YANKEE HOLDING CORP.
Indicate by check mark whether each 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 such registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YCC Holdings LLC and Yankee Holding Corp. are voluntary filers of reports required of companies with public securities under Section 13 or 15(d) of the Securities Exchange Act of 1934, and they will have filed all reports which would have been required of them during the past 12 months had they been subject to such provisions.
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that such registrant was required to submit and post such files).
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
YCC Holdings LLC does not issue common stock but has one member’s interest issued and outstanding. YCC Holdings LLC’s sole member is Yankee Candle Investments LLC.
As of May 4, 2012, there were 497,981 shares of Yankee Holding Corp. common stock, $0.01 par value, outstanding, all of which are owned by YCC Holdings LLC.
Yankee Holding Corp. meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
This quarterly report is a combined report of YCC Holdings LLC (“YCC Holdings”) and Yankee Holding Corp. (“Holding Corp.”), a direct 100% owned subsidiary of YCC Holdings. Unless the context indicates otherwise, any reference in this report to the “Companies,” “we,” “us” and “our” refers to YCC Holdings together with its direct and indirect subsidiaries, including Holding Corp.
The principal subsidiary of YCC Holdings and Holding Corp. is The Yankee Candle Company, Inc. (together with its subsidiaries, “Yankee Candle”). All of the operating results of YCC Holdings and Holding Corp. are derived from the operating results of Yankee Candle. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. In addition, separate financial statements for each company are included in Part I, Item 1.
This quarterly report contains a number of forward-looking statements. Any statements contained herein, including without limitation statements to the effect that together the Companies or their management “believes”, “expects”, “anticipates”, “plans” and similar expressions, that relate to prospective events or developments should be considered forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Operating Results”. Management undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
1. BASIS OF PRESENTATION, ORGANIZATION AND CURRENT EVENTS
The unaudited interim condensed consolidated financial statements of YCC Holdings LLC (“YCC Holdings”) and Yankee Holding Corp. (“Holding Corp.” together with YCC Holdings and its direct and indirect subsidiaries the “Companies”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”). The financial information included herein is unaudited; however, in the opinion of management such information reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position, results of operations, and cash flows as of the date and for the periods indicated. All intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.
The accompanying unaudited condensed consolidated financial statements of YCC Holdings and Holding Corp. should be read in conjunction with the audited consolidated financial statements of YCC Holdings and Holding Corp. for the year ended December 31, 2011 included in the Companies Annual Report on Form 10-K.
YCC Holdings and Holding Corp. are holding companies with no direct operations. Their principal assets are the indirect equity interests in The Yankee Candle Company, Inc. (“Yankee Candle”), and all of their operations are conducted through Yankee Candle, the wholly owned operating subsidiary of Holding Corp. Holding Corp. is a wholly owned subsidiary of YCC Holdings. YCC Holdings is a wholly owned subsidiary of Yankee Candle Investments LLC (“Yankee Investments”), which is in turn a wholly owned subsidiary of Yankee Candle Group LLC (“Yankee Group”). See the entity chart below:
2. RECENT ACCOUNTING PRONOUNCEMENTS
3. INVENTORY
The Companies value their inventory on the first–in first–out (“FIFO”) basis. The components of inventory were as follows (in thousands):
4. GOODWILL AND INTANGIBLE ASSETS
The Companies have determined that their tradenames have an indefinite useful life and, therefore, are not being amortized. In accordance with Accounting Standards Codification (“ASC”) Topic 350 “Intangibles - Goodwill and Other,” goodwill and indefinite lived intangible assets are not amortized but are subject to an annual impairment test. There were no changes in the carrying amount of goodwill during the thirteen weeks ended March 31, 2012 and April 2, 2011.
The carrying amount and accumulated amortization of intangible assets consisted of the following (in thousands):
Total amortization expense from finite–lived intangible assets was $1.3 million and $3.1 million for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. These intangible assets are amortized on a straight line basis. Favorable lease agreements are amortized over the remaining lease term of each respective lease.
5. LONG-TERM DEBT
Long-term debt consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
As of March 31, 2012, Yankee Candle’s senior secured credit facility (the “Senior Secured Credit Facility”) consisted of a $650.0 million senior secured term loan facility (the “Term Facility”) with outstanding borrowings of $388.1 million, maturing on February 6, 2014 and a senior secured revolving credit facility (“Revolving Facility”) for $140.0 million, which expires on February 6, 2013. Amounts repaid under the Term Facility cannot be reborrowed. In April 2011, Yankee Candle entered into a Joinder Agreement to the Revolving Facility which provided a total of $15.0 million in new revolving loan commitments increasing Yankee Candle’s total revolving loan capacity under the Revolving Facility from $125.0 million to $140.0 million. See Note 13 “Subsequent Events,” for a discussion of the refinancing of Yankee Candle’s Senior Secured Credit Facility.
All borrowings under Yankee Candle’s Senior Secured Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at Yankee Candle’s option, (i) the higher of (a) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (b) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. In addition to paying interest on outstanding principal under the senior secured credit facility, Yankee Candle is required to pay a commitment fee to the lenders in respect of unutilized loan commitments at a rate of 0.50% per annum. As of March 31, 2012, the weighted average combined interest rate on the Term Facility and the Revolving Facility was 4.16%.
Yankee Candle's Senior Secured Credit Facility contains a financial covenant which requires that Yankee Candle maintain at the end of each fiscal quarter, commencing with the quarter ended December 31, 2011 through the quarter ending December 31, 2013, a consolidated total secured debt (net of cash and cash equivalents not to exceed $30.0 million) to Consolidated Adjusted EBITDA ratio of no more than 2.75 to 1.00. As of March 31, 2012, Yankee Candle's actual secured leverage ratio was 2.08 to 1.00, as defined. As of March 31, 2012, total secured debt (including Yankee Candle's capital lease obligations of $5.3 million and net of $5.7 million in cash) was approximately $402.7 million. Under Yankee Candle's Senior Secured Credit Facility, Consolidated Adjusted EBITDA is defined as net income plus, interest, taxes, depreciation and amortization, further adjusted to add back extraordinary, unusual or non-recurring losses, non-cash stock option expense, fees and expenses related to the Merger, fees and expenses under the Management Agreement with our equity sponsor, restructuring charges or reserves, as well as other non-cash charges, expenses or losses, and further adjusted to subtract extraordinary, unusual or non-recurring gains, other non-cash income or gains, and certain cash contributions to our common equity.
As of March 31, 2012, Yankee Candle had outstanding letters of credit of $2.1 million and $15.0 million outstanding under the Revolving Facility, leaving $122.9 million in availability under the Revolving Facility.
See Note 13, “Subsequent Events,” for a description of the refinancing of the Senior Secured Credit Facility.
Yankee Candle's senior notes due 2015 (the “Senior Notes”) bear interest at a per annum rate equal to 8.50%. Interest is paid every six months on February 15 and August 15. Yankee Candle’s senior subordinated notes due 2017 (the “Senior Subordinated Notes”) bear interest at a per annum rate equal to 9.75%. Interest is paid every six months on February 15 and August 15. The Senior Notes mature on February 15, 2015 and the Senior Subordinated Notes mature on February 15, 2017. In April 2012, $315.0 million of the Senior Notes were redeemed in connection with the refinancing of the Senior Secured Credit Facility. See Note 13, “Subsequent Events,” for a complete description.
The indentures governing the senior notes and Senior Subordinated Notes restrict the ability of Holding Corp., Yankee Candle and most or all of Yankee Candle’s subsidiaries to: incur additional debt; pay dividends or make other distributions on the Company's capital stock or repurchase capital stock or subordinated indebtedness; make investments or other specified restricted payments; create liens; sell assets and subsidiary stock; enter into transactions with affiliates; and enter into mergers, consolidations and sales of substantially all assets.
Obligations under the Senior Notes are guaranteed on an unsecured senior basis and obligations under the Senior Subordinated Notes are guaranteed on an unsecured senior subordinated basis, by Holding Corp. and Yankee Candle's existing and future domestic subsidiaries. If Yankee Candle cannot make any payment on either or both series of notes, the guarantors must make the payment instead.
In the event of certain change in control events specified in the indentures governing these notes, Yankee Candle must offer to repurchase all or a portion of such notes at 101% of the principal amount of the such notes on the date of purchase, plus any accrued and unpaid interest to the date of repurchase.
In February 2011, YCC Holdings and Yankee Finance co-issued $315.0 million of Senior PIK Notes pursuant to an Indenture at a discount of $6.3 million for net proceeds of $308.7 million. Issuance costs related to the Senior PIK Notes were $9.7 million, of which $7.8 million were paid for by YCC Holdings and $1.9 million were paid for by Holding Corp.
Cash interest on the Senior PIK Notes accrues at a rate of 10.25% per annum, and PIK Interest (defined below) accrues at the cash interest rate plus 0.75%. YCC Holdings is required to pay interest on the Senior PIK Notes entirely in cash interest, unless the conditions described in the indenture are satisfied with respect to the related interest period, in which case, YCC Holdings may pay interest on the Senior PIK Notes for such interest period by increasing the principal amount of the Senior PIK Notes or by issuing new PIK Notes for up to the entire amount of the interest payment (in each case, “PIK Interest”) to the extent described in the related indenture.
YCC Holdings is indirectly dependent upon dividends from Yankee Candle to generate the funds necessary to meet its outstanding debt service obligations. Neither Yankee Candle nor Holding Corp. guarantees the Senior PIK Notes. Yankee Candle is not obligated to pay dividends to Holding Corp. and Holding Corp. is not obligated to pay dividends to YCC Holdings. Yankee Candle’s ability to pay dividends to Holding Corp. to permit Holding Corp. to pay dividends to YCC Holdings was restricted at March 31, 2012 by Yankee Candle’s Senior Secured Credit Facility and the indentures governing the senior notes and senior subordinated notes. See Note 13 “Subsequent Events,” for a discussion of the refinancing of Yankee Candle’s Senior Secured Credit Facility.
As of March 31, 2012, the ability of Yankee Candle to make dividends to Yankee Holdings was limited under the Senior Secured Credit Facility based upon available excess cash flow defined as the aggregate cumulative amount of excess cash flow for all fiscal years subsequent to the date of the credit agreement (February 2007) that is not required to prepay the term debt. On an annual basis, Yankee Candle is required to prepay the term debt by 50% of excess cash flow, which percentage is reduced to 25% if the consolidated total leverage ratio (as defined in the Senior Secured Credit Facility) is greater than 4.0 to 1.0 and not greater than 5.0 to 1.0. Yankee Candle is not required to make a payment if the consolidated total leverage ratio is not greater than 4.0 to 1.0.
For the fifty-two weeks ended December 31, 2011, Yankee Candle’s required excess cash flow payment was $12.0 million. This amount was classified as short-term debt on the accompanying condensed consolidated balance sheet at December 31, 2011. As of March 31, 2012, the $12.0 million was classified as long-term debt since the amount was refinanced on a long term basis in April 2012. See Note 13, “Subsequent Events,” for additional details related to the Company’s April 2012 refinancing.
The indentures governing Yankee Candle's Senior Notes and Senior Subordinated Notes permit Yankee Candle to pay dividends to Holding Corp. if: (i) there is no default or event of default under the indentures governing Yankee Candle’s notes; (ii) Yankee Candle would have a fixed charge coverage ratio of at least 2.0 to 1.0; and (iii) such dividend, together with the aggregate amount of all other “restricted payments” (as defined in such indentures) made by Yankee Candle and its restricted subsidiaries after February 6, 2007 (excluding certain restricted payments), is less than the sum (a) 50% of the Consolidated Net Income (as defined in such indentures) of Yankee Candle for the period (taken as one accounting period) from December 31, 2006 to the end of Yankee Candle’s most recently ended fiscal quarter for which internal financial statements are available at the time of such dividend (or, in the case such Consolidated Net Income for such period is a deficit, minus 100% of such deficit), plus (b) the proceeds from specified equity contributions or issuances of equity.
In addition to the capacity described above, Yankee Candle has a “basket” of $35.0 million under the indentures from which it may make dividends in amount not to exceed $35.0 million (since the date of the issuance of Yankee Candle’s notes), so long there is no default or event of defaults under the indentures. The ability of Yankee Candle and Holding Corp. to pay dividends to YCC Holdings and thus pay cash interest on the Senior PIK Notes is limited by Delaware law.
As of December 31, 2011, the amount available for dividends from Yankee Candle to YCC Holdings was approximately $153.0 million. During the thirteen weeks ended March 31, 2012 Holding Corp. paid a dividend of $16.2 million to YCC Holdings to fund interest payments for the Senior PIK Notes, which decreased the amount available for future dividends.
6. MEMBER’S DEFICIT, STOCKHOLDER’S EQUITY AND EQUITY-BASED COMPENSATION
In March 2012, the Board of Managers approved the issuance of 13,650 Class C common units to Vice President’s and above. These Class C common units are partially performance based and generally vest as follows, subject to the terms of the applicable agreements: (i) 25% of the units granted shall vest on a daily basis over five years, (ii) 25% of the units granted shall vest in the event that the Company’s Adjusted EBITDA performance in fiscal 2012 meets or exceeds a pre-approved target established by the Compensation Committee of the Board of Managers (the “2012 units”) and (iii) 50% of the units granted shall vest following the end of any fiscal year during which the Company attains an additional Adjusted EBITDA target established by the Compensation Committee of the Board of Managers. In the event the Company fails to achieve the 2012 Adjusted EBITDA target referenced in clause (ii) above, such 2012 units remain eligible for vesting under clause (iii) above in the event the Company subsequently achieves the applicable Adjusted EBITDA target.
