UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 


 

(Mark One)

 

 

ý

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

 

 

 

For the fiscal year ended January 31, 2004

 

 

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)

 

(I.R.S. Employer
Identification No.)

 

 

 

One East Weaver Street
Greenwich, Connecticut

 

06831

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code: (203) 661-1926

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.02 par value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  ý  No  o

 

As of July 31, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $853 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on such date and based on the assumption, for purposes of this computation only, that all of the registrant’s directors and executive officers are affiliates.

 

As of April 27, 2004, there were 45,618,927 outstanding shares of Common Stock, $0.02 par value.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the 2004 Proxy Statement for the Annual Meeting of Shareholders to be held on June 24, 2004 (Incorporated into Part III).

 

 



 

TABLE OF CONTENTS

 

PART I

 

 

 

Item 1.   Business

3

 

 

Item 2.   Properties

13

 

 

Item 3.   Legal Proceedings

14

 

 

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

14

 

 

PART II

 

 

 

Item 5.   Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

 

 

Item 6.   Selected Consolidated Financial Data

16

 

 

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

37

 

 

Item 8.   Financial Statements and Supplementary Data

39

 

 

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

74

 

 

Item 9A. Controls and Procedures

75

 

 

PART III

 

 

 

Item 10.  Directors and Executive Officers of the Company

76

 

 

Item 11.  Executive Compensation

76

 

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

76

 

 

Item 13.  Certain Relationships and Related Transactions

76

 

 

Item 14.  Principal Accountant Fees and Services

76

 

 

PART IV
 
 
 

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

76

 

2



 

Part I

 

Item 1. Business

 

(a)          General Development of the Business

 

Blyth, Inc. (together with its subsidiaries, the “Company,” which may be referred to as “we,” “us” or “our”) is a home expressions company competing primarily in the home décor, seasonal decorations and gift industry.  The Company designs, markets and distributes an extensive array of candles, home fragrance products, decorative accessories, seasonal decorations and household convenience items, as well as tabletop lighting and chafing fuel for the Away From Home or foodservice trade.  Blyth manufactures most of its candles and sources nearly all of its other products. The Company’s sales and operations take place primarily in the United States, Canada and Europe, with additional activity in Mexico, Australia and the Far East.

 

Blyth became a publicly traded company in 1994, at which time net sales were approximately $157.5 million.  Both internal growth and acquisitions have contributed to significant overall growth since that time.  Internal growth has been generated by (a) increased sales of existing home expressions products to consumers and retailers, (b) the introduction of new products and product line extensions and (c) geographic expansion.  The Company has also integrated numerous acquisitions and investments into its operations since its formation in 1977.

 

Additional information is available on our website, www.blyth.com.  The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto filed or furnished pursuant to the Securities Exchange Act of 1934 are available on our website free of charge as soon as reasonably practicable following submission to the SEC.  Also available on the Company’s website are its Corporate Governance Guidelines, its Code of Conduct, and the charters for its Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, each of which is available in print to any shareholder who makes a request to Blyth, Inc., One East Weaver Street, Greenwich, CT 06831; Attention Bruce D. Kreiger, Secretary.  The information posted to www.blyth.com, however, is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.

 

(b)          Business Segments

 

The Company reports its financial results in five business segments: the Direct Selling segment, the Wholesale Home Fragrance segment, the Wholesale Creative Expressions segment, the Catalog & Internet segment, and the All Other segment.  These segments accounted for approximately 51%, 25%, 14%, 7% and 4% of consolidated net sales, respectively, for the fiscal year ended January 31, 2004.*  Financial information relating to these business segments for the years ended January 31, 2004, 2003 and 2002 appears in Note 18 of the Company’s consolidated financial

 


* Percentages do not add up to 100% due to rounding.

 

3



 

statements and is incorporated herein by reference.

 

Direct Selling Segment

 

In fiscal year 2004, this segment represented approximately 51% of Blyth’s total sales.  Products sold globally in the Direct Selling segment are marketed through a network of independent sales consultants using the party plan method of direct selling.  Products designed, manufactured or sourced, marketed and distributed within this segment include fragranced and non-fragranced candles, bath products and a broad range of related accessories.  These products are sold in North America, Europe and Australia under the brand name PartyLite®.

 

United States Market

 

Within the United States market, candles, other home fragrance products, bath products and related accessories are sold directly to consumers through a network of independent sales consultants.  Independent sales consultants are compensated on the basis of PartyLite® brand product sales at parties organized by them and parties organized by consultants recruited by them.  Over 36,000 independent sales consultants located in the US were selling PartyLite® brand products in the US at fiscal 2004 year-end.  Our products are designed, packaged and priced in a manner appropriate to the premium nature of their quality and exclusivity and distribution channel through which they are sold.

 

International Market

 

Blyth continues to focus on becoming a global home fragrance company in its Direct Selling segment. In fiscal 2004, products were sold internationally in this segment directly to consumers by more than 20,000 independent sales consultants located outside the US, the exclusive distributors of PartyLite® brand products. These products were sold in the following international markets during fiscal year 2004: Australia, Austria, Canada, Finland, France, Germany, Mexico, Switzerland and the United Kingdom.

 

We support our independent sales consultants with inventory management and control and satisfy delivery requirements through on-line ordering, which is available to all independent sales consultants in the United States, Canada and Germany.

