<PAGE>
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: October 4, 1997
------------------------------------
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
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(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 October 4, 1997, 20,603,817 shares of the registrant's common stock,
par value $.01 per share, were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
OCTOBER 4, DECEMBER 28,
1997 1996
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,714 $ 46,405
Accounts receivable, net 100,014 35,603
Inventories 23,833 20,526
Other current assets 8,694 6,769
--------- ---------
Total current assets 135,255 109,303
PROPERTY AND EQUIPMENT, net 12,067 12,318
GOODWILL AND TRADEMARKS, net 160,185 163,618
OTHER ASSETS 311 494
$ 307,818 $ 285,733
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 2,487 $ -
Current portion of long-term debt 20,000 20,000
Accounts payable 7,958 7,618
Other current liabilities 20,093 13,688
--------- ---------
Total current liabilities 50,538 41,306
DEFERRED TAXES 7,670 7,670
LONG-TERM DEBT 40,000 40,000
STOCKHOLDERS' EQUITY 209,610 196,757
--------- ---------
$ 307,818 $ 285,733
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER QUARTER
ENDED ENDED
OCTOBER 4, SEPTEMBER 28,
1997 1996
---- ----
NET SALES $ 61,602 $ 60,210
COST OF SALES 25,845 25,408
--------- ---------
Gross profit 35,757 34,802
OPERATING EXPENSES:
Selling, general, and administrative 12,074 11,679
Amortization of goodwill and trademarks 1,144 1,144
Recovery of import duties - (218)
--------- ---------
Total operating expenses 13,218 12,605
--------- ---------
INCOME FROM OPERATIONS 22,539 22,197
OTHER EXPENSE (INCOME)
Interest expense 1,069 1,744
Other, net (142) (41)
--------- ---------
INCOME BEFORE INCOME TAXES 21,612 20,494
PROVISION FOR INCOME TAXES 8,537 8,198
--------- ---------
NET INCOME $ 13,075 $ 12,296
--------- ---------
--------- ---------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.63 $ 0.57
--------- ---------
--------- ---------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 20,904 21,748
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
40 WEEKS 39 WEEKS
ENDED ENDED
OCTOBER 4, SEPTEMBER 28,
1997 1996
---- ----
NET SALES $ 165,895 $ 194,483
COST OF SALES 69,660 81,559
--------- ---------
Gross profit 96,235 112,924
OPERATING EXPENSES:
Selling, general, and administrative 34,568 36,184
Amortization of goodwill and trademarks 3,432 3,432
Recovery of import duties (370) (453)
--------- ---------
Total operating expenses 37,630 39,163
--------- ---------
INCOME FROM OPERATIONS 58,605 73,761
OTHER EXPENSE (INCOME)
Interest expense 3,240 4,590
Other, net (1,159) (372)
--------- ---------
INCOME BEFORE INCOME TAX 56,524 69,543
PROVISION FOR INCOME TAXES 22,327 27,817
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NET INCOME $ 34,197 $ 41,726
--------- ---------
--------- ---------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 1.62 $ 1.92
--------- ---------
--------- ---------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 21,117 21,757
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
40 WEEKS 39 WEEKS
ENDED ENDED
OCTOBER 4, SEPTEMBER 28,
1997 1996
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES-
Net cash used in operating activities $ (22,996) $ (32,736)
CASH FLOWS FROM INVESTING ACTIVITIES-
Purchases of property and equipment (1,202) (962)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,059 247
Net borrowings under revolving credit facility 2,487 29,370
Stock repurchases (23,039) -
--------- ---------
Net cash provided by (used in) financing
activities (19,493) 29,617
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (43,691) (4,081)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,405 7,805
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,714 $ 3,724
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 3,004 $ 4,111
Income taxes $ 20,024 $ 22,740
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December 28,
1996 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 October 4, 1997 and the 40
weeks ended October 4, 1997 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 1996
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. INCOME PER SHARE
Net income per common and common equivalent share is 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share". This Statement
specifies the computation, presentation, and disclosure requirements for
earnings per share. This Statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods, and
adoption by the Company in 1997 is not expected to have a material impact on the
earnings per share computation.
