due to
non-recurring
consulting costs and
non-recurring
executive severance charges incurred during 2018. General and administrative
expenses as a percentage of total revenues were 7.8% and 8.4% during the first
nine months of 2019 and 2018, respectively.
Art and development costs were $17.6 million and $17.3 million during the first
nine 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).
During September 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.

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During the nine months ended September 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
first nine months of, 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
nine 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, $6.3 million of labor and other costs related to closing the
stores and $0.7 million of severance.
Goodwill impairment charges for the nine months ended September 30, 2019
were $259.1 million. The
non-cash
pre-tax
 goodwill impairment charges were the result of a sustained decline in the
Company's market capitalization. There was no goodwill impairment for the nine
months ended September 30, 2018. See Note 4 to the condensed consolidated
financial statements for further discussion.
Interest expense, net
Interest expense, net, totaled $88.9 million during the first nine months of
2019, compared to $76.5 million during the comparable period of 2018. The
variance principally relates to the impact of the Company's August 2018
refinancing (see the Company's 2018 Form
10-K
for discussion of such refinancing) and the impact of borrowings and average
rates under our Term Loan and ABL credit facilities.
Other expense, net
For the first nine months of 2019 and 2018, other expense, net, totaled
$6.6 million and $9.1 million, respectively. During the first nine months of
2018, other expense included costs associated with the August 2018 refinancing
of our debt portfolio.
Income tax expense
The effective income tax rate for the nine months ended September 30, 2019,
7.6%, is lower than the statutory rate primarily due to the non-deductible
portions of the goodwill impairment charges noted above.
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;










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• they do not reflect changes in, or cash requirements for, the Company's

        working capital needs;








• adjusted EBITDA does not reflect the significant interest expense, or the

cash requirements necessary to service interest or principal payments, on

        the Company's indebtedness;









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









     •  non-cash

compensation is and will remain a key element of the Company's overall

long-term incentive compensation package, although the Company excludes it

        as an expense when evaluating its core operating performance for a
        particular period;









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








• other companies in the Company's industry may calculate adjusted EBITDA,

adjusted net income and adjusted net income per common share differently

than the Company does, limiting its usefulness as a comparative measure.

Because of these limitations, adjusted EBITDA, adjusted net income and adjusted
net income per common share - diluted should not be considered in isolation or
as substitutes for performance measures calculated in accordance with GAAP. We
compensate for these limitations by relying primarily on our GAAP results and
using adjusted EBITDA, adjusted net income and adjusted net 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       Three Months Ended       Nine Months Ended       Nine Months Ended
                                                     September 30, 2019       September 30, 2018      September 30, 2019       September 30, 2018
(Dollars in thousands)
Net (loss) income                                    $          (281,745 )   $             (2,440 )   $          (264,029 )   $             24,445
Interest expense, net                                             29,424                   27,705                  88,857                   76,481
Income taxes                                                     (27,252 )                    777                 (21,809 )                  9,443
Depreciation and amortization                                     19,155                   16,974                  62,380                   57,786

EBITDA                                                          (260,418 )                 43,016                (134,601 )                168,155
Non-cash
purchase accounting adjustments                                       -                     2,154                   2,757                    2,696
Store impairment and restructuring charges (a)                     8,694                       -                   54,960                       -
Other restructuring, retention and severance (b)                     (73 )                    951                   5,248                    3,105
Goodwill impairment (c)                                          259,100                       -                  259,100                       -
Deferred rent (d)                                                    446                    2,468                  (1,042 )                  3,623
Closed store expense (e)                                           2,326                      825                   3,424                    3,430
Foreign currency losses/(gains), net                                 646                     (314 )                   486                      128
Stock option expense (f)                                             409                      550                   1,150                    1,492

Non-employee

equity-based compensation (g)                                        128                      (13 )                   386                      352
Undistributed (loss) income in equity method
investments                                                            7                     (279 )                  (195 )                   (580 )
Corporate development expenses (h)                                 4,588                    3,057                  11,782                    8,409
Non-recurring
consulting charges (i)                                                -                       624                      -                    12,243
Refinancing charges (j)                                               -                     5,091                      -                     6,237
Restricted stock units - time-based (k)                              610                      470                   1,543                      722
Restricted stock units - performance-based (l)                       560                      889                   1,036                    1,482
Non-recurring                                                                                                                                    -
legal settlements/costs
                                                                     194                       -                    1,795
Gain on sale/leaseback transaction (m)                                -                        -                  (58,381 )                     -
Other                                                                (75 )                    (44 )                   217                     (295 )