 

Wholesale Home Fragrance Segment

 

In fiscal year 2004, this segment represented approximately 25% of Blyth’s total sales. Blyth is a global wholesale home fragrance company.  Products designed, manufactured or sourced, marketed and distributed within this segment include fragranced and non-fragranced candles, potpourri, seasonal decorations, environmental fragrance products such as air fresheners and filters and a broad range of related accessories.  These products are sold in multiple channels of distribution in North America and Europe under brand names that include Ambria®, Colonial™1, Colonial Candle of Cape Cod®, Colonial at HOME®, Carolina®, Florasense®, Gies®1,Kaemingk®1 and Liljeholmens®.  Our wholesale home fragrance products are designed, packaged and priced to satisfy the varying demands of consumers within each distribution channel.

 

4



 

United States Market

 

Products sold in the Wholesale Home Fragrance segment in the United States are marketed through the premium and mass consumer wholesale channels.  Within these channels, we sell candles, home fragrance products and related accessories to independent gift shops, specialty chains, department stores, food and drug outlets and mass retailers through independent sales representatives, Company key account managers and Company sales managers.  This sales force supports the Company’s customers with comprehensive product catalogs and samples, merchandising programs and selective fixtures.  The independent sales representatives, Company key account managers and Company sales managers also receive training on the marketing and proper use of our products.

 

International Market

 

Products sold internationally in the Wholesale Home Fragrance segment are marketed to retailers in the premium and mass consumer wholesale channels through independent sales representatives and Company sales managers.  Customers include European mass merchants, garden centers, and department and gift stores.

 

In June 2003, Blyth acquired Kaemingk, B.V., a European wholesaler of premium seasonal decorations.  Its products are sold to more than 3,000 garden centers, and department and gift stores in 20 European countries under the brand name Kaemingk®1.  Kaemingk’s customer base and sourcing requirements are similar to those of our other Wholesale Home Fragrance businesses, and one management team handles oversight responsibility for all businesses in this segment.

 

Blyth’s international wholesale operations also include exports of products from the United States and various European countries to Canada, Europe, Latin America and the Pacific Rim.  Exported products are sold through Company sales managers and independent sales representatives to premium and mass retailers.  The Company may expand its international presence through the establishment of additional non-US based marketing and distribution operations.

 

The Company believes that competing in multiple distribution channels offers certain advantages.  Successful new ideas and research can be shared among and adapted by Blyth’s marketing groups.  Blyth’s competitive position in these channels is enhanced by its ability to respond quickly to changes in consumer preferences and new product trends.  Moreover, the Company effectively supports customers with inventory management and control and satisfies delivery requirements through electronic ordering, which is available to independent sales representatives and sales managers in the premium wholesale channel.

 

Wholesale Creative Expressions Segment

 

In fiscal year 2004, this segment represented approximately 14% of Blyth’s total sales.  Blyth designs, markets and distributes home décor products and seasonal decorations within this segment.  These products are sold through multiple distribution channels under brand names that include CBK®, Holiday365™ and Seasons of Cannon Falls™.

 

5



 

Home décor products and seasonal decorations are sold in the United States to premium and mass retailers.  Premium everyday home décor products and gifts, including decorative metal and wicker accessories, picture frames, lamps and textiles are designed for and marketed and distributed to more than 25,000 premium independent retailers.  Blyth also designs, markets and distributes seasonal decorations for the premium and mass distribution channels.  During fiscal year 2004, the Impact Plastics seasonal decorations business was realigned with that of our other Wholesale Creative Expressions business, Midwest, in order to concentrate these seasonal businesses into one unit.

 

Catalog & Internet Segment

 

In fiscal year 2004, this segment represented approximately 7% of Blyth’s total sales.  Blyth designs, markets and distributes a wide range of household convenience items, personalized gifts and photo storage products within this segment.  These products are sold through the catalog and Internet distribution channel under brand names that include Exposures®, Miles Kimball®, Walter Drake® and The Home Marketplace®.

 

Blyth acquired the Miles Kimball Company, a catalog and Internet marketer of household convenience products, personalized gifts, photo albums, frames and holiday cards, in April 2003.  In December 2003, the Company acquired Jackson Acquisition Company, LLC, doing business as Walter Drake, which markets similar products through the catalog and Internet distribution channel.  In fiscal year 2005, we began consolidating the operations of Walter Drake into those of Miles Kimball in Oshkosh, Wisconsin as the seasonality of the Miles Kimball business is complemented by the relatively less seasonal selling pattern of Walter Drake, thereby enhancing distribution center capacity utilization throughout the year.

 

All Other Segment

 

In fiscal year 2004, this segment represented approximately 4% of Blyth’s total sales.  Within this segment, we manufacture and source chafing fuel and tabletop illumination products sold under brand names including Sterno®, HandyFuel® and Ambria® for the Away From Home or foodservice channel.  These products are sold primarily in the United States, as well as in Canada, Europe, Latin America and the Pacific Rim through independent sales representatives and foodservice distributors.

 

United States Market
 

Products sold in the All Other segment in the United States are marketed by the Company to the foodservice industry.  Chafing fuel and tabletop lighting products such as candles, liquid fuel lamps and accessories are sold to restaurants, caterers, hotels and other institutional customers.  Sales are solicited by independent sales representatives, independent foodservice distributors and Company sales managers.

