UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended July 31, 2003

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                   

 

Commission file number 1-13026

 

BLYTH, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

36-2984916

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

One East Weaver Street, Greenwich, Connecticut 06831

(Address of principal executive offices)            (Zip Code)

 

 

 

(203) 661-1926

(Registrant’s telephone number, including area code)

 

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes   ý          No   o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

45,521,877 Common Shares as of August 29, 2003

 

 



 

BLYTH, INC.

 

INDEX

 

Form 10-Q Cover Page

 

Form 10-Q Index

 

Part I.  Financial Information:

 

 

Item 1.

Financial Statements:

 

Consolidated Balance Sheets

 

 

 

Consolidated Statements of Earnings

 

 

 

Consolidated Statements of Stockholders’ Equity

 

 

 

Consolidated Statements of Cash Flows

 

 

 

Notes to Consolidated Financial Statements

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4.

Controls and Procedures

 

 

Part II.  Other Information

 

 

Item 1.

Legal Proceedings

 

 

Item 2.

Changes in Securities

 

 

Item 3.

Defaults upon Senior Securities

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

Item 5.

Other Information

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

Signatures

 

2



 

Part I. FINANCIAL INFORMATION

Item I. FINANCIAL STATEMENTS

 

BLYTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)

 

July 31,
2003

 

January 31,
2003

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

67,977

 

$

168,596

 

Accounts receivable, less allowance for doubtful receivables of $4,163 and $4,093, respectively

 

101,673

 

82,913

 

Inventories

 

256,121

 

187,935

 

Prepaid and other

 

22,242

 

15,226

 

Deferred income taxes

 

20,456

 

17,767

 

Total current assets

 

468,469

 

472,437

 

Property, plant and equipment, at cost:

 

 

 

 

 

Less accumulated depreciation of $211,296 and $178,397, respectively

 

277,350

 

244,798

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Investments

 

3,380

 

3,564

 

Excess of cost over fair value of assets acquired

 

210,672

 

149,365

 

Other intangible assets, net of accumulated amortization of $600

 

24,500

 

 

Deposits and other assets

 

12,678

 

16,494

 

 

 

251,230

 

169,423

 

Total assets

 

$

997,049

 

$

886,658

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

28,971

 

$

7,377

 

Current maturities of long-term debt

 

4,592

 

4,037

 

Accounts payable

 

62,256

 

58,571

 

Accrued expenses

 

72,579

 

80,953

 

Income taxes

 

2,721

 

2,685

 

Total current liabilities

 

171,119

 

153,623

 

Deferred income taxes

 

40,239

 

24,280

 

Long-term debt, less current maturities

 

210,453

 

165,079

 

Minority interest and other

 

11,619

 

4,212

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock - authorized 10,000,000 shares of $0.01 par value; no shares issued and outstanding

 

 

 

Common stock - authorized 100,000,000 shares of $0.02 par value; issued 49,777,177 shares and 49,703,682 shares, respectively

 

995

 

994

 

Additional contributed capital

 

103,086

 

101,567

 

Retained earnings

 

548,758

 

523,865

 

Accumulated other comprehensive income (loss)

 

7,214

 

(377

)

Treasury stock, at cost, 4,015,300 shares and 3,644,100 shares, respectively

 

(96,434

)

(86,585

)

Total stockholders’ equity

 

563,619

 

539,464

 

Total liabilities and stockholders’ equity

 

$

997,049

 

$

886,658

 

 

The accompanying notes are an integral part of these financial statements.

 

3



 

BLYTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

Six months ended July 31 (In thousands, except per share data)

 

2003

 

2002

 

Net sales

 

$

587,259

 

$

545,917

 

Cost of goods sold

 

291,311

 

263,577

 

Gross profit

 

295,948

 

282,340

 

Selling

 

179,298

 

163,642

 

Administrative

 

61,673

 

54,133

 

 

 

240,971

 

217,775

 

Operating profit

 

54,977

 

64,565

 

Other expense (income):

 

 

 

 

 

Interest expense

 

7,102

 

7,570

 

Interest income and other

 

(1,282

)

(695

)

Equity in loss of investee

 

199

 

190

 

 

 

6,019

 

7,065

 

Earnings before income taxes, minority interest and cumulative effect of change in accounting principle

 

48,958

 

57,500

 

Income tax expense

 

18,014

 

21,390

 

Earnings before minority interest and cumulative effect of change in accounting principle

 

30,944

 

36,110

 

Minority interest

 

(71

)

 

Cumulative effect of change in accounting principle, net of taxes of $2,887

 

 

(4,515

)

Net earnings

 

$

30,873

 

$

31,595

 

Basic:

 

 

 

 

 

Earnings per common share before cumulative effect of change in accounting principle

 

$

0.67

 

$

0.78

 

Cumulative effect of change in accounting principle

 

 

(0.10

)

 

 

$

0.67

 

$

0.68

 

Weighted average number of shares outstanding

 

45,991

 

46,310

 

Diluted:

 

 

 

 

 

Earnings per common share before cumulative effect of change in accounting principle

 

$

0.67

 

$

0.78

 

Cumulative effect of change in accounting principle

 

 

(0.10

)

 

 

$

0.67

 

$

0.68

 

Weighted average number of shares outstanding

 

46,174

 

46,591

 

 

The accompanying notes are an integral part of these financial statements.

 

4



 

BLYTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

Three months ended July 31 (In thousands, except per share data)

 

2003

 

2002

 

Net sales

 

$

275,268

 

$

268,021

 

Cost of goods sold

 

140,716

 

130,689

 

Gross profit

 

134,552

 

137,332

 

Selling

 

82,229

 

75,235

 

Administrative

 

31,604

 

28,440

 

 

 

113,833

 

103,675

 

Operating profit

 

20,719

 

33,657

 

Other expense (income):

 

 

 

 

 

Interest expense

 

3,512

 

3,747

 

Interest income and other

 

(691

)

(254

)

Equity in loss of investee

 

64

 

218

 

 

 

2,885

 

3,711

 

Earnings before income taxes and minority interest

 

17,834

 

29,946

 

Income tax expense

 

6,561

 

11,140

 

Earnings before minority interest

 

11,273

 

18,806

 

Minority interest

 

(27

)

 

Net earnings

 

$

11,246

 

$

18,806

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.25

 

$

0.41

 

Weighted average number of shares outstanding

 

45,903

 

46,330

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.24

 

$

0.40

 

Weighted average number of shares outstanding

 

46,155

 

46,710

 

 

The accompanying notes are an integral part of these financial statements.