3. STOCKHOLDERS' EQUITY
On December 10, 1996, the Board of Directors of the Company authorized a
stock repurchase program. The program allows the repurchase in open market and
privately negotiated transactions of up to 1.5 million shares through the end of
June 1998. Board authorization of a similar repurchase program of up to an
additional 1.5 million shares valid through December 31, 1999 became effective
on October 15, 1997. The timing, prices and number of shares repurchased under
both programs will be determined at the discretion of the Company's management
and subject to continued compliance with the Company's credit facilities.
During the quarter ended October 4, 1997, the Company repurchased 284,600 shares
at a cost of $7.4 million. During the 40 weeks ended October 4, 1997, the
Company repurchased 1,125,258 shares at a cost of $23.0 million.
<PAGE>
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 OCTOBER 4, 1997 TO THE
QUARTER ENDED SEPTEMBER 28, 1996.
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
October 4, 1997 September 28, 1996
--------------- ------------------
(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net sales $61.6 100% $60.2 100%
Gross profit 35.8 58 34.8 58
Selling, general, and administrative expenses 12.1 20 11.7 19
Amortization of goodwill and trademarks 1.1 2 1.1 2
Recovery of import duties - - (0.2) -
Income from operations 22.5 37 22.2 37
Interest expense 1.1 2 1.7 3
Other income, net (0.1) - - -
Income before income taxes 21.6 35 20.5 34
Provision for income taxes 8.5 14 8.2 14
Net income 13.1 21 12.3 20
</TABLE>
NET SALES. Net sales increased $1.4 million, or 2%, from $60.2
million in the third quarter of 1996 to $61.6 million in the third quarter of
1997. Sales of the Company's Village Series products increased $.5 million,
or 1%, while sales of General Giftware products increased $.9 million, or 4%
between the two periods. Village Series and General Giftware products
represented 62% and 38%, respectively, of the Company's net sales during the
third quarter of 1997.
<PAGE>
GROSS PROFIT. Gross profit increased $1.0 million, or 3%, between the
third quarter of 1996 and the third quarter of 1997. The increase in gross
profit was principally due to the increase in sales volume. Gross profit as a
percentage of net sales was 58% during the third quarter of both 1996 and 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.4 million, or 3%, between the third quarter
of 1996 and the third quarter of 1997 principally due to inflationary increases
in administrative expenses. Selling, general and administrative expenses as a
percentage of sales increased from approximately 19% in the third quarter of
1996 to 20% in the third quarter of 1997.
INCOME FROM OPERATIONS. Income from operations increased $.3 million, or
2%, between the third quarter of 1996 and the third quarter of 1997 due to the
factors described above. Income from operations was 37% of net sales during the
third quarter of both 1996 and 1997.
INTEREST EXPENSE. Interest expense decreased $.7 million, or 39%, between
the third quarter of 1996 and the third quarter of 1997 principally due to the
payment of $20 million of long term debt during 1996 and lower borrowings under
the revolving line of credit in 1997.
PROVISION FOR INCOME TAXES. The effective tax rate was 40.0% and 39.5%
during the third quarter of 1996 and 1997, respectively.
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE 40 WEEKS ENDED OCTOBER 4, 1997 TO
THE 39 WEEKS ENDED SEPTEMBER 28, 1996.