 

International Market
 

The Company also exports foodservice products from the United States.  Exported products are sold through Company sales managers and

 

6



 

independent sales representatives to retailers and foodservice distributors.

 

Product Brand Names

 

The key brand names under which our Direct Selling segment products are sold are:

 

PartyLite®

Lavish by PartyLite™

 

The key brand names under which our Wholesale Home Fragrance segment products are sold are:

 

Asp-Holmblad®(1)

Carolina®

Colonial™(1)

Colonial Candle of Cape Cod®

Colonial at HOME®

Florasense®

Gies®(1)

Kaemingk®(1)

Liljeholmens®

 

The key brand names under which our Wholesale Creative Expressions segment products are sold are:

 

CBK®

Holiday365™

JMC Impact™

Seasons of Cannon Falls™

 

The key brand names under which our Catalog & Internet segment products are sold are:

 

Exposures®

Miles Kimball®

The Home Marketplace®

Walter Drake®

 

The key brand names under which our All Other segment products are sold are:

 

Ambria®

HandyFuel®

Sterno®

 

New Product Development

 

Concepts for new products and product line extensions are directed to the marketing departments of our business units from within all areas of the Company, as well as from the Company’s independent sales representatives and worldwide product manufacturing partners.  The new product development process may include technical research, consumer market research, fragrance studies, comparative analyses, the formulation of engineering specifications, feasibility studies, safety assessments, testing and evaluation which can generally require from 3 to 18 months to complete.  Each year, new products typically account for at least 25% of our net sales in the first full year following their introduction.

 

The Company’s focus on new products and product line extensions specific to each distribution channel and segment has been an important element of its efforts to become a leading home expressions products company.  The continual introduction of new product forms, shapes, fragrances, packaging and presentation is intended to appeal to the changing tastes of consumers and retailers.

 

Manufacturing, Sourcing and Distribution

 

In all of the Company’s business segments, management continuously works to increase value and lower costs through increased efficiency in worldwide production, sourcing and distribution practices, application of new

 

7



 

technologies and process control systems, and consolidation and rationalization of equipment and facilities.  Since our 1994 initial public offering, we have invested over $255 million in new facilities and equipment in order to lower manufacturing costs, improve product quality and increase manufacturing capacity significantly in order to accommodate expected future sales growth, as well as to improve the speed to market of new product introductions.  Management has also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions.

 

The manufacture of Blyth’s products involves the use of highly automated processes and technologies, as well as certain hand crafting and finishing.  Many of the Company’s products in all of its business segments are manufactured by others based on Blyth’s design specifications, making the Company’s global supply chain approach critically important to its new product development process, quality control and cost management.  Management has also built a network of stand-alone highly automated distribution facilities in its core markets.

 

Technological Advancements

 

The Company continues to see the benefit of its substantial investment in technological initiatives, particularly Internet-based ordering technology.  An Internet-based order-entry and business management system is available to all PartyLite independent sales consultants in the United States, Canada and Germany.  By fiscal year end, show orders placed via the PartyLite Extranet had increased to over 75% of total show orders in the United States and over 85% of total show orders in Canada.  The system became available to PartyLite consultants in Germany during the third quarter of fiscal 2004, and approximately 20% of German show orders were being placed via the Extranet by year-end.  The Extranet’s automated features eliminate errors common on hand-written paper forms and speed orders through processing and distribution, improving customer service.  Furthermore, by easing the administrative workload and providing tools with which to track sales and programs, the Extranet has helped PartyLite independent sales consultants build their businesses more efficiently.  The improved accuracy of the automated system also results in administrative savings for the Company.

 

By fiscal year end, Blyth’s consumer wholesale business in North America introduced UCCnet support with which the Company now supports automated product information synchronization with retailers in the mass channel.  This new technical capability enables us to send immediate, up-to-date product information to participating retailers to ensure that they have current Blyth product information to support their supply chain.  Today Blyth supports over 200 retail customers with various modes and forms of electronic data interchange (EDI).

 

Customers

 

Customers in the Direct Selling segment are individual consumers served by independent sales consultants.  Sales within the Catalog & Internet segment are also made directly to consumers.  Blyth’s Wholesale Home Fragrance segment and Wholesale Creative Expressions segment customers include

 

8



 

department and independent gift stores, mass merchandisers, specialty chains and food and drug stores.  Within its All Other segment, the Company sells to institutional customers such as hotels, restaurants and foodservice distributors.  No single customer accounts for 10% or more of Blyth’s sales.

 

Competition

 

All of the Company’s business segments are very competitive.  Principle competitive factors are new product introductions, price, product quality, delivery time and customer service.  The domestic and international markets are very fragmented and served by numerous suppliers in all of Blyth’s business segments.  Additional information about ways in which the Company’s business may be affected by increased competition appears below under the heading “Risk of Increased Competition.”

