##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended: April 1, 2006
 Commission File Number: 001-15023
 THE YANKEE CANDLE COMPANY, INC.
  MASSACHUSETTS
    
    04 259 1416(State
or other jurisdiction of
incorporation or organization)
    

(I.R.S.
Employer Identification No.)
 
 
 þ o
 þ o o
 o þ




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##### 



Item
    
    PagePART I. Financial InformationItem 1. Financial Statements-UnauditedCondensed Consolidated Balance Sheets as of April 1, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income
for the Thirteen weeks ended April 1, 2006 and April 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Thirteen weeks ended April 1, 2006 and April 2, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. Other InformationItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26Signatures
    
    
    27EX-31.1 Certification of CEOEX-31.2 Certification of CFOEX-32.1 Certification of CEOEX-32.2 Certification of CFO




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##### Table of Contents



PART I
 Financial Information
 
 Item 1. Financial Statements.
  
   April 1,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9,091
    
    
    $
    12,655Accounts receivable, net
    
    
    42,920
    
    
    
    42,546Inventory
    
    
    63,114
    
    
    
    55,528Prepaid expenses and other current assets
    
    
    10,118
    
    
    
    9,060Deferred tax assets
    
    
    5,428
    
    
    
    6,734TOTAL CURRENT ASSETS
    
    
    130,671
    
    
    
    126,523PROPERTY, PLANT AND EQUIPMENT-NET
    
    
    135,218
    
    
    
    139,089MARKETABLE SECURITIES
    
    
    2,284
    
    
    
    2,223DEFERRED TAX ASSETS
    
    
    73,000
    
    
    
    73,975GOODWILL
    
    
    6,035
    
    
    
    6,035INTANGIBLE ASSETS
    
    
    6,594
    
    
    
    6,849OTHER ASSETS
    
    
    473
    
    
    
    440TOTAL ASSETS
    
    $
    354,275
    
    
    $
    355,134LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    14,827
    
    
    $
    21,068Accrued payroll
    
    
    10,267
    
    
    
    14,319Accrued income taxes
    
    
    1,905
    
    
    
    20,828Accrued purchases of property and equipment
    
    
    2,863
    
    
    
    5,944Accrued repurchases of common stock
    
    
    
    
    
    
    5,463Other accrued liabilities
    
    
    13,531
    
    
    
    22,919TOTAL CURRENT LIABILITIES
    
    
    43,393
    
    
    
    90,541DEFERRED COMPENSATION OBLIGATION
    
    
    2,330
    
    
    
    2,418LONG-TERM DEBT
    
    
    208,000
    
    
    
    178,000DEFERRED RENT
    
    
    15,767
    
    
    
    16,031STOCKHOLDERS EQUITY
    
    
    84,785
    
    
    
    68,144TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    354,275
    
    
    $
    355,134
  3




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For the Thirteen Weeks EndedApril 1,
    
    
    April 2,2006
    
    
    2005Sales
    
    $
    133,914
    
    
    $
    119,255Cost of sales
    
    
    61,936
    
    
    
    54,424Gross profit
    
    
    71,978
    
    
    
    64,831Selling expenses
    
    
    37,267
    
    
    
    32,493General and administrative expenses
    
    
    15,464
    
    
    
    13,532Income from operations
    
    
    19,247
    
    
    
    18,806Interest income
    
    
    (7
    )
    
    
    (6
    )Interest expense
    
    
    2,788
    
    
    
    936Other expense (income)
    
    
    (145
    )
    
    
    218Income before provision for income taxes
    
    
    16,611
    
    
    
    17,658Provision for income taxes
    
    
    4,140
    
    
    
    6,887Net income
    
    $
    12,471
    
    
    $
    10,771Basic earnings per share
    
    $
    0.30
    
    
    $
    0.23Diluted earnings per share
    
    $
    0.30
    
    
    $
    0.23Weighted average shares:Basic
    
    
    41,016
    
    
    
    46,877Diluted
    
    
    41,262
    
    
    