A summary of Class A, B and C nonvested units for Yankee Group as of March 31, 2012 and YCC Holdings as of April 2, 2011, and the activity for the thirteen weeks ended March 31, 2012 and April 2, 2011 is presented below (there are no units remaining in Yankee Investments):
During the thirteen weeks ended March 31, 2012, 9 Class A common units, 4,322 vested Class B common units and 711 vested Class C common units were repurchased for $0.3 million. During the thirteen weeks ended April 2, 2011, 565 vested Class B common units and 900 vested Class C common units were repurchased for $0.1 million. Yankee Group anticipates that all of its nonvested common units will vest.
The total estimated fair value of equity awards vested during thirteen weeks ended March 31, 2012 and April 2, 2011 was $0.2 million. Equity-based compensation expense for the thirteen weeks ended March 31, 2012 and April 2, 2011 was $0.2 million and $3.3 million, respectively. Included in the $3.3 million of equity-based compensation for the thirteen weeks ended April 2, 2011 was the $3.0 million payment to the holders of Class B common units and Class C common units. The $3.0 million payment was recorded as additional paid in capital and is shown as a contribution by YCC Holdings LLC in Holding Corp.’s condensed consolidated statement of changes in stockholder’s equity and in Holding Corp.’s condensed consolidated statements of cash flows.
As of March 31, 2012, there was approximately $1.7 million of total unrecognized compensation cost related to Yankee Group’s Class B and Class C common unit equity awards and there was no unrecognized expense related to Yankee Group’s Class A common unit equity awards. This cost is expected to be recognized over the remaining vesting period, of approximately 5 years (April 2012 to February 2017).
Presented below is a summary of assumptions for the thirteen weeks ended March 31, 2012. During the thirteen weeks ended March 31, 2012, there were 31,759 Class C grants and no Class B grants. There were no Class C or Class B grants during the thirteen weeks ended April 2, 2011.
With respect to the Class B and Class C common units, since YCC Holdings and Yankee Group are not publicly traded, the estimate of expected volatility is based on the median historical volatility of a group of eight comparable public companies, adjusted for differences in leverage. The historical volatilities of the comparable companies were measured over a 5-year historical period. The expected term of the Class B and Class C common units granted represents the period of time that the units are expected to be outstanding and is assumed to be approximately five years based on management’s estimate of the time to a liquidity event. Yankee Group does not expect to pay dividends, and accordingly, the dividend yield is zero. The risk free interest rate reflects a five-year period commensurate with the expected time to a liquidity event and was based on the U.S. Treasury yield curve.
7. RESTRUCTURING CHARGES
During the thirteen weeks ended March 31, 2012, the Company restructured its Wholesale and Retail operations. The Company also initiated a change in reporting structure and changes of roles and responsibilities within the organization that resulted in workforce reductions. These changes included changes to the executive committee, changes to the reporting structure and operational focus within the retail segment, alignment of the brand innovation and merchandising teams across all channels of the business, and other administrative changes. As a result of these changes the Company incurred restructuring charges of $0.7 million during the thirteen weeks ended March 31, 2012.
The Company made restructuring related payments of $0.2 million and $0.1 million during the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. As of March 31, 2012, the balance of $1.4 million in the restructuring accrual was related to (i) continuing operations employee related expenses of $0.6 million as a result of the first quarter of 2012 organization changes detailed above, and (ii) discontinued operations of $0.8 million primarily related to lease agreements for one Illuminations retail store and a lease related the former Illuminations corporate headquarters in Petaluma, California. The lease for the Illuminations retail store expires in January 2017 and the lease for the property in Petaluma California expires in March 2013. These leases will be paid through the lease termination date unless the Company is able to structure a buyout agreement with the landlord.
The following is a summary of restructuring charge activity for the thirteen weeks ended March 31, 2012 and April 2, 2011 (in thousands):
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Companies follow the guidance under ASC Topic 815 “Derivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments. The guidance requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholder’s equity or member’s deficit as accumulated other comprehensive income (loss) (“OCI”) or net income (loss) depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
Yankee Candle uses interest rate swaps to eliminate the variability of a portion of cash flows associated with the forecasted interest payments on its Term Facility. Yankee Candle’s interest rate swaps are not designated as cash flow hedges and the swaps are measured at fair value with changes in fair value recognized as other (income) expense.
The fair values of the Companies’ derivative instruments as of March 31, 2012 and December 31, 2011, were as follows (in thousands):
The effect of derivative instruments on the condensed consolidated statements of operations for the thirteen weeks ended March 31, 2012 and April 2, 2011, was as follows (in thousands):
9. FAIR VALUE MEASUREMENTS
The Companies follow the guidance prescribed by ASC Topic 820 “Fair Value Measurement.” ASC Topic 820 defines fair value and provides a consistent framework for measuring fair value under GAAP, including financial statement disclosure requirements. As specified under this Topic, valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. The Fair Value Measurement Topic classifies these inputs into the following hierarchy:
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 (in thousands):
The Companies hold marketable securities in Yankee Candle’s deferred compensation plan. The marketable securities consist of investments in mutual funds and are recorded at fair value based on third party quotes. The Companies use an income approach to value the asset and liability for Yankee Candle’s interest rate swaps using a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contract using current market information as of the reporting date such as the one month LIBOR curve and the creditworthiness of the Companies and their counterparties.
The Companies’ long-term debt is recorded at historical amounts. The Companies determine the fair value of their long-term debt based on current quoted market prices (Level 1 in the fair value hierarchy). The following table represents the carrying value and fair value of Yankee Candle’s senior notes, senior subordinated notes and Term Facility and YCC Holdings’ Senior PIK Notes as of March 31, 2012 and December 31, 2011 (in thousands):
The Companies have segmented their operations in a manner that reflects how their chief operating decision–maker (the “CEO”) currently reviews the results of the Companies and their subsidiaries’ businesses. The CEO evaluates its retail, wholesale, and international operations based on an “operating earnings” measure. Such measure gives recognition to specifically identifiable operating costs such as cost of sales and selling expenses. Costs and income not specifically identifiable are included within the unallocated/corporate/other column and include administrative charges, interest expense, fair value changes of derivative contracts, restructuring charges for continuing operations and other costs not allocated to specific operating segments. The Companies do not account for or report assets, capital expenditures or depreciation and amortization by segment to the CEO.
The following are the relevant data for the thirteen weeks ended March 31, 2012 and April 2, 2011 (in thousands):
Sales by geographic location are based on the location of the customer. The following tables set forth sales by geographic location:
Long lived assets of the Companies’ foreign operations were approximately $5.5 million and $3.9 million as of March 31, 2012 and December 31, 2011, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Companies are engaged in various lawsuits, either as plaintiff or defendant. In the opinion of management, the ultimate outcome of these lawsuits will not have a material adverse effect on the Companies’ financial condition, results of operations or cash flows.
12. FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES UNDER YANKEE CANDLE’S SENIOR NOTES AND SENIOR SUBORDINATED NOTES
Obligations under the senior notes of Yankee Candle are guaranteed on an unsecured senior basis and obligations under the senior subordinated notes are guaranteed on an unsecured senior subordinated basis by Holding Corp. and 100% of Yankee Candle’s existing and future domestic subsidiaries. The senior notes are fully and unconditionally guaranteed by all of Yankee Candle’s 100% owned U.S. subsidiaries (the “Guarantor Subsidiaries” and collectively with the Holding Corp., the “Guarantors”) on a senior unsecured basis. These guarantees are joint and several obligations of the Guarantors. Yankee Candle’s foreign subsidiary does not guarantee these notes.
The following tables present condensed consolidating supplementary financial information for Yankee Candle, as the issuer of the senior and senior subordinated notes, Holding Corp., Yankee Candle’s domestic guarantor subsidiaries and the non guarantor subsidiaries together with eliminations as of and for the periods indicated. Holding Corp. is also a guarantor of the notes. Separate complete financial statements of the respective Guarantors would not provide additional material information that would be useful in assessing the financial composition of the Guarantors.
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
YANKEE HOLDING CORP. AND SUBSIDIARIES
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YANKEE HOLDING CORP. AND SUBSIDIARIES
13. SUBSEQUENT EVENTS
On April 2, 2012, Yankee Candle entered into a Credit Agreement (the “New Term Loan Facility”) with the lenders party thereto, Bank of America, N.A. (“BofA”), as administrative agent, Barclays Bank PLC (“Barclays”), as syndication agent, and BofA and Barclays, as joint lead arrangers and joint book runners. Under the New Term Loan Facility, Yankee Candle borrowed $725.0 million. At closing, on April 2, 2012, a portion of the net proceeds from the New Term Loan Facility were used to (i) redeem $180.0 million of Yankee Candle’s Senior Notes, (ii) repay $403.1 million of outstanding debt on the Company’s existing Senior Secured Credit Facility (consisting of $388.1 million outstanding under the Term Facility and $15.0 outstanding under the Revolving Facility), and (iii) pay fees and expenses related to the foregoing. On April 13, 2012, the Company used the remaining net proceeds to redeem an additional $135.0 million of the Senior Notes. The New Term Loan Facility will mature on April 2, 2019; however, the maturity date of the New Term Loan Facility will accelerate if the Senior Subordinated Notes and the Senior PIK Notes are not defeased, repurchased, refinanced or redeemed 91 days prior to their respective maturity dates.
The New Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the New Term Loan Facility, with the balance payable at final maturity. Interest is payable on the New Term Loan Facility at either (i)the Eurodollar Rate (subject to a 1.25% floor) plus 4.00% or (ii) the ABR (subject to a 2.25% floor) plus 3.00%. The default rate of interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the non-default interest rate then applicable to ABR loans.
The New Term Loan Facility requires Holding Corp. and its subsidiaries to maintain a maximum consolidated net total leverage ratio. In addition, the New Term Loan Facility contains customary covenants and restrictions on Holding Corp. and its subsidiaries’ activities, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates and the ability to change the nature of its business or its fiscal year. All obligations under the New Term Loan Facility are guaranteed by Holding Corp.’s and Yankee Candle’s domestic subsidiaries and secured by a lien on substantially all of the assets of Holding Corp. and its domestic subsidiaries.
On April 2, 2012, Yankee Candle, together with certain of its foreign subsidiaries, also entered into a Credit Agreement (the “ABL Facility”) with BofA, as agent, the other lenders party thereto, Barclays, as syndication agent, U.S. Bank National Association and Wells Fargo Capital Finance LLC, as co-documentation agents, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays, as joint lead arrangers and joint book runners.
The ABL Facility is scheduled to expire on April 2, 2017; however, the expiration date of the ABL Facility will accelerate if the Senior Subordinated Notes and the Senior PIK Notes are not defeased, repurchased, refinanced or redeemed 91 days prior to their respective maturity dates The ABL Facility permits revolving borrowings of up to $175.0 million subject to eligible inventory and trade accounts receivable balances. The ABL Facility is inclusive of sub-facilities for up to $25.0 million in swing line advances, up to $25.0 million for letters of credit, up to $10.0 million for borrowings by Yankee Candle’s Canadian subsidiary, up to $10.0 million for borrowings by Yankee Candle’s German subsidiary and up to $75.0 million for borrowing by Yankee Candle’s United Kingdom subsidiary. Borrowings under the ABL Facility bear interest at a rate equal to either (i)LIBOR or the BofA rate plus the applicable margin or (ii) the prime rate plus the applicable margin. The applicable margin ranges from 0.50% to 2.00%, dependent on the currency of the borrowing. For purposes of determining interest rates, the applicable margin is subject to a variable grid, dependent on average daily excess availability calculated as of the immediately preceding fiscal quarter.
The unused line fee payable under the ABL Facility is equal to (i) 0.50% per annum if less than 50% of the ABL Facility has been used on average during the immediately preceding fiscal quarter or (ii) 0.375% per annum if 50% or more of the ABL Facility has been utilized on average during the immediately preceding fiscal quarter.
The ABL Facility requires Yankee Candle and its subsidiaries to maintain a consolidated fixed charge coverage ratio of at least 1.0: 1.0 during a covenant compliance event, which occurs if unused borrowing availability is less than the greater of (x) 10% of the maximum amount that can be borrowed under the ABL Facility, which amount is the lesser of $175.0 million and a borrowing formula based on receivables and inventory (the “ABL Loan Cap”) or (y) $15.0 million and continues until excess availability has exceeded the amounts set forth herein for 30 consecutive days. In addition, the ABL Facility contains customary covenants and restrictions on Yankee Candle and its subsidiaries’ activities, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or its fiscal year, enter into certain hedging agreements and enter into certain burdensome agreements. All obligations under the ABL Facility are guaranteed by Yankee Candle’s domestic subsidiaries and secured by a lien on substantially all of the assets of Yankee Candle and its domestic subsidiaries. Certain of the obligations under the ABL Facility are guaranteed by Yankee Candle’s foreign subsidiaries and are secured by a lien on substantially all of the assets of such foreign subsidiaries, which consist primarily of inventory and receivables.
ORGANIZATION
YCC Holdings LLC (“YCC Holdings”) and Yankee Holding Corp. (“Holding Corp.”) are holding companies with no direct operations. Their principal assets are the indirect equity interests in The Yankee Candle Company, Inc. (“Yankee Candle”), and all of their operations are conducted through Yankee Candle, the wholly owned operating subsidiary of Holding Corp. Holding Corp. is a wholly owned subsidiary of YCC Holdings. YCC Holdings is a wholly owned subsidiary of Yankee Candle Investments LLC (“Yankee Investments”), which is in turn a wholly owned subsidiary of Yankee Candle Group LLC (“Yankee Group”).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our condensed consolidated financial statements for both YCC Holdings and Holding Corp. and their subsidiaries, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about operating results and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes to our critical accounting policies as discussed in YCC Holdings’ and Holding Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Except where otherwise indicated, this discussion relates to the consolidated financial statements for both YCC Holdings and Holding Corp. (together, the “Companies”).
