FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 29, 1996
Commission file number: 1-11908
Department 56, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3684956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Village Place, 6436 City West Parkway, Eden Prairie, MN 55344
(Address of principal executive offices)
(Zip Code)
(612) 944-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of June 29, 1996, 21,549,987 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
JUNE 29, DECEMBER 30,
1996 1995
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 2,810 $ 7,805
Accounts receivable, net 107,161 34,271
Inventories 25,363 29,059
Other current assets 7,173 6,544
-------- --------
Total current assets 142,507 77,679
PROPERTY AND EQUIPMENT, net 12,119 12,445
GOODWILL AND TRADEMARKS, net 165,906 168,195
OTHER ASSETS 573 766
-------- --------
$321,105 $259,085
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 26,909 $ --
Current portion of long-term debt 20,000 20,000
Accounts payable 6,434 6,599
Other current liabilities 20,456 15,065
-------- --------
Total current liabilities 73,799 41,664
DEFERRED TAXES 7,453 7,135
LONG-TERM DEBT 60,000 60,000
STOCKHOLDERS' EQUITY 179,853 150,286
-------- --------
$321,105 $259,085
======== ========
See notes to condensed consolidated financial statements.
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER QUARTER
ENDED ENDED
JUNE 29, 1996 JULY 1, 1995
--------------- --------------
NET SALES $ 75,277 $ 74,755
COST OF SALES 30,958 32,327
-------- --------
Gross profit 44,319 42,428
OPERATING EXPENSES:
Selling, general, and administrative 13,006 12,163
Amortization of goodwill and trademarks 1,144 1,144
Recovery of import duties (36) --
-------- --------
Total operating expenses 14,114 13,307
-------- --------
INCOME FROM OPERATIONS 30,205 29,121
OTHER EXPENSE (INCOME)
Interest expense 1,489 2,466
Other, net (71) (93)
-------- --------
INCOME BEFORE INCOME TAXES 28,787 26,748
PROVISION FOR INCOME TAXES 11,515 10,833
-------- --------
NET INCOME $ 17,272 $ 15,915
======== ========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.79 $ 0.73
======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 21,744 21,722
======== ========
See notes to condensed consolidated financial statements.
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
26 WEEKS 26 WEEKS
ENDED ENDED
JUNE 29, 1996 JULY 1, 1995
--------------- --------------
NET SALES $ 134,273 $ 127,802
COST OF SALES 56,151 55,722
--------- ---------
Gross profit 78,122 72,080
OPERATING EXPENSES:
Selling, general, and administrative 24,506 22,137
Amortization of goodwill and trademarks 2,288 2,288
Recovery of import duties (235) --
--------- ---------
Total operating expenses 26,559 24,425
--------- ---------
INCOME FROM OPERATIONS 51,563 47,655
OTHER EXPENSE (INCOME)
Interest expense 2,846 4,483
Other, net (332) (234)
--------- ---------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 49,049 43,406
PROVISION FOR INCOME TAXES 19,620 17,579
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 29,429 25,827
EXTRAORDINARY CHARGE DUE TO REFINANCING
OF DEBT -- 1,312
--------- ---------
NET INCOME $ 29,429 $ 24,515
========= =========
INCOME BEFORE EXTRAORDINARY ITEM
PER COMMON AND COMMON EQUIVALENT SHARE $ 1.35 $ 1.19
========= =========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 1.35 $ 1.13
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 21,756 21,712
========= =========
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
26 WEEKS 26 WEEKS
ENDED ENDED
JUNE 29, JULY 1,
1996 1995
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES-
Net cash used in operating activities $(31,538) $ (34,516)
CASH FLOWS FROM INVESTING ACTIVITIES-
Purchases of property and equipment (479) (748)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 113 550
Net borrowings under revolving credit facility 26,909 44,442
Proceeds from issuance of term loan -- 100,000
Principal payments on long-term debt -- (108,000)
-------- ---------
Net cash provided by financing activities 27,022 36,992
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,995) 1,728
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,805 2,180
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,810 $ 3,908
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 2,399 $ 4,635
Income taxes $ 15,865 $ 11,034
See notes to condensed consolidated financial statements.
DEPARTMENT 56, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December
30, 1995 was derived from the audited consolidated balances as of that date. The
remaining accompanying condensed consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments necessary for a fair
presentation. Such adjustments were of a normal recurring nature.
The results of operations for the quarter ended June 29, 1996 are not
necessarily indicative of the results for the full fiscal year.
It is suggested that these financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
1995 Annual Report to Stockholders and Annual Report on Form 10-K filed by
Department 56, Inc. (the "Company") with the Securities and Exchange Commission.
