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, 2002
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) |
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Delaware |
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13-3684956 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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One Village Place, 6436 City West Parkway, Eden Prairie, MN 55344 |
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(Address of principal executive offices) |
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(Zip Code) |
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(952) 944-5600 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
As of June 29, 2002, 13,029,821 shares of the registrant’s common stock, par value $.01 per share, were outstanding.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
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JUNE 29, |
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DECEMBER 29, |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
3,696 |
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$ |
48,088 |
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Accounts receivable, net |
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61,616 |
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23,584 |
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Inventories |
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15,746 |
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11,151 |
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Other current assets |
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9,991 |
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11,328 |
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Total current assets |
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91,049 |
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94,151 |
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PROPERTY AND EQUIPMENT, net |
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22,425 |
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29,749 |
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GOODWILL, TRADEMARKS AND OTHER, net |
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60,176 |
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153,963 |
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OTHER ASSETS |
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2,190 |
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1,958 |
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$ |
175,840 |
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$ |
279,821 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Current portion of long-term debt |
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$ |
2,235 |
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$ |
900 |
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Borrowings on revolving credit agreement |
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8,000 |
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— |
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Accounts payable |
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5,411 |
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10,811 |
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Other current liabilities |
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23,780 |
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19,546 |
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Total current liabilities |
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39,426 |
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31,257 |
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DEFERRED TAXES |
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5,362 |
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7,717 |
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LONG-TERM DEBT |
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51,765 |
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84,100 |
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STOCKHOLDERS’ EQUITY |
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79,287 |
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156,747 |
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$ |
175,840 |
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$ |
279,821 |
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See notes to condensed consolidated financial statements.
2
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
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QUARTER ENDED |
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JUNE 29, |
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JUNE 30, |
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NET SALES |
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$ |
59,850 |
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$ |
55,168 |
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COST OF SALES |
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26,036 |
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23,850 |
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Gross profit |
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33,814 |
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31,318 |
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OPERATING EXPENSES: |
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Selling, general, and administrative |
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14,479 |
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15,348 |
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Amortization of goodwill, trademarks and other |
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66 |
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1,274 |
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Total operating expenses |
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14,545 |
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16,622 |
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INCOME FROM OPERATIONS |
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19,269 |
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14,696 |
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OTHER EXPENSE (INCOME): |
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Interest expense |
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840 |
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1,713 |
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Other, net |
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(46 |
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59 |
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INCOME BEFORE INCOME TAXES |
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18,475 |
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12,924 |
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INCOME TAX PROVISION |
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6,651 |
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4,911 |
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NET INCOME |
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$ |
11,824 |
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$ |
8,013 |
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NET INCOME PER SHARE — BASIC |
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$ |
0.91 |
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$ |
0.62 |
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NET INCOME PER SHARE — ASSUMING DILUTION |
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$ |
0.89 |
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$ |
0.62 |
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WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC |
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12,974 |
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12,883 |
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WEIGHTED AVERAGE SHARES OUTSTANDING — ASSUMING DILUTION |
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13,324 |
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12,904 |
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See notes to condensed consolidated financial statements.
3
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
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26 WEEKS ENDED |
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JUNE 29, |
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JUNE 30, |
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NET SALES |
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$ |
92,349 |
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$ |
84,294 |
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COST OF SALES |
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40,257 |
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37,201 |
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Gross profit |
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52,092 |
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47,093 |
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OPERATING EXPENSES: |
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Selling, general, and administrative |
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32,655 |
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30,153 |
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Amortization of goodwill, trademarks and other |
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133 |
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2,648 |
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Total operating expenses |
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32,788 |
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32,801 |
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INCOME FROM OPERATIONS |
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19,304 |
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14,292 |
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OTHER EXPENSE (INCOME): |
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Interest expense |
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1,896 |
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3,949 |
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Litigation settlement |
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(5,388 |
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— |
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Other, net |
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(254 |
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(256 |
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INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
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23,050 |
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10,599 |
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INCOME TAX PROVISION |
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8,298 |
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4,028 |
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INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
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14,752 |
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6,571 |
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
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(93,654 |
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— |
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NET (LOSS) INCOME |
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$ |
(78,902 |
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$ |
6,571 |
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INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE — BASIC |
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$ |
1.14 |
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$ |
0.51 |
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE — BASIC |
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(7.24 |
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— |
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NET (LOSS) INCOME PER SHARE — BASIC |
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$ |
(6.10 |
) |
$ |
0.51 |
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INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE — ASSUMING DILUTION |
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$ |
1.12 |
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$ |
0.51 |
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE — ASSUMING DILUTION |
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(7.14 |
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— |
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NET (LOSS) INCOME PER SHARE — ASSUMING DILUTION |
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$ |
(6.02 |
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$ |
0.51 |
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WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC |
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12,936 |
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12,864 |
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WEIGHTED AVERAGE SHARES OUTSTANDING — ASSUMING DILUTION |
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13,117 |
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12,901 |
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See notes to condensed consolidated financial statements.