 

5



 

BLYTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)

 

 

 

Common stock

 

Additional
contributed
capital

 

Retained
earnings

 

Treasury stock

 

Accumulated
other
comprehensive
income (loss)

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended July 31, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 31, 2002

 

49,509,776

 

$

990

 

$

97,879

 

$

449,038

 

(2,630,900

)

$

(62,950

)

$

(16,894

)

$

468,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for the period

 

 

 

 

 

 

 

31,595

 

 

 

 

 

 

 

31,595

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

9,057

 

9,057

 

Unrealized holding losses on certain investments (net of tax of $20)

 

 

 

 

 

 

 

 

 

 

 

 

 

(34

)

(34

)

Net loss on cash flow hedging instruments (net of tax of $253)

 

 

 

 

 

 

 

 

 

 

 

 

 

(427

)

(427

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with exercise of stock options

 

149,706

 

3

 

2,490

 

 

 

 

 

 

 

 

 

2,493

 

Tax benefit from stock options

 

 

 

 

 

311

 

 

 

 

 

 

 

 

 

311

 

Dividends

 

 

 

 

 

 

 

(5,098

)

 

 

 

 

 

 

(5,098

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(712,100

)

(15,709

)

 

 

(15,709

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 31, 2002

 

49,659,482

 

$

993

 

$

100,680

 

$

475,535

 

(3,343,000

)

$

(78,659

)

$

(8,298

)

$

490,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended July 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 31, 2003

 

49,703,682

 

$

994

 

$

101,567

 

$

523,865

 

(3,644,100

)

$

(86,585

)

$

(377

)

$

539,464

 

Net earnings for the period

 

 

 

 

 

 

 

30,873

 

 

 

 

 

 

 

30,873

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

8,011

 

8,011

 

Unrealized holding losses on certain investments (net of tax of $74)

 

 

 

 

 

 

 

 

 

 

 

 

 

(126

)

(126

)

Net loss on cash flow hedging instruments (net of tax of $171)

 

 

 

 

 

 

 

 

 

 

 

 

 

(294

)

(294

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with exercise of stock options

 

73,495

 

1

 

1,419

 

 

 

 

 

 

 

 

 

1,420

 

Tax benefit from stock options

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

100

 

Dividends

 

 

 

 

 

 

 

(5,980

)

 

 

 

 

 

 

(5,980

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(371,200

)

(9,849

)

 

 

(9,849

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 31, 2003

 

49,777,177

 

$

995

 

$

103,086

 

$

548,758

 

(4,015,300

)

$

(96,434

)

$

7,214

 

$

563,619

 

 

The accompanying notes are an integral part of these financial statements.

 

6



 

BLYTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six months ended July 31 (In thousands)

 

2003

 

2002

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

30,873

 

$

31,595

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

Cumulative effect of change in accounting principle, net of tax

 

 

4,515

 

Depreciation and amortization

 

16,633

 

15,134

 

Tax benefit from stock options

 

100

 

311

 

Deferred income taxes

 

517

 

1,812

 

Equity in loss of investee

 

199

 

190

 

Minority interest

 

71

 

 

Gain on sales of long-term investment

 

(487

)

 

Changes in operating assets and liabilities, net of effect of business acquisitions:

 

 

 

 

 

Accounts receivable

 

(15,530

)

(14,593

)

Inventories

 

(36,889

)

(31,854

)

Prepaid and other

 

2,814

 

(8,443

)

Deposits and other assets

 

171

 

(142

)

Accounts payable

 

(4,003

)

(1,457

)

Accrued expenses

 

(12,239

)

(9,145

)

Other liabilities

 

1,548

 

1,463

 

Income taxes

 

(3,716

)

(2,020

)

Total adjustments

 

(50,811

)

(44,229

)

Net cash used in operating activities

 

(19,938

)

(12,634

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(11,115

)

(9,624

)

Purchases of long-term investment

 

(1,377

)

 

Proceeds from sales of long term investment

 

1,874

 

 

Purchase of businesses, net of cash acquired

 

(94,736

)

(51,010

)

Net cash used in investing activities

 

(105,354

)

(60,634

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

1,420

 

2,493

 

Purchases of treasury stock

 

(9,849

)

(15,709

)

Borrowings from bank line of credit

 

18,560

 

36,452

 

Repayments on bank line of credit

 

(6,303

)

(21,892

)

Borrowings on long-term debt

 

30,678

 

517

 

Repayments of long-term debt

 

(3,853

)

(3,880

)

Dividends paid

 

(5,980

)

(5,098

)

Net cash provided by (used in) financing activities

 

24,673

 

(7,117

)

Net decrease in cash and cash equivalents

 

(100,619

)

(80,385

)

Cash and cash equivalents at beginning of period

 

168,596

 

135,357

 

Cash and cash equivalents at end of period

 

$

67,977

 

$

54,972

 

 

The accompanying notes are an integral part of these financial statements.

 

7



 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Basis of Presentation

 

Blyth is a global competitor in the gift and decorative accessories market, which the Company calls the Home Expressions category.  Within this category, the Company reports its financial results in two segments – the Candles & Home Fragrance segment and the Creative Expressions segment.

 

Within the Candles & Home Fragrance segment, the Company designs, manufactures and markets an extensive line of products including scented candles, potpourri and other fragranced products and markets a broad range of related candle accessories, as well as tabletop illumination products and chafing fuel.  These products are sold direct to the consumer under the PartyLite® brand, to retailers in the premium and specialty retail channels under the Colonial Candle of Cape Cod®, Colonial at HOMEâ, Carolina®, and Kate’s™ brands, in the mass retail channel under the Florasense®, Ambria®, and FilterMate® brands and to the foodservice, or Away From Home, industry under the Sterno®, Ambria®, and HandyFuel® brand names.  In Europe, these products are also sold under the Colonial, Ambria®, Carolina Designs®, Gies® (1) and Liljeholmens® brands.

 

Within the Creative Expressions segment, the Company designs, sources and markets a broad range of home décor, household convenience items, premium photo albums, frames, holiday cards and giftware products under the CBK®, Miles Kimballâ and Exposuresâ brands, seasonal accents under the Seasons of Cannon FallsÔ and ImpactÔ brands, and decorative gift bags under the Jeanmarie® brand.  In Europe, a wide range of premium seasonal decorations are sold under the Kaemingk brand.

 

The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  Investments in companies that are not majority owned or controlled are reported using the equity method and are recorded in investments.  Interest income and other consists of interest income earned from investments, foreign currency gains and losses and gains and losses from sales of investments.  Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to January 31.  European operations maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period.  In the opinion of management, the accompanying unaudited consolidated financial statements include all accruals necessary for fair presentation of the Company’s consolidated financial position at July 31, 2003 and the consolidated results of its operations and cash flows for the six-month periods ended July 31, 2003 and 2002. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended January 31, 2003, as set forth in the Company’s Annual Report on Form 10-K.  Operating results for the six months ended July 31, 2003 are not necessarily indicative of the results that may be expected for the year ending January 31, 2004.

 

Reclassifications

 

Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the current year.

 


(1)                                  Gies is registered and sold only outside the United States.

