<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 3, 1999
---------------
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 3, 1999, 17,972,645 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)
<TABLE>
<CAPTION>
ASSETS
APRIL 3, JANUARY 2,
1999 1999
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,596 $ 2,783
Accounts receivable, net 29,362 26,170
Inventories 20,329 18,287
Other current assets 12,209 10,661
----------- ----------
Total current assets 65,496 57,901
PROPERTY AND EQUIPMENT, net 20,013 17,722
GOODWILL, TRADEMARKS AND OTHER, net 156,268 157,531
DEFERRED FINANCING COSTS AND OTHER ASSETS 1,808 129
------------ --------------
$ 243,585 $ 233,283
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 15,492 $ -
Accounts payable 8,428 11,100
Other current liabilities 13,539 17,525
------------ --------------
Total current liabilities 37,459 28,625
DEFERRED TAXES 5,923 5,923
LONG-TERM DEBT 20,000 20,000
STOCKHOLDERS' EQUITY 180,203 178,735
------------ --------------
$ 243,585 $ 233,283
============ ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
APRIL 3, APRIL 4,
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 33,648 $ 49,027
COST OF SALES 13,752 20,594
----------- -----------
Gross profit 19,896 28,433
OPERATING EXPENSES:
Selling, general, and administrative 12,488 11,630
Amortization of goodwill and trademarks 1,263 1,152
----------- -----------
Total operating expenses 13,751 12,782
----------- -----------
INCOME FROM OPERATIONS 6,145 15,651
OTHER EXPENSE (INCOME)
Interest expense 516 770
Other, net 236 (392)
----------- -----------
INCOME BEFORE INCOME TAXES 5,393 15,273
PROVISION FOR INCOME TAXES 2,049 6,033
----------- -----------
NET INCOME $ 3,344 $ 9,240
=========== ===========
NET INCOME PER COMMON SHARE $ 0.19 $ 0.48
=========== ===========
NET INCOME PER COMMON SHARE ASSUMING DILUTION $ 0.18 $ 0.47
=========== ===========
</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 3, APRIL 4,
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (9,028) $ (5,918)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,521) (258)
Acquisitions - (2,310)
------------ -----------
Net cash used in investing activities (3,521) (2,568)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 960 1,109
Net borrowings under revolving credit facility 15,492 -
Stock repurchases (3,090) (14,647)
------------ -----------
Net cash provided by (used in) financing activities 13,362 (13,538)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 813 (22,024)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,783 37,361
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,596 $ 15,337
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 2,170 $ 778
Income taxes $ 1,200 $ 1,265
============ ===========
</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 January 2, 1999
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 3, 1999 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 1998
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 3, 1999, the Company repurchased 100,000
shares at a cost of $3.1 million under its existing stock repurchase program.
Since January 1997, the Company has repurchased a total of 4.0 million shares at
an average price of $29 per share. As of April 3, 1999, the Company was
authorized to repurchase 524,000 additional shares under this program through
the end of 1999. The timing 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.
<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 3, 1999 TO THE
QUARTER ENDED APRIL 4, 1998.
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
April 3, 1999 April 4, 1998
------------- -------------
(Dollars in millions)
% of % of
Dollars Net Sales Dollars Net Sales
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net sales $33.6 100 % $49.0 100 %
Gross profit 19.9 59 28.4 58
Selling, general, and administrative expenses 12.5 37 11.6 24
Amortization of goodwill and trademarks 1.3 4 1.2 2
Income from operations 6.1 18 15.7 32
Interest expense 0.5 2 0.8 2
Other income, net 0.2 1 (0.4) (1)
Income before income taxes 5.4 16 15.3 31
Provision for income taxes 2.0 6 6.0 12
Net income 3.3 10 9.2 19
</TABLE>
NET SALES. Net sales decreased $15.4 million, or 31%, from $49.0
million in the first quarter of 1998 to $33.6 million in the first quarter of
1999. The decrease in sales was principally due to delays experienced from
the implementation of the Company's new integrated computer system and a
decrease in volume as a result of the timing of product received from the
Company's suppliers. Sales of the Company's Village Series products
decreased $8.9 million, or 27%, while sales of General Giftware products
decreased $6.5 million, or 39% between the two periods. Village Series and
General Giftware products represented 70% and 30%, respectively, of the
Company's net sales during the first quarter of 1999.
