<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: April 5, 1997
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Commission file number: 1-11908
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Department 56, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3684956
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(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
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(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
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As of April 11, 1997, 20,872,329 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
APRIL 5, DECEMBER 28,
1997 1996
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 48,613 $ 46,405
Accounts receivable, net 34,740 35,603
Inventories 20,149 20,526
Other current assets 6,816 6,769
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Total current assets 110,318 109,303
PROPERTY AND EQUIPMENT, net 12,120 12,318
GOODWILL AND TRADEMARKS, net 162,473 163,618
OTHER ASSETS 498 494
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$ 285,409 $ 285,733
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 20,000 $ 20,000
Accounts payable 7,315 7,618
Other current liabilities 16,664 13,688
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Total current liabilities 43,979 41,306
DEFERRED TAXES 7,670 7,670
LONG-TERM DEBT 40,000 40,000
STOCKHOLDERS' EQUITY 193,760 196,757
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$ 285,409 $ 285,733
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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
APRIL 5, 1997 MARCH 30, 1996
--------------- -----------------
NET SALES $ 45,729 $ 58,996
COST OF SALES 19,112 25,193
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Gross profit 26,617 33,803
OPERATING EXPENSES:
Selling, general, and administrative 11,094 11,500
Amortization of goodwill and trademarks 1,144 1,144
Recovery of import duties (370) (200)
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Total operating expenses 11,868 12,444
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INCOME FROM OPERATIONS 14,749 21,359
OTHER EXPENSE (INCOME)
Interest expense 1,075 1,357
Other, net (744) (260)
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INCOME BEFORE INCOME TAXES 14,418 20,262
PROVISION FOR INCOME TAXES 5,695 8,105
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NET INCOME $ 8,723 $ 12,157
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-------- --------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $0.40 $0.56
----- -----
----- -----
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 21,570 21,748
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See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
APRIL 5, MARCH 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES-
Net cash provided by operating activities $ 14,216 $ 993
CASH FLOWS FROM INVESTING ACTIVITIES-
Purchases of property and equipment (286) (225)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 22 90
Stock repurchases (11,744) --
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Net cash provided by (used in) financing activities (11,722) 90
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,208 858
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,405 7,805
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,613 $ 8,663
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,100 $ 1,278
Income taxes $ 630 $ 593
</TABLE>
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 balance sheet 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 April 5, 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 and income before extraordinary item per common and common
equivalent share are based on the weighted average number 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 the open
market of up to 1.5 million shares through the end of June 1998. The timing,
prices and number of shares repurchased will be determined at the discretion
of the Company's Management based on its view of prevailing economic and
market conditions. During the quarter ended April 5, 1997, the Company
repurchased 631,758 shares at a cost of $11,743,629 in the open market.
<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 APRIL 5, 1997 TO THE
QUARTER ENDED MARCH 30, 1996.
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
April 5, 1997 March 30,1996
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(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $45.7 100% $59.0 100%
Gross profit 26.6 58 33.8 57
Selling, general, and administrative expenses 11.1 24 11.5 19
Amortization of goodwill and trademarks 1.1 3 1.1 2
Recovery of import duties (.4) (1) (.2) --
Income from operations 14.7 32 21.4 36
Interest expense 1.1 2 1.4 2
Other income, net (0.7) (2) (0.3) --
Income before income taxes 14.4 32 20.3 34
Provision for income taxes 5.7 12 8.1 14
Net income 8.7 19 12.2 21
</TABLE>
<PAGE>
NET SALES. Net sales decreased $13.3 million, or 22%, from $59.0 million
in the first quarter of 1996 to $45.7 million in the first quarter 1997. This
decrease was principally due to a decrease in volume. Sales of the Company's
Village Series products decreased $7.5 million, or 19%, while sales of General
Giftware products decreased $5.8 million, or 29% between the two periods.
Village Series and General Giftware products represented 68% and 32%,
respectively, of the Company's net sales during the first quarter.
GROSS PROFIT. Gross profit decreased $7.2 million, or 21%, between the
first quarter of 1996 and the first quarter of 1997. The decrease in gross
profit was principally due to the decrease in sales volume. Gross profit as a
percentage of net sales increased from 57% in the first quarter of 1996 to 58%
in the first quarter of 1997, principally due to a reduction in the amount
provided for slow-moving inventory and increased manufacturing efficiencies in
the first quarter of 1997 as compared to the first quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $.4 million, or 4%, between the first quarter
of 1996 and the first quarter of 1997 principally due to a 28% 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 the first quarter of 1996 to 24% in the first quarter
of 1997.
RECOVERY OF IMPORT DUTIES. The Company received net refunds of $.4
million and $.2 million in custom duties and related interest in the first
quarter of 1997 and the first quarter of 1996, respectively. The duties
pertained to certain merchandise imported into the United States prior to 1996.
INCOME FROM OPERATIONS. Income from operations decreased $6.6 million, or
31%, between the first quarter of 1996 and the first quarter of 1997 due to the
factors described above. Income from operations decreased from 36% to 32% of
net sales principally due to the increase in selling, general and administrative
expense as a percentage of sales.
