THE CONTAINER STORE GROUP, INC. Cautionary note regarding forward-looking statements
This report, including this Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. In some
cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "expects," "plans," "anticipates," "could," "intends,"
"target," "projects," "contemplates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other similar
expressions. The forward-looking statements included in this Quarterly Report,
including without limitation statements regarding expectations for our business,
anticipated financial performance and liquidity, including, without limitation
impacts of, and our plans in response to, the COVID-19 pandemic, and anticipated
capital expenditures and other expenses, are only predictions and involve known
and unknown risks, uncertainties and other important factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. These include, but are not limited to: the COVID-19
pandemic and the associated impact on our business, results of operations and
financial condition; our ability to continue to lease space on favorable terms;
costs and risks relating to new store openings; quarterly and seasonal
fluctuations in our operating results; cost increases that are beyond our
control; our inability to protect our brand; our failure or inability to protect
our intellectual property rights; overall decline in the health of the economy,
consumer spending, and the housing market; our inability to source and market
new products to meet consumer preferences; failure to successfully anticipate
consumer preferences and demand; competition from other stores and
internet-based competition; vendors may sell similar or identical products to
our competitors; our and our vendors' vulnerability to natural disasters and
other unexpected events; disruptions at our Elfa manufacturing facilities;
deterioration or change in vendor relationships or events that adversely affect
our vendors or their ability to obtain financing for their operations, including
COVID-19; our payment terms for goods and services, and our negotiation of
alternative terms for lease payments and other business contracts, each as a
result of COVID-19; product recalls and/or product liability, as well as changes
in product safety and other consumer protection laws; risks relating to
operating two distribution centers; our dependence on foreign imports for our
merchandise; our reliance upon independent third party transportation providers;
our inability to effectively manage our online sales; effects of a security
breach or cyber-attack of our website or information technology systems,
including relating to our use of third-party web service providers; damage to,
or interruptions in, our information systems as a result of external factors,
working from home arrangements, staffing shortages and difficulties in updating
our existing software or developing or implementing new software; our
indebtedness may restrict our current and future operations, and we may not be
able to refinance our debt on favorable terms, or at all; fluctuations in
currency exchange rates; our inability to maintain sufficient levels of cash
flow to meet growth expectations; our fixed lease obligations; disruptions in
the global financial markets leading to difficulty in borrowing sufficient
amounts of capital to finance the carrying costs of inventory to pay for capital
expenditures and operating costs; changes to global markets and inability to
predict future interest expenses; our reliance on key executive management; our
inability to find, train and retain key personnel; labor relations difficulties;
increases in health care costs and labor costs; violations of the
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report. Because forward-looking statements are inherently
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subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.
Unless the context otherwise requires, references in this Quarterly Report on
Form 10-Q to the "Company," "we," "us," and "our" refer to
We follow a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of
thirteen weeks grouped into two four-week "months" and one five-week "month",
and our fiscal year is the 52- or 53-week period ending on the Saturday closest
to
Overview
The Container Store® is the original and leading specialty retailer of storage
and organization products and solutions in
Our operations consist of two operating segments:
?
? Elfa,
Business Update Related to Coronavirus
The novel coronavirus ("COVID-19") pandemic had a negative impact on the Company's first quarter of fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. During the first quarter of fiscal 2021, all stores were open. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply as COVID-19 and other uncertainties continue to unfold. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores. We
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will continue to monitor guidance from the
Note on Dollar Amounts
All dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated.