<PAGE>
GROSS PROFIT. Gross profit decreased $8.5 million, or 30%, between the
first quarter of 1998 and the first quarter of 1999. The decrease in gross
profit was principally due to the decrease in sales volume. Gross profit as
a percentage of net sales increased from 58% in the first quarter of 1998 to
59% in the first quarter of 1999, principally due to a change in the mix of
product shipped during the first quarter of 1999 as compared to the first
quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.9 million, or 7%, between the first
quarter of 1998 and the first quarter of 1999. The increase is principally
due to an increase in marketing expenses, an increase in showroom expenses as
a result of the Company's acquisition of showrooms during 1998, an increase
in depreciation expense associated with the Company's implementation of its
new integrated computer system, offset by a decrease in commission expense.
Selling, general and administrative expenses as a percentage of sales was 24%
during the first quarter of 1998 and 37% during the first quarter of 1999.
INCOME FROM OPERATIONS. Income from operations decreased $9.5 million,
or 61%, between the first quarter of 1998 and the first quarter of 1999 due
to the factors described above. Income from operations was 32% of net sales
during the first quarter of 1998 and 18% of net sales during the first
quarter of 1999.
INTEREST EXPENSE. Interest expense decreased $0.3 million, or 33%,
between the first quarter of 1998 and the first quarter of 1999 principally
due to the payment of $20 million of long term debt during 1998 partially
offset by increased borrowings under the revolving line of credit in 1999.
PROVISION FOR INCOME TAXES. The effective tax rate was 39.5% during
the first quarter of 1998 and 38% during the first quarter of 1999. The
decreased effective income tax rate experienced during the first quarter of
1999 is consistent with the Company's expectation of a lower overall
effective income tax rate for fiscal year 1999 as disclosed on Form 8-K dated
February 26, 1999.
LIQUIDITY AND CAPITAL RESOURCES
In March 1999, the Company entered into a new credit agreement providing
a $100 million revolving credit facility and a $150 million revolver/term
loan. The $150 million revolver/term loan converts to a four-year term loan
after one year. The revolver/term loan will have annual amortization
payments of 15%, 20%, 25% and 40% of the amount outstanding at conversion in
March 2001, 2002, 2003, and 2004, respectively.
The Company used the proceeds of the revolver/term loan to refinance the
remaining $20 million term loan under its former credit agreement. In
connection therewith, the Company recorded $1.7 million in deferred financing
fees, which will be amortized over the life of the credit agreement.
The revolving credit facility provides for borrowings of up to $100
million including letters of credit. The letters of credit are issued
primarily in connection with inventory purchases.
<PAGE>
The credit agreement contains financial and operating covenants, including
restrictions on incurring indebtedness and liens, selling property and paying
dividends. In addition, the Company is required to satisfy consolidated net
worth, interest coverage ratio and leverage ratio tests, in each case at the
end of each fiscal quarter.
The Company believes that its internally generated cash flow and
seasonal borrowings under the revolving credit facility will be adequate to
fund operations and capital expenditures for the next twelve months.
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
available cash, internally generated cash flow and seasonal borrowings. The
Company's cash and cash equivalents balances peak in December, following the
collection in November and December of accounts receivable with extended
payment terms. The Company's bad debt experience relating to these accounts
receivable has not been material.
Accounts receivable decreased from $36.0 million at April 4, 1998 to $29.4
million at April 3, 1999, principally due to the decrease in net sales in 1999
as compared to 1998, offset by slower cash collections in 1999. The Company's
cash collections during the first quarter of 1999 were delayed due to the timing
of invoices and statements mailed to customers as a result of the implementation
of the new integrated computer system.