    47,312
  4




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For the Thirteen Weeks EndedApril 1,
    
    
    April 2,2006
    
    
    2005CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:Net income
    
    $
    12,471
    
    
    $
    10,771Adjustments to reconcile net income to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    6,485
    
    
    
    5,908Unrealized (gain) loss on marketable securities
    
    
    (56
    )
    
    
    36Stock-based compensation expense
    
    
    1,182
    
    
    
    746Deferred taxes
    
    
    2,281
    
    
    
    2,004Loss on disposal of fixed assets
    
    
    65
    
    
    
    2Changes in assets and liabilities:Accounts receivable, net
    
    
    (313
    )
    
    
    (5,795
    )Inventory
    
    
    (7,509
    )
    
    
    (1,113
    )Prepaid expenses and other assets
    
    
    (1,097
    )
    
    
    (550
    )Investments in marketable securities
    
    
    (386
    )
    
    
    (344
    )Accounts payable
    
    
    (6,248
    )
    
    
    564Income taxes payable
    
    
    (18,438
    )
    
    
    (20,966
    )Accrued expenses and other liabilities
    
    
    (18,899
    )
    
    
    (10,530
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (30,462
    )
    
    
    (19,267
    )CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (5,360
    )
    
    
    (3,956
    )Purchase of intangible assets
    
    
    
    
    
    
    (604
    )Proceeds from sale of property and equipment
    
    
    7
    
    
    
    10NET CASH USED IN INVESTING ACTIVITIES
    
    
    (5,353
    )
    
    
    (4,550
    )CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Net borrowings under bank credit agreements
    
    
    30,000
    
    
    
    45,000Payments for redemption of common stock
    
    
    
    
    
    
    (39,911
    )Deferred financing costs
    
    
    (135
    )
    
    
    Excess tax
benefit from exercise of stock options
    
    
    702
    
    
    
    Net proceeds from issuance of common stock
    
    
    1,668
    
    
    
    465NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    32,235
    
    
    
    5,554EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    16
    
    
    
    (26
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,564
    )
    
    
    (18,289
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    12,655
    
    
    
    36,424CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    9,091
    
    
    $
    18,135SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    2,615
    
    
    $
    462Income taxes
    
    $
    19,587
    
    
    $
    25,846Net decrease in accrued purchases of property and equipment
    
    $
    3,081
    
    
    $
    
  5




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6




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For the Thirteen Weeks EndedApril 1, 2006
    
    
    April 2, 2005Net income, as reported
    
    $
    12,471
    
    
    $
    10,771Add: Stock-based compensation expense
included in reported net income, net of
related tax effects
    
    
    721
    
    
    
    455Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (721
    )
    
    
    (584
    )Pro forma net income
    
    $
    12,471
    
    
    $
    10,642Earnings per share:Basic-as reported
    
    $
    0.30
    
    
    $
    0.23Basic-pro forma
    
    $
    0.30
    
    
    $
    0.23Weighted average basic shares outstanding
    
    
    41,016
    
    
    
    46,877Diluted-as reported
    
    $
    0.30
    
    
    $
    0.23Diluted-pro forma
    
    $
    0.30
    
    
    $
    0.22Weighted average diluted shares
outstanding
    
    
    41,262
    
    
    
    47,312
  Stock Options
    7




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##### Table of Contents



2006
    
    2005Volatility
    
    
    31.4
    %
    
    
    34.8
    %Dividend yield
    
    
    0.2
    %
    
    
    0.0
    %Risk free interest rate
    
    
    3.7
    %
    
    
    3.1
    %Expected lives
    
    4.2 years
    
    4 years
   Weighted AverageExercise PriceOptions
    
    
    Per ShareOutstanding at December 31, 2005
    
    
    2,054,080
    
    
    $
    22.35Granted
    
    
    329,350
    
    
    
    27.99Exercised
    
    
    (110,675
    )
    
    
    15.07Forfeited
    
    
    (78,450
    )
    