Results of Operations
The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Thirteen Weeks Ended
July 3, June 27,
2021 2020
Net sales $ 245,315 $ 151,686 Cost of sales (excluding depreciation and amortization) 98,991 73,447 Gross profit
146,324 78,239
Selling, general, and administrative expenses
(excluding depreciation and amortization) 110,148 86,265
Stock-based compensation 869 832
Pre-opening costs 594 9
Depreciation and amortization 8,201 8,949
Other expenses - 809
Gain on disposal of assets (5) (7)
Income (loss) from operations 26,517 (18,618)
Interest expense, net 3,185 4,950
Income (loss) before taxes 23,332 (23,568)
Provision (benefit) for income taxes 5,660 (6,898)
Net income (loss) $ 17,672 $ (16,670)
Net income (loss) per common share - basic $ 0.36 $ (0.34)
Net income (loss) per common share - diluted $ 0.35 $ (0.34)
Weighted-average common shares - basic 49,080,897 48,389,205
Weighted-average common shares - diluted 50,448,216 48,389,205
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Thirteen Weeks Ended
July 3, June 27,
2021 2020
Percentage of net sales:
Net sales 100.0 % 100.0 %
Cost of sales (excluding depreciation and
amortization) 40.4 % 48.4 %
Gross profit 59.6 % 51.6 %
Selling, general, and administrative expenses
(excluding depreciation and amortization) 44.9 % 56.9 %
Stockbased compensation 0.4 % 0.5 %
Preopening costs 0.2 % 0.0 %
Depreciation and amortization 3.3 % 5.9 %
Other expenses - % 0.5 %
Gain on disposal of assets (0.0) % (0.0) %
Income (loss) from operations 10.8 % (12.3) %
Interest expense, net 1.3 % 3.3 %
Income (loss) before taxes 9.5 % (15.5) %
Provision (benefit) for income taxes 2.3 % (4.5) %
Net income (loss) 7.2 % (11.0) %
Operating data:
Number of stores at end of period (1) 94 93
NonGAAP measures (2):
Adjusted EBITDA (3) $ 33,502 $ 4,463
Adjusted net income (loss) (4) $ 18,151 $ (15,523)
Adjusted net income (loss) per common share -
diluted (4) $ 0.36 $ (0.32) In the first quarter of fiscal 2021, all 94 stores were open with strict
health and safety protocols and adherence to local regulations. In the first (1) quarter of fiscal 2020, the Company operated a total of 93 store locations,
the majority of which were temporarily closed for at least seven days, as a
result of COVID-19, and therefore were not considered comparable.
We have presented in the table above Adjusted EBITDA, adjusted net income
(loss), and adjusted net income (loss) per common share - diluted as
supplemental measures of financial performance that are not required by, or
presented in accordance with, accounting principles generally accepted in the
United States of America ("GAAP"). These non-GAAP measures should not be
considered as alternatives to net income or net loss as a measure of
financial performance or cash flows from operations as a measure of
liquidity, or any other performance measure derived in accordance with GAAP
and they should not be construed as an inference that our future results will
be unaffected by unusual or non-recurring items. These non-GAAP measures are
key metrics used by management, our board of directors, and Leonard Green and
Partners, L.P. ("LGP") to assess our financial performance. We present these
non-GAAP measures because we believe they assist investors in comparing our
performance across reporting periods on a consistent basis by excluding itemsthat we do not believe are indicative of our core operating performance and (2) because we believe it is useful for investors to see the measures that
management uses to evaluate the Company. These non-GAAP measures are also
frequently used by analysts, investors and other interested parties to
evaluate companies in our industry. In evaluating these non-GAAP measures,
you should be aware that in the future we will incur expenses that are the
same as or similar to some of the adjustments in this presentation. Our
presentation of these non-GAAP measures should not be construed to imply that
our future results will be unaffected by any such adjustments. Management
compensates for these limitations by relying on our GAAP results in addition
to using non-GAAP measures supplementally. Our non-GAAP measures are not
necessarily comparable to other similarly titled captions of other companies
due to different methods of calculation. Please refer to footnotes (3) and
(4) of this table for further information regarding why we believe each
non-GAAP measure provides useful information to investors regarding our
financial condition and results of operations, as well as the additional
purposes for which management uses each non-GAAP financial measure.
Additionally, this Management's Discussion and Analysis also refers to the
change in Elfa third-party net sales after the conversion of Elfa's net sales
from Swedish krona to
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Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company's underlying performance.
EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on
Form 10-Q as supplemental measures of financial performance that are not
required by, or presented in accordance with, GAAP. We define EBITDA as net
income (loss) before interest, taxes, depreciation, and amortization.Adjusted EBITDA is calculated in accordance with our Secured Term Loan (3) Facility (as defined below) and the Revolving Credit Facility (as defined
below) and is one of the components for performance evaluation under our
executive compensation programs. Adjusted EBITDA reflects further adjustments
to EBITDA to eliminate the impact of certain items, including certain
non-cash and other items that we do not consider in our evaluation of ongoing
operating performance from period to period as discussed further below.
EBITDA and Adjusted EBITDA are included in this Quarterly Report on Form 10-Q because they are key metrics used by management, our board of directors and LGP to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management's discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre-opening costs and stock compensation expense. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
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A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is set forth
below:
Thirteen Weeks Ended
July 3, June 27,
2021 2020
Net income (loss) $ 17,672 $ (16,670)
Depreciation and amortization 8,201 8,949
Interest expense, net 3,185 4,950
Income tax provision (benefit) 5,660 (6,898) EBITDA
34,718 (9,669)
Pre-opening costs (a) 594 9
Non-cash lease expense (b) (3,355) 11,138
Stock-based compensation (c) 869 832
Management transition costs (d) 473 -
Foreign exchange losses (e) 11 121
COVID-19 costs (f) 192 1,223
COVID-19 severance (g) - 809
Adjusted EBITDA $ 33,502 $ 4,463 Non-capital expenditures associated with opening new stores and relocating (a) stores, including marketing expenses, travel and relocation costs, and
training costs. We adjust for these costs to facilitate comparisons of our
performance from period to period.