4
DEPARTMENT 56, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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26 WEEKS ENDED |
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JUNE 29, |
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JUNE 30, |
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CASH FLOWS FROM OPERATING ACTIVITIES - |
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Net cash used in operating activities |
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$ |
(21,601 |
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$ |
(7,585 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(853 |
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(1,583 |
) |
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Net cash used in investing activities |
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(853 |
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(1,583 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from the exercise of common stock options |
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1,062 |
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— |
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Borrowings on revolving credit agreement |
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8,000 |
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6,000 |
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Principal payments on long-term debt |
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(31,000 |
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(20,000 |
) |
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Net cash used in financing activities |
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(21,938 |
) |
(14,000 |
) |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(44,392 |
) |
(23,168 |
) |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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48,088 |
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23,698 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
3,696 |
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$ |
530 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - |
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Cash paid for: |
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Interest |
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$ |
2,229 |
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$ |
3,695 |
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Income taxes |
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$ |
2,774 |
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$ |
200 |
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See notes to condensed consolidated financial statements.
5
DEPARTMENT 56, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1. Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 29, 2001 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.
The results of operations for the quarter and 26 weeks ended June 29, 2002 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 2001 Annual Report to Stockholders and Annual Report on Form 10-K as 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. Legal Proceedings
Reference is made to Item 3, “Legal Proceedings,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001, which Item is incorporated herein in its entirety. On March 1, 2002, the Company received net proceeds (before income taxes) of $11.0 million in settlement of the Company’s litigation against Arthur Andersen LLP and Andersen Worldwide Société Coopérative concerning implementation of its information systems. This recovery resulted in other income of $5.4 million and a $5.6 million reduction in net depreciable assets.
On May 1, 2002, the United States District Court, District of Minnesota entered the order of its Chief Judge granting Department 56 and Susan Engel’s Motion to Dismiss the previously reported class action lawsuit, In Re Department 56, Inc., Securities Litigation.
6
4. Goodwill and Indefinite Lived Intangible Assets - Adoption of SFAS No. 142
Effective at the beginning of fiscal year 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. This standard primarily addresses the accounting for acquired goodwill and intangible assets (i.e., the post-acquisition accounting). The most significant changes made by SFAS No. 142 are: 1) goodwill and indefinite-lived intangible assets will no longer be amortized; 2) goodwill and indefinite-lived intangible assets will be tested for impairment at least annually; and 3) the amortization period of intangible assets with finite lives will no longer be limited to forty years.
Upon adoption of SFAS No. 142, amortization of goodwill and indefinite-lived intangible assets ceased. The Company determined that its trademarks are indefinite-lived intangible assets and no longer amortizes them. Recorded goodwill was tested for impairment by comparing the fair value to its carrying value. Fair value was determined by considering discounted cash flow methodologies, industry control premiums in the marketplace and private transaction financial models. Independent and other market valuation methods were used to determine the fair value of the Company’s trademarks and other assets. This impairment test is required to be performed at adoption of SFAS 142 and at least annually thereafter. As a result of the fair market value analysis, the Company recorded a $93,654 charge as a cumulative effect of change in accounting principle during the first quarter of 2002.