 

8



 

Employee Stock Options

 

The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, and continues to follow Accounting Principles Board (APB) opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock options granted to its employees and directors under the intrinsic value method.  Accordingly, no compensation expense is recorded for the stock options issued to employees unless the option price is below market at the measurement date.  The Company does not at this time, issue stock options below market value, therefore no compensation expense has been recorded in the financial statements.  Had compensation expense for the Company’s stock options been determined in accordance with the fair value method in SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, the Company’s reported net income and earnings per share would have been adjusted to the pro forma amounts indicated below:

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands except per share data)

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

As reported

 

$

11,246

 

$

18,806

 

$

30,873

 

$

31,595

 

Stock-based employee compensation expense determined under SFAS No. 123 for all awards, net of related tax

 

908

 

945

 

1,844

 

1,932

 

Pro forma

 

$

10,338

 

$

17,861

 

$

29,029

 

$

29,663

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

As reported:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.41

 

$

0.67

 

$

0.68

 

Diluted

 

0.24

 

0.40

 

0.67

 

0.68

 

Pro forma:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.39

 

$

0.63

 

$

0.64

 

Diluted

 

0.22

 

0.37

 

0.61

 

0.62

 

 

2.                                      New Accounting Pronouncements

 

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities,” which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and addresses consolidation by business enterprises of variable interest entities that have specific characteristics as described in the Interpretation. This Interpretation was effective immediately with respect to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  The implementation of this standard had no impact on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  This standard is effective for derivative contracts entered into or modified after June 30, 2003.  The implementation of this standard had no impact on our financial statements.

 

9



 

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  This standard is effective for financial instruments entered into or modified after May 31, 2003. The implementation of this standard had no impact on our financial statements.

 

3.                                      Goodwill Impairment

 

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, effective February 1, 2002. In accordance with the new standard, Blyth ceased amortization of goodwill and performed an assessment for impairment of its goodwill. As a result of the impairment review, Blyth reduced the carrying value of the goodwill related to its acquisition of the Sternoâ brand in 1997 by $7.4 million.  The fair value of the Sterno Group was determined through an independent valuation utilizing market comparable analysis, as well as discounted cash flow models reflecting the expected range of future cash flow outcomes over the life of the model.  These cash flows were discounted to January 31, 2002 using a risk-adjusted discount rate.  The impairment of the Sterno Group’s goodwill, which was recorded as a cumulative effect of a change in accounting principle, had the effect of reducing net income in the quarter ended April 30, 2002 by $4.5 million (after tax) or $0.10 per share.

 

4.                                      Business Acquisitions

 

On May 10, 2002, the Company purchased all of the interests in CBK, Ltd., LLC, now known as CBK Styles, Inc. (“CBK”), a designer and marketer of premium everyday home décor and giftware, for approximately $51.0 million in cash.  The excess of the purchase price over the estimated fair value of the net assets acquired approximated $40.0 million, which will be deductible for income tax purposes over 15 years.  The results of operations of CBK are included in the Consolidated Statements of Earnings of the Company since May 11, 2002.  For segment reporting purposes, CBK is included in the Creative Expressions segment.

 

On April 1, 2003, the Company acquired 100% of the Miles Kimball Company (“MK”), a direct marketer of giftware, home décor and household convenience items, premium photo albums, frames and holiday cards under the Miles Kimball® and Exposures® catalog titles for approximately $66.2 million in cash.  The excess of the purchase price over the estimated fair value of the net assets acquired approximated $46.0 million, which will not be deductible for income tax purposes.  The other intangibles acquired consist of $16.1 million of trade names and trademarks, which are deemed to have an indefinite life and will not be amortized, plus $9.0 million of customer lists, which will be amortized on an accelerated basis over 12 years.  Amortization expense was $0.45 million for the three months ended July 31, 2003 and $0.6 million for the six months ended July 31, 2003.  Estimated amortization expense for the next 5 fiscal years is as follows:  $1.5 million, $1.5 million, $1.2 million, $0.9 million and $0.9 million.  The results of operations of MK are included in the Consolidated Statements of Earnings of the Company since April 2, 2003.  For segment reporting purposes, MK is included in the Creative Expressions segment.

 

10



The following provides an allocation of the purchase price of Miles Kimball (in thousands)

 

Cash Purchase Price

 

$

66,219

 

Less: Assets acquired

 

 

 

Accounts receivable

 

1,124

 

Inventories

 

9,983

 

Property, plant and equipment

 

17,959

 

Intangible assets

 

25,100

 

Other

 

1,706

 

Total assets acquired

 

55,872

 

Plus: Liabilities assumed

 

 

 

Accounts payable

 

3,610

 

Accrued expenses

 

1,783

 

Deferred income taxes

 

11,155

 

Debt

 

10,729

 

Other

 

8,412

 

Total liabilities assumed

 

35,689

 

Unallocated purchase price (goodwill)

 

$

46,036

 

 

11



 

On June 20, 2003, the Company acquired a 100% interest in Kaemingk B.V. (“Kaemingk”), a designer and marketer of a wide range of premium seasonal decorations. Kaemingk’s product lines feature Christmas décor, including ornaments, lighting, trim, glassware, candles and plush animals, as well as spring and summer decorative accents and tabletop products.  The cash purchase price was approximately $36.2 million less cash acquired of $7.7 million resulting in net cash paid of $28.5 million.   Approximately $30.6 million of the cash purchase price was borrowed under the Company’s $200 million unsecured revolving credit facility.  The Company also assumed Kaemingk’s long-term debt of approximately $14.4 million.  The excess of the purchase price over the estimated fair value of the net assets acquired approximated $13.5 million, which will not be deductible for income tax purposes.  In addition to the fixed purchase price, there is contingent consideration payable in the form of a three-year earn out provision based on a pre-defined formula related to a multiple of earnings before interest and income taxes.  The results of operations of Kaemingk are included in the Consolidated Statements of Earnings of the Company since June 21, 2003.  For segment reporting purposes, Kaemingk is included in the Creative Expressions segment.

 

The following provides a preliminary allocation of the purchase price of Kaemingk (in thousands)

 

Cash Purchase Price

 

$

 36,176

 

Less: Assets acquired

 

 

 

Cash and cash equivalents

 

7,681

 

Accounts receivable

 

2,106

 

Inventories

 

25,514

 

Property, plant and equipment

 

18,930

 

Other

 

606

 

Total assets acquired

 

54,837

 

Plus: Liabilities assumed

 

 

 

Bank lines of credit

 

9,335

 

Accounts payable

 

2,479

 

Accrued expenses

 

2,079

 

Deferred income taxes

 

2,786

 

Debt

 

14,364

 

Other

 

1,143

 

Total liabilities assumed

 

32,186

 

Unallocated purchase price (goodwill)

 

$

13,525

 

 

12



 

The following unaudited pro forma financial information summarizes the estimated combined results of operations of the Company, CBK, MK and Kaemingk assuming that the acquisitions of CBK, MK and Kaemingk had taken place on February 1, 2002.  The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of CBK, MK and Kaemingk and no representation is made by the Company with respect to the accuracy of such information.  The pro forma combined results of operations reflect adjustments for interest income, additional depreciation based on the fair market value of CBK’s and MK’s property, plant, and equipment, amortization of identifiable intangibles of MK and income tax expense.