OVERVIEW
General Business Information
We are the largest specialty branded premium scented candle company in the United States based on our annual sales. We sell our products in multiple channels of distribution across many countries. Our customer touchpoints include our own company-operated retail stores, our Consumer Direct business, our Fundraising business, and a global network of both national account and independent specialty gift customers and channels. We have a 42-year history of category leadership and growth by marketing Yankee Candle products as affordable luxuries, consumable products, and valued gifts. We offer a wide variety of jar candles, Samplers® votive candles, Tarts® wax potpourri, pillars and other candle products, the vast majority of which are marketed under the Yankee Candle® brand. We also sell a wide range of other home fragrance products, including electric plug home fragrancers, decorative reed diffusers, room sprays, potpourri, scented oils and coordinated candle related and home decor accessories. Additionally, we offer products such as the Yankee Candle Car Jars® auto air freshener product line, travel sprays and other products to fragrance cars and small spaces.
Candle products are the foundation of our business, and are available in a wide range of fragrances and colors across a variety of jar candles. Our candle prices range from $1.99 for a Samplers® votive candle to $27.99 for a large 22-ounce jar candle. This variety ensures each customer can find Yankee Candle products appropriate for the consumer's lifestyle and budget. In addition to our "everyday" product offerings, we also offer seasonally-appropriate fragrances, products, home décor accessories, and giftsets on a limited edition, seasonal basis. These themed temporary programs occur four times a year: Spring, Summer, Fall, and the Christmas/Holiday season.
Retail Operations: We are the largest specialty retailer of premium scented candles in the U.S. Our retail operations include our retail stores, our Consumer Direct business, our Fundraising business, and Chandler's restaurant (located at our South Deerfield, Massachusetts flagship store). We operate 554 specialty retail stores under the Yankee Candle ® name as of March 31, 2012. Our retail stores, excluding our two flagship stores, average approximately 1,629 gross square feet and are primarily located in high traffic shopping malls and lifestyle centers. We operate two flagship stores, a 90,000-square-foot store in South Deerfield, Massachusetts, which is a major tourist destination in Massachusetts, and a second 42,000-square-foot store in Williamsburg, Virginia. These stores promote our brand image and culture and allow us to test new product and fragrance introductions. In addition to our retail stores, we also sell our products directly to consumers through the Consumer Direct business and the Fundraising business. We believe these two businesses will continue to serve as important sources of revenue growth and profitability, while also helping to build brand awareness, introduce our products to new customers and drive traffic to our retail stores.
Wholesale Operations: We have an attractive and growing wholesale segment with a diverse customer base. As of March 31, 2012, we had approximately 28,500 wholesale locations in North America, including independent gift stores, leading national gift retailers such as Hallmark, leading home specialty retailers such as Bed, Bath & Beyond, national department stores such as Kohl’s and JC Penney, regional department stores, “premium mass” retailers such as Target and Meijer, home improvement retailers and selected club stores and other national accounts. We believe the Yankee Candle® brand name is the most recognized brand in the premium scented candle market. Our wholesale customers are also loyal, with approximately 79% of our U.S. wholesale accounts having been customers for more than five years. We believe that our ability to provide industry leading category management expertise to our wholesale customers regarding product knowledge, display suggestions, promotional ideas and geographical consumer preferences is a significant competitive advantage that we plan to continue to leverage.
International Operations: We sell our products in the United Kingdom and elsewhere in Europe primarily through international distributors and our wholly-owned subsidiary Yankee Candle (Europe), LTD (“YCE”), which has an international wholesale customer network of approximately 6,000 store locations and distributors covering 57 countries as of March 31, 2012. YCE sells our products through multiple channels, with the majority of its sales occurring in the United Kingdom and Ireland through independent gift stores, national accounts and also through its "store within a store" retail concessions business. YCE also sells directly to wholesale accounts in countries such as Germany, Italy and France, and to numerous other countries through distributors. We intend to continue to grow our business outside of North America by leveraging our wholesale distribution network and our existing distribution center in Bristol, England, and by further expanding our international business, including further geographic expansion in Asia, primarily in Japan, China and Korea and in Latin America.
Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.
Discontinued Operations
During 2009, we discontinued the operations of our Illuminations and Aroma Naturals businesses. Accordingly, we have classified the results of operations of the Illuminations and Aroma Naturals businesses as discontinued operations for all periods presented.
RESULTS OF OPERATIONS
The following table sets forth the various components of our condensed consolidated statements of operations, expressed as a percentage of sales, for the periods indicated that are used in connection with the discussion herein.
| | | Thirteen | | | Thirteen | |
| | | Weeks Ended | | | Weeks Ended | |
| | | March 31, 2012 | | | April 2, 2011 | |
| YCC Holdings LLC Statements of Operations Data: | | | | | | |
| Sales: | | | | | | |
| Retail | | | 52.2 | % | | | 51.9 | % |
| Wholesale | | | 32.4 | | | | 32.9 | |
| International | | | 15.4 | | | | 15.2 | |
| Total sales | | | 100.0 | | | | 100.0 | |
| Cost of sales | | | 46.0 | | | | 45.0 | |
| Gross profit | | | 54.0 | | | | 55.0 | |
| Selling expenses | | | 35.8 | | | | 36.8 | |
| General and administrative expenses | | | 10.9 | | | | 13.0 | |
| Restructuring charges | | | 0.4 | | | | - | |
| Operating income | | | 6.9 | | | | 5.2 | |
| Other expense, net | | | 16.0 | | | | 14.5 | |
| Loss from continuing operations before benefit from income taxes | | | (9.1 | ) | | | (9.3 | ) |
| Benefit from income taxes | | | (3.4 | ) | | | (3.5 | ) |
| Loss from continuing operations | | | (5.7 | ) | | | (5.9 | ) |
| Loss from discontinued operations, net of taxes | | | - | | | | - | |
| Net loss | | | (5.7 | ) % | | | (5.9 | ) % |
| | | Thirteen | | | Thirteen | |
| | | Weeks Ended | | | Weeks Ended | |
| | | March 31, 2012 | | | April 2, 2011 | |
| Yankee Holding Corp. Statements of Operations Data: | | | | | | |
| Sales: | | | | | | |
| Retail | | | 52.2 | % | | | 51.9 | % |
| Wholesale | | | 32.4 | | | | 32.9 | |
| International | | | 15.4 | | | | 15.2 | |
| Total sales | | | 100.0 | | | | 100.0 | |
| Cost of sales | | | 46.0 | | | | 45.0 | |
| Gross profit | | | 54.0 | | | | 55.0 | |
| Selling expenses | | | 35.8 | | | | 36.8 | |
| General and administrative expenses | | | 10.9 | | | | 12.9 | |
| Restructuring charges | | | 0.4 | | | | - | |
| Operating income | | | 6.9 | | | | 5.3 | |
| Other expense, net | | | 10.4 | | | | 11.0 | |
| Loss from continuing operations before benefit from income taxes | | | (3.5 | ) | | | (5.7 | ) |
| Benefit from income taxes | | | (1.2 | ) | | | (2.0 | ) |
| Loss from continuing operations | | | (2.3 | ) | | | (3.7 | ) |
| Loss from discontinued operations, net of taxes | | | - | | | | - | |
| Net loss | | | (2.3 | ) % | | | (3.7 | ) % |
The results of operations discussion that follows for the thirteen weeks ended March 31, 2012 versus the thirteen weeks ended April 2, 2011 is for continuing operations only. The results of operations of the Aroma Naturals and the Illuminations divisions have been treated as discontinued operations for all periods presented and are not included in the discussion below.
Thirteen weeks ended March 31, 2012 versus the Thirteen weeks ended April 2, 2011
SALES
Sales increased 7.6% to $155.1 million for the thirteen weeks ended March 31, 2012 from $144.1 million for the thirteen weeks ended April 2, 2011.
Retail Sales
Retail sales increased 8.3% to $81.0 million for the thirteen weeks ended March 31, 2012, from $74.8 million for the thirteen weeks ended April 2, 2011. The increase in retail sales was primarily due to (i) sales attributable to stores opened in 2011 that have not yet entered the comparable store base (which in 2011 were open for less than a full year) of approximately $2.8 million, (ii) increased sales in our catalog and internet business (“Consumer Direct”) of approximately $2.0 million, (iii) an increase in sales from our Yankee Candle Fundraising division of approximately $1.7 million and (iv) the addition of 10 new Yankee Candle stores during 2012 which contributed $0.4 million, these increases were partially offset by decreased comparable store sales of approximately $0.7 million.
Comparable sales for our Retail business, including Consumer Direct, increased 1.8% for the thirteen weeks ended March 31, 2012 compared to the thirteen weeks ended April 2, 2011. Yankee Candle comparable store sales for the thirteen weeks ended March 31, 2012 decreased 1.2% compared to the thirteen weeks ended April 2, 2011. Comparable store sales represent a comparison of sales during the corresponding fiscal periods on stores in our comparable stores sales base. A store first enters our comparable store sales base in the fourteenth fiscal month of operation. Permanently closed stores are excluded from the comparable store calculation beginning in the month in which the store closes. The decrease in comparable store sales was driven by an increase in average ticket price of 4.9% offset by decreased traffic of 6.1%. There were 509 stores included in the Yankee Candle comparable store base as of March 31, 2012 as compared to 486 stores included in the Yankee Candle comparable store base as of April 2, 2011. There were 554 total retail stores open as of March 31, 2012, compared to 518 total retail stores open as of April 2, 2011.
Wholesale Sales
Wholesale sales increased 5.7% to $50.2 million for the thirteen weeks ended March 31, 2012 from $47.5 million for the thirteen weeks ended April 2, 2011.
The increase in wholesale sales was primarily due to (i) increased sales in our all other channel consisting of various accounts outside of our premium mass and gift channels of approximately $2.5 million and (ii) increased sales to domestic premium mass and department store channels of approximately $1.2 million, partially offset by (i) decreased sales in our domestic gift store account channel of approximately $0.8 million coupled with (ii) decreased sales from co-packing and licensing activities of approximately $0.1 million.
International Sales
International sales increased 9.3% to $23.9 million for the thirteen weeks ended March 31, 2012 from $21.9 million for the thirteen weeks ended April 2, 2011.
The increase in international sales was primarily due to (i) increased sales in our retail concession channel of $1.1 million, (ii) increased sales in our export direct channel of $0.9 million and (iii) an increase in our international distributor channel of $0.6 million, partially offset by decreased sales in our United Kingdom wholesale business of $0.5 million coupled with a decrease of $0.3 million due to the effect of changes in foreign currency exchange rates, primarily the British Pound.
GROSS PROFIT
Gross profit is sales less cost of sales. Included within cost of sales are the cost of the merchandise we sell through our retail, wholesale and international segments, inbound and outbound freight costs, the operational costs of our distribution facilities, which include receiving costs, inspection and warehousing costs, and salaries and expenses incurred by our buying and merchandising operations.
Gross profit increased 5.7% to $83.8 million for the thirteen weeks ended March 31, 2012 from $79.3 million for the thirteen weeks ended April 2, 2011. As a percentage of sales, gross profit decreased to 54.0% for the thirteen weeks ended March 31, 2012 from 55.0% for the thirteen weeks ended April 2, 2011. Included in gross profit for the thirteen weeks ended March 31, 2012 and April 2, 2011 are purchase accounting costs of $0.5 million and $0.1 million respectively. These costs were not allocated to our segments.
Retail Gross Profit
Retail gross profit dollars increased 7.8% to $51.1 million for the thirteen weeks ended March 31, 2012 compared to $47.4 million for the thirteen weeks ended April 2, 2012. The increase in gross profit dollars over the prior year quarter was primarily due to (i) price increases taken during the second quarter of 2011 and first quarter of 2012, which assuming no elasticity contributed $3.5 million, (ii) increased sales volume which increased gross profit by approximately $3.0 million, (iii) sales volume increases from our Yankee Candle fundraising division which contributed additional gross profit of approximately $0.7 million and (iv) decreased costs in our supply chain operations of approximately $0.5 million, offset by increased promotional and marketing activity of approximately $3.7 million, coupled with unfavorable product mix of approximately $0.3 million.
As a percentage of sales, retail gross profit decreased slightly to 63.1% for the thirteen weeks ended March 31, 2012 from 63.3% for the thirteen weeks ended April 2, 2011. The decrease in gross profit rate was primarily the result of (i) increased promotional activity which decreased gross profit by approximately 1.6%, (ii) unfavorable product mix of approximately 0.4% and (iii) decreased gross profit rate of our Yankee Candle fundraising division of 0.5%, offset by (i) price increases taken during the second quarter of 2011, which assuming no elasticity increased gross profit by approximately 1.7% and (ii) decreased costs in our supply chain operations resulting in an increase in gross profit rate of 0.6%.
Wholesale Gross Profit
Wholesale gross profit dollars increased 2.2% to $23.2 million for the thirteen weeks ended March 31, 2012 from $22.7 million for the thirteen weeks ended April 2, 2011. The increase in wholesale gross profit dollars was primarily attributable to (i) price increases taken during the second quarter of 2011 and first quarter of 2012, which assuming no elasticity increased gross profit by approximately $2.4 million, (ii) increased sales volume which increased gross profit by approximately $2.3 million, and (iii) decreased costs in our supply chain operations of approximately $0.5 million, partially offset by an unfavorable product cost related to shift in channel mix of approximately $2.7 million, coupled with increased promotional and marketing activity of approximately $2.0 million.