    
    28.18Outstanding at April 1, 2006
    
    
    2,194,305
    
    
    $
    23.36Exercisable at April 1, 2006
    
    
    974,429
    
    
    $
    18.13
  Weighted AverageGrant DateOptions
    
    

Fair
ValueUnvested at
December 31 2005
    
    
    992,588
    
    
    $
    7.97Granted
    
    
    329,350
    
    
    
    8.16Vested
    
    
    (31,562
    )
    
    
    7.84Forfeited
    
    
    (70,500
    )
    
    
    7.70Unvested at
April 1, 2006
    
    
    1,219,876
    
    
    $
    8.04
    AverageRange of Exercise
    
    
    
    Options
    
    Options
    
    Remaining LifePrices
    
    
    
    Outstanding
    
    Exercisable
    
    (Years)$4.25
    
    
    
    
    16,498
    
    
    
    16,498
    
    
    
    2.411.88-16.20
    
    
    
    
    382,500
    
    
    
    377,500
    
    
    
    5.116.80-18.00
    
    
    
    
    181,407
    
    
    
    178,282
    
    
    
    4.321.13-29.75
    
    
    
    
    1,242,450
    
    
    
    381,837
    
    
    
    8.231.12-32.81
    
    
    
    
    371,450
    
    
    
    20,312
    
    
    
    9.1$4.25-$32.81
    
    
    
    
    2,194,305
    
    
    
    974,429
    
    
    
    7.4
 Restricted Stock and Performance Shares
  8




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##### Table of Contents



Weighted AverageRestricted
    
    
    Performance
    
    
    Grant DateShares
    
    
    Shares
    
    
    Fair ValueUnvested shares at December 31,
2005
    
    
    
    
    
    
    188,700
    
    
    $
    31.31Granted
    
    
    84,000
    
    
    
    38,000
    
    
    
    28.01Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    (6,300
    )
    
    
    33.03Unvested shares at April 1, 2006
    
    
    84,000
    
    
    
    220,400
    
    
    $
    29.95
   April 1,
    
    
    December 31,2006
    
    
    2005Finished goods
    
    $
    59,194
    
    
    $
    52,164Work-in-process
    
    
    438
    
    
    
    1Raw materials and packaging
    
    
    6,037
    
    
    
    5,91865,669
    
    
    
    58,083Less LIFO adjustment
    
    
    (2,555
    )
    
    
    (2,555
    )$
    63,114
    
    
    $
    55,528
   April 1, 2006
    
    
    December 31, 2005Average
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetUseful Life
    
    
    Carrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Book(in years)
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueIndefinite life:Tradename
    
    
    N/A
    
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520
    
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520Finite life:Deferred
financing costs
    
    
    5
    
    
    
    1,122
    
    
    
    (427
    )
    
    
    695
    
    
    
    987
    
    
    
    (393
    )
    
    
    594Customer list
    
    
    4
    
    
    
    3,880
    
    
    
    (1,525
    )
    
    
    2,355
    
    
    
    3,880
    
    
    
    (1,283
    )
    
    
    2,597Non-competes
    
    
    3  4
    
    
    
    1,123
    
    
    
    (435
    )
    
    
    688
    
    
    
    1,123
    
    
    
    (361
    )
    
    
    762Trademarks
    
    
    15
    
    
    
    231
    
    
    
    (182
    )
    
    
    49
    
    
    
    231
    
    
    
    (178
    )
    
    
    53Formulas
    
    
    3
    
    
    
    431
    
    
    
    (144
    )
    
    
    287
    
    
    
    431
    
    
    
    (108
    )
    
    
    3236,787
    
    
    
    (2,713
    )
    
    
    4,074
    
    
    
    6,652
    
    
    
    (2,323
    )
    
    
    4,329Total intangible
assets
    
    
    
    
    
    $
    9,307
    
    
    $
    (2,713
    )
    
    $
    6,594
    
    
    $
    9,172
    
    
    $
    (2,323
    )
    
    $
    6,849
 9




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2006
    
    $
    1,1922007
    
    
    1,5902008
    
    
    8692009
    
    
    3602010
    
    
    63Total
    
    $
    4,074
   
    
    A required consolidated total debt to consolidated EBITDA ratio of no
more than 3.00 to 1.00 (at April 1, 2006 this ratio was 1.29 to 1.00
). The original Credit Facility required a consolidated total debt to
consolidated EBITDA ratio of no more than 2.25 to 1.00.
    