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands except per share data)

 

2003

 

2002

 

2003

 

2002

 

Net sales

 

$

276,575

 

$

291,789

 

$

610,311

 

$

614,781

 

Earnings before cumulative effect of change in accounting principle

 

10,793

 

17,109

 

28,562

 

34,321

 

Net earnings

 

10,793

 

17,109

 

28,562

 

29,806

 

Basic:

 

 

 

 

 

 

 

 

 

Earnings per common share before the cumulative effect of change in accounting principle

 

$

0.24

 

$

0.37

 

$

0.62

 

$

0.74

 

Net earnings per common share

 

0.24

 

0.37

 

0.62

 

0.64

 

Diluted:

 

 

 

 

 

 

 

 

 

Earnings per common share before the cumulative effect of change in accounting principle

 

$

0.23

 

$

0.37

 

$

0.62

 

$

0.74

 

Net earnings per common share

 

0.23

 

0.37

 

0.62

 

0.64

 

 

13



 

The unaudited pro forma combined results of operations are not necessarily indicative of, and do not purport to represent, what the Company’s results of operations or financial condition actually would have been had the acquisitions been made as of February 1, 2002.

 

At July 31, 2003, the Company had a total of $210.7 million of excess of cost over fair value of assets acquired  (“goodwill”) on its balance sheet compared to $149.4 million at January 31, 2003.  Goodwill attributable to the Candles & Home Fragrance segment at July 31, 2003 was $72.4 million, an increase of $1.7 million from $70.7 million at January 31, 2003.  Such increase is a result of the effects of foreign currency exchange rate increases versus the US dollar on our European businesses goodwill.  Goodwill attributable to the Creative Expressions segment at July 31, 2003 was $138.3 million, an increase of $59.6 million, from $78.7 million at January 31, 2003.  Such increase is a result of the goodwill from the acquisitions of Miles Kimball and Kaemingk.

 

5.                                      Inventories

 

The components of inventory are as follows (in thousands):

 

 

 

July 31, 2003

 

January 31, 2003

 

Raw materials

 

$

29,333

 

$

33,950

 

Work in process

 

3,757

 

2,509

 

Finished goods

 

223,031

 

151,476

 

 

 

$

256,121

 

$

187,935

 

 

6.                                      Earnings per Share

 

The components of basic and diluted earnings per share are as follows (in thousands):

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

 

 

2003

 

2002

 

2003

 

2002

 

Net earnings

 

$

11,246

 

$

18,806

 

$

30,873

 

$

31,595

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

45,903

 

46,330

 

45,991

 

46,310

 

Dilutive effect of stock options

 

252

 

380

 

183

 

281

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Diluted

 

46,155

 

46,710

 

46,174

 

46,591

 

 

As of July 31, 2003 and 2002, options to purchase 60,423 and 40,468 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be antidilutive.

 

7.                                      Unusual Charges

 

At January 31, 2003, the Company had approximately $0.4 million of restructuring charges included in the Consolidated Balance Sheet, which related to lease obligations.  As a result of payments made during the six-month period ended July 31, 2003, approximately $0.2 million of lease obligations were remaining on the balance sheet at July 31, 2003.  The lease obligation continues through the third quarter of fiscal 2005.

 

14



 

The following is a tabular roll forward of the unusual charges described above that were recorded in the balance sheet of the Company:

 

(In thousands)

 

Lease
Obligations

 

Balance at January 31, 2003

 

$

405

 

Payments made against 2002 charges

 

(175

)

Balance at July 31, 2003

 

$

230

 

 

8.                                      Segment Information

 

Blyth is a global competitor in the gift and decorative accessories market, which the Company calls the Home Expressions category.  Within this category, the Company reports its financial results in two segments – the Candles & Home Fragrance segment and the Creative Expressions segment.  Miles Kimball, acquired in April 2003 and Kaemingk, acquired in June 2003 are included in the Creative Expressions segment.  The Company has operations both inside and outside the United States and sells its products worldwide.

 

In the segment summary table below, earnings represent net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments.  Other expense includes interest expense, interest income and equity in earnings of investee, which are not allocated to the business segments.  Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations.  Other identifiable assets include corporate long-term investments and deferred bond costs, which are not allocated to the business segments.

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands)

 

2003

 

2002

 

2003

 

2002

 

Net Sales

 

 

 

 

 

 

 

 

 

Candles & Home Fragrance

 

$

204,603

 

$

209,410

 

$

474,698

 

$

469,616

 

Creative Expressions

 

70,665

 

58,611

 

112,561

 

76,301

 

Total

 

$

275,268

 

$

268,021

 

$

587,259

 

$

545,917

 

Earnings

 

 

 

 

 

 

 

 

 

Candles & Home Fragrance

 

$

16,922

 

$

23,330

 

$

51,765

 

$

55,994

 

Creative Expressions

 

3,797

 

10,327

 

3,212

 

8,571

 

 

 

20,719

 

33,657

 

54,977

 

64,565

 

Other expense

 

(2,885

)

(3,711

)

(6,019

)

(7,065

)

Earnings before income taxes, minority interest and cumulative effect of change in accounting principle

 

$

17,834

 

$

29,946

 

$

48,958

 

$

57,500

 

 

 

 

 

 

July 31, 2003

 

 

 

January 31, 2003

 

Identifiable Assets

 

 

 

 

 

 

 

 

 

Candles & Home Fragrance

 

 

 

$

635,841

 

 

 

$

693,082

 

Creative Expressions

 

 

 

348,359

 

 

 

180,339

 

Other

 

 

 

12,849

 

 

 

13,237

 

Total

 

 

 

$

997,049

 

 

 

$

886,658

 

 

15



 

9.                                      Contingencies

 

The Company has contingent liabilities that have arisen in the ordinary course of its business, including pending litigation.  The Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

 

On June 2, 2003, the parties agreed in open court to settle and resolve all matters involving or in any way relating to the previously reported legal proceedings by and between the Company and its wholly-owned subsidiary, Endar Corp., on the one hand, and Ennio Racinelli, Darlene Racinelli and others, on the other hand, by means of a written settlement and release agreement, without any payment by any party.  On August 25, 2003, the case was dismissed by the Riverside Superior Court.

 

10.                               Debt

 

At July 31, 2003, Miles Kimball had approximately $10.1 million of long-term debt outstanding under a real estate mortgage note payable to John Hancock Life Insurance Company, which matures June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

 

As of June 30, 2003, Kaemingk had available lines of credit of approximately $39.4 million maturing in March 2004.  The lines of credit are collateralized by certain real estate and equipment owned by Kaemingk.  At June 30, 2003, approximately $10.9 million was outstanding at a weighted average interest rate of 2.7%.