 

Employees

 

As of January 31, 2004, the Company had approximately 5,600 full-time employees, of whom approximately 26% are based outside of the United States.  Approximately 4,200 of the 5,600 employees are non-salaried.  Blyth does not have any unionized employees in the United States.  Approximately 50 employees of the Gies Group are represented by the IG Chemie labor union in the Company’s German facility and have a General Agreement in place with no termination period.  A Wages Agreement will be under negotiation for renewal beginning in May 2004 and currently may be terminated by the union at the end of that month.  Management believes that relations with the Company’s employees are good.  Since its formation in 1977, Blyth has never experienced a work stoppage.

 

Raw Materials

 

All of the raw materials used by Blyth for its candles, home fragrance products and chafing fuel, principally petroleum-based wax, fragrance, glass containers and corrugate, have historically been available in adequate supply from multiple sources.  Additional information about ways in which Blyth’s business may be affected by shortages of raw materials appears below under the heading “Risk of Shortages of Raw Materials.”

 

Trademarks and Patents

 

The Company owns and has pending numerous trademark registrations and applications in the United States Patent and Trademark Office related to its products.  Blyth also registers certain trademarks in other countries.  While management regards these trademarks and patents as valuable assets to its business, the Company is not dependent on any single trademark or patent or group thereof.

 

Environmental Law Compliance

 

Most of the Company’s manufacturing, distribution and research operations are affected by federal, state, local and international environmental laws relating to the discharge of materials or otherwise to the protection of the environment.  Management has made and intends to continue to make the necessary expenditures to comply with applicable environmental laws and does not believe that such expenditures will have a material effect on the Company’s

 

9



 

capital expenditures, earnings or competitive position.

 

Cautionary Factors That May Affect Future Results

 

The disclosure and analysis in this report and in Blyth’s 2004 Annual Report to Shareholders contain forward-looking statements that describe the Company’s current expectations or forecasts of future events.  One can usually identify these statements by the fact that they do not relate strictly to historical or current facts.  Forward-looking statements often include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words or terms in connection with any discussion of future operating or financial performance.  These include statements relating to future actions, performance or results related to current or future products or product approvals, sales efforts, expenses, the outcome of contingencies such as legal proceedings and financial results.  From time to time, the Company may provide oral or written forward-looking statements in other public materials.

 

Any or all of the forward-looking statements in this report, in our 2004 Annual Report to Shareholders and in any other public statements made by management may turn out to be wrong.  They may be affected by inaccurate assumptions or known or unknown risks or uncertainties.  Many factors mentioned in this discussion, such as competition or the competitive environment, are important to the outcome of future results.  Consequently, no forward-looking statements can be guaranteed, and actual results may vary materially from the Company’s projections.

 

Management undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.  However the public is advised to review any future disclosures the Company makes on related subjects in its quarterly reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K to the SEC.  The Company also provides below the following cautionary discussion of risks, uncertainties and potentially inaccurate assumptions relevant to its business.  These and other factors could cause actual results to differ materially from expected and historical results and are provided as permitted by the Private Securities Litigation Reform Act of 1995.

 

            Risk of Inability to Maintain Growth Rate

 

The Company has experienced significant sales growth in past years.  While management expects continued growth, Blyth’s future growth rate will likely be less than its historical growth rate.  The Company expects faster sales growth in its international market versus its United States market, particularly in the Direct Selling and Wholesale Home Fragrance business segments.  The market for Blyth’s Away From Home or foodservice products has also grown historically, though at a slower rate, a pattern that is expected to continue.  In recent years, our overall sales for the Away From Home or foodservice products were flat, reflecting a generally weak economic environment during these years.  The Company’s ability to increase sales depends on numerous factors, including market acceptance of

 

10



 

existing products, the successful introduction of new products, the ability to recruit new independent sales consultants, sourcing of raw materials and demand-driven increases in production and distribution capacity.  Business in all of Blyth’s segments is driven by consumer preferences.  Accordingly, there can be no assurances that the Company’s current or future products will maintain or achieve market acceptance.  Blyth’s sales and earnings results can be negatively impacted by the worldwide economic environment; particularly the Canadian, United States and European economies.  There can be no assurances that the Company’s financial results will not be materially adversely affected by these factors in the future.

 

The Company’s historical growth has been due in part to acquisitions and management continues to consider additional strategic acquisitions.  There can be no assurances that management will continue to identify suitable acquisition candidates, consummate acquisitions on terms favorable to the Company, finance acquisitions or successfully integrate acquired operations.

 

            Risks Associated With International Sales and Foreign-Sourced Products

 

Blyth’s international sales growth rate has outpaced that of its United States growth rate in recent years.  Moreover, the Company sources a portion of its products in all of its business segments from independent manufacturers in the Pacific Rim, Europe and Mexico.  For these reasons, Blyth is subject to the following risks associated with international manufacturing and sales:  fluctuations in currency exchange rates, economic or political instability, international public heath crises, transportation costs and delays, difficulty in maintaining quality control, restrictive governmental actions, nationalizations, the laws and policies of the United States, Canada and certain European countries affecting the importation of goods (including duties, quotas and taxes) and the trade and tax laws of other nations.

 

            Ability to Respond to Increased Product Demand

 

The Company’s ability to meet future product demand in all of its business segments will depend upon its success in (1) bringing new production and distribution capacity on line in a timely manner, (2) improving its ability to forecast product demand and fulfill customer orders promptly, (3) improving customer service-oriented management information systems and (4) training, motivating and managing new employees.  The failure of any of the above could result in a material adverse effect on Blyth’s financial results.