Reflects the extent to which our annual GAAP operating lease expense has been
above or below our cash operating lease payments. The amount varies depending
on the average age of our lease portfolio (weighted for size), as our GAAP
operating lease expense on younger leases typically exceeds our cashoperating lease payments, while our GAAP operating lease expense on older (b) leases is typically less than our cash operating lease payments. Non-cash
lease expense increased in the thirteen weeks ended June 27, 2020 due to
renegotiated terms with landlords due to COVID-19 that resulted in deferral
of $11,900 of certain cash lease payments, of which approximately $2,200
remains deferred as of July 3, 2021 , and the modification of certain lease
terms for a substantial portion of our leased properties.
Non-cash charges related to stock-based compensation programs, which vary (c) from period to period depending on volume and vesting timing of awards. We
adjust for these charges to facilitate comparisons from period to period.
Costs related to the transition of key executives including severance and (d) signing bonus recorded as selling, general and administrative expenses, which
we do not consider in our evaluation of ongoing performance.
(e) Realized foreign exchange transactional gains/losses our management does not
consider in our evaluation of our ongoing operations.
Includes incremental costs attributable to the COVID-19 pandemic, whichconsist of sanitization costs in the first quarter of fiscal 2021 and fiscal (f) 2020, and hazard pay for distribution center employees in the first quarter
of fiscal 2020, all of which are recorded as selling, general and
administrative expenses, which we do not consider in our evaluation of
ongoing performance.
Include costs incurred in the first quarter of fiscal 2020 associated with (g) the reduction in workforce as a result of the COVID-19 pandemic and the
related temporary store closures in the first quarter of fiscal 2020, which
we do not consider in our evaluation of ongoing performance.
Adjusted net income (loss) and adjusted net income (loss) per common share -diluted have been presented in this Quarterly Report on Form 10-Q as (4) supplemental measures of financial performance that are not required by, or
presented in accordance with, GAAP. We define adjusted net income (loss) as
net income (loss) before restructuring
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charges, charges related to the impact of COVID-19 on business operations,
credits pursuant to the CARES Act, severance charges associated with COVID-19,
loss on extinguishment of debt, certain gains on disposal of assets, certain
management transition costs incurred and benefits realized, charges incurred as
part of the implementation of our optimization plan, charges associated with an
Elfa manufacturing facility closure, charges related to the closure of Elfa
infrequent tax items. We define adjusted net income (loss) per common share -
diluted as adjusted net income (loss) divided by the diluted weighted average
common shares outstanding. We use adjusted net income (loss) and adjusted net
income (loss) per common share - diluted to supplement GAAP measures of
performance to evaluate the effectiveness of our business strategies, to make
budgeting decisions and to compare our performance against that of other peer
companies using similar measures. We present adjusted net income (loss) and
adjusted net income (loss) per common share - diluted because we believe they
assist investors in comparing our performance across reporting periods on a
consistent basis by excluding items that we do not believe are indicative of our
core operating performance and because we believe it is useful for investors to
see the measures that management uses to evaluate the Company.
A reconciliation of the GAAP financial measures of net income (loss) and net
income (loss) per common share - diluted to the non-GAAP financial measures of
adjusted net income (loss) and adjusted net income (loss) per common share -
diluted is set forth below:
Thirteen Weeks Ended
July 3, June 27,
2021 2020
Numerator:
Net income (loss) $ 17,672 $ (16,670)
Management transition costs (a) 473 -
COVID-19 costs (b) 192 1,223
COVID-19 severance (c) - 809
Taxes (d) (186) (885)
Adjusted net income (loss) $ 18,151 $ (15,523)
Denominator:Weighted-average common shares outstanding - diluted 50,448,216 48,389,205
Net income (loss) per common share - diluted$ 0.35 $ (0.34)
Adjusted net income (loss) per common share - diluted
Costs related to the transition of key executives including severance and (a) signing bonus recorded as selling, general and administrative expenses, which
we do not consider in our evaluation of ongoing performance.