Had SFAS No. 142 been effective at the beginning of 2001, the non-amortization provisions would have had the following effect on the results of the quarter and 26 weeks ended June 29, 2002:
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QUARTER ENDED |
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(In thousands, except per share amounts) |
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JUNE 29, |
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JUNE 30, |
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Reported net income |
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$ |
11,824 |
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$ |
8,013 |
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Add back: Goodwill amortization |
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— |
|
1,119 |
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Add back: Trademark amortization, net of tax |
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— |
|
71 |
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Adjusted net income |
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$ |
11,824 |
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$ |
9,203 |
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Basic earnings per share: |
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Reported net income per share |
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$ |
0.91 |
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$ |
0.62 |
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Goodwill amortization |
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— |
|
0.09 |
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Trademark amortization |
|
— |
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— |
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Adjusted net income per share — basic |
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$ |
0.91 |
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$ |
0.71 |
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Diluted earnings per share: |
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Reported net income per share |
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$ |
0.89 |
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$ |
0.62 |
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Goodwill amortization |
|
— |
|
0.09 |
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Trademark amortization |
|
— |
|
— |
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Adjusted net income per share — assuming dilution |
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$ |
0.89 |
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$ |
0.71 |
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7
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26 WEEKS ENDED |
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(In thousands, except per share amounts) |
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JUNE 29, |
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JUNE 30, |
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|
|
|
|
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Reported net (loss) income |
|
$ |
(78,902 |
) |
$ |
6,571 |
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Add back: Goodwill amortization |
|
— |
|
2,237 |
|
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Add back: Trademarks amortization, net of tax |
|
— |
|
143 |
|
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Adjusted net (loss) income |
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(78,902 |
) |
8,951 |
|
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Add back: Cumulative effect of change in accounting principle |
|
93,654 |
|
— |
|
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Adjusted earnings before cumulative effect of change in accounting principle |
|
$ |
14,752 |
|
$ |
8,951 |
|
|
|
|
|
|
|
|
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Basic earnings per share: |
|
|
|
|
|
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Reported net (loss) income per share |
|
$ |
(6.10 |
) |
$ |
0.51 |
|
Goodwill amortization |
|
— |
|
0.17 |
|
||
Trademark amortization |
|
— |
|
0.01 |
|
||
Adjusted net (loss) income per share — basic |
|
(6.10 |
) |
0.69 |
|
||
Add back: Cumulative effect of change in accounting principle |
|
7.24 |
|
— |
|
||
Adjusted earnings per share before cumulative effect of change in accounting principle — basic |
|
$ |
1.14 |
|
$ |
0.69 |
|
|
|
|
|
|
|
|
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Diluted earnings per share: |
|
|
|
|
|
||
Reported net (loss) income per share |
|
$ |
(6.02 |
) |
$ |
0.51 |
|
Goodwill amortization |
|
— |
|
0.17 |
|
||
Trademark amortization |
|
— |
|
0.01 |
|
||
Adjusted net (loss) income per share — assuming dilution |
|
(6.02 |
) |
0.69 |
|
||
Add back: Cumulative effect of change in accounting principle |
|
7.14 |
|
— |
|
||
Adjusted earnings per share before cumulative effect of change in accounting principle — assuming dilution |
|
$ |
1.12 |
|
$ |
0.69 |
|
In accordance with SFAS No. 142, the Company will continue to amortize non-compete agreements (i.e. finite-lived intangible assets). Amortization of non-compete agreements was $66 and $67 during the first and second quarters of 2002, respectively. Expected annual amortization expense for non-compete agreements recorded as of December 30, 2001 (fiscal 2002) is as follows:
|
2002 |
|
$ |
248 |
|
|
2003 |
|
231 |
|
|
|
2004 |
|
231 |
|
|
|
2005 |
|
196 |
|
|
|
2006 |
|
141 |
|
|
|
Thereafter |
|
379 |
|
|
|
|
|
$ |
1,426 |
|
The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events.
8
Included in goodwill, trademarks and other on the Company’s consolidated balance sheet as of the end of the second quarter, June 29, 2002, and as of the latest fiscal year end, December 29, 2001, are the following acquired intangible assets by reporting segment (net of accumulated amortization):
|
(In thousands) |
|
JUNE 29, |
|
DECEMBER 29, |
|
||
WHOLESALE: |
|
|
|
|
|
||
Goodwill |
|
$ |
37,074 |
|
$ |
130,728 |
|
Trademarks |
|
13,761 |
|
13,761 |
|
||
Non-compete agreements |
|
1,009 |
|
1,097 |
|
||
|
|
|
$ |
51,844 |
|
$ |
145,586 |
|
|
|
|
|
|
|
|
||
RETAIL: |
|
|
|
|
|
||
Goodwill |
|
$ |
7,912 |
|
$ |
7,912 |
|
Trademarks |
|
137 |
|
137 |
|
||
Non-compete agreements |
|
283 |
|
328 |
|
||
|
|
|
$ |
8,332 |
|
$ |
8,377 |
|
9
5. Segments of the Company and Related Information
The Company has two reportable segments - wholesale and retail. Although the product produced and sold for each segment is similar, the type of customer for the product and the method used to distribute the product are different. The segmentation of these operations also reflects how the Company’s chief executive officer (the CEO) currently reviews the results of these operations. Income from operations for each operating segment includes specifically identifiable operating costs such as cost of sales and selling expenses. General and administrative expenses are generally not allocated to specific operating segments and are therefore reflected in the other category. Other components of the statement of operations which are classified below income from operations are also not allocated by segment. In addition, the Company does not account for or report assets, capital expenditures or depreciation and amortization by segment. All transactions between operating segments have been eliminated and are not included in the table below.