 

At June 30, 2003, Kaemingk had approximately $14.1 million of long-term debt outstanding under seven loans with ING Bank N.V. at a weighted average interest rate of 4.9%.  The bank loans have maturity dates ranging from 2005 through 2021.  The loans are collateralized by certain real estate and equipment owned by Kaemingk.

 

11.                               Fire Loss

 

In July 2003, the Company’s manufacturing facility located in Monterrey, Mexico was destroyed by fire.  Products manufactured at this leased facility were primarily for the North American mass market.  Customer service disruptions were minimal as other Company facilities and third party suppliers met the production requirements and will continue to meet production requirements for the immediate future.  The loss of fixed assets and inventory totaled approximately $8.0 million.  The Company recorded a charge of $0.6 million in the quarter ended July 31, 2003 for the insurance deductible and employee related costs as a result of the fire.  The Company is insured for losses related to this fire.

 

16



 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS:

 

Net Sales

 

Net sales increased $41.4 million or 7.6% to $587.3 million in the first six months of fiscal 2004 from $545.9 million in the first six months of fiscal 2003.  Net sales in the quarter ended July 31, 2003 increased $7.3 million or 2.7% to $275.3 million compared with $268.0 million a year earlier.  There are three primary factors affecting net sales in the second quarter.  First, the inclusion of sales from the acquisitions of Miles Kimball in April 2003 and Kaemingk in June 2003 had a favorable impact offset by the exclusion of sales from Wax Lyrical, which was closed in December 2002.  Second, the continued weakness in the US and European economies and the resulting cautious ordering by retailers had a negative impact on sales.  Third, the favorable foreign exchange rates compared to the US Dollar had a positive impact on reported sales.  Excluding the effect of the acquisitions of Miles Kimball and Kaemingk, the closure of Wax Lyrical, and the favorable foreign exchange effects, net sales in the quarter ended July 31, 2003 decreased approximately 8% compared to the same period a year earlier.

 

Net sales in the Candles and Home Fragrance segment decreased $4.8 million, or 2.3%, to $204.6 million in the quarter ended July 31, 2003, compared with $209.4 million in the same period last year.  PartyLite’s reported net sales in the second quarter were flat when compared to the same period in the prior year.  In the United States, PartyLite’s second quarter sales were negatively impacted by weakened consumer demand as well as a timing shift in the introduction of warm weather product lines that benefited PartyLite’s first quarter.  Offsetting this decline in sales in the United States, PartyLite’s second quarter sales in Europe increased 20% in local currency due to strong sales in April, which were a result of the well-received 30th anniversary product offerings.  In the quarter ended July 31, 2003, net sales increases in Blyth’s European wholesale businesses were offset by decreases in net sales in our North American wholesale premium and mass channel businesses when compared to the prior year period.  Net sales of the Sterno Group, or Away From Home business, decreased 11% in the second quarter of fiscal 2004 compared with the same period last year as the travel and tourism industry continues to struggle.

 

Net sales in the Creative Expressions segment increased $12.1 million, or 20.5%, to $70.7 million in the quarter ended July 31, 2003, compared with $58.6 million in the same period last year.  This increase is attributable to the inclusion of sales from Miles Kimball and, to a lesser extent Kaemingk, which was acquired on June 20, 2003.  Excluding these acquisitions, this segment’s sales declined approximately 13% as a result of reduced consumer spending and retailers’ caution in placing orders.

 

Gross Profit

 

Gross profit increased $13.6 million or 5.0% from $282.3 million in the first six months of fiscal 2003 to $295.9 million in the first six months of fiscal 2004.  Gross profit margin decreased from 51.8% for the first six months of fiscal 2003 to 50.4% for the first six months of fiscal 2004.  Gross profit in the quarter ended July 31, 2003 decreased $2.7 million or 2.1% from $137.3 million for the quarter ended July 31, 2002 to $134.6 million for the quarter ended July 31, 2003.  Gross profit margin decreased from 51.3% for the quarter ended July 31, 2002 to 48.9% for the quarter ended July 31, 2003.  The decrease in gross profit margin is largely attributable to the inclusion of Miles Kimball, which has a lower gross profit margin than the overall Company margin, reduced overhead absorption at the manufacturing facilities due to the decline in sales demand, and a shift in sales among the businesses.

 

Selling Expense

 

Selling expense increased $15.7 million, or 9.6%, from $163.6 million in the first six months of fiscal 2003, when selling expense was 30.0% of net sales, to $179.3 million in the first six months of fiscal 2004, or 30.6% of net sales.  Selling expense increased $7.0 million, or 9.3%, from $75.2 million in the quarter ended July 31, 2002 to $82.2 million in the quarter ended July 31, 2003.  As a percent of sales, selling expense was 29.9% in the second quarter of fiscal 2004 compared to 28.1% a year earlier.  The increase in selling expense is primarily attributable to the addition of Miles Kimball.  The increase in selling expense as a percentage of net sales

 

17



from quarter to quarter is a result of the similar level of expenses applied against a decreased level of sales.

 

Administrative Expense

 

Administrative expense increased $7.6 million, or 14.0%, from $54.1 million in the first six months of fiscal 2003 to $61.7 million in the first six months of fiscal 2004.  Administrative expense increased  $3.2 million or 11.2% from $28.4 million in the quarter ended July 31, 2002 to $31.6 million in the quarter ended July 31, 2003.  Administrative expenses increased due to the addition of Miles Kimball and Kaemingk, as well as the recording of a $0.6 million charge related to the fire at the Monterrey facility, as discussed under the heading “Liquidity and Capital Resources.”

 

Operating Profit

 

Operating profit decreased $9.6 million, or 14.9%, from $64.6 million in the first six months of fiscal 2003 to $55.0 million in the first six months of fiscal 2004.  Operating profit decreased $13.0 million, or 38.5%, from $33.7 million in the quarter ended July 31, 2002 to $20.7 million in the quarter ended July 31, 2003.  These decreases were the result of the factors described above under “Gross Profit,” “Selling Expense” and “Administrative Expense.”

 

Interest Expense

 

Interest expense decreased $0.5 million in the six-month period ended July 31, 2003, as compared with the prior year.  Interest expense decreased $0.2 million in the three months ended July 31, 2003, when compared to the same period last year.  This decrease was primarily a result of reduced interest rates associated with the interest rate swap, as described in Item 3, Quantitative and Qualitative Disclosures About Market Risk, under the heading “Interest Rate Risk.”

 

Interest Income and Other

 

Interest income and other increased $0.6 million in the six-month period ended July 31, 2003, from the six-month period ended July 31, 2002.  Interest income and other increased $0.4 million in the quarter ended July 31, 2003, when compared to the quarter ended July 31, 2002.  These increases are primarily attributable to the $0.5 million gain on the sale of marketable securities that was recorded in the second quarter.

