<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 4, 1998
--------------------------------
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 April 4, 1998, 19,174,701 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
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1998 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,337 $ 37,361
Accounts receivable, net 35,985 23,004
Inventories 23,672 18,070
Other current assets 9,194 9,311
-------- --------
Total current assets 84,188 87,746
PROPERTY AND EQUIPMENT, net 12,775 12,753
GOODWILL AND TRADEMARKS, net 158,771 159,042
OTHER ASSETS 146 154
-------- --------
$255,880 $259,695
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 20,000 $ 20,000
Accounts payable 9,212 9,973
Other current liabilities 17,975 16,916
-------- --------
Total current liabilities 47,187 46,889
DEFERRED TAXES 6,151 6,151
LONG-TERM DEBT 20,000 20,000
STOCKHOLDERS' EQUITY 182,542 186,655
-------- --------
$255,880 $ 259,695
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
APRIL 4, APRIL 5,
1998 1997
---- ----
<S> <C> <C>
NET SALES $49,027 $45,729
COST OF SALES 20,594 19,112
-------- --------
Gross profit 28,433 26,617
OPERATING EXPENSES:
Selling, general, and administrative 11,630 11,094
Amortization of goodwill and trademarks 1,152 1,144
Recovery of import duties - (370)
-------- --------
Total operating expenses 12,782 11,868
-------- --------
INCOME FROM OPERATIONS 15,651 14,749
OTHER EXPENSE (INCOME)
Interest expense 770 1,075
Other, net (392) (744)
-------- --------
INCOME BEFORE INCOME TAXES 15,273 14,418
PROVISION FOR INCOME TAXES 6,033 5,695
-------- --------
NET INCOME $ 9,240 $ 8,723
-------- --------
-------- --------
NET INCOME PER COMMON SHARE $ 0.48 $ 0.41
-------- --------
-------- --------
NET INCOME PER COMMON SHARE ASSUMING DILUTION $ 0.47 $ 0.40
-------- --------
-------- --------
</TABLE>
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 4, APRIL 5,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ (5,918) $ 14,216
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (258) (286)
Acquisitions (2,310) -
-------- --------
Net cash used in investing activities (2,568) (286)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,109 22
Stock repurchases (14,647) (11,744)
Net cash used in financing activities (13,538) (11,722)
-------- --------
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,024) 2,208
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,361 46,405
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,337 $ 48,613
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 778 $ 1,100
Income taxes $ 1,265 $ 630
</TABLE>
See notes to condensed consolidated financial statments.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of January 3, 1998
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 April 4, 1998 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 1997
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 COMMON SHARE
Net income per common share is calculated by dividing net income by the
weighted average number of shares outstanding during the period. Net income per
common share assuming dilution reflects per share amounts that would have
resulted had the Company's outstanding stock options been converted to common
stock.
3. STOCKHOLDERS' EQUITY
During the quarter ended April 4, 1998, the Company repurchased 435,000
shares at a cost of $14.6 million under its existing stock repurchase program.
As of April 4, 1998, the company was authorized to repurchase 366,000 additional
shares under this program.
On April 29, 1998, the Board of Directors of the Company authorized a stock
repurchase program providing for the repurchase in open market and privately
negotiated transactions of up to an additional 1.5 million shares valid through
the end of the Company's 1999 fiscal year. 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.
4. ACQUISITIONS
During January 1998, the Company acquired substantially all of the assets
of the independent sales representative organization that represented the
Company's products in California and several other western states. Also during
January 1998, the Company acquired the inventory and certain other assets of its
Canadian distributor.
<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 4, 1998 TO THE
QUARTER ENDED APRIL 5, 1997.
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
April 4, 1998 April 5, 1997
(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net sales $49.0 100% $45.7 100%
Gross profit 28.4 58 26.6 58
Selling, general, and administrative expenses 11.6 24 11.1 24
Amortization of goodwill and trademarks 1.2 2 1.1 3
Recovery of import duties - - (0.4) (1)
Income from operations 15.7 32 14.7 32
Interest expense 0.8 2 1.1 2
Other income, net (0.4) (1) (0.7) (2)
Income before income taxes 15.3 31 14.4 32
Provision for income taxes 6.0 12 5.7 12
Net income 9.2 19 8.7 19
</TABLE>
NET SALES. Net sales increased $3.3 million, or 7%, from $45.7
million in the first quarter of 1997 to $49.0 million in the first quarter of
1998. Sales of the Company's Village Series products increased $1.2 million, or
4%, while sales of General Giftware products increased $2.1 million, or 15%
between the two periods. Village Series and General Giftware products
represented 66% and 34%, respectively, of the Company's net sales during the
first quarter of 1998.