Includes incremental costs attributable to the COVID-19 pandemic, whichconsist of sanitization costs in the first quarter of fiscal 2021 and fiscal (b) 2020, and hazard pay for distribution center employees in the first quarter
of fiscal 2020, all of which are recorded as selling, general and
administrative expenses, which we do not consider in our evaluation of
ongoing performance.
Includes costs incurred in the first quarter of fiscal 2020 associated with (c) the reduction in workforce as a result of the COVID-19 pandemic and the
related temporary store closures in the first quarter of fiscal 2020, which
we do not consider in our evaluation of ongoing performance.
Tax impact of adjustments to net income (loss) which are considered to be (d) unusual or infrequent tax items, all of which we do not consider in our
evaluation of ongoing performance.
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Thirteen Weeks Ended
Net sales
The following table summarizes our net sales for each of the thirteen weeks
ended
July 3, 2021 % total June 27, 2020 % total
TCS net sales $ 228,729 93.2 % $ 139,386 91.9 %
Elfa third party net sales 16,586 6.8 % 12,300 8.1 %
Net sales $ 245,315 100.0 % $ 151,686 100.0 %
Net sales in the thirteen weeks ended
Net sales
Net sales for the thirteen weeks ended June 27, 2020 $ 151,686 Incremental net sales increase due to:
TCS net sales (including an offset of
89,343
Elfa third party net sales (excluding impact of foreign currency translation)
2,112
Impact of foreign currency translation on Elfa third party net sales
2,174
Net sales for the thirteen weeks ended July 3, 2021 $ 245,315 The Company's consolidated net sales for the thirteen weeks ended
As a result of the impact of the COVID-19 pandemic on our Company stores and the Company's policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the first quarter of fiscal 2021. We do not believe that comparable store sales will be a meaningful metric in fiscal 2021.
Gross profit and gross margin
Gross profit in the thirteen weeks ended
July 3, 2021 June 27, 2020
TCS gross margin 58.2 % 49.8 %
Elfa gross margin 36.6 % 42.7 %
Total gross margin 59.6 % 51.6 %
TCS gross margin increased 840 basis points primarily due to decreased shipping
costs as a result of a lower mix of online sales combined with less promotional
activity, partially offset by an unfavorable mix of lower margin product and
service sales in the thirteen weeks ended
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improvement for the remainder of fiscal 2021, due to expected freight and shipping headwinds, along with expected higher commodity prices.
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirteen weeks ended
July 3, 2021 June 27, 2020
% of Net sales % of Net sales
TCS selling, general and administrative 41.8 % 52.8 %
Elfa selling, general and administrative 3.1 % 4.1 %
Total selling, general and administrative 44.9 % 56.9 %
Total selling, general and administrative expenses as a percentage of
consolidated net sales decreased 1,200 basis points primarily due to leverage of
occupancy, payroll, marketing and other costs on higher sales during the
thirteen weeks ended
Interest expense
Interest expense decreased by
Taxes
The provision for income taxes in the thirteen weeks ended
Liquidity and Capital Resources
We have relied on cash flows from operations, a
Our primary cash needs are for merchandise inventories and direct materials,
payroll, store leases, capital expenditures associated with opening new stores
and updating existing stores, as well as information technology and
infrastructure, including our distribution centers, and Elfa manufacturing
facility enhancements. The most significant components of our operating assets
and liabilities are merchandise inventories, accounts receivable, prepaid
expenses, operating lease assets, and other assets, accounts payable, operating
lease liabilities, other current and noncurrent liabilities, taxes receivable
and taxes payable. Our liquidity fluctuates as a result of our building
inventory for key selling periods, and as a result, our borrowings are generally
higher during these periods when compared to the rest of our fiscal year. In
fiscal 2021, we expect total capital expenditures to be approximately
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the future, we may seek to raise additional capital, which could be in the form of loans, bonds, convertible debt or equity, to fund our operations and capital expenditures. There can be no assurance that we will be able to raise additional capital on favorable terms or at all.
At
Cash flow analysis
A summary of our key components and measures of liquidity are shown in the
following table:
Thirteen Weeks Ended
July 3 , June 27,
2021 2020
Net cash provided by operating activities
(7,561) (3,907)
Net cash used in financing activities (3,571) (26,093)
Effect of exchange rate changes on cash 220 139
Net decrease in cash $ (7,175) $ (4,247)
Free cash flow (Non-GAAP) (1) $ (3,829) $ 21,701 (1) See below for a discussion of this non-GAAP financial measure and
reconciliation to its most directly comparable GAAP financial measure.