 

Income Taxes

 

Income tax expense decreased $3.4 million, or 15.8%, from $21.4 million in the first six months of fiscal 2003 to $18.0 million in the same period in the current fiscal year.  Income tax expense decreased $4.5 million, or 41.1%, from $11.1 million in the quarter ended July 31, 2002, to $6.6 million in the quarter ended July 31, 2003.  This decrease is a result of the decreased level of earnings in the current year.  The effective tax rate decreased to 36.8% in fiscal 2004 from 37.2% in fiscal 2003.

 

Cumulative Effect of Change in Accounting Principle

 

The Company recorded a one-time charge of $7.4 million pre-tax, $4.5 million net of income taxes on February 1, 2002, which is reflected as the cumulative effect of a change in accounting principle, as a result of adopting SFAS No. 142, “Goodwill and Other Intangible Assets” (See Note 3 to the Consolidated Financial Statements).

 

18



 

Net Earnings

 

As a result of the foregoing, earnings before the cumulative effect of change in accounting principle decreased $5.2 million, or 14.3%, from $36.1 million in the six months ended July 31, 2002 to $30.9 million for the six months ended July 31, 2003.  Net earnings after the cumulative effect of change in accounting principle decreased $0.7 million, or 2.3%, from $31.6 million in the first six months of fiscal 2003 to $30.9 in the first six months of fiscal 2004.  Net earnings decreased $7.6 million, or 40.2%, from $18.8 million in the quarter ended July 31, 2002 to $11.2 million in the quarter ended July 31, 2003.

 

Basic earnings per share before the cumulative effect of change in accounting principle, based upon the weighted average number of shares outstanding for the six months ended July 31, 2003, were $0.67, a decrease of $0.11, or 14.1% compared to $0.78 for the six months ended July 31, 2002.  Basic net earnings per share after the cumulative effect of change in accounting principle, based upon the weighted average number of shares outstanding for the six months ended July 31, 2003, were $0.67, a decrease of $0.01, compared to $0.68 for the six months ended July 31, 2002.  Diluted earnings per share before the cumulative effect of change in accounting principle, based upon the potential dilution that could occur if options to issue common stock were exercised, were $0.67 compared to $0.78 for the same period the prior year. The cumulative effect of change in accounting principle on diluted earnings per share equaled $0.10.  Diluted net earnings per share after the cumulative effect of change in accounting principle, based upon the potential dilution that could occur if options to issue common stock were exercised, were $0.67, compared to $0.68 for the same period the prior year.

 

Liquidity and Capital Resources

 

Compared to January 31, 2003, when inventory levels are typically at the lowest point of the fiscal year, inventory increased $68.2 million from $187.9 million at January 31, 2003 to $256.1 million at July 31, 2003.  This increase is driven in part by the acquisition of Miles Kimball and Kaemingk.  Excluding these acquisitions, inventory increased $26.1 million from January 31, 2003, which is normal given the seasonal nature of the business.  Excluding Miles Kimball and Kaemingk, inventory levels at July 31, 2003 decreased by $15.6 million when compared to July 31, 2002.  This decrease is a result of a continued focus on inventory control throughout the Company.

 

Accounts receivable increased $18.8 million from $82.9 million at January 31, 2003 to $101.7 million at July 31, 2003.  Excluding the effects of the acquisitions of Miles Kimball and Kaemingk, accounts receivable increased $14.4 million due to seasonality.  Excluding Miles Kimball and Kaemingk, accounts receivable decreased $13.0 million when compared to July 31, 2002 due to a decrease in sales.

 

Accounts payable and accrued expenses decreased $4.7 million to $134.8 million at July 31, 2003, from $139.5 million at January 31, 2003.  This decrease is primarily related to payments against accruals that existed at January 31, 2003.  When compared to July 31, 2002, accounts payable and accrued expenses increased $25.3 million due partly to the inclusion of Miles Kimball and Kaemingk and the recording of the deferred gain from the termination of the interest rate swap as further discussed in Item 3, Quantitative and Qualitative Disclosures About Market Risk, under the heading “Interest Rate Risk.”

 

In July 2003, the Company’s manufacturing facility located in Monterrey, Mexico was destroyed by fire.  Products manufactured at this leased facility were primarily for the North American mass market.  Customer service disruptions were minimal as other Company facilities and third party suppliers met the production requirements and will continue to meet production requirements for the immediate future.  The loss of fixed assets and inventory totaled approximately $8.0 million.  The Company recorded a charge of $0.6 million in the quarter ended July 31, 2003 for the insurance deductible and employee related costs as a result of the fire.  The Company is insured for losses related to this fire.

 

19



 

Capital expenditures for property, plant, and equipment were $11.1 million for the six months ended July 31, 2003, as compared with $9.6 million in the prior year period.  Capital expenditures consisted primarily of investments in information technology and upgrades of equipment and facilities.  The Company expects total capital spending of approximately $25.0 million for fiscal 2004.

 

The Company has a $200 million unsecured revolving credit facility having a three-year term (the “Credit Facility”).  The Company has the ability to increase the Credit Facility, under certain circumstances, by an additional $50 million.  The Credit Facility may be used for seasonal working capital needs, general corporate purposes and funding for strategic acquisitions.  The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments.  At July 31, 2003, the Company was in compliance with such covenants.  Amounts outstanding under the Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate (4.0% at July 31, 2003) or at the Eurocurrency rate plus a credit spread ranging from 0.525% to 1.5%, calculated on the basis of a combination of the Company’s senior unsecured long-term debt rating and the Company’s usage of the Credit Facility.  At July 31, 2003, the weighted average interest rate was 3.07%.  On July 31, 2003, approximately $32.3 million was outstanding (including $3.2 million of outstanding letters of credit) under the Credit Facility.

 

As of July 31, 2003, the Company had a total of $15.0 million available under an uncommitted bank line of credit with La Salle Bank National Association, which matures in June 2004.  Amounts outstanding under the line of credit bear interest at short-term fixed rates.  No amounts were outstanding under the uncommitted line of credit at July 31, 2003.

 

At July 31, 2003, the Company had a total of $10.0 million available under an uncommitted line of credit with Bank of America to be used for letters of credit.  At July 31, 2003, approximately $0.5 million of letters of credit were outstanding under this credit line.

 

As of June 30, 2003, The Gies Group (“Gies”) had available lines of credit of approximately $40.2 million of which approximately $13.2 million was outstanding.  The amounts outstanding under the lines of credit bear interest at a weighted average rate of 4.0% at June 30, 2003.  The lines of credit are renewed annually.

 

Colony Gift Corporation Limited (“Colony”) has a $24.8 million short-term revolving credit facility with Barclays Bank, which matures in June 2004.  As of June 30, 2003, Colony had borrowings under the credit facility of approximately $4.8 million, at a weighted average interest rate of 4.14%.