|
|
|
QUARTER ENDED |
|
26 WEEKS ENDED |
|
||||||||
|
(In thousands) |
|
JUNE 29, |
|
JUNE 30, |
|
JUNE 29, |
|
JUNE 30, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
WHOLESALE: |
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
58,827 |
|
$ |
54,289 |
|
$ |
85,993 |
|
$ |
82,996 |
|
Income from operations |
|
28,604 |
|
26,408 |
|
39,581 |
|
37,203 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
RETAIL: |
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
1,023 |
|
$ |
879 |
|
$ |
6,356 |
|
$ |
1,298 |
|
Loss from operations |
|
(1,057 |
) |
(390 |
) |
(2,690 |
) |
(836 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
OTHER - |
|
|
|
|
|
|
|
|
|
||||
Loss from operations |
|
$ |
(8,278 |
) |
$ |
(11,322 |
) |
$ |
(17,587 |
) |
$ |
(22,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
CONSOLIDATED: |
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
59,850 |
|
$ |
55,168 |
|
$ |
92,349 |
|
$ |
84,294 |
|
Income from operations |
|
19,269 |
|
14,696 |
|
19,304 |
|
14,292 |
|
||||
10
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, 2002 to the Quarter Ended June 30, 2001.
|
(In millions) |
|
QUARTER ENDED |
|
QUARTER ENDED |
|
||||||
|
|
|
Dollars |
|
% of |
|
Dollars |
|
% of |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net sales |
|
$ |
59.9 |
|
100 |
% |
$ |
55.2 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
|
Gross profit |
|
33.8 |
|
57 |
|
31.3 |
|
57 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Selling, general, and administrative expenses |
|
14.5 |
|
24 |
|
15.3 |
|
28 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Amortization of goodwill, trademarks and other |
|
0.1 |
|
— |
|
1.3 |
|
2 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income from operations |
|
19.3 |
|
32 |
|
14.7 |
|
27 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Interest expense |
|
0.8 |
|
1 |
|
1.7 |
|
3 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Other, net |
|
— |
|
— |
|
0.1 |
|
— |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income before income taxes |
|
18.5 |
|
31 |
|
12.9 |
|
23 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income tax provision |
|
6.7 |
|
11 |
|
4.9 |
|
9 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net income |
|
11.8 |
|
20 |
|
8.0 |
|
15 |
|
||
11
Net Sales
Net sales increased $4.7 million, or 8%, from $55.2 million in the second quarter of 2001 to $59.9 in the second quarter of 2002. The increase in sales was principally due to an increase in wholesale sales to independent gift retailers (wholesale customers).
Wholesale sales increased $4.5 million, or 8%, from $54.3 million in the second quarter of 2001 to $58.8 million in the second quarter of 2002. The increase in wholesale revenues was principally due to the Company’s ability to source and ship product earlier and the effect of a $1.0 million reduction in the provision for sales returns and credits resulting from lower levels of product returns. Wholesale sales of the Company’s Village Series products decreased $3.1 million, or 8%, while sales of General Giftware products increased $7.7 million, or 46% between the two periods. Village Series products represented 58% of the Company’s sales during the second quarter of 2002 versus 69% during the second quarter of 2001.
Retail sales increased $0.1 million from $0.9 million in 2001 to $1.0 million in 2002. The Company’s retail business is comprised of its Department 56 branded year-round stores, seasonal stores operating under the name “Holidays by Department 56” and seasonally-operated kiosks operating under the GeppeddoÒ brand. Second quarter 2001 and 2002 retail sales reflect the operations of the three year-round stores. The Company recognizes the majority of its retail sales in the fourth quarter during the peak holiday shopping season.
Gross Profit
Gross profit as a percentage of net sales was 56.8% and 56.5% in the second quarter of 2001 and 2002, respectively. The decrease in gross profit as a percentage of net sales during the second quarter of 2002 compared to the second quarter of 2001 was principally due to a shift in the mix of wholesale product shipments as noted above, partially offset by the adjustment to the provision for sales returns and credits.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.9 million, or 6%, between the second quarter of 2001 and the second quarter of 2002. Selling, general and administrative expenses as a percentage of net sales was 28% and 24% in the second quarter of 2001 and 2002, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales in the second quarter of 2002 compared to the second quarter of 2001 was primarily the result of cost control initiatives in the Company’s wholesale segment and decreased depreciation expense, partially offset by increased retail operations. Retail selling, general and administrative expenses increased primarily due to the acquisition of Geppeddo during the third quarter of 2001. Retail sales, which have higher selling, general and administrative expenses as a percentage of sales than wholesale sales, represented 2% of total net sales during the second quarter of 2002 and 2001.
12
Interest Expense
Interest expense decreased $0.9 million, or 51%, between the second quarter of 2001 and the second quarter of 2002 principally due to decreased interest rates paid by the Company and a decrease in the amount of term debt outstanding. The Company prepaid $20 million of its term debt in March 2001, $1.0 million in March 2002, and $30 million in May 2002.
Provision for Income Taxes
The effective income tax rate was 38% during the second quarter of 2001 and 36% during the second quarter of 2002. The change in the effective income tax rate reflects the change in accounting for goodwill as a result of the Company’s adoption of SFAS No. 142.