Net cash provided by operating activities
Cash from operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, stock-based compensation, and deferred taxes as well as the effect of changes in operating assets and liabilities.
Net cash provided by operating activities was
Net cash provided by operating activities was
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information systems, and our distribution centers.
Our total capital expenditures for the thirteen weeks ended
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investments in our existing stores and new stores. We opened one new store
during the thirteen weeks ended
Our total capital expenditures for the thirteen weeks ended
Net cash used in financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa Senior Secured Credit Facilities.
Net cash used in financing activities was
Net cash used in financing activities was
As of
As of
Free cash flow (Non-GAAP)
We present free cash flow, which we define as net cash provided by operating activities in a period minus payments for property and equipment made in that period, because we believe it is a useful indicator of the Company's overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Our free cash flow fluctuates as a result of seasonality of net sales, building
inventory for key selling periods, and timing of investments in new store
openings, existing store remodels, infrastructure, information systems, and our
distribution centers, among other things. Historically, our free cash flow has
been lower in the first half of the fiscal year, due to lower net sales,
operating income, and cash flows from operations, and as such, is not
necessarily indicative of the free cash flow for the full year. We generated
negative free cash flow of
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expenditures. Additionally, during the first quarter of fiscal 2020, the Company
renegotiated terms with landlords as a result of the COVID-19 pandemic, which
resulted in the deferral of approximately
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:
Thirteen Weeks Ended
July 3 , June 27,
2021 2020
Net cash provided by operating activities
$ (3,829) $ 21,701
Senior Secured Term Loan Facility
On
The Senior Secured Term Loan Facility is secured by (a) a first priority
security interest in substantially all of our assets (excluding stock in foreign
subsidiaries in excess of 65%, assets of non-guarantors and subject to certain
other exceptions) (other than the collateral that secures the Revolving Credit
Facility described below on a first-priority basis) and (b) a second priority
security interest in the assets securing the Revolving Credit Facility described
below on a first-priority basis. Obligations under the Senior Secured Term Loan
Facility are guaranteed by
Revolving Credit Facility
On
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amended, the "Revolving Credit Facility"). On
The aggregate principal amount of the facility is
The Revolving Credit Facility provides that proceeds are to be used for working
capital and other general corporate purposes, and allows for swing line advances
of up to
The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).
The Revolving Credit Facility is secured by (a) a first-priority security
interest in substantially all of our personal property, consisting of inventory,
accounts receivable, cash, deposit accounts, and other general intangibles, and
(b) a second-priority security interest in the collateral that secures the
Senior Secured Term Loan Facility on a first-priority basis, as described above
(excluding stock in foreign subsidiaries in excess of 65%, and assets of
non-guarantor subsidiaries and subject to certain other exceptions). Obligations
under the Revolving Credit Facility are guaranteed by
The Revolving Credit Facility contains a number of covenants that, among other
things, restrict our ability, subject to specified exceptions, to incur
additional debt; incur additional liens and contingent liabilities; sell or
dispose of assets; merge with or acquire other companies; liquidate or dissolve
ourselves, engage in businesses that are not in a related line of business; make
loans, advances or guarantees; engage in transactions with affiliates; and make
investments. In addition, the financing agreements contain certain cross-default
provisions. We are required to maintain a consolidated fixed-charge coverage
ratio of 1.0 to 1.0 if excess availability is less than
2019 Elfa Senior Secured Credit Facilities
On
The 2019 Elfa Senior Secured Credit Facilities are secured by the majority of assets of Elfa. The 2019 Elfa Senior Secured Credit Facilities contains a number of covenants that, among other things, restrict Elfa's ability, subject to specified exceptions, to incur additional liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a
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Group Equity Ratio (as defined in the 2019 Elfa Senior Secured Credit
Facilities) of not less than 32.5% and (ii) a consolidated ratio of net debt to
EBITDA (as defined in the 2019 Elfa Senior Secured Credit Facilities) of less
than 3.20. As of
Critical accounting policies and estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. A summary of our significant accounting policies is included in Note 1 to our annual consolidated financial statements in our 2020 Annual Report on Form 10-K.
Certain of our accounting policies and estimates are considered critical, as
these policies and estimates are the most important to the depiction of our
consolidated financial statements and require significant, difficult, or complex
judgments, often about the effect of matters that are inherently uncertain. Such
policies are summarized in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of our 2020 Annual Report
on Form 10-K. As of
Contractual obligations
There were no material changes to our contractual obligations from those disclosed in our 2020 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
There have been no material changes to our off-balance sheet arrangements as disclosed in our 2020 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.
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