In April 1999, the Company executed a lease for a new distribution center
in Minnesota. By the end of 1999, the Company plans to consolidate its three
current distribution centers into the new distribution center. The lease
provides for a 10-year term, with options to renew the lease, as well as to
expand and/or acquire the facility, and requires minimum future annual rentals
that approximate the combined annual rentals of the three existing distribution
centers.
During the quarter ended April 3, 1999, the Company repurchased 100,000
shares at a cost of $3.1 million under its existing stock repurchase program.
Since January 1997, the Company has repurchased a total of 4.0 million shares at
an average price of $29 per share. As of April 3, 1999, the Company was
authorized to repurchase 524,000 additional shares under this program through
the end of 1999. The timing 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.
YEAR 2000
On January 3, 1999, the Company substantially implemented a new integrated
computer system, which replaced its primary operating and financial computing
systems. The vendor of the core software program for the new integrated system
has indicated that this system will substantially address Year 2000
requirements, and the Company does not anticipate that it will experience any
material disruption to its transaction processing operations or financial or
accounting functions as a result of the failure of any of its systems to be Year
2000 compliant. The Company is continuing to monitor and evaluate its new and
existing systems so that, in the
<PAGE>
event substantial non-compliance with Year 2000 needs is detected, the
remainder of 1999 can be utilized to achieve necessary functionality.
Total expenditures (aside of internal labor costs) for implementation of
the new system has been revised to approximately $9.5 million due to higher than
anticipated consulting fees. Accordingly, the Company's previous estimate of
full fiscal year 1999 total capital expenditures (including systems
expenditures, leasehold improvements associated with the new distribution
center, and other capital expenditures) totaling $10.0 million has been
increased to $15.0 million. Approximately $5.5 million of the systems
expenditures have been incurred as of April 3, 1999. Hardware, software and
certain project costs were capitalized and will be amortized over their useful
lives. All other costs were expensed as incurred.
The Company believes that the implementation of the new integrated computer
system will allow it to be substantially Year 2000 compliant. There can be no
assurance, however, that the systems of third parties on which the Company
relies will be Year 2000 compliant in a timely manner. As a precautionary
measure, the Company intends to develop contingency plans for all of its systems
that are not expected to be Year 2000 compliant by October 1999. A variety of
automated as well as manual fallback plans will be considered, including the use
of electronic spreadsheets, resetting system dates and manual workarounds. An
interruption of the Company's ability to conduct its business due to a Year 2000
problem with a third party could have a material adverse effect on the Company.
The Company's product vendor and customer bases are fragmented, and generally
are not dependent on computer control or systematization of their business
operations. Management, therefore, believes that the greatest risks presented
by potential Year 2000 failures of third parties are those which would affect
the general economy or certain industries, such as may occur if there were
insufficient electric power or other utilities needed for the Company's
operations or manufacture of its products or insufficient reliable means of
transporting the Company's products. While such failures could affect important
operations of the Company, either directly or indirectly, in a significant
manner, the Company cannot at present estimate either the likelihood or the
potential cost of such failures. The statements concerning future matters are
"forward-looking statements" and actual results may vary.
FOREIGN EXCHANGE
The dollar value of the Company's assets abroad is not significant.
Substantially all of 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 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 foreign 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.
<PAGE>
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
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.
<TABLE>
<CAPTION>
CUSTOMER ORDERS ENTERED (1)
(IN MILLIONS)
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr Total
--- --- --- --- -----
<S> <C> <C> <C> <C> <C>
1997 161 44 34 6 245
1998 174 50 37 8 269
1999 189 - - - -
</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 65% and 66% of its total annual customer orders during the first
quarter of both 1998 and 1997, respectively. Cancellations were approximately
7% and 8% of total annual orders in 1998 and 1997, respectively.