<TABLE>
<CAPTION>
40 Weeks 39 Weeks
Ended Ended
October 4, 1997 September 28,1996
--------------- -----------------
(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net sales $165.9 100% $194.5 100%
Gross profit 96.2 58 112.9 58
Selling, general, and administrative expenses 34.6 21 36.2 19
Amortization of goodwill and trademarks 3.4 2 3.4 2
Recovery of import duties (0.4) - (0.5) -
Income from operations 58.6 35 73.8 38
Interest expense 3.2 2 4.6 2
Other income, net (1.2) (1) (0.4) -
Income before income taxes 56.5 34 69.5 36
Provision for income taxes 22.3 14 27.8 14
Net income 34.2 21 41.7 21
</TABLE>
NET SALES. Net sales decreased $28.6 million, or 15%, from $194.5 million
in 1996 to $165.9 million in 1997. This decrease was principally due to a
decrease in volume. Sales of the Company's Village Series products decreased
$21.4 million, or 17%, while sales of General Giftware products decreased $7.2
million, or 11% between the two periods. Village Series and General Giftware
products represented 65% and 35%, respectively, of the Company's net sales in
1997.
<PAGE>
GROSS PROFIT. Gross profit decreased $16.7 million, or 15%, between 1996
and 1997. The decrease in gross profit was principally due to the decrease in
sales volume. Gross profit as a percentage of net sales was 58% in both 1996
and 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.6 million, or 4%, between 1996 and 1997
principally due to a 19% decrease in commission expense offset by inflationary
increases in administrative expenses. Selling, general and administrative
expenses as a percentage of sales increased from approximately 19% in 1996 to
21% in 1997.
INCOME FROM OPERATIONS. Income from operations decreased $15.2 million,
or 21%, between 1996 and 1997 due to the factors described above. Income from
operations decreased from 38% to 35% of net sales principally due to the
increase in selling, general and administrative expense as a percentage of
sales.
INTEREST EXPENSE. Interest expense decreased $1.4 million, or 29%,
between 1996 and 1997 principally due to the payment of $20 million of long term
debt during 1996 and lower borrowings under the revolving line of credit in
1997.
PROVISION FOR INCOME TAXES. The effective tax rate was 40.0% and 39.5%
during 1996 and 1997, respectively.
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 October 4, 1997, the Company had $2.5
million of outstanding loans and acceptances and $2.7 million of outstanding
letters of credit under its revolving line of credit. The available revolving
line of credit commitment was $83.3 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 that 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 decreased $28.0 million from $128.0 million at
September 28, 1996 to $100.0 million at October 4, 1997 principally due to the
decrease in sales in 1997 as compared to 1996.
<PAGE>
On December 10, 1996, the Board of Directors of the Company authorized a
stock repurchase program. The program allows the repurchase in open market and
privately negotiated transactions of up to 1.5 million shares through the end of
June 1998. Board authorization of a similar repurchase program of up to an
additional 1.5 million shares valid through December 31, 1999 became effective
on October 15, 1997. The timing, prices and number of shares repurchased under
both programs will be determined at the discretion of the Company's management
and subject to continued compliance with the Company's credit facilities. As of
October 4, 1997, the Company had repurchased 1,125,258 shares at a cost of $23.0
million in the open market.
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 its products from manufacturers located in the Pacific
Rim, primarily The People's Republic of China, Taiwan (Republic of China) and
The Philippines. These transactions are principally denominated in U.S.
dollars, except for imports from Taiwan which are principally denominated in New
Taiwan dollars. 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. The Company's
costs could be adversely affected if the currencies of the countries in which
the manufacturers operate appreciate significantly relative to the U.S. dollar.
At October 4, 1997 the Company had $3.8 million of foreign exchange
contracts outstanding to hedge 1997 New Taiwan dollar denominated inventory
purchases. These contracts mature from October 1997 through December 1997 at a
rate of approximately 27.50 NT$/US$.
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.
<PAGE>
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 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
--- --- --- --- -----
1995 $210 $30 $27 $9 $276
1996 178 35 28 8 249
1997 161 44 34 - -
(1) Customer orders entered are 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 71% and 76% of its total annual customer orders during the first
quarter of both 1996 and 1995, respectively. Cancellations were approximately
6% and 7% of total annual orders in 1996 and 1995, respectively.