13
RESULTS OF OPERATIONS
Comparison of Results of Operations for the 26 Weeks Ended June 29, 2002 to the 26 Weeks Ended June 30, 2001.
|
(In millions) |
|
26 WEEKS ENDED |
|
26 WEEKS ENDED |
|
||||||
|
|
|
Dollars |
|
% of |
|
Dollars |
|
% of |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net sales |
|
$ |
92.3 |
|
100 |
% |
$ |
84.3 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
|
Gross profit |
|
52.1 |
|
56 |
|
47.1 |
|
56 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Selling, general, and administrative expenses |
|
32.7 |
|
35 |
|
30.2 |
|
36 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Amortization of goodwill, trademarks and other |
|
0.1 |
|
— |
|
2.6 |
|
3 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income from operations |
|
19.3 |
|
21 |
|
14.3 |
|
17 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Interest expense |
|
1.9 |
|
2 |
|
3.9 |
|
5 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Litigation settlement |
|
(5.4 |
) |
6 |
|
— |
|
— |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Other, net |
|
(0.3 |
) |
— |
|
(0.3 |
) |
— |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income before income taxes and cumulative effect of change in accounting principle |
|
23.1 |
|
25 |
|
10.6 |
|
13 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income tax provision |
|
8.3 |
|
9 |
|
4.0 |
|
5 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Income before cumulative effect of change in accounting principle |
|
14.8 |
|
16 |
|
6.6 |
|
8 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Cumulative effect of change in accounting principle |
|
(93.7 |
) |
N/A |
|
— |
|
— |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Net (loss) income |
|
(78.9 |
) |
N/A |
|
6.6 |
|
8 |
|
||
14
Net Sales
Net sales increased $8.1 million, or 10%, from $84.3 million in 2001 to $92.3 in 2002. The increase in sales was principally due to an increase in retail sales and an increase in wholesale sales to independent gift retailers (wholesale customers).
Wholesale sales increased $3.0 million, or 4%, from $83.0 million in 2001 to $86.0 million in 2002. The increase in wholesale revenues was principally due to the Company’s ability to source and ship product earlier and the effect of a $1.0 million reduction in the provision for sales returns and credits resulting from lower levels of product returns. Wholesale sales of the Company’s Village Series products decreased $1.6 million, or 3%, while sales of General Giftware products increased $4.6 million, or 16% between the two periods. Village Series products represented 61% of the Company’s sales during 2002 versus 65% during 2001.
Retail sales increased $5.1 million from $1.3 million in 2001 to $6.4 million in 2002. The Company’s retail business is comprised of its Department 56 branded year-round stores, seasonal stores operating under the name “Holidays by Department 56” and seasonally-operated kiosks operating under the GeppeddoÒ brand. Retail sales for 2002 benefited from the addition of ten seasonal stores and 359 seasonal kiosks during the latter part of 2001 that were open during January 2002, as well as, the first quarter results of one of its year-round stores that was opened during the second quarter of 2001.
Gross Profit
Gross profit as a percentage of net sales was 55.9% and 56.4% in 2001 and 2002, respectively. The increase in gross profit as a percentage of net sales during 2002 compared to gross profit as a percentage of net sales for 2001 was principally due to an increase in retail sales (which provide higher gross margins) and the benefit from the adjustment to the provision for sales returns and credits noted above, partially offset by a shift in the mix of wholesale product shipments as noted above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.5 million, or 8%, between 2001 and 2002. Selling, general and administrative expenses as a percentage of net sales was 36% and 35% in 2001 and 2002, respectively. The decrease in selling, general and administrative expenses as a percentage of net sales in 2002 compared to 2001 is principally due to cost control initiatives in the Company’s wholesale segment and decreased depreciation expense, partially offset by increased retail operations. Retail selling, general and administrative expenses increased during 2002 primarily due to the acquisition of Geppeddo during the third quarter of 2001. Retail sales, which have higher selling, general and administrative expenses as a percentage of sales than wholesale sales, represented 7% of total net sales during 2002 compared to 2% during 2001.
15
Interest Expense
Interest expense decreased $2.1 million, or 52%, between 2001 and 2002 principally due to decreased interest rates paid by the Company and a decrease in the amount of term debt outstanding. The Company prepaid $20 million of its term debt in March 2001, $1.0 million in March 2002, and $30 million in May 2002.
Litigation Settlement
On March 1, 2002, the Company received net proceeds (before income taxes) of $11.0 million in settlement of the Company’s litigation against Arthur Andersen LLP and Andersen Worldwide Société Coopérative concerning implementation of its information systems. This recovery resulted in other income of $5.4 million and a $5.6 million reduction in net depreciable assets.