INTEREST EXPENSE. Interest expense decreased $.3 million, or 21%, between
the first quarter of 1996 and the first quarter of 1997 principally due to the
payment of $20 million of debt during 1996.
PROVISION FOR INCOME TAXES. The effective tax rate was 40.0% and 39.5% in
the first quarter of 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.
<PAGE>
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 April 5, 1997, the Company had $5.8 million
of outstanding letters of credit under its revolving line of credit. The
available revolving line of credit commitment was $27.5 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 decreased $20.5 million from $55.3 million at March 30,
1996 to $34.7 million at April 5, 1997 principally due to the decrease in sales
in the first quarter of 1997 as compared to the first quarter of 1996.
Inventory decreased $5.6 million from $25.7 million at March 30,1996 to
$20.1 million at April 5, 1997 principally due to the decrease in sales volume
in the first quarter of 1997 as compared to the first quarter of 1996 and taking
a more cautious approach to inventory purchases.
On December 10, 1996, the Board of Directors of the Company authorized a
stock repurchase program. The program allows the repurchase in the open market
of up to 1.5 million shares through the end of June 1998. The timing, prices
and number of shares repurchased will be determined at the discretion of the
Company's management based on its view of prevailing economic and market
conditions. As of April 11, 1997, the Company had repurchased 713,158 shares
at a cost of $13,167,625 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 in the currencies of the countries in which
the manufacturers operate appreciate significantly relative to the U.S. dollar.
At April 5, 1997 the Company had $11.3 million of foreign exchange
contracts outstanding to hedge 1997 New Taiwan dollar denominated inventory
purchases. These contracts mature from April 1997 through December 1997 at a
rate of aproximately 27.50 NT$/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 been low and 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 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
--- --- --- --- -----
1995 $210 $30 $27 $9 $276
1996 178 35 28 8 249
1997 161 -- -- -- --
(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 71% and 76% of its total annual customer orders during the first
quarter of 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 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 $117 million as of April 5,
1997 as compared to $125 million as of March 30, 1996.
Through the first quarter of 1997, customer orders entered decreased 10% as
compared to the same period of 1996. Customer orders entered for Village Series
products have decreased 14% throught the first quarter of 1997 as compared to
the first quarter of 1996 while customer orders entered for General Giftware
Products have increased 3%.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company has adopted a shareholder rights plan. Under the rights
plan, each shareholder will receive a dividend of one right for each
outstanding share of the Company's stock. Upon the occurrence of certain
events involving a buyer acquiring a 20% or greater position in the
Company, all rights holders except the buyer will be entitled to purchase
the Company's stock at a discount. If the Company is acquired in a merger
after such an acquisition, all rights holders except the buyer will also
be entitled to purchase stock in the buyer at a discount.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 4.2/(1)/ Rights Agreement, dated as of April 23, 1997,
between the Registrant and Chase Mellon
Shareholder Services, LLC, which includes Exhibit B
thereto the Form of Right Certificate.
Exhibit 11.1 Computation of net income per share.
(b) A Current Report on Form 8-K, dated February 24, 1997, was filed
reporting in Items 5 and 7 thereof and containing unaudited condensed
statements of income and unaudited condensed balance sheets.
/(1)/ Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement and Form 8-A, filed as of April 24, 1997.
<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: April 23, 1997 /s/Susan Engel
----------------
Susan Engel
President and Chief Executive Officer
Date: April 23, 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)
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
April 5, 1997 March 30, 1996
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PRIMARY:
<S> <C> <C>
Net Income $ 8,723 $12,157
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Weighted average number of common shares outstanding 21,426 21,549
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 144 199
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Weighted average number of common and
common equivalent shares 21,570 21,748
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------- -------
Net Income per Common and
Common Equivalent Share $0.40 $0.56
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FULLY DILUTED:
Net Income $ 8,723 $12,157
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Weighted average number of common shares outstanding 21,426 21,549
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 144 199
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Weighted average number of common and
common equivalent shares 21,570 21,748
------- -------
------- -------
Fully Diluted Net Income per Common and
Common Equivalent Share $0.40 $0.56
------- -------
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> APR-05-1997
<CASH> 48,613
<SECURITIES> 0
<RECEIVABLES> 34,740
<ALLOWANCES> 0
<INVENTORY> 20,149
<CURRENT-ASSETS> 110,318
<PP&E> 12,120
<DEPRECIATION> 0
<TOTAL-ASSETS> 285,409
<CURRENT-LIABILITIES> 43,979
<BONDS> 40,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 285,409
<SALES> 45,729
<TOTAL-REVENUES> 45,729
<CGS> 19,112
<TOTAL-COSTS> 19,112
<OTHER-EXPENSES> 11,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,075
<INCOME-PRETAX> 14,418
<INCOME-TAX> 5,695
<INCOME-CONTINUING> 8,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,723
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