Adjusted EBITDA                                      $            17,142     $             59,445     $           149,666     $            211,199











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                                              Three Months        Three Months         Nine Months         Nine Months
                                                  Ended               Ended               Ended               Ended
                                              September 30,       September 30,       September 30,       September 30,
                                                  2019                2018                2019                2018
(Dollars in thousands, except per share
amounts)
(Loss) income before income taxes            $      (308,997 )$        (1,663 )$      (285,838 )$        33,888
Intangible asset amortization                          3,553                 591              10,528               7,959

Non-cash

purchase accounting adjustments                          424               1,659               4,200               2,622
Amortization of deferred financing costs
and original issuance discounts (j)                    1,222               6,268               3,511               9,834
Store impairment and restructuring charges
(a)                                                    8,694                  -               54,960                  -
Other restructuring charges (b)                         (263 )               809               2,822                 809
Goodwill impairment (c)                              259,100                  -              259,100                  -
Non-employee
equity-based compensation (g)                            128                 (13 )               386                 352
Refinancing charges (j)                                   -                   -                   36                  -
Non-recurring
consulting charges (i)                                    -                  624                  -               12,243
Stock option expense (f)                                 409                 550               1,150               1,492
Gain on sale/leaseback transaction (m)                    -                   -              (58,381 )                -
Restricted stock units - performance-based
(l)                                                      560                 889               1,036               1,482

Adjusted (loss) income before income taxes           (35,170 )             9,714              (6,490 )            70,681
Adjusted income tax (benefit) expense (n)             (9,459 )             2,364              (2,117 )            17,213

Adjusted net (loss) income                   $       (25,711 )   $         7,350     $        (4,373 )$        53,468

Adjusted net (loss) income per common
share - diluted                              $         (0.28 )   $          

0.08 $ (0.05 ) $ 0.55


Weighted-average number of common
shares-diluted                                    93,346,448          97,714,252          93,271,392          97,684,290








(a) During the nine months ended September 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 nine 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: $6,327,

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 (loss) income. The other charges

were recorded in store impairment and restructuring charges in the Company's

statement of operations and comprehensive (loss) income. 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 $7,858.








(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) As a result of a sustained decline in market capitalization, the Company

    recognized a
    non-cash
    pre-tax
    goodwill impairment charge at September 30, 2019 of $259,100.








(d) 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.








(e) Charges incurred related to closing and relocating stores in the ordinary

    course of business.









(f) Represents
    non-cash
    charges related to stock options.








(g) Principally represents shares of Kazzam awarded to Ampology as compensation

    for Ampology's services. See the 2018 Form
    10-K
    for further discussion.








(h) 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).








(i) Non-recurring

    consulting charges related to the Company's retail operations.








(j) During 2018, the Company amended its credit facilities. In conjunction with

the amendments, 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.










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(k) Non-cash

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

(l) Non-cash

charges for restricted stock units that vest based on performance conditions.

(m) 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.








(n) 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 twelve 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 $182.3 million and $86.2 million
during the nine months ended September 30, 2019 and 2018, respectively. The
variance principally reflects the net loss from operations for the nine months
ended September 30, 2019 compared to the net income for the nine month ended
September 30, 2018. Net cash flows used in operating activities before changes
in operating assets and liabilities were $23.2 million during the first nine
months of 2019, compared to positive cash flows of $101.2 million during the
corresponding period of 2018. Changes in operating assets and liabilities during
the first nine months of 2019 and 2018 resulted in the use of cash of
$159.1 million and $187.4 million, respectively.
Net cash provided by investing activities totaled $58.6 million during the nine
months ended September 30, 2019, as compared to $129.3 million used during the
nine months ended September 30, 2018. During September 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 5 to the Company's consolidated financial statements for further
detail. Capital expenditures during the nine months ended September 30, 2019 and
2018 were $45.8 million and $65.5 million, respectively. Retail capital
expenditures totaled $25.8 million during 2019. Wholesale capital expenditures
during 2019 totaled $20.0 million.
Net cash provided by financing activities was $97.8 million during the nine
months ended September 30, 2019 and $210.1 million during the first nine months
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 September 30, 2019, the Company had approximately $152 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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GoodwillGoodwill 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 third quarter of 2019, the Company identified an impairment indicator
associated with its market capitalization and performed an interim impairment
test on the goodwill at its retail and wholesale reporting units. As a result,
the Company recorded a $259.1 million goodwill impairment charge. See footnote 4
to the condensed consolidated financial statements for further discussion.
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
additional 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 nine months ended September 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 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

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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.
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.

                                       37

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses

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