 

            Risk of Shortages of Raw Materials

 

Certain raw materials could be in short supply due to capacity, availability, a change in requirements, weather or other factors, including supply disruptions due to production or transportation delays.  Such shortages have not had and are not presently expected to have a material adverse effect on the Company’s operations.  While the price of crude oil is only one of several factors impacting the price of petroleum wax, it is possible that recent fluctuations in oil prices may have a material adverse affect on the cost of petroleum-based products used in the manufacture or transportation of Blyth’s

 

11



 

products, particularly in the Direct Selling and Wholesale Home Fragrance business segments.

 

            Dependence on Key Corporate Management Personnel

 

Blyth’s success depends in part on the contributions of key corporate management, including its Chairman and Chief Executive Officer, Robert B. Goergen.  The Company does not have employment contracts with any of its key corporate management personnel except Mr. Goergen, nor does it 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.

 

            Risk of Increased Competition

 

As noted above under the heading “Competition,” Blyth’s business is highly competitive both in terms of pricing and new product introductions.  The worldwide market for home 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 in all of Blyth’s business segments, the Company may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to Blyth.  Competition includes companies selling candles manufactured at low cost outside of the United States.  Moreover, certain competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

 

            Risks Associated with Terrorist Attacks or Other Hostilities and the International Political Climate

 

Geopolitical conflict, including acts of war and terrorist attacks, have and may in the future affect the US and global economies and may increase other risk factors faced by the Company.

 

            Risks Related to Information Technology Systems

 

Blyth’s information technology systems are dependent on global communications providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have experienced significant system failures and outages in the past.  Blyth’s systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events.  Despite the implementation of network security measures, the Company’s systems are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with Company systems.  The occurrence of these or other events could disrupt or damage Blyth’s information technology systems and inhibit internal operations, the ability to provide customer service or the ability of customers or sales personnel to access the Company’s information systems.

 


(1)   Registered and sold outside the United States only.

12



 

Item 2.  Properties

 

The following table sets forth the location and approximate square footage of the Company’s major manufacturing and distribution facilities:

 

 

 

 

 

 

 

Approximate Square Feet

 

Location

 

Use

 

Business Segment

 

Owned

 

Leased

 

Aalten, Netherlands

 

Distribution

 

Wholesale Home Fragrance

 

227,500

 

148,000

 

Arndell Park, Australia

 

Distribution

 

Direct Selling

 

 

 

10,000

 

Batavia, Illinois

 

Manufacturing and Research & Development

 

Direct Selling and Wholesale Home Fragrance

 

486,000

 

 

 

Caldas da Rainha, Portugal

 

Manufacturing and related distribution

 

Wholesale Home Fragrance

 

230,000

 

 

 

Cannon Falls, Minnesota

 

Distribution

 

Wholesale Creative Expressions

 

 

 

192,000

 

Carol Stream, Illinois

 

Distribution

 

Direct Selling

 

 

 

651,000

 

Clara City, Minnesota

 

Manufacturing and related distribution

 

Wholesale Creative Expressions

 

54,000

 

220,000

 

Colorado Springs, Colorado

 

Manufacturing and related distribution

 

Catalog & Internet

 

211,200

 

 

 

Cumbria, England(1)

 

Manufacturing and related distribution

 

Direct Selling and Wholesale Home Fragrance

 

206,200

 

70,000

 

Elkin, North Carolina

 

Manufacturing and related distribution

 

Wholesale Home Fragrance

 

690,000

 

 

 

Glinde, Germany

 

Manufacturing and related distribution

 

Wholesale Home Fragrance

 

172,000

 

 

 

Maynard, Minnesota

 

Manufacturing and related distribution

 

Wholesale Creative Expressions

 

54,000

 

 

 

Hyannis, Massachusetts(2)

 

Manufacturing

 

Direct Selling and Wholesale Home Fragrance

 

69,000

 

 

 

Memphis, Tennessee

 

Distribution

 

Wholesale Home Fragrance

 

 

 

462,000

 

Monterrey, Mexico

 

Distribution

 

Wholesale Home Fragrance

 

 

 

45,000

 

Ontario, Canada

 

Distribution

 

Direct Selling

 

 

 

25,000

 

Oshkosh, Wisconsin

 

Distribution

 

Catalog & Internet

 

 

 

375,000

 

Oskarshamm, Sweden

 

Manufacturing and related distribution

 

Wholesale Home Fragrance

 

 

 

123,000

 

Plymouth, Massachusetts

 

Distribution

 

Direct Selling

 

59,000

 

 

 

Texarkana, Texas

 

Manufacturing and related distribution

 

All Other

 

154,000

 

65,000

 

Tilburg, Netherlands

 

Distribution

 

Direct Selling

 

327,000

 

 

 

Tijuana, Mexico

 

Manufacturing

 

Wholesale Home Fragrance

 

 

 

200,800

 

Union City, Tennessee

 

Distribution

 

Wholesale Creative Expressions

 

360,000

 

60,000

 

 

The Company’s executive offices, administrative offices and outlet stores are generally located in leased space (except for certain offices located in owned space).  Most of the Company’s properties are currently being utilized for their intended purpose except as discussed in the footnotes below.