Provision for Income Taxes
The effective income tax rate was 38% during the 26 weeks ended June 30, 2001 and 36% during the 26 weeks ended June 29, 2002. The change in the effective income tax rate reflects the change in accounting for goodwill noted above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities increased $14.0 million from $7.6 million in 2001 to $21.6 million in 2002 principally due to higher cash collections in 2001 as a result of the higher than normal accounts receivable balances at the end of 2000. This increase was partially offset by the $11.0 million net proceeds (before income taxes) received as a result of the Company’s litigation settlement (see Note 3 to the condensed consolidated financial statements).
Consistent with customary practice in the giftware industry, the Company offers extended accounts receivable terms to many of its wholesale customers. This practice has typically created significant working capital requirements in the second and third quarters which the Company has generally financed with internally generated cash flow and seasonal borrowings. The Company’s cash and cash equivalents balances peak during the first quarter of the subsequent year, following the collection of accounts receivable with extended payment terms due in November and December.
Accounts receivable, net of reserves, which principally consists of wholesale trade receivables, increased from $57.5 million at June 30, 2001 to $61.6 million at June 29, 2002. The increase in accounts receivable was principally due to the increase in wholesale sales, as well as, the decrease in the provision for sales returns and credits noted above. Management believes there is adequate provision for any doubtful accounts receivable and sales returns that may arise.
16
Capital expenditures decreased $0.7 million from $1.6 million in 2001 to $0.9 million in 2002. For fiscal 2002, management expects total capital expenditures to be in line with historical levels of 1% to 2% of annual revenues.
The Company’s credit agreement provides for a revolving credit facility and a term loan facility. 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. The credit agreement contains numerous 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. None of these restrictions are expected to have a material adverse effect on the Company’s ability to operate in the future.
During the first quarter of 2001, the Company prepaid $20 million of term debt. During the first quarter of 2002, the Company paid $1.0 million of term debt consisting of an annual amortization payment of $0.9 million, and a $0.1 million prepayment of its annual installment due March 2003. During the second quarter of 2002, the Company prepaid $30 million of term debt due March 2003. As of June 29, 2002, the total term debt outstanding was $54 million. The Company’s remaining term debt requires amortization payments of $2.2 million and $51.8 million due in March 2003 and 2004, respectively.
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 12 months.
17
CREDIT, RETURN AND OTHER CRITICAL ACCOUNTING POLICIES
The Company has credit policies that establish specific criteria related to credit worthiness that its customers must meet prior to the shipment of product to the customer. The Company periodically makes limited and selective exceptions to its policy of not shipping to customers with overdue balances when the particular customer has met specific criteria which are indicative of a wherewithal to pay their past due and future balances.
The Company does not accept returns from wholesale customers without its prior authorization. Returns are typically accepted only for damaged or defective goods, or for pricing or shipping discrepancies. The Company reserves the right to refuse authorization of any returns and to discard any unauthorized returns. If the Company accepts an unauthorized return or if a return is the result of a customer error, the wholesale customer may be subject to a 20% handling charge. The Company reserves the right to cancel open orders or backorders for those wholesale customers who abuse or excessively use return privileges.
The Company believes that the selection and application of its accounting policies are appropriately reasoned. Management believes the following require the most difficult, subjective or complex judgments about matters that are inherently uncertain.
Sales Returns — An allowance is established for expenses and losses related to possible returns of product. The amount of the allowance is based on historical ratios of returns to sales, the historical average length of time between the sale and the return, and other factors. Changes in customers’ behavior versus historical experience or changes in the Company’s return policies are among the factors that would result in materially different amounts for this item.
Inventory Valuation — A reserve is established for estimated surplus and discontinued inventory items. The amount of the reserve is determined by analyzing historical and projected sales information, plans for discontinued products and other factors. Changes in sales volumes due to unexpected economic or competitive conditions are among the factors that would result in materially different amounts for this item.
Allowance for Doubtful Accounts — An allowance is established for estimated uncollectible accounts receivable. The required allowance is determined by reviewing customer accounts and making estimates of amounts that may be uncollectible. Factors considered in determining the amount of the reserve include the age of the receivable, the financial condition of the customer, general business, economic and political conditions, and other relevant facts and circumstances. Unexpected changes in the aforementioned factors would result in materially different amounts for this item.
18
RECENT DEVELOPMENTS
The Company continues to closely monitor the contract negotiations between the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union. The PMA represents West Coast port employers and shippers, whom handle the majority of the Company’s import shipments from overseas suppliers. The previous contract between the PMA and union longshoremen expired on July 1, 2002, and a series of 24-hour contract extensions have been agreed to since the expiration. Negotiation between the parties continues to progress. A strike by the union members could cause a disruption in the operations of the Company and therefore could affect the Company’s earnings guidance.