As a percentage of sales, wholesale gross profit decreased to 46.2% for the thirteen weeks ended March 31, 2012 from 47.8% for the thirteen weeks ended April 2, 2011. The decrease in gross profit rate was primarily attributable to (i) unfavorable product cost related to shift in channel mix of 3.4% and (ii) increased allowances and promotional and marketing activity which decreased gross profit rate by 2.0%, partially offset by (i) price increases taken during the second quarter of 2011and first quarter of 2012, which assuming no elasticity contributed approximately 2.7% (ii) decreased costs in our supply chain operations which increased gross profit rate by approximately 1.0%, and (iii) slight increases in our other wholesale market gross profit rate of 0.1% .
International Gross Profit
International gross profit dollars increased 8.6% to $10.1 million for the thirteen weeks ended March 31, 2012 from $9.3 million for the thirteen weeks ended April 2, 2011. The increase in international gross profit dollars was primarily attributable to (i) increased sales volume of $1.7 million and (ii) favorable product cost and channel mix of $0.7 million, partially offset by increased allowances and promotional and marketing activity which decreased gross profit by approximately $1.6 million.
As a percentage of sales, international gross profit showed a slight decrease to 42.2% for the thirteen weeks ended March 31, 2012 from 42.6% for the thirteen weeks ended April 2, 2011. The decrease in gross profit rate was primarily attributable by increased allowances and promotional and marketing activity which decreased gross profit rate by 3.6%, offset by (i) favorable channel mix of approximately 2.7% driven primarily by increased sales within our retail concessions channel, which has the highest margins within our international business and (ii) decreased supply chain operations costs which contributed an increase of gross profit of 0.5%.
SELLING EXPENSES
Selling expenses increased 4.5% to $55.5 million for the thirteen weeks ended March 31, 2012 from $53.1 million for the thirteen weeks ended April 2, 2011. These expenses are related to our wholesale, retail and international operations and consist of payroll, occupancy, advertising and other operating costs, as well as store pre-opening costs, which are expensed as incurred. As a percentage of sales, selling expenses were 35.8% and 36.8% for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively.
Included in selling expenses for the thirteen weeks ended March 31, 2012 and April 2, 2011 are purchase accounting costs of $1.6 million and $3.5 million respectively, consisting primarily of the amortization of intangible assets. These costs were not allocated to our segments.
Retail Selling Expenses
Retail selling expenses increased 9.0% to $44.8 million for the thirteen weeks ended March 31, 2012 from $41.1 million for the thirteen weeks ended April 2, 2011. As a percentage of retail sales, retail selling expenses were 55.3% and 55.0% for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. The increase in retail selling expenses in dollars was primarily related to selling expenses incurred in the new Yankee Candle retail stores opened in 2012 and 2011, which together represented an increase of approximately $3.0 million.
Wholesale Selling Expenses
Wholesale selling expenses decreased 6.3% to $3.0 million for the thirteen weeks ended March 31, 2012 from $3.2 million for the thirteen weeks ended April 2, 2011. These expenses relate to payroll, advertising and other operating costs. As a percentage of wholesale sales, wholesale selling expenses were 6.0% and 6.8% for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. The decrease in selling expenses and as a percentage of sales was attributable to decreased marketing costs and commissions coupled with a decrease in labor costs year over year.
International Selling Expenses
International selling expenses increased 17.3% to $6.1 million for the thirteen weeks ended March 31, 2012 from $5.2 million for the thirteen weeks ended April 2, 2011. These expenses relate to payroll, advertising and other operating costs. As a percentage of international sales, international selling expenses were 25.6% and 23.9% for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. The increase in selling expenses was attributable to increased commissions, labor and other related selling costs of approximately $0.7 million related to the increased sales volume in this business. The increase in selling expenses as a percentage of sales was largely related to increased allowances and promotional and marketing activity.
General and Administrative Expenses
General and administrative expenses, which are shown in our unallocated/corporate/other column of the Companies’ segment footnote, consist primarily of personnel–related costs including senior management, accounting, information systems, human resources, legal, marketing, management incentive programs and bonus and other costs that are not readily allocable to either the retail, wholesale or international operations. General and administrative expenses decreased 10.1% to $16.9 million for the thirteen weeks ended March 31, 2012 compared to $18.8 million for the thirteen weeks ended April 2, 2011. As a percentage of sales, general and administrative expenses were approximately 10.9% and 13.0% for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively.
The general and administrative expenses of $18.8 million for the thirteen weeks ended April 2, 2011 includes the $3.0 million paid to Class B and Class C common unit holders in February 2011 in connection with the issuance of the Senior PIK Notes. Excluding such expenses, general and administrative costs were unfavorable by $1.1 million driven largely by increased medical costs and as a percentage of sales decreased slightly year over year at 10.9% and 11.0% for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively.
Restructuring Charges
During the first quarter of 2012, the Company restructured its Wholesale and Retail operations. The Company also initiated a change in reporting structure and changes of roles and responsibilities within the organization that resulted in workforce reductions. These changes included changes to the executive committee, changes to the reporting structure and operational focus within the retail segment, alignment of the brand innovation and merchandising teams across all channels of the business, and other administrative changes. As a result of these changes the Company incurred restructuring charges of $0.7 million during the thirteen weeks ended March 31, 2012.
Interest and Other Expense, Net
YCC Holdings’ interest and other (income) expense, net, which is shown in YCC Holdings’ unallocated/corporate/other column of YCC Holdings’ segment footnote was $24.9 million for the thirteen weeks ended March 31, 2012 compared to $20.9 million for the thirteen weeks ended April 2, 2011. The primary component of this expense is interest expense, which was $25.9 million and $22.7 million for the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively. The increase in interest expense primarily relates to $3.3 million of interest expense related to the Senior PIK Notes.
Holding Corp.’s interest and other expense, net, which is shown in Holding Corp.’s unallocated/corporate/other column of Holding Corp.’s segment footnote was $16.1 million for the thirteen weeks ended March 31, 2012 compared to $15.8 million for the thirteen weeks ended April 2, 2011. The primary component of this expense is interest expense, which was $17.2 million and $17.7 million for the thirteen weeks ended March 31, 2012 and April 2, 2011 respectively.
Changes in the fair value of Yankee Candle’s derivative contracts are recognized in the condensed consolidated statement of operations. During the thirteen weeks ended March 31, 2012 and April 2, 2011, Yankee Candle recognized a gain related to its derivative contracts of $1.6 million and $1.4 million, respectively.
Benefit From Income Taxes
The benefit from income taxes for YCC Holdings for the thirteen weeks ended March 31, 2012 and April 2, 2011 was approximately $5.2 million and $5.0 million, respectively. The effective tax rates for the thirteen weeks ended March 31, 2012 and April 2, 2011 were 36.9% and 37.1%, respectively.
The provision for income taxes for Holding Corp. for the thirteen weeks ended March 31, 2012 was $1.9 million compared to $2.9 million for the thirteen weeks ended April 2, 2011. The effective tax rates for the thirteen weeks ended March 31, 2012 and April 2, 2011 were 35.6% and 35.5%, respectively.
Loss from Discontinued Operations, Net of Tax
During 2009, we discontinued the operations of our Illuminations and Aroma Naturals businesses. Accordingly, the Companies have classified the results of operations of the Illuminations and Aroma Naturals businesses as discontinued operations for all periods presented. The loss from discontinued operations was minimal for both the thirteen weeks ended March 31, 2012 and April 2, 2011, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Senior Secured Credit Facility
Yankee Candle’s Senior Secured Credit Facility as of March 31, 2012 consisted of a 7-year Term Facility with outstanding borrowings of $388.1 million and a 6-year $140.0 million Revolving Facility. See Note 13 “Subsequent Events,” for a discussion of the refinancing of Yankee Candle’s Senior Secured Credit Facility. All borrowings under the Senior Secured Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at our option, (i) the higher of (x) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (y) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, Yankee Candle is required to pay a commitment fee to the lenders in respect of unutilized loan commitments at a rate of 0.50% per annum. The Term Facility matures on February 6, 2014 and the Revolving Facility matures on February 6, 2013.
As of March 31, 2012, Yankee Candle had outstanding letters of credit of $2.1 million and $15.0 million outstanding under the Revolving Facility, leaving $122.9 million in availability under the Revolving Facility. As of March 31, 2012, Yankee Candle was in compliance with all covenants under the Senior Secured Credit Facility.
Yankee Candle uses interest rate swaps to eliminate the variability of a portion of cash flows associated with the forecasted interest payments on the Term Facility. During the second and third quarters of 2009, Yankee Candle entered into forward starting amortizing interest rate swaps to eliminate the variability in future interest payments by having Yankee Candle pay fixed-rate amounts in exchange for receipt of floating-rate interest payments. The effective date of the forward starting swaps was March 31, 2011. The aggregate notional value amortizes over the life of the swaps. As of March 31, 2012, the aggregate notional value of the swaps was $276.1 million, or 71.1% of the Term Facility, resulting in a blended fixed rate of 3.49%. The forward starting swaps are not designated as cash flow hedges and, are measured at fair value with changes in fair value recognized in the consolidated statements of operations as a component of other income (expense). The forward starting swap agreements terminate in March 2013.
All obligations under the Senior Secured Credit Facility are guaranteed by Yankee Candle and each of Yankee Candle's existing and future domestic subsidiaries. In addition, the Senior Secured Credit Facility is secured by first priority perfected liens on all of Yankee Candle's capital stock and substantially all of Yankee Candle's existing and future material assets and the existing and future material assets of Yankee Candle's guarantors, except that only up to 66% of the voting capital stock of the first tier foreign subsidiaries and 100% of the non-voting capital stock of such foreign subsidiaries will be pledged in favor of the Senior Secured Credit Facility and each of the guarantor's assets.
The Senior Secured Credit Facility permits all or any portion of the loans outstanding to be prepaid at any time and commitments to be terminated in whole or in part at Yankee Candle's option without premium or penalty. Yankee Candle is required to repay amounts borrowed under the Term Facility in equal quarterly installments in an aggregate annual amount equal to one percent (1.0%) of the original principal amount of the Term Facility with the balance being payable on the maturity date of the Term Facility.
Subject to certain exceptions, the Senior Secured Credit Facility requires that 100% of the net proceeds from certain asset sales, casualty insurance, condemnations and debt issuances, and 50% (subject to step downs) from excess cash flow, as defined, for each fiscal year must be used to pay down outstanding borrowings. The calculation to determine if Yankee Candle has excess cash flow per the Senior Secured Credit Facility is on an annual basis at the end of each fiscal year.
Yankee Candle's Credit Facility contains a financial covenant which requires that Yankee Candle maintain at the end of each fiscal quarter, commencing with the quarter ended December 31, 2011 through the quarter ending December 31, 2013, a consolidated total secured debt (net of cash and cash equivalents not to exceed $30.0 million) to Consolidated Adjusted EBITDA ratio of no more than 2.75 to 1.00. As of March 31, 2012, Yankee Candle's actual secured leverage ratio was 2.08 to 1.00, as defined. As of March 31, 2012, total secured debt (including Yankee Candle's capital lease obligations of $5.3 million) was approximately $402.7 million (net of $5.7 million in cash). Under Yankee Candle's Credit Facility, Consolidated Adjusted EBITDA is defined as net income plus, interest, taxes, depreciation and amortization, further adjusted to add back extraordinary, unusual or non-recurring losses, non-cash stock option expense, fees and expenses related to the Merger, fees and expenses under the Management Agreement with our equity sponsor, restructuring charges or reserves, as well as other non-cash charges, expenses or losses, and further adjusted to subtract extraordinary, unusual or non-recurring gains, other non-cash income or gains, and certain cash contributions to our common equity. Set forth below is a reconciliation of Yankee Candle’s Consolidated Adjusted EBITDA, as calculated under Yankee Candle's Credit Facility, to EBITDA and net income for the thirteen weeks ended March 31, 2012 (in thousands):
| Net income | | $ | 56,382 | |
| Income tax provision | | | 31,488 | |
| Interest expense, net (excluding amortization of deferred financing fees) | | | 59,392 | |
| Depreciation and amortization | | | 40,032 | |
| EBITDA | | | 187,294 | |
| Share-based compensation expense | | | 830 | |
| Restructuring charges | | | 655 | |
| Fees paid pursuant to the Management Agreement | | | 1,500 | |
| Other non-cash expense | | | 3,679 | |
| Consolidated Adjusted EBITDA under the Credit Facility | | $ | 193,958 | |
Senior PIK Notes of YCC Holdings
In February 2011 YCC Holdings formed a 100% owned subsidiary, Yankee Finance, for the purpose of co-issuing in conjunction with YCC Holdings $315.0 million Senior PIK Notes. Cash interest accrues at a rate of 10.25% per annum, and PIK Interest (defined below) accrues at the cash interest rate plus 0.75%. YCC Holdings is required to pay interest on the Senior PIK Notes entirely in cash interest, unless the conditions described in the indenture are satisfied with respect to the related interest period, in which case, YCC Holdings may pay interest on Senior PIK Notes for such interest period by increasing the principal amount of the Senior PIK Notes or by issuing new PIK Notes for up to the entire amount of the interest payment (in each case, "PIK Interest"), to the extent described in the related indenture. The amount of cash interest required to be paid for an interest period is determined prior to the beginning of an interest period and is calculated based upon the amount that would be permitted to be paid as a dividend as of such determination date to YCC Holdings by its subsidiaries for the purpose of paying cash interest on the Senior PIK Notes (based upon restrictions imposed by applicable law and such subsidiaries' debt agreements) plus the amount of cash on hand at YCC Holdings on the determination date (subject to certain exceptions set forth in the indenture). If the amount that would be available is less than the amount of interest due for that interest period, then YCC Holdings is permitted to pay all or a specified portion of such interest as PIK Interest rather than in cash on the interest payment date as provided in the indenture. As of March 31, 2012, the Senior PIK Notes are structurally subordinated to approximately $916.1 million of indebtedness of Holding Corp.