 


(1)   Represents four separate facilities as follows: 60,200 square feet, 56,000 square feet and 70,000 square feet used by Colony Gifts Corporation Limited; 90,000 square feet used by CCW Manufacturing Limited.

(2)   This facility was closed on January 31, 2004.

 

13



 

Item 3.  Legal Proceedings

 

The Company is involved in litigation arising in the ordinary course of its business. In the opinion of the Company’s management, existing litigation will not have a material adverse effect on the Company’s financial position or results of operations.

 

On June 2, 2003, the Company and its wholly-owned subsidiary, Endar Corp., on the one hand, and Ennio Racinelli, Darlene Racinelli and others, on the other hand, 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 them, 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 4.  Submission of Matters to a Vote of Security Holders

 

The Company’s 2004 annual meeting of stockholders will be held on June 24, 2004.  No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year ended January 31, 2004.

 

PART II

 

Item 5.  Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our Common Stock is traded on the New York Stock Exchange under the symbol BTH.  The price range for the Company’s Common Stock on the New York Stock Exchange as reported by the New York Stock Exchange was as follows:

 

 

 

FISCAL 2003
(ENDED JANUARY 31, 2003)

 

 

 

HIGH

 

LOW

 

First Quarter

 

$

30.15

 

$

20.85

 

Second Quarter

 

$

32.80

 

$

25.83

 

Third Quarter

 

$

30.34

 

$

23.96

 

Fourth Quarter

 

$

28.63

 

$

23.91

 

 

 

 

FISCAL 2004
(ENDED JANUARY 31, 2004)

 

 

 

HIGH

 

LOW

 

First Quarter

 

$

26.63

 

$

23.46

 

Second Quarter

 

$

30.38

 

$

25.36

 

Third Quarter

 

$

28.82

 

$

25.95

 

Fourth Quarter

 

$

33.65

 

$

27.93

 

 

As of April 27, 2004, there were 1,983 registered holders of record of the Company’s Common Stock.

 

On March 31, 2004, the Company’s Board of Directors declared a regular semi-annual cash dividend in the amount of $0.17 per share of Common Stock payable in the second quarter of fiscal year 2005.  During fiscal years 2004 and 2003, the Company’s Board of Directors declared dividends as follows: $0.13 per share of Common Stock

 

14



 

payable in the second quarter of fiscal year 2004; $0.15 per share of Common Stock payable in the fourth quarter of fiscal year 2004 and $0.11 per share of Common Stock payable in each of the second and fourth quarters of fiscal year 2003.

 

The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the fourth quarter of the fiscal year ended January 31, 2004.

 

ISSUER PURCHASES OF EQUITY SECURITIES1
 

 

Period

 

(a) Total
Number
of Shares
Purchased

 

(b)
Average
Price Paid
per Share

 

(c) Total
Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

(d) Maximum
Number (or
Approximate Dollar
Value) of Shares
that May Yet Be
Purchased Under
the Plans or
Programs

 

Month #1
November 1, 2003 -
November 30, 2003

 

89,800

 

$

29.55

 

 

4,345,100

 

1,654,900 shares

 

Month #2
December 1, 2003 -
December 31, 2003

 

0

 

0

 

 

4,345,100

 

1,654,900 shares

 

Month #3
January 1, 2004 -
January 31, 2004

 

0

 

0

 

 

4,345,100

 

1,654,900 shares

 

Total

 

89,800

 

$

29.55

 

 

4,345,100

 

1,654,900 shares

 

 

_____________________________

 

(1)   On September 10, 1998, the Company’s Board of Directors approved the Company’s share repurchase program (the “Repurchase Program”) pursuant to which the Company can repurchase up to 1,000,000 shares of its issued and outstanding Common Stock in open market transactions.  On June 8, 1999, the Company’s Board of Directors amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 1,000,000 to 2,000,000 shares.  On March 30, 2000, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 2,000,000 to 3,000,000 shares.  On December 14, 2000, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 3,000,000 to 4,000,000 shares.  On April 4, 2002, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.  The Repurchase Program does not have an expiration date.  The Company intends to make further purchases under the Repurchase Program.

 

15



 

Item 6.

 

Selected Consolidated Financial Data

 

Set forth below are selected summary consolidated financial and operating data of the Company for fiscal years 2000 through 2004, which have been derived from the Company’s audited financial statements for those years except for the restatement of fiscal year 2003 described in Note 5 below and Note 2 to the Consolidated Financial Statements.  The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report to Shareholders on Form 10-K.