<PAGE>
GROSS PROFIT. Gross profit increased $1.8 million, or 7%, between the
first quarter of 1997 and the first quarter of 1998. 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 first quarter of both 1997 and 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.5 million, or 5%, between the first quarter
of 1997 and the first quarter of 1998 principally due to an increase in
marketing expenses. Selling, general and administrative expenses as a
percentage of sales was 24% during the first quarter of both 1997 and 1998.
INCOME FROM OPERATIONS. Income from operations increased $1.0 million, or
6%, between the first quarter of 1997 and the first quarter of 1998 due to the
factors described above. Income from operations was 32% of net sales during the
first quarter of both 1997 and 1998.
INTEREST EXPENSE. Interest expense decreased $.3 million, or 28%, between
the first quarter of 1997 and the first quarter of 1998 principally due to the
payment of $20 million of long term debt during 1997.
PROVISION FOR INCOME TAXES. The effective tax rate was 39.5% during the
first quarter of both 1997 and 1998.
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 April 4, 1998, the Company had $5.4 million
of outstanding letters of credit under its revolving line of credit. The
available revolving line of credit commitment was $24.6 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 increased $1.3 million from $34.7 million at April 5,
1997 to $36.0 million at April 4, 1998 principally due to the increase in sales
in 1998 as compared to 1997.
<PAGE>
During the quarter ended April 4, 1998, the Company repurchased 435,000
shares at a cost of $14.6 million under its existing stock repurchase program.
As of April 4, 1998, the company was authorized to repurchase 366,000 additional
shares under this program.
On April 29, 1998, the Board of Directors of the Company authorized a stock
repurchase program providing for the repurchase in open market and privately
negotiated transactions of up to an additional 1.5 million shares valid through
the end of the Company's 1999 fiscal year. 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.
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 most of 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.
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)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Total
--- --- --- --- -----
<S> <C> <C> <C> <C> <C>
1996 $178 $ 35 $ 28 $ 8 $249
1997 161 44 34 6 245
1998 174 - - - -
</TABLE>
(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 66% and 71% of its total annual customer orders during the first
quarter of both 1997 and 1996, respectively. Cancellations were approximately
8% and 6% of total annual orders in 1997 and 1996, respectively.
The Company shipped and recorded as net sales approximately 90% and 92% of
its annual customer orders in 1997 and 1996, respectively. Orders not shipped
in a particular period, net of cancellations, returns, allowances and cash
discounts, are carried into backlog. The backlog was $126.1 million as of April
4, 1998, as compared to $117.2 million as of April 5, 1997.
Through the first quarter of 1998, customer orders entered increased 8% as
compared to the same period for 1997. Customer orders entered for Village
Series products have increased 10% through the first quarter of 1998 while
customer orders entered for General Giftware products have increased 5%.
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.
(b) A Current Report on Form 8-K, dated February 24, 1998, was filed
reporting in Items 5 and 7 thereof and containing unaudited
condensed statements of income and unaudited condensed balance
sheets. A Current Report on Form 8-K, dated March 13, 1998, was
filed reporting in Items 5 and 7 thereof and containing no
financial statements.
<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 30, 1998 /s/Susan E. Engel
-----------------
Susan E. Engel
Chairwoman, Chief Executive Officer
and Director
Date: April 30, 1998 /s/Timothy J. Schugel
---------------------
Timothy J. Schugel
Vice President - Finance and
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT PAGE
NUMBER NAME NUMBER
------ ---- ------
<S> <C> <C>
11.1 Computation of net income per share.
</TABLE>
<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 4, April 5,
1998 1997
---- ----
<S> <C> <C>
BASIC:
Net Income $ 9,240 $ 8,723
------- -------
------- -------
Weighted average number of common shares outstanding 19,411 21,426
Net Income per Common Share $ 0.48 $ 0.41
------- -------
------- -------
ASSUMING DILUTION:
Net Income $ 9,240 $ 8,723
------- -------
------- -------
Weighted average number of common shares outstanding 19,411 21,426
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 288 144
------- -------
Weighted average number of common and
common equivalent shares 19,699 21,570
------- -------
------- -------
Net Income per Common Share Assuming Dilution $ 0.47 $ 0.40
------- -------
------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> APR-04-1998
<CASH> 15,337
<SECURITIES> 0
<RECEIVABLES> 35,985
<ALLOWANCES> 0
<INVENTORY> 23,672
<CURRENT-ASSETS> 9,194
<PP&E> 12,775
<DEPRECIATION> 0
<TOTAL-ASSETS> 255,880
<CURRENT-LIABILITIES> 47,187
<BONDS> 20,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 255,880
<SALES> 49,027
<TOTAL-REVENUES> 49,027
<CGS> 20,594
<TOTAL-COSTS> 20,594
<OTHER-EXPENSES> 12,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 770
<INCOME-PRETAX> 15,273
<INCOME-TAX> 6,033
<INCOME-CONTINUING> 9,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,240
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
</TABLE>