 

At July 31, 2003, CBK had $4.7 million of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letter of credit issued by La Salle Bank National Association.  The amount outstanding under the IRB bears interest at short-term floating rates, which equaled a weighted average interest rate of 1.2% at July 31, 2003.

 

At July 31, 2003, Miles Kimball had approximately $10.1 million of long-term debt outstanding under a real estate mortgage note payable to John Hancock Life Insurance Company, which matures June 1, 2020. Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

 

As of June 30, 2003, Kaemingk had available lines of credit of approximately $39.4 million maturing in March 2004.  The lines of credit are collateralized by certain real estate and equipment owned by Kaemingk.  At June 30, 2003, approximately $10.9 million was outstanding at a weighted average interest rate of 2.7%.

 

At June 30, 2003, Kaemingk had approximately $14.1 million of long-term debt outstanding under seven loans with ING Bank N.V. at a weighted average interest rate of 4.9%.  The bank loans have maturity dates ranging from 2005 through 2021.  The loans are collateralized by certain real estate and equipment owned by Kaemingk.

 

20



 

Net cash used in operating activities amounted to $19.9 million for the six months ended July 31, 2003, compared to $12.6 million used in operating activities for the six months ended July 31, 2002.  The decrease in cash flow from operations relates primarily to changes in the Company’s working capital and the absence of the $4.5 million cumulative effect adjustment related to the goodwill impairment at the Sterno Group that was recorded in fiscal 2003.

 

The Company’s Board of Directors has authorized the Company to repurchase up to 6,000,000 shares of common stock under the share repurchase program.  In the second quarter of fiscal 2004, the Company purchased 259,400 shares on the open market for a cost of $7.0 million, bringing the year-to-date total to 371,200 shares at a cost of $9.8 million.  Since the program inception, the Company has purchased 4,015,300 shares at a total cost of $96.4 million.  The acquired shares are held as common stock in the treasury at cost.

 

On September 4, 2003, the Company declared a cash dividend of $0.15 per share of the Company’s common stock for the six months ended July 31, 2003.  This represents an increase of $0.02 per share or 15%, above the most recent dividend.  The dividend is payable to shareholders of record as of October 31, 2003 and will be paid on November 14, 2003.

 

Critical Accounting Policies

 

For a discussion of the Company’s critical accounting policies see our Annual Report on Form 10-K for the fiscal year ended January 31, 2003.

 

Impact of Adoption of Recently Issued Accounting Standards

 

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities,” which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and addresses consolidation by business enterprises of variable interest entities that have specific characteristics as described in the Interpretation. This Interpretation was effective immediately with respect to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  The implementation of this standard had no impact on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  This standard is effective for derivative contracts entered into or modified after June 30, 2003. The implementation of this standard had no impact on our financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  This standard is effective for financial instruments entered into or modified after May 31, 2003. The implementation of this standard had no impact on our financial statements.

 

21



 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

The Company has operations outside of the United States and sells its products worldwide.  The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and commodity prices.  These financial exposures are actively monitored and, where considered appropriate, managed by the Company.

 

Interest Rate Risk

 

As of July 31, 2003, the Company is subject to interest rate risk on approximately $71.0 million of variable rate debt.  Each 10% increase in the interest rate would impact pre-tax earnings by approximately $7.1 million if applied to the total.

 

On July 10, 2003, the Company terminated the interest rate swap agreement in relation to $50.0 million of our outstanding 7.90% Senior Notes, which mature on October 1, 2009.  This termination resulted in a deferred gain of approximately $5.0 million, which will be amortized over the remaining term of the Notes.

 

Foreign Currency Risk

 

The Company uses forward foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain committed capital expenditures, certain inventory purchases, Canadian intercompany payables and certain intercompany loans.  The Company does not hold or issue derivative financial instruments for trading purposes.

 

The Company has designated its forward exchange contracts on Canadian intercompany purchases and forecasted future purchase commitments as cash flow hedges and, as such, as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in accumulated other comprehensive income (loss) (“OCI”) until earnings are affected by the variability of the cash flows being hedged.  With regard to commitments for machinery and equipment and inventory purchases, upon payment of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from accumulated OCI and is included in the measurement cost of the acquired asset.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in accumulated OCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  Approximately $294,000 of hedge losses are included in accumulated OCI at July 31, 2003, and are expected to be transferred into earnings within the next twelve months.

 

The Company has designated its foreign currency forward contracts related to intercompany loans as fair value hedges. The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.

 

For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the cash flow with the items being hedged.

 

22



 

The following table provides information about the Company’s foreign exchange forward contracts at July 31, 2003.

 

(In thousands, except average contract rate)

 

U.S. Dollar
Notional Amount

 

Average
Contract Rate

 

Estimated
Fair Value

 

Canadian Dollar

 

$

12,821

 

1.47

 

$

(483

)

Euro

 

40,831

 

1.09

 

(888

)

Pound Sterling

 

12,740

 

1.59

 

(119

)

 

 

$

66,392

 

 

 

$

(1,490

)

 

The foreign exchange contracts outstanding as of July 31, 2003, have maturity dates ranging from August 2003 through March 2004.

 

23



 

Item 4.  CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

 

(b) Changes in internal control over financial reporting.

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

24



 

Part II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

On June 2, 2003, the parties agreed in open court to settle and resolve all matters involving or in any way relating to the previously reported legal proceedings by and between the Company and its wholly-owned subsidiary, Endar Corp., on the one hand, and Ennio Racinelli, Darlene Racinelli and others, on the other hand, by means of a written settlement and release agreement, without any payment by any party.  On August 25, 2003, the case was dismissed by the Riverside Superior Court.

 

Item 2.  Changes in Securities

None

 

Item 3.  Defaults upon Senior Securities

None

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

The following matters were voted upon at the Annual Meeting of Stockholders held on June 4, 2003, and received the votes set forth below:

 

1)              Each of the following persons nominated was elected to serve as director and received the number of votes set forth opposite his name.

 

 

 

For

 

Against

 

Withheld

 

Abstentions

 

Roger A. Anderson

 

36,324,630

 

0

 

6,299,499

 

0

 

Pamela M. Goergen

 

42,239,726

 

0

 

384,403

 

0

 

Carol J. Hochman

 

42,441,336

 

0

 

182,793

 

0

 

 

In addition to the directors elected at the meeting, the directors of the Company whose terms of office continued after the meeting are:  John W. Burkhart, Robert B. Goergen, Neal I. Goldman, Phillip Greer, John E. Preschlack and Howard E. Rose.

 

2)              A proposal to ratify the appointment of PricewaterhouseCoopers LLP as independent certified public accountants received 34,468,292 votes for, 8,140,781 votes against, 0 votes withheld and 15,056 abstentions.

 

3)              A resolution to adopt the Company’s 2003 Long-Term Incentive Plan received 33,087,013 votes for, 6,787,506 votes against, 0 votes withheld and 275,538 abstentions.  In addition there were 2,474,072 broker non-votes with respect to this resolution.