The $315.0 million aggregate principal amount of the Senior PIK Notes were issued at a discount of $6.3 million and YCC Holdings paid deferred financing fees of $7.8 million. YCC Holdings is amortizing the discount and the deferred financing fees using the effective interest rate method over the terms of the Senior PIK Notes. The proceeds from the Senior PIK Notes were used to pay transaction costs (exclusive of the amounts paid by Holding Corp.) and to make a payment of $300.8 million to Yankee Investments, which in turn made payments of $297.8 million to holders of Yankee Investments' Class A common units and payments of $3.0 million to holders of Yankee Investments' Class B and Class C common units.
YCC Holdings is a holding company with no direct operations. Its principal asset is the indirect equity interests it holds in Yankee Candle, and all of its operations are conducted through Yankee Candle. As a result, YCC Holdings is indirectly dependent upon dividends from Yankee Candle to generate the funds necessary to meet its outstanding debt service obligations. Neither Yankee Candle nor Holding Corp. guaranteed the Senior PIK Notes. Yankee Candle is not obligated to pay dividends to Holding Corp. and Holding Corp. is not obligated to pay dividends to YCC Holdings. Yankee Candle’s ability to pay dividends to Holding Corp. to permit Holding Corp. to pay dividends to YCC Holdings was restricted at March 31, 2012 by Yankee Candle’s Secured Credit Facility and the indentures governing the senior notes and senior subordinated notes. See Note 13 “Subsequent Events,” for a discussion of the refinancing of Yankee Candle’s Senior Secured Credit Facility.
The New Term Loan Facility and ABL Facility discussed below restrict Yankee Candle’s ability to pay dividends to YCC Holdings. For a further description of these limitations, see the discussion below under “--Refinancing of the Senior Secured Credit Facility and Repurchase of $315 million of Yankee Candle’s 8 1/2% Senior Notes due 2015.”
The indentures governing the Yankee Candle notes permit Yankee Candle to pay dividends to Holding Corp. if: (i) there is no default or event of default under the indentures governing the Yankee Candle Notes; (ii) Yankee Candle would have a fixed charge coverage ratio of at least 2.0 to 1.0; and (iii) such dividend, together with the aggregate amount of all other "restricted payments" (as defined in such indentures) made by Yankee Candle and its restricted subsidiaries after February 6, 2007 (excluding certain restricted payments), is less than the sum of (a) 50% of the Consolidated Net Income (as defined in such indentures) of Yankee Candle for the period (taken as one accounting period) from December 31, 2006 to the end of Yankee Candle's most recently ended fiscal quarter for which internal financial statements are available at the time of such dividend (or, in the case such Consolidated Net Income for such period is a deficit, minus 100% of such deficit), plus (b) the proceeds from specified equity contributions or issuances of equity.
In addition to the capacity described above, Yankee Candle has a "basket" of $35.0 million under the indentures from which it may make dividends in amount not to exceed $35.0 million (since the date of the issuance of Yankee Candle's notes), so long there is no default or event of defaults under the indentures.
Because the New Term Loan Facility, ABL Facility and the indentures governing Yankee Candle’s senior notes and senior subordinated notes each contain limitations on dividends, Yankee Candle is permitted to make dividends only to the extent it is permitted to do so under each of these agreements.
During the thirteen weeks ended March 31, 2012 Holding Corp. made a dividend of $16.2 million to YCC Holdings primarily to fund interest payments for the Senior PIK Notes, which decreased the amount available for future dividends under the indentures governing Yankee Candle’s senior notes and senior subordinated notes and under the Senior Secured Credit Facility. We currently anticipate that Yankee Candle will be permitted under the terms of its debt agreements to make dividends sufficient to pay cash interest on the PIK Notes in the next twelve months.
Refinancing of the Senior Secured Credit Facility and Repurchase of $315 million of Yankee Candle’s 8 ½% Senior Notes Due 2015
On April 2, 2012, Yankee Candle entered into a Credit Agreement (the “New Term Loan Facility”) with the lenders party thereto, Bank of America, N.A. (“BofA”), as administrative agent, Barclays Bank PLC (“Barclays”), as syndication agent, and BofA and Barclays, as joint lead arrangers and joint book runners. Under the New Term Loan Facility, Yankee Candle borrowed $725.0 million. At closing, on April 2, 2012, a portion of the net proceeds from the New Term Loan Facility were used, at closing, to (i) redeem $180.0 million of Yankee Candle’s Senior Notes, (ii) repay $403.1 million of outstanding debt on the Company’s existing Senior Secured Credit Facility (consisting of $388.1 outstanding under the Term Facility and $15.0 million outstanding under the Revolving Facility) and (iii) pay fees and expenses related to the foregoing. On April 13, 2012, the Company used the remaining net proceeds to redeem an additional $135.0 million of the Senior Notes. The New Term Loan Facility will mature on April 2, 2019; however the maturity date of the New Term Loan Facility will accelerate if the senior subordinated notes and Senior PIK Notes are not defeased, repurchased, refinanced or redeemed 91 days prior to their respective maturity dates.
The New Term Loan Facility is subject to quarterly amortization of principal equal to 0.25% of the original aggregate principal amount of the New Term Loan Facility, with the balance payable at final maturity. Interest is payable on the New Term Loan Facility at either (i)the Eurodollar Rate (subject to a 1.25% floor) plus 4.00% or (ii) the ABR (subject to a 2.25% floor) plus 3.00%. The default rate of interest will accrue (i) on the overdue principal amount of any loan at a rate of 2% in excess of the rate otherwise applicable to such loan and (ii) on any overdue interest or any other outstanding overdue amount at a rate of 2% in excess of the non-default interest rate then applicable to ABR loans.
The New Term Loan Facility requires Yankee Candle and its subsidiaries to maintain a maximum consolidated net total leverage ratio, and the ABL Facility requires Yankee Candle and its subsidiaries to maintain a maximum consolidated fixed charge coverage ratio. In addition, the New Term Loan Facility and the ABL Facility contain customary covenants and restrictions on Yankee Candle and its subsidiaries’ activities, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates and the ability to change the nature of its business or its fiscal year. All obligations under the New Term Loan Facility and ABL Facility are guaranteed by Yankee Holdings’ and Yankee Candle’s domestic subsidiaries and secured by a lien on substantially all of the assets of Yankee Holdings and its domestic subsidiaries.
Under the New Term Loan Facility, Yankee Candle is permitted to make dividends to YCC Holdings equal to the sum of (a) $10.0 million and (b) the available excess cash flow based on provisions determined in Yankee Candle’s New Term Loan Facility, together with certain equity and debt issuances which, to date, have not occurred and together with the receipt of certain cash and cash equivalents and certain investments. Available excess cash flow for Yankee Candle’s Term Loan Facility is defined as the aggregate cumulative amount of excess cash flow for all fiscal years commencing with the fiscal year ending December 31, 2012 and for all fiscal years ending after December 31, 2012 that is not required to prepay the term debt. On an annual basis, Yankee Candle is required to prepay the term debt by 50% of excess cash flow, which percentage is reduced to 25% if the consolidated net total leverage ratio (as defined in the Term Loan Credit Facility) is not greater than 4.0 to 1.0. Yankee Candle is not required to make a payment if the consolidated net total leverage ratio is not greater than 3.0 to 1.0. Excess cash flow is defined in the Term Loan Credit Facility agreement as consolidated net income of Holding Corp. and its restricted subsidiaries plus all non cash charges (including depreciation, amortization, and deferred tax expense), non-cash losses on disposition of certain property, decreases in working capital and the net increase in deferred tax liabilities or net decrease in deferred tax assets, decreased by non-cash gains including gains or credits, cash paid for capital expenditures, acquisitions, certain other investments, regularly scheduled principal payments, voluntary prepayments and certain mandatory prepayments of principal on debt, transaction costs for certain debt, equity, recapitalization, acquisition and investment transactions, purchase price adjustments in connection with acquisitions and certain payments to the Company’s equity sponsor, increases in working capital and the net decrease in deferred tax liabilities or net increase in deferred tax assets, call premiums in connection with cancellation of indebtedness, and certain amounts paid in connection with an asset sale or recovery event.
Additionally, as of April 2, 2012, a basket of $137.1 million consisting of the cumulative retained (and not yet applied) available excess amount under the Senior Secured Credit Facility is available to be dividended up from Yankee Candle to YCC Holdings to be applied to cash interest payments on the Senior PIK Notes.
On April 2, 2012, Yankee Candle also entered into a Credit Agreement (the “ABL Facility”) with BofA, as agent, the other lenders party thereto, Barclays, as syndication agent, U.S. Bank National Association and Wells Fargo Capital Finance LLC, as co-documentation agents, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays, as joint lead arrangers and joint book runners.
The ABL Facility is scheduled to expire on April 2, 2017; however, the expiration of the ABL Facility will accelerate if the senior subordinated notes and Senior PIK Notes are not defeased, repurchased, refinanced or redeemed 91 days prior to their respective maturity dates. The ABL Facility permits revolving borrowings of up to $175.0 million subject to eligible inventory and trade accounts receivable balances. The ABL Facility is inclusive of sub-facilities for up to $25.0 million in swing line advances, up to $25.0 million for letters of credit, up to $10.0 million for borrowings by Yankee Candle’s Canadian subsidiary, up to $10.0 million for borrowings by Yankee Candle’s German subsidiary and up to $75.0 million for borrowing by Yankee Candle’s United Kingdom subsidiary. Borrowings under the ABL Facility bear interest at a rate equal to either (i)LIBOR or the BofA rate plus the applicable margin or (ii) the prime rate plus the applicable margin. The applicable margin ranges from 0.50% to 2.00%, dependent on the currency of the borrowing. For purposes of determining interest rates, the applicable margin is subject to a variable grid, dependent on average daily excess availability calculated as of the immediately preceding fiscal quarter.
The unused line fee payable under the ABL Facility is equal to (i) 0.50% per annum if less than 50% of the ABL Facility has been used on average during the immediately preceding fiscal quarter or (ii) 0.375% per annum if 50% or more of the ABL Facility has been utilized on average during the immediately preceding fiscal quarter.
The ABL Facility requires Yankee Candle and its subsidiaries to maintain a consolidated fixed charge coverage ratio of at least 1.0: 1.0 during a covenant compliance event, which occurs if unused borrowing availability is less than the greater of (x) 10% of the maximum amount that can be borrowed under the ABL Facility, which amount is the lesser of $175.0 million and a borrowing formula based on receivables and inventory (the “ABL Loan Cap”) or (y) $15.0 million and continues until excess availability has exceeded the amounts set forth herein for 30 consecutive days. In addition, the ABL Facility contains customary covenants and restrictions on Yankee Candle and its subsidiaries’ activities, including but not limited to, limitations on the incurrence of additional indebtedness, liens, negative pledges, guarantees, investments, loans, asset sales, mergers, acquisitions, prepayment of other debt, distributions, dividends, the repurchase of capital stock, transactions with affiliates, the ability to change the nature of its business or its fiscal year, enter into certain hedging agreements and enter into certain burdensome agreements. All obligations under the ABL Facility are guaranteed by Yankee Candle’s domestic subsidiaries and secured by a lien on substantially all of the assets of Yankee Candle and its domestic subsidiaries. Certain of the obligations under the ABL Facility are guaranteed by Yankee Candle’s foreign subsidiaries and are secured by a lien on substantially all of the assets of such foreign subsidiaries, which consist primarily of inventory and receivables.
Under the ABL Facility, Yankee Candle is permitted to make dividends to Holding Corp (1) on an unlimited basis and (2) also solely to fund interest payments on the Senior PIK notes subject to the following restrictions.
(1) Yankee Candle is permitted to make dividends to Holding Corp. in an unlimited amount so long as (a) unused borrowing availability is greater than or equal to 15% of the ABL Loan Cap at the time of the making of such dividend and projected on a pro forma basis for the immediately succeeding six months following such dividend, except that, to the extent that the dividend is made during the “August Period”, or the August Period is included in such six month projections, then unused borrowing availability shall only be required to be greater than or equal to 10% of the ABL Loan Cap and (b) to the extent unused borrowing availability is less than 25% of the ABL Loan Cap and is projected to be less than 25% of the ABL Loan Cap for the immediately succeeding six months following such dividend (or 10%, in the case that the dividend is made in the August Period or the August Period is included in such six month projections), the consolidated fixed charge coverage ratio for the most recently ended period of twelve fiscal months preceding such dividend on a pro forma basis is greater than or equal to 1.1 to 1.0.
“August Period”, as used herein, means August 1st through the earlier of the date that the borrowing base certificate is due for the month of August and the fifteenth business day after the end of the August fiscal month.
(2) Yankee Candle is permitted to make dividends to Holding Corp and Holding Corp is permitted to make dividends to YCC Holdings solely for the purpose of funding interest payments due on the Senior PIK Notes if (a) except for payments to be made during the August Period as to which there is no minimum unused borrowing availability requirement, unused borrowing availability is greater than or equal to 15% of the ABL Loan Cap at the time of the making of such dividend and projected on a pro forma basis for the immediately succeeding six months following such dividend and (b) to the extent unused borrowing availability is less than 25% of the ABL Loan Cap and is projected to be less than 25% of the ABL Loan Cap for the immediately succeeding six months following such dividend (or 10%, in the case that the August Period is included in such projected six month period), the consolidated fixed charge coverage ratio for the most recently ended period of twelve fiscal months preceding such dividend on a pro forma basis is greater than or equal to 1.1 to 1.0; provided that for purposes of satisfying the test in this clause (b), no dividend made during the month of August for the purpose of funding, in whole or in part, an interest payment on the Senior PIK Notes shall be included in the calculation of consolidated fixed charge coverage ratio.