    A fixed charge coverage ratio (the ratio of the sum of consolidated
EBITDA plus rent expense, less cash taxes paid and capital
expenditures to the sum of consolidated cash interest expense plus
rent expense and dividends) of no less than 2.00 to 1.00 (for the
thirteen weeks ended April 1, 2006 this ratio was 2.42 to 1.00). The
original Credit Facility required a fixed charge coverage ratio of no
less than 2.25 to 1.00.
    
    Amounts outstanding under the Amended Credit Facility bear interest at
a rate equal to, at the Companys option, Citizens Bank prime rate or
a Eurodollar rate that ranges from 0.50% to 1.125% above LIBOR. Under
the original Credit Facility, the Eurodollar rate ranged from 0.50% to
0.85% above LIBOR.
    
    The Company is required to pay the lenders a quarterly commitment fee
on the unused revolving loan commitment amount which ranges from
0.125% to 0.25%. Under the original Credit Facility, the commitment
fee ranged from 0.125% to 0.20%.
   10




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
 
     Costs Paid During theAccrued as of
    
    
    Thirteen Weeks
    
    
    Accrued as ofDecember 31, 2005
    
    
    Ended April 1, 2006
    
    
    April 1, 2006Occupancy
    
    $
    1,150
    
    
    $
    809
    
    
    $
    341Other expenses
    
    
    84
    
    
    
    26
    
    
    
    58Employee related
    
    
    473
    
    
    
    133
    
    
    
    340Total
    
    $
    1,707
    
    
    $
    968
    
    
    $
    739
    11




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For the Thirteen Weeks EndedApril 1, 2006
    
    
    April 2, 2005(in thousands)Basic
    
    
    41,016
    
    
    
    46,877Add:Shares issuable pursuant to stock awards
    
    
    246
    
    
    
    435Diluted
    
    
    41,262
    
    
    
    47,312
        Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofThirteen weeks ended April 1, 2006
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    61,637
    
    
    $
    72,277
    
    
    $
    
    
    
    $
    133,914Gross Profit
    
    
    38,759
    
    
    
    33,219
    
    
    
    
    
    
    
    71,978Selling Expenses
    
    
    31,976
    
    
    
    5,291
    
    
    
    
    
    
    
    37,267Operating Margin
    
    
    6,783
    
    
    
    27,928
    
    
    
    (15,464
    )
    
    
    19,247Other expense
    
    
    
    
    
    
    
    
    
    
    (2,636
    )
    
    
    (2,636
    )Income before provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,611
 12




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Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofThirteen weeks ended April 2, 2005
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    51,819
    
    
    $
    67,436
    
    
    $
    
    
    
    $
    119,255Gross Profit
    
    
    31,441
    
    
    
    33,390
    
    
    
    
    
    
    
    64,831Selling Expenses
    
    
    28,340
    
    
    
    4,153
    
    
    
    
    
    
    
    32,493Operating Margin
    
    
    3,102
    
    
    
    29,236
    
    
    
    (13,532
    )
    
    
    18,806Other expense
    
    
    
    
    
    
    
    
    
    
    (1,148
    )
    
    
    (1,148
    )Income before provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,658
  13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Sales/receivables
  Other Income Statement Accounts
    Inventory
  14




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Taxes
  Value of long-lived assets, including intangibles
  Stock-based compensation
     15




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Self-insurance
  PERFORMANCE MEASURES
  FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
  Seasonality.
 New Store Openings.
 New Wholesale Accounts.
 RESULTS OF OPERATIONS
 Overview
  16




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®
 ®
  EXECUTIVE SUMMARY
 
    
    For the thirteen weeks ended April 1, 2006, net sales increased 12.3% to
$133.9 million from $119.3 million for the thirteen weeks ended April 2, 2005. We reported net
earnings of $12.5 million and diluted earnings per share of $0.30 for the thirteen weeks ended
April 1, 2006 compared to net earnings of $10.8 million and diluted earnings per share of $0.23
for the thirteen weeks ended April 2, 2005.
    