2. EXTRAORDINARY ITEM
In February 1995, the principal operating subsidiary of the Company,
D 56, Inc., entered into a new credit agreement providing a $100,000 term loan
and a $90,000 revolving line of credit. The Company used the proceeds of the
term loan combined with $8,000 of the revolving line of credit to refinance its
long-term debt. In connection therewith, the Company recorded an extraordinary
charge of $1,312, net of a tax benefit of $893.
3. INCOME PER SHARE
Net income and income before extraordinary item per common and common
equivalent share are based on the weighted average of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of the Company's common stock issuable upon exercise of common stock
options, determined using the treasury stock method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 29, 1996 TO THE
QUARTER ENDED JULY 1, 1995.
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
June 29, 1996 July 1, 1995
------------- -----------
(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net sales $75.3 100 % $74.8 100 %
Gross profit 44.3 59 42.4 57
Selling, general, and administrative expenses 13.0 17 12.2 16
Amortization of goodwill and trademarks 1.1 2 1.1 2
Income from operations 30.2 40 29.1 39
Interest expense 1.5 2 2.5 3
Other income, net (0.1) - (0.1) -
Income before income taxes 28.8 38 26.7 36
Provision for income taxes 11.5 15 10.8 14
Net income 17.3 23 15.9 21
</TABLE>
Net Sales. Net sales increased $.5 million, or 1%, from $74.8 million
in the second quarter of 1995 to $75.3 million in the second quarter of 1996.
Sales of the Company's Village Series products increased $.2 million, or 0%,
while sales of General Giftware products increased $.3 million, or 1%, between
the two periods. Village Series and General Giftware products represented 71%
and 29%, respectively, of the Company's net sales during the second quarter.
Gross Profit. Gross profit increased $1.9 million, or 4%, between the
second quarter of 1995 and the second quarter of 1996. The increase in gross
profit was principally due to improved manufacturing efficiencies and lower
volume discounts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $.8 million, or 7%, between the second quarter
of 1995 and the second quarter of 1996. The increase in expenses was due
principally to higher sales, marketing and other expenses. Selling, general and
administrative expenses as a percent of sales increased from 16% in the second
quarter of 1995 to 17% in the second quarter of 1996.
Income from Operations. Income from operations increased $1.1 million,
or 4%, between the second quarter of 1995 and the second quarter of 1996 due to
the factors described above. Income from operations, which increased from 39% to
40% of net sales, was favorably affected by the increase in the gross profit
percentage.
Interest Expense. Interest expense decreased $1.0 million, or 40%,
between the second quarter of 1995 and the second quarter of 1996 principally
due to the payment of $33 million of debt during 1995 and a decrease in
interest rates.
Provision for Income Taxes. The effective tax rate was 40.5% during the
second quarter of 1995 and 40.0% during the second quarter of 1996.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE 26 WEEKS ENDED JUNE 29, 1996 TO THE
26 WEEKS ENDED JULY 1, 1995.
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Ended Ended
June 29, 1996 July 1,1995
------------- -----------
(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net sales $134.3 100 % $127.8 100 %
Gross profit 78.1 58 72.1 56
Selling, general, and administrative expenses 24.5 18 22.1 17
Amortization of goodwill and trademarks 2.3 2 2.3 2
Recovery of import duties (.2) - - -
Income from operations 51.6 38 47.7 37
Interest expense 2.8 2 4.5 4
Other income, net (0.3) - (0.2) -
Income before income taxes
and extraordinary item 49.0 37 43.4 34
Provision for income taxes 19.6 15 17.6 14
Income before extraordinary item 29.4 22 25.8 20
Extraordinary charge - - 1.3 1
Net income 29.4 22 24.5 19
</TABLE>
Net Sales. Net sales increased $6.5 million, or 5%, from $127.8 million
in 1995 to $134.3 million in 1996. This increase was principally due to an
increase in volume. Sales of the Company's Village Series products increased
$1.6 million, or 2%, while sales of General Giftware products increased $4.9
million, or 13%, between the two periods. Village Series and General Giftware
products represented 68% and 32%, respectively, of the Company's net sales in
1996.
Gross Profit. Gross profit increased $6.0 million, or 8%, between 1995
and 1996. The increase in gross profit was principally due to the increase in
sales volume, improved manufacturing efficiencies, lower volume discounts and
lower import duties from the implementation of GATT.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.4 million, or 11%, between 1995 and 1996.
The increase in expenses was due principally to higher sales, marketing and
other expenses. Selling, general and administrative expenses as a percent of
sales increased from 17% in 1995 to 18% in 1996.
Income from Operations. Income from operations increased $3.9 million,
or 8%, between 1995 and 1996 due to the factors described above. Income from
operations, which increased from 37% to 38% of net sales, was favorably affected
by the increase in the gross profit percentage.