Cash Flows and Funding of our Operations
Our cash includes interest-bearing and non-interest bearing accounts. We maintain cash balances at several financial institutions. Cash as of March 31, 2012, was $5.7 million compared to $50.8 million as of December 31, 2011. Cash used in operating activities for Holding Corp. for the thirteen weeks ended March 31, 2012 was $38.0 million as compared to cash used in operations of $63.5 million for the thirteen weeks ended April 2, 2011. The reduction in cash used in operations relative to the prior year quarter was primarily driven by a decrease in income tax payments of $12.0 million which was largely related to the tax benefit from interest expense of the $315.0 million Senior PIK Notes that were issued in 2011, a reduced pre-build of inventory during the first quarter of 2012 of $8.9 million and other favorable changes in working capital. Cash used in operating activities for YCC Holdings during the thirteen weeks ended March 31, 2012 was $54.2 million as compared to cash used in operations of $63.5 million for the thirteen weeks ended April 2, 2011. The difference in cash used for operations between YCC Holdings and Holding Corp. was primarily related to interest paid on the Senior PIK Notes. Those interest payments are funded by dividends from Holding Corp. to YCC Holdings and are recorded as a financing activity by Holding Corp.
Net cash used in investing activities was $5.5 million and $4.1 million for the thirteen weeks ended March 31, 2012 and April 2, 2011 respectively and was used for the purchase of property and equipment, primarily related to new stores, store renovations and supply chain initiatives.
For the thirteen weeks ended March 31, 2012, net cash used in financing activities for Holding Corp. was $1.8 million compared to cash provided by financing activities of $58.9 million for the thirteen weeks ended April 2, 2011. The fluctuation in financing activities was primarily driven by reduced revolver borrowings of $43.0 from Yankee Candle’s Revolving Facility during the first quarter of 2012, and increased dividends paid to YCC Holdings related to the interest expense from the $315.0 million Senior PIK Notes. For the thirteen weeks ended March 31, 2012, net cash provided by financing activities for YCC Holdings was $14.4 million compared to cash provided by financing activities of $58.9 million for the thirteen weeks ended April 2, 2011. The difference in financing activities between Holding Corp. and YCC Holdings is attributable to the dividends paid to YCC Holdings to fund interest payments of the $315.0 million Senior PIK Notes.
In February 2011, YCC Holdings and Yankee Finance co-issued $315.0 million of 10.25%/11.00% Senior Notes due 2016 (the “Senior PIK Notes”) pursuant to an Indenture at a discount of $6.3 million for net proceeds of $308.7 million. Issuance costs related to the Senior PIK Notes were $9.7 million, of which $7.8 million were paid for by YCC Holdings and $1.9 million were paid for by Holding Corp. The net proceeds were used make a payment of $300.8 million to Yankee Investments which in turn made payments of $297.8 million to holders of Yankee Investments’ Class A common units and payments of $3.0 million to holders of Yankee Investments’ Class B and Class C common units.
YCC Holdings is dependent upon dividends from Holding Corp., which are subject to restrictions under Yankee Candle’s New Term Loan Facility and ABL Facility and the indentures governing Yankee Candle’s senior notes and senior subordinated notes, to generate the funds necessary to meet its outstanding debt service obligations. Holding Corp. funds its operations through a combination of internally generated cash from operations and from borrowings under Yankee Candle’s ABL Facility. Our primary uses of cash are working capital requirements, new store expenditures, new store inventory purchases and debt service requirements. We anticipate that cash generated from operations together with amounts available under Yankee Candle’s ABL Facility will be sufficient to meet its future working capital requirements, new store expenditures, new store inventory purchases and debt service obligations as they become due over the next twelve months. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal on and to satisfy any other present or future debt obligations will depend on future operating performance which will be affected by general economic, financial and other factors beyond our control. While we do not yet have sufficient visibility to the 2012 retail environment, based upon current trends and our budget expectations we remain confident that for the foreseeable future we will have sufficient cash flow and liquidity to fund our working capital requirements and meet our debt service obligations. In addition, borrowings under Yankee Candle’s ABL Facility are dependent upon our continued compliance with the financial and other covenants contained therein.
Due to the seasonality of the business, we typically do not generate positive cash flow from operations through the first three quarters of our fiscal year. As such, we draw on the revolver portion of Yankee Candle’s ABL Facility during these times to fund operations. In the fourth quarter, these borrowings are typically repaid in full using cash generated from operations during the fourth quarter holiday season. We typically reach our peak borrowings during the latter part of the third quarter. In fiscal 2011 the Companies’ peak borrowing was $137.0 million. We review and forecast our cash flow on a daily basis for the current year and on a quarterly basis for the upcoming year to ensure we have adequate liquidity to fund our business. We believe that we will, for the foreseeable future, be able to meet our debt service obligations, fund our working capital requirements, fund our capital expenditures and be in compliance with our covenants under Yankee Candle’s New Term Loan Facility and ABL Facility.
Our market risks relate primarily to changes in interest rates. At March 31, 2012, Yankee Candle had $403.1 million of floating rate debt and $513.0 million of fixed rate debt. At March 31, 2012, YCC Holdings had an additional $315.0 million of fixed rate debt. For fixed rate debt, interest rate changes affect the fair market value, but do not impact earnings or cash flows. Conversely for floating rate debt, interest rate changes do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. The $403.1 million outstanding under Yankee Candle’s Senior Secured Credit Facility bears interest at variable rates. All borrowings under Yankee Candle’s Senior Secured Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at Yankee Candle’s option, (i) the higher of (a) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (b) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. As of March 31, 2012, the weighted average combined interest rate on Yankee Candle’s Term Facility and Revolving Facility was 4.2%. Yankee Candle’s Senior Secured Credit Facility is intended to fund operating needs. Because Yankee Candle’s Senior Secured Credit Facility bears a variable interest rate based on market indices, our results of operations and cash flows will be exposed to changes in interest rates.
The variable nature of our obligations under Yankee Candle’s Senior Secured Credit Facility creates interest rate risk. In order to mitigate this risk we use interest rate swaps to manage the variability of a portion of cash flows associated with the forecasted interest payments on Yankee Candle’s Term Facility. This is achieved through converting a portion of the floating rate Term Facility to a fixed rate by entering into pay-fixed interest rate swaps. In essence, Yankee Candle converted a portion of its Term Facility, which is floating-rate debt, to a fixed-rate up to the aggregate notional value of the swaps by paying fixed-rate amounts in exchange for the receipt of floating-rate interest payments. As of March 31, 2012, the aggregate notional value of the swaps was $276.1 million, or 71.1% of Yankee Candle’s Term Facility, resulting in a blended fixed rate of 3.49%. Based on Yankee Candle’s outstanding floating rate debt and the notional amount of our interest rate swaps, as of March 31, 2012, a 1.0% increase or decrease in current market interest rates would have the effect of causing an approximately $1.3 million additional annual pre–tax charge or benefit to our results of operations.
We buy a variety of raw materials for inclusion in our products. The only raw material that is considered to be of a commodity nature is wax. Wax is a petroleum based product. Its market price has not historically fluctuated with the movement of oil prices and has instead generally moved with inflation. However, in the past several years the price of wax has increased at a rate significantly above the rate of inflation. Future increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.
A portion of our sales and a portion of our costs are denominated in currencies other than the U.S. dollar. These currencies could appreciate or depreciate relative to the U.S. dollar. Any movement of these currencies may materially and adversely affect our cash flows, revenues, operating results and financial position.
Disclosure Controls and Procedures for YCC Holdings LLC
YCC Holdings LLC’s management, with the participation of its chief executive officer and treasurer (principal financial and accounting officer), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, YCC Holdings LLC’s chief executive officer and treasurer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting for YCC Holdings LLC
No change in YCC Holdings LLC’s internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) occurred during the thirteen weeks ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, YCC Holdings LLC’s internal control over financial reporting.
Disclosure Controls and Procedures for Yankee Holding Corp.
Yankee Holding Corp.’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, Yankee Holding Corp.’s chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting for Yankee Holding Corp.
No change in Yankee Holding Corp.’s internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) occurred during the thirteen weeks ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, Yankee Holding Corp.’s internal control over financial reporting.
We are party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results of operations or cash flows.
This report on Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about our expectations, anticipated financial results, projected capital expenditures, and future business prospects, are forward-looking statements. You can identify these statements by our use of words such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,” and other similar expressions. You can find examples of these statements throughout this report, including “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There are a number of factors that might cause our actual results to differ significantly from the results reflected by the forward-looking statements contained herein. You should review carefully the risk factors listed in “Item 1A. Risk Factors” in the Companies’ 2011 Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission. In addition, you should consider the following factors before investing in the Company. We do not assume an obligation to update any forward-looking statement.
Risks Relating to Our Business
The current economic conditions and uncertain future outlook, including the continued softness in consumer confidence and spending, may continue to negatively impact our business and results of operations.
As widely reported, beginning in the latter part of 2008 financial and credit markets in the United States (“U.S.”) and globally experienced significant volatility and disruption, which resulted in, among other things, diminished liquidity and credit availability and a widespread reduction in business activity and consumer spending and confidence. Since 2008, these economic conditions have negatively impacted our business and our results of operations and continue to do so. While the credit and liquidity crisis appears to have stabilized, at least in the U.S., overall U.S. and global economies continue to be challenged. This in turn continues to negatively impact our consumer confidence and spending, and the retail environment in general. Any continuation or deterioration in the current economic conditions, or any prolonged global, national or regional recession, may materially adversely affect our results of operations and financial condition.
These economic developments affect businesses such as ours in a number of ways. The current economic conditions negatively impact the discretionary spending of our consumers and may result in a decrease in sales or demand for our products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, energy costs, interest rates and tax rates, the availability of consumer credit and consumer confidence. Similarly, these conditions may negatively impact the financial and operating condition of our wholesale customer base which in turn could cause them to reduce or delay their purchases of our products and increase our exposure to losses from bad debts. These conditions could also increase the likelihood that one or more of our wholesale customers may file for bankruptcy or similar protection from creditors, which also may result in a loss of sales and increase our exposure to bad debt.
In addition, the ongoing credit and financial market issues in the Euro-Zone and the resulting austerity measures and pressure on all economies may negatively impact our International operations, which are focused primarily in Europe.
We are unable to predict the likely duration and severity of the ongoing economic downturn in the U.S. and the economies of other countries, nor are we able to predict the long-term impact of these conditions on our operations.
Our substantial level of indebtedness could adversely affect our financial condition and operations.
We have a substantial amount of debt. Following the refinancing of Yankee Candle’s Senior Secured Credit Facility and the redemption of our senior notes YCC Holdings and its subsidiaries had $1,258 million of total debt, $745 million of which is secured debt.
Our substantial level of indebtedness could have important consequences to you. For example, it could:
| | ● | make it more difficult for us to satisfy our obligations; |
| | ● | increase our vulnerability to adverse economic and industry conditions; |
| | ● | limit our ability to obtain additional financing for future working capital, capital expenditures, raw materials, strategic acquisitions and other general corporate requirements; |
| | ● | expose us to interest rate fluctuations because the interest on the debt under the New Term Loan Facility and ABL Facility are imposed at variable rates; |
| | ● | require us to dedicate a substantial portion of our cash flow from operations to payments on our debt (including scheduled repayments on our outstanding term loan borrowings under the New Term Loan Facility and ABL Facility), thereby reducing the availability of our cash flow for operations and other purposes, including making cash available to the Issuers, by dividend, debt repayment or otherwise to enable us to make payments on our indebtedness; |
| | ● | make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness; |
| | ● | limit our ability to refinance indebtedness or increase the associated costs; |
| | ● | require us to sell assets to reduce debt or influence our decision about whether to do so; |
| | ● | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate or prevent us from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business; and |
| | ● | place us at a competitive disadvantage compared to any competitors that have less debt or comparable debt at more favorable interest rates and that, as a result, may be better positioned to withstand economic downturns. |
If we do not generate sufficient cash flows, we may be unable to service all of our indebtedness.
To service our and our subsidiaries' indebtedness, we will require a significant amount of cash. Our ability to generate cash, make scheduled payments or to refinance our debt obligations depends on our successful financial and operating performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control.
If our subsidiaries' cash flow and capital resources are insufficient to fund our and our subsidiaries' debt service obligations and Yankee Candle's senior notes and senior subordinated notes when they mature, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or operations, reducing or delaying capital investments, or seeking to raise additional capital. Any refinancing of our debt could be at higher interest rates and may require us to comply with more restrictive covenants which could further restrict our business operations and Yankee Candle's ability to make cash available to YCC Holdings, by dividend, debt repayment or otherwise to enable YCC Holdings to repay the amounts due under the Senior PIK Notes. Our ability to implement successfully any such alternative financing plans will be dependent on a range of factors, including general economic conditions, the level of activity in mergers and acquisitions and capital markets generally and the terms of our various debt instruments then in effect. In addition, Yankee Candle’s New Term Loan Facility and ABL Facility are secured by a lien on substantially all of Yankee Candle's and its subsidiaries’ assets, and any successor credit facility is likely to be secured on a similar basis. As such, our ability to refinance the Senior PIK Notes or seek additional financing, or Yankee Candle’s ability to make cash available to YCC Holdings, by dividend, debt repayment or otherwise to enable YCC Holdings to repay the amounts due under the Senior PIK Notes, could be impaired as a result of such security interest and the agreements governing such security interests.
Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms could have a material adverse effect on our business, including our financial condition and results of operations, as well as on Yankee Candle's ability to make cash available to YCC Holdings, by dividend, debt repayment or otherwise to enable YCC Holdings to satisfy its obligations on the Senior PIK Notes.
Our failure to protect our reputation could have a material adverse effect on our brand image.
We compete primarily in the premium segment of the scented candle and home fragrance markets. Our products are sold at a premium to the cost of competitive products sold in mass market channels. Our ability to charge a premium price depends upon the high quality of our products and the strength of and reputation for quality associated with our brand. Our ability to maintain our reputation is critical to our brand image. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.
We believe that our trade names, trademarks and patents are an essential element of our strategy. We have obtained or applied for federal registration of these trade names, trademarks and patents and have applied for or obtained registrations in many foreign countries. There can be no assurance that we will obtain such registrations or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. If any third-party copies our products in a manner that projects lesser quality or carries a negative connotation, it could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
Many aspects of our manufacturing and distribution facilities are customized for our business; as a result, the loss of one of these facilities would materially disrupt our operations.
Approximately 76% of our gross sales for the thirteen weeks ended March 31, 2012 were generated by products we manufactured at our manufacturing facility in Whately, Massachusetts and we rely primarily on our distribution facilities in South Deerfield, Massachusetts to distribute our products. Because most of our machinery is designed or customized by us to manufacture our products, and because we have strict quality control standards for our products, the loss of our manufacturing facility, due to natural disaster or otherwise, would materially affect our operations. Similarly, our distribution facilities rely upon customized machinery, systems and operations, the loss of which would materially affect our operations. Although our manufacturing and distribution facilities are adequately insured, if our facilities were destroyed we believe it would take up to twelve months to resume operations at a level equivalent to current operations.
It will be difficult to maintain our historical growth rates. If we fail to grow our business as planned, our future operating results may suffer.
We intend to continue to pursue a long-term business strategy of increasing sales and earnings by expanding our retail and wholesale operations both in the U.S. and internationally. However, our ability to grow these operations in the short-term may be negatively impacted by the current economic conditions. Our ability to implement our long-term growth strategy successfully will also be dependent in part on several factors beyond our control, including economic conditions, consumer preferences, and the competitive environment in the markets in which we compete, and we may not be able to achieve our planned growth or sustain our financial performance. Our ability to anticipate changes in the candle, home fragrance and giftware industries, and identify industry trends, will be critical factors in our ability to remain competitive.
We expect that it will become more difficult to maintain our historical growth rate, which could negatively impact our operating margins and results of operations. New stores typically generate lower operating margin contributions than mature stores because (i) fixed costs, as a percentage of sales, are higher and (ii) pre-opening costs are fully expensed in the year of opening. In addition, our retail sales generate lower segment margins than our wholesale sales. Over the past several years, our wholesale business has grown by increasing sales to existing customers and by adding new customers. If we are not able to continue this, our sales and profitability could be adversely affected. In addition, as we expand our wholesale business into new channels of trade that we believe to be appropriate, sales in some of these new channels may, for competitive reasons within the channels, generate lower margins than do our existing wholesale sales. Similarly, as we continue to broaden our product offerings in order to meet consumer demand, we may do so in part by adding products that have lower product margins than those of our core candle products.
Our profitability may be affected by increases in the cost of raw materials. Further increases in wax prices above the rate of inflation may negatively impact our cost of goods sold and margins. Any shortages in refined oil supplies could impact our wax supply.
Our cost of goods sold is impacted by the fluctuations in the price of various raw materials, including wax, dye, fragrance oils and glass. Price and availability of these raw materials could be negatively impacted by numerous factors, including weather, supply disruptions, governmental regulation, transportation delays, or other factors.
In the past several years significant increases in the price of crude oil have adversely impacted our transportation and freight costs and have contributed to significant increases in the cost of various raw materials, including wax, which is a petroleum-based product. These price increases were significant in 2010 and 2011, and we have already incurred additional wax price increases in 2012. This in turn negatively impacts our cost of goods sold and margins. In addition, we believe that rising oil prices and corresponding increases in raw materials and transportation costs negatively impact not only our business but consumer sentiment and the economy at large. Continued weakness in consumer confidence and the macro-economic environment could negatively impact our sales and earnings.
Future significant increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.
In addition to the impact of increased wax prices, any shortages in refined oil supplies may impact our wax supply. The closing or disruption of oil refineries could significantly limit our ability to source wax and negatively impact our operations. While we experienced no supply issues in 2011, any future prolonged interruption or reduction in wax supplies could negatively impact our operations, sales and earnings.
We face significant competition in the giftware industry. This competition could cause our revenues or margins to fall short of expectations which could adversely affect our future operating results, financial condition, liquidity and our ability to continue to grow our business.
We compete generally for the disposable income of consumers with other producers and retailers in the giftware industry. The giftware industry is highly competitive with a large number of both large and small participants and relatively low barriers to entry.
Our products compete with other scented and unscented candle, home fragrance and personal care products and with other gifts within a comparable price range, like boxes of candy, flowers, wine, fine soap and related merchandise. Our retail stores compete primarily with specialty candle retailers and a variety of other retailers including department stores, gift stores and national specialty retailers that carry candles along with personal care items, giftware and houseware. In addition, while we focus primarily on the premium scented candle segment, scented and unscented candles are also sold outside of that segment by a variety of retailers, including mass merchandisers. In our wholesale business, we compete with numerous manufacturers and importers of candles, home fragrance products and other home decor and gift items for the limited space available in our wholesale customer locations for the display and sale of such products to consumers. Some of our competitors are part of large, diversified companies which have greater financial resources and a wider range of product offerings than we do. Many of our competitors source their products from low cost manufacturers outside of the U.S. This competitive environment could adversely affect our future revenues and profits, financial condition and liquidity and our ability to continue to grow our business. Among other things, increased competition could result in increased marketing and promotional expenses, price reductions, and loss of market share, any of which could have a material adverse effect on our results of operations, financial condition or cash flow.
We depend upon our information technology systems.
We are increasingly dependent on information technology systems to operate our websites, process transactions, manage inventory, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Our information technology systems depend on global communication providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have experienced significant system failures and outages in the past. Our systems are susceptible to outages due to fire, floods, power loss, telecommunication failures, and similar events. Despite the implementation of network security measures, our systems may be vulnerable to computer viruses, hacking or other attacks, break-ins and similar disruptions from unauthorized tampering with our systems. The occurrence of these or other events could disrupt or damage our information technology systems and inhibit internal operations, the ability to provide customer service or the ability of customers or sales personnel to access our information systems.
Management uses information systems to support decision making and to monitor business performance. We may fail to generate accurate financial and operational reports essential for making decisions at various levels of management. Failure to adopt systematic procedures to maintain quality information technology general controls could disrupt our business. In addition, if we do not maintain adequate controls such as reconciliations, segregation of duties and verification to prevent errors or incomplete information, our ability to operate our business could be limited.
As part of our normal course of business, we collect, process and retain sensitive and confidential customer information, including credit card information. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to cybersecurity breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any cybersecurity breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our third-party service providers, could severely damage our reputation and our relationship with our clients, expose us to risks of litigation and adversely affect our business. In addition, we may incur significant remediation costs in the event of a cybersecurity breach, including liability for stolen client or associate information, repairing system damage or providing credit monitoring or other benefits to clients affected by the breach. We may also incur increased cybersecurity protection costs to guard against future cyber incidents. These and other cybersecurity-related compliance, prevention and remediation costs may adversely impact our financial condition and results of operations.
A material decline in consumers’ discretionary income could cause our sales and income to decline.
Our results depend on consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during periods of significant economic volatility and disruption such as the one we are currently experiencing, or during other economic downturns or periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the U.S. or which result from the threat of war or the possibility of further terrorist attacks. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales and income.
Current environmental laws and regulations, or those enacted in the future, could result in additional liabilities and costs.
The manufacturing of our products may require the use of materials that are subject to a variety of environmental, health and safety laws and regulations. For example, various federal and state agencies regulate the petroleum used to produce our wax products and certain ingredients contained in our fragrance oils. Compliance with these laws and regulations could increase our costs and impact the availability of components required to manufacture our products. Violation of these laws and regulations may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position or cash flows.
In addition, a number of governmental authorities in the U.S. and abroad have introduced or are contemplating enacting legal requirements, including emissions limitations, cap and trade systems and other measures to reduce production of greenhouse gases, in response to the potential impacts of climate change. These measures may have an indirect effect on us by affecting the prices of products made from fossil fuels, including paraffin.
We may be unable to continue to open new stores successfully or renew leases for existing locations.
Our retail strategy depends in large part on our ability to successfully open new stores in both existing and new geographic markets. For our strategy to be successful, we must identify and lease favorable store sites on favorable economic terms, hire and train managers and associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully and any changes in the availability of suitable real estate locations on acceptable terms could adversely impact our retail growth. If we are unable to open new stores as quickly as planned or at all, then our future sales and profits could be materially adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our retail strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs, or the opening of new malls or lifestyle centers in the market. However, these new stores may result in the loss of sales in existing stores in nearby areas, thereby negatively impacting our comparable store sales. A decrease in our retail comparable store sales will have an adverse impact on our cash flows and earnings. This is due to the fact that a significant portion of our expenses are comprised of fixed costs, such as lease payments, and our ability to decrease expenses in response to negative comparable store sales is limited in the short term. Our retail strategy also depends upon our ability to successfully renew the expiring leases of our profitable existing stores. If we are unable to do so at planned levels and upon favorable economic terms, then our future sales and profits could be negatively affected.
The loss or significant deterioration in the financial condition of a significant wholesale customer, or a bankruptcy filing and subsequent bankruptcy proceedings by such a customer, could negatively impact our sales and operating results.
The loss or significant deterioration in the financial condition of one of our major customers could have a material adverse effect on our sales, profitability and cash flow to the extent that we are unable to offset any revenue losses with additional revenue from existing customers or by opening new accounts. We continually monitor and evaluate the credit status of our customers and attempt to adjust trade and credit terms as appropriate. Given the current economic environment, there is an increased risk that wholesale customers could be forced to cease or significantly reduce their purchases from us. The loss of one or more significant wholesale customers, or a significant reduction in their operations, could materially adversely impact our results of operations and financial condition. In addition, in the event that one of our significant wholesale customers files for bankruptcy protection, there are various potential claims that may arise in connection therewith that, if filed and adversely decided, could potentially negatively impact our operating results and financial condition.
The failure or delay of a third party to supply goods to our customers could adversely impact our business.
For certain of our operations, we rely on third-party vendors to supply goods to our customers. The failure of such vendors to deliver our goods in a timely or appropriate manner could adversely impact our customer relationships, which would adversely impact our business. For example, we currently utilize third party fulfillment providers for the Fundraising business and the Consumer Direct business. In 2010, one of these parties experienced difficulty in timely delivering goods to our Fundraising business and Consumer Direct business customers. Delays such as these or other problems encountered by our third-party vendors could have an adverse effect on our business, including our reputation and ability to grow our operations as planned.
Sustained interruptions in the supply of products from overseas may affect our operating results.
We source various accessories and other products from Asia. A sustained interruption of the operations of our suppliers, as a result of economic difficulties, the impact of global shipping capacity constraints, the impact of health epidemics, natural disasters or other factors, could have an adverse effect on our ability to receive timely shipments of certain of our products, which might in turn negatively impact our sales and operating results.
Restrictive covenants in the indenture governing the Senior PIK Notes, the indentures governing Yankee Candle’s senior notes and senior subordinated notes and Yankee Candle’s New Term Loan Facility and ABL Facility could restrict our operating flexibility.
The indenture governing the Senior PIK Notes currently contains covenants that limit YCC Holdings’ and its subsidiaries’ ability to take certain actions, and the indentures governing Yankee Candle's senior notes and senior subordinated notes and Yankee Candle’s New Term Loan Facility and ABL Facility currently contain covenants that limit Holding Corp.’s and its restricted subsidiaries' ability to take certain actions. These restrictions and restrictions in YCC Holdings’ or Yankee Candle's future indebtedness may limit our ability to operate our businesses and may prohibit or limit our ability to enhance our operations or take advantage of potential business opportunities as they arise.
The indenture governing the Senior PIK Notes currently contains covenants that limit Holding Corp.’s and its subsidiaries’ ability to, and the indentures governing Yankee Candle's senior notes and senior subordinated notes currently contain covenants that limit Yankee Candle's and its restricted subsidiaries' ability to:
| | ● | incur additional indebtedness or issue preferred stock; |
| | ● | pay dividends, redeem stock or make other distributions, including distributions to YCC Holdings and Yankee Finance to make payments in respect of their indebtedness, including the Senior PIK Notes; |
| | ● | make other restricted payments or investments; |
| | ● | create restrictions on payment of dividends or other amounts by us to our restricted subsidiaries; |
| | ● | transfer or sell assets; |
| | ● | engage in mergers or consolidations; |
| | ● | engage in certain transactions with affiliates; and |
| | ● | designate subsidiaries as unrestricted subsidiaries. |
Yankee Candle’s New Term Loan Facility and ABL Facility restrict, among other things and subject to certain exceptions, Yankee Candle's ability to:
| | ● | incur additional indebtedness; |
| | ● | pay dividends or other payments on capital stock; |
| | ● | guarantee other obligations; |
| | ● | make loans, acquisitions or other investments; |
| | ● | make optional payments or modify certain debt instruments; |
| | ● | engage in transactions with affiliates; |
| | ● | amend organizations documents; |
| | ● | engage in mergers or consolidations; |
| | ● | enter into sale and leaseback transactions; |
| | ● | enter into arrangements that restrict our and our restricted subsidiaries' ability to pay dividends; |
| | ● | change the nature of the business conducted by Yankee and its subsidiaries; |
| | ● | designate our subsidiaries as unrestricted subsidiaries; |
| | ● | enter into certain hedging agreements; |
| | ● | enter into certain burdensome agreements; and |
| | ● | activities of Holding Corp. (pursuant to the New Term Loan Facility only) |
In addition, these agreements require Yankee Candle to maintain specified financial ratios and satisfy other financial conditions, including a “consolidated net total leverage ratio” (as defined in the New Term Loan Facility) and a “consolidated fixed charge coverage ratio” (as defined in the ABL Facility).