 

 

 

Year ended January 31,

 

(In thousands, except per share and percent data)

 

2000

 

2001

 

2002

 

2003

 

2004

 

 

 

 

 

 

 

 

 

Restated (5)

 

 

 

Statement of Earnings Data: (1)

 

 

 

 

 

 

 

 

 

 

 

Net sales (4)

 

$

1,135,875

 

$

1,178,813

 

$

1,178,771

 

$

1,288,583

 

$

1,505,573

 

Gross profit (4)

 

572,006

 

596,101

 

577,005

 

640,302

 

723,675

 

Operating profit

 

164,001

 

145,244

 

120,490

 

155,517

 

153,077

 

Interest expense

 

12,104

 

15,876

 

17,237

 

14,664

 

17,443

 

Earnings before income taxes, minority interest and cumulative effect of accounting change (2)

 

150,390

 

130,690

 

108,289

 

142,557

 

136,893

 

Earnings before minority interest and cumulative effect of accounting change

 

92,847

 

80,715

 

68,006

 

89,525

 

86,516

 

Net earnings (3)

 

92,389

 

79,562

 

68,006

 

57,772

 

86,351

 

Basic net earnings per common share before cumulative effect of accounting change

 

$

1.91

 

$

1.69

 

$

1.45

 

$

1.94

 

$

1.89

 

Cumulative effect of accounting change (3)

 

 

(0.02

)

 

(0.69

)

 

 

 

$

1.91

 

$

1.67

 

$

1.45

 

$

1.25

 

$

1.89

 

Diluted net earnings per common share before cumulative effect of accounting change

 

$

1.89

 

$

1.69

 

$

1.44

 

$

1.92

 

$

1.88

 

Cumulative effect of accounting change

 

 

(0.02

)

 

(0.68

)

 

 

 

$

1.89

 

$

1.66

 

$

1.44

 

$

1.24

 

$

1.88

 

Cash dividends paid, per share

 

$

 

$

0.20

 

$

0.20

 

$

0.22

 

$

0.28

 

Basic weighted average number of common shares outstanding

 

48,471

 

47,629

 

47,056

 

46,256

 

45,771

 

Diluted weighted average number of common shares outstanding

 

48,818

 

47,902

 

47,205

 

46,515

 

46,027

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Gross profit margin

 

50.4

%

50.6

%

48.9

%

49.7

%

48.1

%

Operating profit margin

 

14.4

%

12.3

%

10.2

%

12.1

%

10.2

%

Capital expenditures

 

$

47,740

 

$

25,322

 

$

11,901

 

$

14,322

 

$

21,963

 

Depreciation and amortization

 

28,107

 

33,383

 

36,246

 

30,212

 

35,954

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

191,257

 

$

224,413

 

$

285,771

 

$

324,060

 

$

400,540

 

Total assets

 

714,536

 

770,974

 

804,781

 

860,084

 

1,127,963

 

Total debt

 

196,222

 

199,968

 

191,701

 

176,493

 

293,886

 

Total stockholders’ equity

 

380,214

 

421,794

 

468,063

 

507,852

 

588,970

 

 


(1)       Statement of Earnings Data includes the results of operations for periods subsequent to the respective purchase acquisitions of the remaining 50% of Colony Gift Corporation Limited in May 1999, which was previously included as an equity investment, Midwest of Cannon Falls, Inc. acquired in April 2001, CBK, Ltd., LLC (now CBK Styles, Inc.) acquired in May 2002, Miles Kimball Company acquired in April 2003, Kaemingk B.V. acquired in June 2003 and Walter Drake acquired in December 2003, none of which had a material effect on the Company’s results of operations in the period during which they occurred, or thereafter.

(2)       Fiscal 2001 pre-tax earnings include restructuring and impairment charges of approximately $7.7 million related to realignment of the Company’s European operations and US consumer wholesale organization, decisions to exit certain product lines, and changes impacting its specialty retail business.  Fiscal 2001 pre-tax earnings also include approximately $9.0 million of unusual charges to cost of sales for adjustments to carrying values of inventory connected with these initiatives, as well as $2.3 million of unexpected bad debt expenses associated with certain customer bankruptcy filings.  Fiscal 2002 pre-tax earnings include restructuring and impairment charges of approximately $14.1 million related to closure of the Company’s 62nd Street Chicago facility, other rationalization of the North American consumer wholesale business and certain changes in the European sector.  Fiscal 2002 pre-tax earnings also include approximately $6.3 million and $5.0 million in unusual charges to cost of sales for inventory revaluations related to the US mass market and other marketplace conditions impacting realizable value of obsolete inventory. Fiscal 2003 pre-tax earnings include an impairment charge of $2.6 million as a result of putting Wax Lyrical into receivership. Fiscal 2004 pre-tax earnings include restructuring and impairment charges of $23.8 million related to manufacturing equipment impairment, closure of the Company’s Hyannis manufacturing facility, the discontinuance of the Canterbury® brand, and the closure of five of the Company’s candle outlet stores.

(3)       The Company recorded a one-time cumulative effect of accounting change in January 2001 to reflect the adoption of Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements.”  The Company recorded a one-time cumulative effect of accounting change in February 2002 to reflect the adoption of SFAS 142, “Goodwill and Other Intangible Assets.”  (See Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”).

(4)       The Company made reclassifications to previously reported net sales and gross profit information to reflect the adoption of Emerging Issues Task Force Issue No. 01-09.  (See Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”).

(5)       The Company has restated its fiscal 2003 financial statements to reflect an increase in the cumulative effect of accounting change  related to the adoption of SFAS 142, “Goodwill and Other Intangible Assets.”  See Note 2 to the Consolidated Financial Statements.

 

16



 

Item 7.

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The financial and business analysis below provides information that we believe is relevant to an assessment and understanding of our consolidated financial condition, changes in financial condition and results of operations.  This financial and business analysis should be read in conjunction with our consolidated financial statements and accompanying notes to the consolidated financial statements set forth in Item 8. below.