FOREIGN EXCHANGE
Approximately 97% of the Company’s sales in 2001 and 2002 were denominated in United States dollars and, as a result, were not subject to changes in exchange rates. Approximately 3% of the Company’s sales in 2001 and 2002 were denominated in foreign currencies which were subject to changes in exchange rates.
The Company imports its product from manufacturers located in the Pacific Rim, principally China. Although the Company generally pays for its product in United States dollars, the cost of such product may fluctuate with the value of the Chinese currency because the purchase price paid to the Company’s vendors in United States dollars would be worth more or less in the Chinese currency. As a result, the Company’s costs could be adversely affected if the Chinese currency appreciates significantly relative to the United States dollar. Conversely, its costs could be favorably affected if the Chinese currency depreciates significantly relative to the United States dollar. In addition, the Company purchased less than 2% of its product from Taiwan (Republic of China) in 2001. These purchases were denominated in New Taiwan Dollars and were subject to changes in exchange rates.
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 did not enter into any foreign exchange contracts nor have any foreign exchange contracts outstanding in 2001 and 2002.
RESTRICTION ON IMPORTS
The Company does not own or operate any manufacturing facilities and imports most of its products from manufacturers in the Pacific Rim, primarily the People’s Republic of China, Taiwan and The Philippines. The Company also imports a small percentage of its products from sources in India and Europe (primarily Germany, Poland and Czechoslovakia).
The Company’s ability to import products and thereby satisfy customer orders is affected by the availability of, and demand for, quality production capacity abroad. The Company competes with other importers of specialty giftware products for the limited number of foreign manufacturing sources which can produce detailed, high-quality products at affordable prices.
19
Foreign manufacturing and procurement of imports is subject to the following inherent risks: fluctuations in currency exchange rates; economic and political instability; cost fluctuations and delays in transportation; restrictive actions by governments; nationalizations; the laws and policies of the U.S. affecting importation of goods (including duties, quota and taxes); and foreign trade and tax laws. The Company’s costs could be adversely affected if the currencies of other countries in which the Company sources product appreciate significantly relative to the U.S. dollar. Moreover, the Company cannot predict what relevant political, legal or regulatory changes may occur or the type or amount of any financial impact on the Company such changes may have in the future.
The Company’s products are subject to customs duties and regulations pertaining to the importation of goods, including requirements for the marking of certain information regarding the country of origin on the Company’s products. In its ordinary course of business, the Company may be involved in disputes with the U.S. Customs Service regarding the amount of duty to be paid, the value of merchandise to be reported or other customs regulations with respect to certain of the Company’s imports, which may result in the payment of additional duties and/or penalties, or which may result in the refund of duties to the Company.
In fiscal 2001, approximately 87% of the Company’s imports were manufactured in The People’s Republic of China (China), and the Company anticipates that such percentage will hold constant or increase for the foreseeable future. China has joined the World Trade Organization and been accorded permanent “Normal Trade Relations” status by the U.S. government.
Various commercial and legal practices widespread in China, including the handling of intellectual properties, as well as certain political and military actions taken or suggested by China, are under review by the U.S. government. China, moreover, has been designated a Country of Particular Concern (CPC) pursuant to the International Religious Freedom Act of 1998 (IRFA). The IRFA enumerates several specific retaliatory actions which may be taken by the U.S. government, none of which the Company believes would have a material impact on its business. The IRFA, however, also accords the President broad discretion in fashioning other or additional actions and, due to the breadth of the Presidential powers under the IRFA, the Company is unable to predict what, if any, action the President could consider taking in the future.
Accordingly, the ability to continue to conduct business with vendors located in China is subject to political uncertainties, the financial impact of which the Company is unable to estimate. To the extent China may have its exports or transaction of business with U.S. persons subject to political retaliation, the cost of Chinese imports could increase significantly and/or the ability to import goods from China may be materially impaired. In such an event, there could be an adverse effect on the Company until alternative arrangements for the manufacture of its products were obtained on economic, production and operational terms at least as favorable as those currently in effect.
20
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.
SEASONALITY AND WHOLESALE CUSTOMER ORDERS
|
|
|
Wholesale Customer Orders Entered(1) |
|
|||||||||||||
|
|
|
(In millions) |
|
|||||||||||||
|
|
|
1st |
|
2nd |
|
3rd |
|
4th |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
2000 |
|
$ |
162 |
|
$ |
48 |
|
$ |
27 |
|
$ |
— |
|
$ |
237 |
|
|
2001 |
|
110 |
|
47 |
|
20 |
|
1 |
|
177 |
|
|||||
|
2002 |
|
114 |
|
42 |
|
— |
|
— |
|
— |
|
|||||
(1) Customer orders entered are orders received and approved by the Company, net of any cancellation for various reasons including credit considerations, inventory shortages, and customer requests. Wholesale customer orders entered exclude orders from company-operated retail stores.