 

25



 

Item 5.  Other Information

 

On July 16, 2003, the Company provided notice to all of its directors, officers and employees regarding a blackout period for trading in the Company’s stock.  The blackout period was imposed in order to ensure that directors, officers and employees of the Company would not be subject to claims that they traded on the basis of inside information.  The blackout period began on July 31, 2003, the last business day of the Company’s second fiscal quarter, and continued until three business days after the release of the Company’s quarterly earnings report to the public, or September 2, 2003.  The information contained in this Item 5 is being furnished pursuant to Item 11 of Form 8-K.

 

The Company is including the following cautionary statement in this Report to make applicable, and to take advantage of, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts.  From time to time, the Company and its representatives may publish or otherwise make available forward-looking statements of this nature.  All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are expressly qualified by the following cautionary statements.  Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.  Such forward-looking statements are expected to be based on various assumptions, many of which are based, in turn, upon further assumptions.

 

There can be no assurance that management’s expectations, beliefs or projections will occur or be achieved or accomplished.  In addition to other factors and matters discussed elsewhere in this Report and in the Company’s other public filings and statements, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the Company’s forward-looking statements.  The Company disclaims any obligation to update any forward-looking statements, or the following factors, to reflect events or circumstances after the date of this Report.

 

Risk of Inability to Maintain Growth Rate

 

The Company has grown substantially in past years.  While we expect continued growth, we expect that our future rate of growth will be less than our historical growth rate.  In the Candles & Home Fragrance segment, we expect the international market to grow faster than the domestic market.  The market for our foodservice, or Away From Home products has grown, but more slowly, and we expect it will continue to do so.  Our ability to continue to grow depends on several factors, including the following:  market acceptance of existing products, the successful introduction of new products, our ability to recruit new independent sales consultants, sourcing of raw materials, and increases in production and distribution capacity to meet demand.  The Candles & Home Fragrance and Creative Expressions industries are driven by consumer tastes.  Accordingly, there can be no assurance that our existing or future products will maintain or achieve market acceptance.  Our sales and earnings results have recently been impacted negatively by a slowing of the United States economy and the economies of certain European countries and by a drop in consumer confidence at both the individual and retailer levels.  There can be no assurance that our sales and earnings results will not be materially adversely affected by these factors in the future.  If the United States economy and/or the economies in certain European countries in which we sell our products slow further and/or consumer confidence drops further, our operating results may be materially adversely affected.  Our past growth in both the Candles & Home Fragrance segment and the Creative Expressions segment has been due, in part, to acquisitions.  We expect our future growth in the Candles & Home Fragrance segment to be primarily organic, with the possibility of selective acquisitions, and we continue to pursue strategic acquisitions in the Creative Expressions segment.  There can be no assurance that we will be able to continue to identify suitable acquisition candidates, to consummate acquisitions on terms favorable to the Company, to finance acquisitions or to integrate successfully acquired operations.  In the future, acquisitions may contribute more to the overall Company’s sales growth rate than historically.

 

26



 

Ability to Respond to Increased Product Demand

 

Our ability to meet future demand for candles and home fragrance products and creative expressions products will be dependent upon success in (1) bringing new production and distribution capacity on line in a timely manner, (2) improving our ability to forecast anticipated product demand in order to continue to fill customer orders promptly, (3) improving management information systems in order to respond promptly to customer orders and (4) training, motivating and managing new employees.  If we are unable to meet future demand for products in a timely and efficient manner, our operating results could be materially adversely affected.

 

Risks Associated with International Sales and Foreign-Sourced Products

 

Our international business has grown at a faster rate than sales in the United States in recent years.  In addition, we source a portion of our candles, accessories and decorative gift bags and home and seasonal décor products from independent manufacturers in the Pacific Rim, Europe and Mexico.  For these reasons, we are subject to the following risks associated with foreign manufacturing and sales: fluctuations in currency exchange rates, economic and political instability, international public health crises, transportation delays, difficulty in maintaining quality control, restrictive actions by foreign governments, nationalizations, the laws and policies of the United States and certain European markets affecting importation of goods (including duties, quotas and taxes and trade and foreign tax laws).

 

Raw Materials

 

For certain raw materials, there may be temporary shortages due to capacity, availability, a change in raw material requirements, weather or other factors, including disruptions in supply caused by raw material transportation or production delays.  Such raw material shortages have not previously had, and are not presently expected to have, a material adverse effect on the Company’s operations.  It is possible, however, that recent increases in oil prices may have a material adverse effect on availability of petroleum-based products used in the manufacture of our candles and home fragrance products.

 

Dependence on Key Corporate Management Personnel

 

Our success depends upon the contributions of key corporate management personnel, including our Chairman, Chief Executive Officer and President, Robert B. Goergen.  We do not have employment contracts with any of our key corporate management personnel except for Mr. Goergen, nor do we maintain any key person life insurance policies.  The loss of any of the key corporate management personnel could have a material adverse effect on the Company.

 

Competition

 

Our business is highly competitive, both in terms of price and new product introductions. The worldwide market for candles and home fragrance products and creative expressions products is highly fragmented, with numerous suppliers serving one or more of the distribution channels served by the Company.  Because there are relatively low barriers to entry to the Candles & Home Fragrance and Creative Expressions segments, we may face increased future competition from other companies, some of which may have substantially greater financial and marketing resources than those available to us.  We compete with companies offering candles manufactured in foreign countries.  In addition, certain competitors focus on a particular geographic or single-product market and attempt to gain or maintain market share solely on the basis of price.

 

27



 

Item 6.  Exhibits and Reports on Form 8-K

 

a)              Exhibits

 

31.1

 

Certification of Chairman, Chief Executive Officer and President pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

 

 

31.2

 

Certification of Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Chairman, Chief Executive Officer and President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

b)             Reports on Form 8-K

 

During the fiscal quarter ended July 31, 2003, the Company filed the following Current Reports on Form 8-K:

 

Current Report on Form 8-K on June 4, 2003 to file as an exhibit the press release reporting the Company’s results of operations for the fiscal quarter ended April 30, 2003.

 

Current Report on Form 8-K on July 10, 2003 to file as an exhibit the press release announcing the Company’s acquisition of Kaemingk B.V.

 

Current Report on Form 8-K on July 25, 2003 to file as an exhibit the press release reporting the second quarter earnings expectations and full year outlook for the fiscal year ended January 31, 2004.

 

28



 

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.

 

 

 

 

BLYTH, INC.

 

 

 

 

 

 

 

Date:

September 15, 2003

 

By:

/s/Robert B. Goergen

 

 

 

Robert B. Goergen

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

Date:

September 15, 2003

 

By:

/s/Robert H. Barghaus

 

 

 

Robert H. Barghaus

 

 

Vice President and Chief Financial Officer

 

29