Interest Expense. Interest expense decreased $1.6 million, or 37%,
between 1995 and 1996 principally due to the payment of $33 million of debt
during 1995 and a decrease in interest rates.
Provision for Income Taxes. The effective income tax rate was 40.5% and
40.0% during 1995 and 1996, respectively.
Extraordinary Charge. In February 1995, D 56, Inc. entered into a new
credit agreement providing for a $100 million term loan and a $90 million
revolving line of credit. The Company used the proceeds of the term loan
combined with $8 million of the revolving line of credit to refinance its
long-term debt. In connection therewith, the Company recorded an extraordinary
charge of $1.3 million, net of a tax benefit of $0.9 million, or $0.06 per
share.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of the Company's liquidity are its available cash
balances, internally generated cash flow and a revolving credit agreement which
provides letters of credit, bankers' acceptances and, if required, short-term
seasonal borrowings. The Company believes that these sources of liquidity will
be more than adequate to fund operations, capital expenditures and required
principal payments on its term loan for the next 12 months.
The Company maintains a revolving credit agreement providing for
borrowings of up to $90 million (subject to certain limitations) including
letters of credit and bankers' acceptances. At June 29, 1996, the Company had
$26.9 million of outstanding loans and acceptances and $3.2 million of
outstanding letters of credit under its revolving line of credit. The available
revolving line of credit commitment was $52.2 million.
Consistent with customary practice in the giftware industry, the
Company offers extended accounts receivable terms to many of its customers. This
practice has typically created significant working capital requirements in the
second and third quarters which the Company has generally financed with net cash
balances, internally generated cash flow and seasonal borrowings. The Company's
net cash balances peak in December, following the collection of accounts
receivable with extended payment terms.
Accounts receivable increased $11.4 million from $95.8 million at July
1, 1995 to $107.2 million at June 29, 1996 principally due to the increase in
sales volume, a higher percentage of 1996 sales qualifying for extended terms
and somewhat slower payment patterns on certain accounts.
FOREIGN EXCHANGE
The dollar value of the Company's assets abroad is not significant. The
Company's sales are denominated in United States dollars and, as a result, are
not subject to changes in exchange rates.
The Company imports a substantial majority of its products from
manufacturers located in the Pacific Rim, primarily Taiwan (Republic of China),
The People's Republic of China and The Philippines. The Company's costs could be
adversely affected if the New Taiwan Dollar (or the currencies of other
countries in which the Company conducts business) appreciates significantly
relative to the United States dollar. The Company, from time to time, will enter
into foreign exchange contracts or build currency deposits as a partial hedge
against currency fluctuations. The Company intends to manage foreign exchange
risks to the extent possible and take appropriate action where warranted.
At June 29, 1996 the Company had $16.0 million of foreign exchange
contracts outstanding to hedge 1996 Taiwan dollar denominated inventory
purchases. These contracts mature from July 1996 through November 1996 at a rate
of approximately 27.00 NT$/US$. The Company's purchases from manufacturers
located in The People's Republic of China and The Philippines are denominated in
United States dollars.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the past
few years, the rate of inflation has not had a material impact on the Company's
results of operations.
SEASONALITY AND CUSTOMER ORDERS
The Company generally records its highest level of sales during the
second and third quarters as retailers stock merchandise in anticipation of the
holiday season. The Company can also experience fluctuations in quarterly sales
growth and related net income compared with the prior year due to timing of
receipt of product from suppliers and subsequent shipment of product from the
Company to customers.
CUSTOMER ORDERS ENTERED (1)
(IN MILLIONS)
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Total
1994 $181 $27 $20 $9 $237
1995 210 30 27 9 276
1996 178 35 - - -
(1) Customer orders entered are domestic orders received and approved
by the Company, subject to cancellation for various reasons, including credit
considerations, inventory shortages and customer requests.
Historically, principally due to the timing of trade shows early in the
calendar year and the limited supply of the Company's products, the Company has
received the majority of its orders in the first quarter of each year. The
Company entered 76% of its total annual customer orders during the first quarter
of both 1995 and 1994. Cancellations were approximately 7% and 5% of total
annual orders in 1995 and 1994, respectively.
The Company shipped and recorded as net sales approximately 91% and
92% of its annual customer orders in 1995 and 1994, respectively. Orders not
shipped in a particular year, net of cancellations, returns, allowances and cash
discounts, are carried into backlog for the following year and have historically
been Easter orders. Domestic unfilled orders were $81 million as of June 29,
1996, as compared to $113 million as of July 1, 1995.