    In the first quarter ended April 1, 2006, we recognized a one-time benefit of $2.3
million, or approximately $0.05 of diluted earnings per share, associated with the closure
of an IRS audit for prior years. The benefit was primarily due to favorable transfer
pricing adjustments associated with sales to our international subsidiary. As a result of
this benefit, our effective tax rate for the quarter ended April 1, 2006 was 24.9%.
Excluding this benefit, our effective tax rate in the first quarter of fiscal 2006 would
have been 39.0%.
    
    We opened four new retail stores during the first quarter of 2006 and closed 13
underperforming stores, bringing our total retail store count to 381 as of April 1, 2006.
The 13 stores closed during the first quarter included 12 stores that were closed in
connection with the restructuring plan initiated in 2005 and one store that was closed due
to the natural expiration of its lease. We added approximately 760 net new wholesale
locations during the thirteen weeks ended April 1, 2006, bringing our total wholesale
location count to approximately 19,300 including our European operations.
    
    We ended the first quarter with $208.0 million of outstanding borrowings under our
Amended Credit Facility as compared to $178.0 million at December 31, 2005. The increase
was primarily due to funding of working capital requirements. Borrowing availability
totaled $39.1 million at April 1, 2006.
 Thirteen weeks ended April 1, 2006 versus April 2, 2005
   Retail Sales
  17




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Wholesale Sales
     Retail Gross Profit
  Wholesale Gross Profit
    18




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Retail Selling Expenses
  Wholesale Selling Expenses
    Retail Operations
  Wholesale Operations
    19




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LIQUIDITY AND CAPITAL RESOURCES
    
 
  20




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 21




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If we fail to grow our business as planned, our future operating results may suffer. As we grow, it
will be difficult to maintain our historical growth rates.
   We may be unable to continue to open new stores successfully.
  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 and liquidity and our ability to continue to grow our business.
  22




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A material decline in consumers discretionary income could cause our sales and income to decline
  Because we are not a diversified company and are effectively dependent upon one industry, we have
less flexibility in reacting to unfavorable consumer trends, adverse economic conditions or
business cycles.
  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.
  Many aspects of our manufacturing and distribution facilities are customized for our business; as a
result, the loss of one of these facilities would disrupt our operations.
  Seasonal, quarterly and other fluctuations in our business, and general industry and market
conditions, could affect the market for our common stock.
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Sustained interruptions in the supply of products from overseas may affect our operating results.
  Provisions in our corporate documents and Massachusetts law could delay or prevent a change in
control of Yankee Candle.
  
    
    authorizing the issuance of preferred stock, the terms of which may be determined
at the sole discretion of the board of directors,
 
    
    providing for a classified board of directors, with staggered three-year terms, and
 
    
    establishing advance notice requirements for nominations for election to the board
of directors or for proposing matters that can be acted on by stockholders at
meetings.
  We are subject to a class action lawsuit in California.
  Further increases in oil prices will negatively impact our cost of goods sold and margins. Any
shortages in refined oil supplies could impact our wax supply. Further increases in wax prices
above the rate of inflation may also negatively impact our cost of goods sold and margins.
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Other factors may also cause our actual results to differ materially from our estimates and
projections.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits
 31.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, dated May 10, 2006.31.2
    
    Certification of Bruce H. Besanko Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, dated May 10, 2006.32.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, dated May 10, 2006.32.2
    
    Certification of Bruce H. Besanko Pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, dated May 10, 2006.
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/s/ Bruce H. BesankoDate: May 10, 2006
    
    By: Bruce H. BesankoSenior Vice President, Finance
and Chief Financial Officer(Principal Financial Officer)
 27