Wholesale customer orders decreased $0.7 million, or 0.5%, from $156.6 million to $155.9 million through the second quarter of 2001 and 2002, respectively. The decrease in wholesale customer orders was principally due to a continued slow erosion of the Company’s collectible account base as noted in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001. Net wholesale customer orders entered for Village Series products decreased 4% through the second quarter of 2002, while net wholesale customer orders entered for General Giftware products increased 5%.
Historically, due to the timing of wholesale trade shows early in the calendar year, the Company has received the majority of its total annual wholesale customer orders during the first quarter of each year. The Company entered 62% and 68% of its total net annual wholesale customer orders during 2001 and 2000, respectively, during the first quarter of each of those years. Cancellations of total annual wholesale customer orders were approximately 8% and 7% in 2001 and 2000, respectively. The Company’s backlog of wholesale customer orders was $76.6 million and $78.6 million at June 29, 2002 and June 30, 2001, respectively.
The Company receives products, pays its suppliers and ships products throughout the year, although historically the majority of wholesale shipments occur in the second and third quarters as retailers stock merchandise in anticipation of the holiday season. As a result of this seasonal pattern, the Company generally records its highest wholesale sales during the second and third quarters of each year. However, the Company can experience fluctuations in quarterly wholesale sales and related net income compared with the prior year due to the timing of receipt of product from suppliers and subsequent shipment of product from the Company to wholesale customers, as well as the timing of orders placed by wholesale customers. In addition, the Company recognizes the majority of its retail sales in the fourth quarter during the peak holiday shopping season. The
21
Company is not managed to maximize quarter-to-quarter results, but rather to achieve annual objectives designed to achieve long-term growth consistent with the Company’s business strategy.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no significant change in the Company’s exposure to market risk since year end. The Company’s risk is limited to interest rate risk associated with credit instruments and foreign currency exchange rate risk.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3, “Legal Proceedings,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001, which Item is incorporated herein in its entirety. On March 1, 2002, the Company received net proceeds (before income taxes) of $11.0 million in settlement of the Company’s litigation against Arthur Andersen LLP and Andersen Worldwide Société Coopérative concerning implementation of its information systems. This recovery resulted in other income of $5.4 million and a $5.6 million reduction in net depreciable assets.
On May 1, 2002, the United States District Court, District of Minnesota entered the order of its Chief Judge granting Department 56 and Susan Engel’s Motion to Dismiss the previously reported class action lawsuit, In Re Department 56, Inc., Securities Litigation.
23
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders during the Company’s Annual Meeting of Stockholders held on May 8, 2002.
Description of Matter:
|
1. |
|
Election of Directors |
|
Votes Cast |
|
Authority |
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan E. Engel |
|
10,815,678 |
|
1,549,609 |
|
|
|
|
James E. Bloom |
|
11,655,729 |
|
709,558 |
|
|
|
|
Michael R. Francis |
|
11,668,529 |
|
696,758 |
|
|
|
|
Stewart M. Kasen |
|
11,668,449 |
|
696,838 |
|
|
|
|
Gary S. Matthews |
|
11,670,029 |
|
695,258 |
|
|
|
|
Steven G. Rothmeier |
|
11,668,354 |
|
696,933 |
|
|
|
|
Vin Weber |
|
11,672,629 |
|
692,658 |
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
|
Broker |
|
|
2. |
|
Ratification of Deloitte & Touche llp as independent accountants |
|
12,280,559 |
|
74,858 |
|
9,870 |
|
0 |
|
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. These statements are based on management’s estimates, assumptions and projections as of today and are not guarantees of future performance. 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. Please read the bases, assumptions and factors set out in Item 7 in the Company’s Form 10-K for 2001 dated March 28, 2002 and filed under the Securities Exchange Act of 1934, all of which is incorporated herein by reference and applicable to the forward-looking statements set forth herein.
24
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
11.1 Computation of net income per share.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the second quarter of 2002:
• Form 8-K dated May 15, 2002 containing a Company press release.
• Form 8-K dated May 2, 2002.
• Form 8-K dated April 26, 2002 containing a Company press release and financial statements.
• Form 8-K dated April 9, 2002 containing a Company press release.
25
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: August 9, 2002 |
/s/ Susan E. Engel |
|
|
|
Susan E. Engel |
|
|
|
Chairwoman of the Board, |
|
|
|
Chief Executive Officer and Director |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Date: August 9, 2002 |
/s/ Timothy J. Schugel |
|
|
|
Timothy J. Schugel |
|
|
|
Chief Financial Officer and Executive Vice President |
|
|
|
(Principal Financial Officer) |
|
26
EXHIBIT INDEX
|
Exhibit |
|
Exhibit |
|
Page |
|
|
|
|
|
|
|
11.1 |
|
Computation of net income per share. |
|
|
27