Through the second quarter of 1996, customer orders entered decreased
11% as compared to the same period for 1995. Customer orders entered for Village
Series products and General Giftware products have decreased 14% and 6%,
respectively, through the second quarter of 1996.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders held on May 16, 1996
(the "Annual Meeting"), all of the persons named in the Company's proxy
materials as management nominees for the Board of Directors were elected. All
the nominees were incumbent directors and their election at the Annual Meeting
was uncontested. In addition, the Company's stockholders at the Annual Meeting
ratified the appointment by the Board of Directors of Deloitte & Touche LLP,
independent public accountants, as auditors for the Company for the fiscal year
ending December 28, 1996 as follows: 19,082,061 voting for ratification; 18,744
voting against; 22,373 abstentions; 2,425,709 not voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 11.1 Computation of net income and income before
extraordinary item per share.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEPARTMENT 56, INC.
Date: July 23, 1996 /s/Susan Engel
Susan Engel
President and Chief Operating Officer
Date: July 23, 1996 /s/Timothy J. Schugel
Timothy J. Schugel
Vice President - Finance and Principal
Accounting Officer
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NAME NUMBER
11.1 Computation of net income and income before
extraordinary item per share.
27 Financial Data Schedule
Exhibit 11.1
DEPARTMENT 56, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarter Quarter
Ended Ended
June 29, 1996 July 1, 1995
------------- ------------
PRIMARY:
Net Income $17,272 $15,915
======= =======
Weighted average number of common shares outstanding 21,547 21,509
The number of shares resulting from the
assumed exercise of stock options
reduced by the number of shares which
could have been purchased with the
proceeds from such exercise, using the
average market price during the period 197 213
------- -------
Weighted average number of common and
common equivalent shares 21,744 21,722
======= =======
Net Income per Common and
Common Equivalent Share $ 0.79 $ 0.73
======= =======
FULLY DILUTED:
Net Income $17,272 $15,915
======= =======
Weighted average number of common shares outstanding 21,547 21,509
The number of shares resulting from the
assumed exercise of stock options
reduced by the number of shares which
could have been purchased with the
proceeds from such exercise, using the
greater of average market price during
the period or period- end market price 197 213
------- -------
Weighted average number of common and
common equivalent shares 21,744 21,722
======= =======
Fully Diluted Net Income per Common and
Common Equivalent Share $ 0.79 $ 0.73
======= =======
DEPARTMENT 56, INC.
COMPUTATION OF NET INCOME AND INCOME BEFORE EXTRAORDINARY ITEM
PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
26 Weeks 26 Weeks
Ended Ended
June 29, 1996 July 1, 1995
------------- ------------
PRIMARY:
Income Before Extraordinary Item $29,429 $25,827
======= =======
Net Income $29,429 $24,515
======= =======
Weighted average number of common shares outstanding 21,549 21,496
The number of shares resulting from the
assumed exercise of stock options
reduced by the number of shares which
could have been purchased with the
proceeds from such exercise, using the
average market price during the period 207 216
------- -------
Weighted average number of common and
common equivalent shares 21,756 21,712
======= =======
Income Before Extraordinary Item
per Common and Common Equivalent Share $ 1.35 $ 1.19
======= =======
Net Income per Common and
Common Equivalent Share $ 1.35 $ 1.13
======= =======
FULLY DILUTED:
Income Before Extraordinary Item $29,429 $25,827
======= =======
Net Income $29,429 $24,515
======= =======
Weighted average number of common shares outstanding 21,549 21,496
The number of shares resulting from the
assumed exercise of stock options
reduced by the number of shares which
could have been purchased with the
proceeds from such exercise, using the
greater of average market price during
the period or period-end market price 207 217
------- -------
Weighted average number of common and
common equivalent shares 21,756 21,713
======= =======
Fully Diluted Income Before Extraordinary Item
per Common and Common Equivalent Share $ 1.35 $ 1.19
======= =======
Fully Diluted Net Income per Common and
Common Equivalent Share $ 1.35 $ 1.13
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 2,810
<SECURITIES> 0
<RECEIVABLES> 107,161
<ALLOWANCES> 0
<INVENTORY> 25,363
<CURRENT-ASSETS> 142,507
<PP&E> 12,119
<DEPRECIATION> 0
<TOTAL-ASSETS> 321,105
<CURRENT-LIABILITIES> 73,799
<BONDS> 60,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 321,105
<SALES> 134,273
<TOTAL-REVENUES> 134,273
<CGS> 56,151
<TOTAL-COSTS> 56,151
<OTHER-EXPENSES> 26,559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,846
<INCOME-PRETAX> 49,049
<INCOME-TAX> 19,620
<INCOME-CONTINUING> 29,429
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,429
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