Our ability to comply with the covenants and restrictions contained in the indenture governing the Senior PIK Notes, the indentures governing Yankee Candle's senior notes and senior subordinated notes and Yankee Candle’s New Term Loan Facility and ABL Facility may be affected by economic conditions and by financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these covenants in future periods will also depend substantially on the pricing and sales volume of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy. The breach of any of these covenants or restrictions could result in a default under the indenture governing the Senior PIK Notes, the indentures governing Yankee Candle's senior notes and senior subordinated notes and Yankee Candle’s New Term Loan Facility and ABL Facility that would permit the holders or applicable lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest and any applicable redemption premium. In that case, Yankee Candle may be unable to make borrowings under its New Term Loan Facility and ABL Facility, may not be able to repay the amounts due under Yankee Candle's senior notes and senior subordinated notes and Yankee Candle’s New Term Loan Facility and ABL Facility and may not be able make cash available to YCC Holdings, by dividend, debt repayment or otherwise to enable YCC Holdings to make payments on the Senior PIK Notes. This could have serious consequences to our financial position, results of operations and/or cash flows and could cause us to become bankrupt or insolvent.
YCC Holdings and Holding Corp. have no independent operations or assets. Their ability to repay their debt is dependent on cash flow generated by Yankee Candle and its subsidiaries. Restrictions in our subsidiaries' debt instruments and under applicable law limit their ability to provide funds to us.
YCC Holdings has no assets other than the stock of Yankee Finance, which has no assets, and the stock of Holding Corp., which has no assets other than the stock of Yankee Candle. Furthermore, YCC Holdings and Holding Corp. conduct no operations. Accordingly, repayment of their indebtedness is dependent, to a significant extent, on the generation of cash flow by Yankee Candle and its subsidiaries and their ability to make such cash available to YCC Holdings and Holding Corp., by dividend, debt repayment or otherwise. Yankee Candle and its subsidiaries are distinct legal entities and they do not have any obligation to pay amounts due on the notes or to make funds available for that purpose or other obligations in the form of loans, distributions or otherwise. Yankee Candle and its subsidiaries may not be able to, or may not be permitted to, make distributions to YCC Holdings and Holding Corp. in order to enable them to make payments in respect of their indebtedness. Yankee Candle’s New Term Loan Facility and ABL Facility and Yankee Candle's senior notes and senior subordinated notes significantly restrict the ability of Holding Corp. and its other subsidiaries to pay dividends or make distributions or any other payments with respect to the Senior PIK Notes. In addition, under certain circumstances, legal restrictions may limit the YCC Holdings’ and Holding Corp.’s ability to obtain cash from Yankee Candle. Under the Delaware General Corporation Law (the "DGCL"), Holding Corp.’s subsidiaries may only make dividends (i) out of their "surplus" as defined in the DGCL or (ii) if there is no such surplus, out of their net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Under fraudulent transfer laws, our subsidiaries may not pay dividends if the relevant entity is insolvent or is rendered insolvent thereby. The measures of insolvency for purposes of these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if:
| | ● | the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; |
| | ● | the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or |
| | ● | it could not pay its debts as they became due. |
While we believe that our relevant subsidiaries currently have surplus and are not insolvent, there can otherwise be no assurance that these subsidiaries will not become insolvent or will be permitted to make distributions in the future in compliance with these restrictions in amounts needed to service our indebtedness.
The interests of our controlling stockholders may differ from the interests of the noteholders.
Private equity funds managed by Madison Dearborn Partners, LLC (“Madison Dearborn”) indirectly own substantially all of our common stock. As a result, Madison Dearborn exercises a controlling influence over matters requiring stockholder approval and our policies and affairs. The interests of Madison Dearborn may conflict with those of noteholders. The controlling stockholders may have an incentive to increase the value of their investment or cause us to distribute funds to the detriment of our financial condition and affect our ability to make payments on outstanding notes. In addition, these funds have the power to elect a majority of our Board of Directors and appoint new officers and management and, therefore, effectively control many other major decisions regarding our operations. Additionally, our controlling stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our controlling stockholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Finally, the indenture governing the Senior PIK Notes and Yankee Candle’s notes currently permit us to pay advisory fees and dividends or make other restricted payments under certain circumstances, and Madison Dearborn may have an interest in our doing so.
Because we are not a diversified company and are primarily dependent upon one industry, we have less flexibility in reacting to unfavorable consumer trends, adverse economic conditions or business cycles.
We rely primarily on the sale of premium scented candles and related products in the giftware industry. In the event that sales of these products decline or do not meet our expectations, we cannot rely on the sales of other products to offset such a shortfall. As a significant portion of our expenses is comprised of fixed costs, such as lease payments, our ability to decrease expenses in response to adverse business conditions is limited in the short term. As a result, unfavorable consumer trends, adverse economic conditions or changes in the business cycle could have a material and adverse impact on our earnings.
If we lose our senior executive officers, or are unable to attract and retain the talent required for our business, our business could be disrupted and our financial performance could suffer.
Our success is in part dependent upon the retention of our senior executive officers. Our senior management team has extensive consumer packaged goods, retail, wholesale and manufacturing experience with an average of over 25 years of relevant experience. If our senior executive officers become unable or unwilling to participate in our business, our future business and financial performance could be materially affected. In addition, as our business grows in size and complexity we must be able to continue to attract, develop and retain qualified personnel sufficient to allow us to adequately manage and grow our business. If we are unable to do so, our operating results could be negatively impacted. We cannot guarantee that we will be able to attract and retain personnel as and when necessary in the future.
Our international operations subject us to a number of risks, including unfavorable regulatory, labor, tax and political conditions in foreign countries.
Sales from our international operations were $23.9 million for the thirteen weeks ended March 31, 2012 and were primarily generated in Europe. As a result, we are subject to the legal, political, social and regulatory requirements and economic conditions of many jurisdictions other than the U.S. Risks inherent to maintaining international operations, include, but are not limited to, the following:
| | ● | withholding taxes or other taxes on our foreign income, tariffs or other restrictions on foreign trade and investment, including currency exchange controls imposed by or in other countries; |
| | ● | the inability to obtain, maintain or enforce intellectual property rights in other jurisdictions, at a reasonable cost or at all; |
| | ● | difficulty with staffing and managing widespread operations; |
| | ● | trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make our product offering less competitive in some countries; and |
| | ● | our establishing ourselves and becoming tax resident in foreign jurisdictions. |
Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success in these international markets depends, in part, on our ability to succeed under differing legal, regulatory, economic, social and political conditions. There can be no assurance that we will be able to develop, implement and maintain policies and strategies that will be effective in each location where we do business. As a result of any of the foregoing factors, our financial condition, results of operations, business and/or prospects could be materially adversely affected.
In the past we have been required to recognize a pre-tax, non-cash impairment charge related to goodwill and other intangible assets, and we may be required to recognize additional impairment charges against goodwill or intangible assets in the future.
At March 31, 2012, the net carrying value of our goodwill and intangible assets totaled approximately $643.6 million and $268.3 million, respectively. Our amortizing intangible assets are subject to impairment testing in accordance with the Accounting Standards Codification (the “ASC”) Topic 350 “Intangibles – Goodwill and Other,” and our non-amortizing goodwill and trade names are subject to impairment tests in accordance with the Intangibles, Goodwill and Other Topic of the ASC. We review the carrying value of our intangible assets and goodwill for impairment whenever events or circumstances indicate that their carrying value may not be recoverable, at least annually for our goodwill and trade names. Significant negative industry or economic trends, including disruptions to our business, unexpected significant changes or planned changes in the use of our intangible assets, and mergers and acquisitions could result in an impairment charge for any of our intangible assets, goodwill or other long-lived assets.
In the impairment analyses we used certain estimates and assumptions, including a combination of market-based and income-based approaches, each of which were weighted at 50% for the impairment test performed as of November 5, 2011. The market-based approach estimates fair value by applying multiples of potential earnings, such as EBITDA and revenue, of publicly traded comparable companies. We believe this approach is appropriate because it provides a fair value using multiples from companies with operations and economic characteristics similar to our reporting units. The income-based approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting units expected long-term operations and cash flow performance. The income-based approach is based on future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. The future projections are based on both past performance and the projections and assumptions used in our current operating plan. Such assumptions are subject to change as a result of changing economic and competitive conditions and could result in additional impairment charges. Further, if the economic market conditions were to worsen and our estimated future discounted cash flows decrease further we may incur additional impairment charges. Additional impairment charges related to our goodwill, tradenames or other intangible assets could have a significant impact on our financial position and results of operations.
Seasonal, quarterly and other fluctuations in our business, and general industry and market conditions, could affect the market for our results of operations.
Our sales and operating results vary from quarter to quarter. We have historically realized higher sales and operating income in our fourth quarter, particularly in our retail business, which accounts for a larger portion of our sales. We believe that this has been due primarily to an increase in giftware industry sales during the holiday season of the fourth quarter. In addition, in anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. As a result of this seasonality, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. In addition, we may also experience quarterly fluctuations in our sales and income depending on various factors, including, among other things, the number of new retail stores we open in a particular quarter, changes in the ordering patterns of our wholesale customers during a particular quarter, pricing and promotional activities of our competitors, and the mix of products sold. Most of our operating expenses, such as rent expense, advertising and promotional expense and employee wages and salaries, do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a particular quarter are below our expectations, we might not be able to proportionately reduce operating expenses for that quarter, and therefore a sales shortfall could have a disproportionate effect on our operating results for that quarter. Further, our comparable store sales from our retail business in a particular quarter could be adversely affected by competition, the opening nearby of new retail stores or wholesale locations, economic or other general conditions or our inability to execute a particular business strategy. As a result of these factors, we may report in the future sales, operating results or comparable store sales that do not match the expectations of analysts and investors. This could cause the price of the notes to decline.
We incur product liability claims, which increase our costs and impact our financial condition and operating results.
We may be subjected to various product liability claims, including claims that relate to the use of candles and claims that products include inadequate instructions as to their uses or inadequate warnings concerning possible side effects. It is possible that widespread product liability claims could increase our costs, and adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future.
Other factors may also cause our actual results to differ materially from our estimates and projections.
In addition to the foregoing, there are other factors which may cause our actual results to differ materially from our estimates and projections. Such factors include the following:
| | ● | changes in the general economic conditions in the U.S. including, but not limited to, consumer debt levels, financial market performance, interest rates, consumer sentiment, inflation, commodity prices, unemployment and other factors that impact consumer confidence and spending; |
| | ● | changes in levels of competition from our current competitors and potential new competition from both retail stores and alternative methods or channels of distribution; |
| | ● | loss of a significant vendor or prolonged disruption of product supply; |
| | ● | the successful introduction of new products and technologies in our product categories, including the frequency of such introductions, the level of consumer acceptance of new products and technologies, and their impact on demand for existing products and technologies; |
| | ● | the impact of changes in pricing and profit margins associated with our sourced products or raw materials; |
| | ● | changes in income tax laws or regulations, or in interpretations of existing income tax laws or regulations; |
| | ● | adverse outcomes from significant litigation matters; |
| | ● | changes in the interpretation or enforcement of laws and regulations regarding our business or the sale of our products, or the ingredients contained in our products; or the imposition of new or additional restrictions or regulations regarding the same; |
| | ● | changes in our ability to attract, retain and develop highly-qualified employees or changes in the cost or availability of a sufficient labor force to manage and support our operations; |
| | ● | changes in our ability to meet objectives with regard to business acquisitions or new business ventures; |
| | ● | the occurrence of severe weather events prohibiting or discouraging consumers from traveling to retail or wholesale locations; |
| | ● | the disruption of global, national or regional transportation systems; |
| | ● | the occurrence of certain material events including natural disasters, acts of terrorism, the outbreak of war or other significant national or international events; |
| | ● | an outbreak of certain public health issues, including contagious diseases; |
| | ● | our ability to react in a timely manner and maintain our critical business processes and information systems capabilities in a disaster recovery situation; and |
| | ● | changes in our ability to manage our existing computer systems and technology infrastructures, and our ability to implement successfully new computer systems and technology infrastructures. |
Not Applicable
| Item 3. | Defaults Upon Senior Securities. |
Not Applicable
Not Applicable
Not Applicable
| YCC Holdings Certification of Harlan M. Kent Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| YCC Holdings Certification of Gregory W. Hunt Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| Yankee Holding Corp. Certification of Harlan M. Kent Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| Yankee Holding Corp. Certification of Gregory W. Hunt Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| YCC Holdings Certification of Harlan M. Kent Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| YCC Holdings Certification of Gregory W. Hunt Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| Yankee Holding Corp. Certification of Harlan M. Kent Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| Yankee Holding Corp. Certification of Gregory W. Hunt Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, dated May 11, 2012 |
| | |
| 101 | Interactive Data Files |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | YANKEE HOLDING CORP. |
| | | |
| Date: May 11, 2012 | By: | /s/ GREGORY W. HUNT |
| | | Gregory W. Hunt |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | YCC HOLDINGS LLC |
| | | |
| Date: May 11, 2012 | By: | /s/ GREGORY W. HUNT |
| | | Gregory W. Hunt |
| | | Treasurer |
| | | (Principal Financial and Accounting Officer) |
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