The Company shipped and recorded as net sales approximately 92% and 91%
of its annual customer orders in 1996 and 1995, respectively. Orders not
shipped in a particular period, net of cancellations, returns, allowances and
cash discounts, are carried into backlog. The backlog was $64.5 million as
of October 4, 1997, as compared to $44.5 million as of September 28, 1996. The
backlog as of October 4, 1997, was predominately made up of orders requested
to be shipped during 1997.
Through the third quarter of 1997, customer orders entered decreased 1% as
compared to the same period for 1996. Customer orders entered for Village
Series products have decreased 7% through the third quarter of 1997 while
customer orders entered for General Giftware products have increased 12%.
Certain General Giftware products have lower gross profit rates than the
Company's average gross profit rate. In addition, from time to time, the
Company liquidates product at lower than average gross profit rates. As a
result, gross profit may vary depending on the mix of product shipped.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 11.1 Computation of net income per share.
<PAGE>
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: October 21, 1997 /s/Susan Engel
--------------
Susan Engel
Chairman, President and Chief Executive
Officer
Date: October 21, 1997 /s/Timothy J. Schugel
---------------------
Timothy J. Schugel
Vice President - Finance and Principal
Accounting Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBIT PAGE
NUMBER NAME NUMBER
------ ------- ------
11.1 Computation of net income per share.
<PAGE>
Exhibit 11.1
DEPARTMENT 56, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarter Quarter
Ended Ended
October 4, September 28,
1997 1996
---- ----
PRIMARY:
Net Income $13,075 $12,296
------- -------
------- -------
Weighted average number of common shares outstanding 20,714 21,564
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 190 184
------- -------
Weighted average number of common and
common equivalent shares 20,904 21,748
------- -------
------- -------
Net Income per Common and
Common Equivalent Share $ 0.63 $ 0.57
------- -------
------- -------
FULLY DILUTED:
Net Income $13,075 $12,296
------- -------
------- -------
Weighted average number of common shares outstanding 20,714 21,564
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 246 203
------- -------
Weighted average number of common and
common equivalent shares 20,960 21,767
------- -------
------- -------
Fully Diluted Net Income per Common and
Common Equivalent Share $ 0.62 $ 0.56
------- -------
------- -------
<PAGE>
DEPARTMENT 56, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
40 Weeks 39 Weeks
Ended Ended
October 4, September 28,
1997 1996
---- ----
PRIMARY:
Net Income $34,197 $41,726
------- -------
------- -------
Weighted average number of common shares outstanding 20,989 21,554
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 128 203
------- -------
Weighted average number of common and
common equivalent shares 21,117 21,757
------- -------
------- -------
Net Income per Common and
Common Equivalent Share $ 1.62 $ 1.92
------- -------
------- -------
FULLY DILUTED:
Net Income $34,197 $41,726
------- -------
------- -------
Weighted average number of common shares outstanding 20,989 21,554
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 218 203
------- -------
Weighted average number of common and
common equivalent shares 21,207 21,757
------- -------
------- -------
Fully Diluted Net Income per Common and
Common Equivalent Share $ 1.61 $ 1.92
------- -------
------- -------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> OCT-04-1997
<CASH> 2,714
<SECURITIES> 0
<RECEIVABLES> 100,014
<ALLOWANCES> 0
<INVENTORY> 23,833
<CURRENT-ASSETS> 135,255
<PP&E> 12,067
<DEPRECIATION> 0
<TOTAL-ASSETS> 307,818
<CURRENT-LIABILITIES> 50,538
<BONDS> 40,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 307,818
<SALES> 165,895
<TOTAL-REVENUES> 165,895
<CGS> 69,660
<TOTAL-COSTS> 69,660
<OTHER-EXPENSES> 37,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,240
<INCOME-PRETAX> 56,524
<INCOME-TAX> 22,327
<INCOME-CONTINUING> 34,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,197
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.61
</TABLE>