The Company shipped and recorded as net sales approximately 91% and 90% of
its annual customer orders in 1998 and 1997, respectively. Orders not shipped
in a particular period, net of cancellations, returns, allowances and cash
discounts, are carried into backlog. The backlog was $156.8 million as of April
3, 1999, as compared to $126.1 million as of April 4, 1998.
Through the first quarter of 1999, customer orders entered increased 9% as
compared to the same period for 1998. Customer orders entered for Village
Series products have increased 9% through the first quarter of 1999 while
customer orders entered for General Giftware products have increased 7%.
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>
NOTES CONCERNING FORWARD LOOKING STATEMENTS:
ANY CONCLUSIONS OR EXPECTATIONS EXPRESSED IN, OR DRAWN FROM, THE STATEMENTS IN
THIS FILING CONCERNING MATTERS THAT ARE NOT HISTORICAL CORPORATE FINANCIAL
RESULTS ARE "FORWARD-LOOKING STATEMENTS" THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S FULL FISCAL YEAR 1999 CAPITAL EXPENDITURES FORECAST IS BASED ON
THE COMPANY'S CURRENT EXPECTATIONS REGARDING THE TIMING AND EFFICIENCY OF
ACHIEVING FULL FUNCTIONALITY IN INFORMATION SYSTEMS DEVELOPED TO COLLECT,
COMPILE AND EXECUTE CUSTOMER ORDERS, AND THE COST OF EXTERNAL CONTRACTOR
SERVICES RELATING THERETO. IF NOT MENTIONED ABOVE, OTHER FACTORS (INCLUDING:
IDENTIFICATION, COMPLETION AND RESULTS OF ACQUISITIONS, INVESTMENTS, AND OTHER
STRATEGIC BUSINESS INITIATIVES; AND INDUSTRY AND GENERAL ECONOMIC CONDITIONS)
CAN SIGNIFICANTLY IMPACT THE COMPANY'S CAPITAL EXPENDITURES. ACTUAL RESULTS MAY
VARY MATERIALLY FROM FORWARD-LOOKING STATEMENTS AND THE ASSUMPTIONS ON WHICH
THEY ARE BASED. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR PUBLISH IN
THE FUTURE ANY FORWARD-LOOKING STATEMENTS.
<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 26, 1999, was filed
reporting in Items 5 and 7 thereof and containing unaudited condensed
statements of income and unaudited condensed balance sheets.
<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 29, 1999 /s/ Susan E. Engel
--------------------------------------
Susan E. Engel
Chairwoman, Chief Executive Officer and Director
Date: April 29, 1999 /s/ Gregg A. Peters
--------------------------------------
Gregg A. Peters
Director of 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 3, April 4,
1999 1998
-------- --------
<S> <C> <C>
BASIC:
Net Income $ 3,344 $ 9,240
======== ========
Weighted average number of common shares outstanding 18,039 19,411
Net Income per Common Share $ 0.19 $ 0.48
======== ========
ASSUMING DILUTION:
Net Income $ 3,344 $ 9,240
======== ========
Weighted average number of common shares outstanding 18,039 19,411
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 246 288
-------- --------
Weighted average number of common and
common equivalent shares 18,285 19,699
======== ========
Net Income per Common Share Assuming Dilution $ 0.18 $ 0.47
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 3,596
<SECURITIES> 0
<RECEIVABLES> 29,362
<ALLOWANCES> 0
<INVENTORY> 20,329
<CURRENT-ASSETS> 65,496
<PP&E> 20,013
<DEPRECIATION> 0
<TOTAL-ASSETS> 243,585
<CURRENT-LIABILITIES> 37,459
<BONDS> 20,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 243,585
<SALES> 33,648
<TOTAL-REVENUES> 33,648
<CGS> 13,752
<TOTAL-COSTS> 13,752
<OTHER-EXPENSES> 13,751
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516
<INCOME-PRETAX> 5,393
<INCOME-TAX> 2,049
<INCOME-CONTINUING> 3,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,344
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