 

OVERVIEW

 

For the past several years, we have reported financial information for two reporting segments, namely Candles & Home Fragrance and Creative Expressions.  We have reevaluated our operating segments pursuant to Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information”, and determined to report financial information with respect to five reporting segments, namely Direct Selling, Wholesale Home Fragrance, Wholesale Creative Expressions, Catalog & Internet and All Other.  This revision of segments had the related effect of requiring changes in the Company’s reporting units for purposes of goodwill impairment reviews under SFAS No. 142, “Goodwill and Other Intangible Assets,” retroactive to the February 1, 2002 adoption date of SFAS 142.  This resulted in the need to perform impairment reviews of several additional reporting units as of February 1, 2002 and each subsequent year-end balance sheet date, thereafter.  These impairment reviews indicated the need to record a $27 million goodwill impairment specifically in our Wholesale Home Fragrance segment, which we have recorded as an increase in the cumulative effect of accounting change for the adoption of SFAS 142 as of February 1, 2002.  As a result, we have restated our 2003 financial statements as discussed in Note 2 to the Consolidated Financial Statements, and such restatement is reflected throughout the remainder of management’s discussion and analysis that is set forth below.

 

The Company’s fiscal year 2004 financial results were strong, despite the overall weakness in the home expressions industry in which we operate, and included record sales and strong cash flow and earnings.  We believe that the strength of our results is a reflection of the successful execution of our growth strategy and our ongoing efforts to ensure that our global supply chain is consistent with the needs of our marketplace.  As discussed more fully below, net sales for the fiscal year ended January 31, 2004 increased 17% to a record $1,506 million.  Operating profits were $153 million, after pre-tax restructuring and impairment charges of $24 million, and net earnings, net of the $15 million after-tax effect of such charges, were $86 million.  Cash flow from operations, at $173 million, was very strong again this year.

 

Towards fiscal year end, we announced a series of steps that continue the rationalization of our business model, primarily in our wholesale candle business, which began several years ago.  These steps reflect our response to rapid changes in the marketplace, as well as our determination that a hybrid supply chain strategy of both manufacturing and sourcing is more effective given these changes.  While healthy growth continues within our European businesses, growth in the home fragrance category has moderated in North America, and the ongoing and increasing pressures of international competition necessitate increased efficiency in our operations.  Moreover, Blyth has also realized significant productivity improvements in its manufacturing facilities in recent years.  The evaluation and rationalization of our infrastructure and evolution of our hybrid strategy is of strategic importance and is a major, continuing management focus.

 

During our fiscal 2004 fourth quarter, we disposed of and wrote off certain equipment in our primary North American manufacturing facilities in response to the above mentioned factors, as well as in response to a continued, consumer-driven product shift from candle forms such as pillars and tapers towards filled containers, votives and tealights.  We also recognized restructuring and impairment charges in the fourth quarter in connection with the consolidation of our Temecula, California potpourri operations, and the write down of certain other equipment and severance payments to employees.  In addition, we recognized an impairment related to our fiscal 1997 acquisition of the Canterbury® brand.

 

In July 2003, our candle manufacturing facility in Monterrey, Mexico was destroyed by fire.  After extensive review, we decided to focus our North American candle production in our two largest state-of-the-art US facilities and not rebuild in Monterrey.  This review also led to the decision to close our Hyannis, Massachusetts plant, Blyth’s smallest manufacturing facility, which was located in a congested downtown Cape Cod area that hampered

 

17



 

the transportation of raw materials and finished goods.  Most of the charges associated with the Hyannis closure were recorded in the Direct Selling segment.  The costs associated with the fire were recorded in the Wholesale Home Fragrance segment and are expected to be recouped through insurance.

 

We believe that all of these steps have positioned Blyth to compete more effectively in the changing worldwide marketplace, and we will continue to evaluate our business model as markets evolve.

 

We invested $22 million in capital projects in fiscal year 2004 and an additional $149 million in cash for the acquisitions of Miles Kimball, Kaemingk and Walter Drake.  Annualized net sales of our fiscal 2004 acquisitions are approximately $290 million.  We ended the year with $230 million of cash and cash equivalents on our balance sheet.

 

Building on our healthy financial condition and strong balance sheet, we took advantage of historically low interest rates this year by issuing $100 million of 10-year senior notes in October.  The proceeds will be used for any or all of internal reinvestment in our businesses, the funding of strategic acquisitions, the repayment of certain short-term debt, dividend payments and share repurchases.

 

SEGMENTS

 

Blyth is a global competitor in the gift and decorative accessories market, which the Company calls the home expressions industry.  Within this category, the Company reports its financial results in five segments - the Direct Selling segment, the Wholesale Home Fragrance segment, the Wholesale Creative Expressions segment, the Catalog & Internet segment, and the All Other segment.  Miles Kimball Company (“Miles Kimball”), acquired in April 2003 and Walter Drake, acquired in December 2003, are included in the Catalog & Internet segment.  Kaemingk B.V. (“Kaemingk”), acquired in June 2003, is included in the Wholesale Home Fragrance segment.  Prior to January 31, 2004, the Company reported its financial results in two reporting segments, the Candles & Home Fragrance segment and the Creative Expressions segment.  The Company has reevaluated its operating segments based on the application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and determined to report financial information with respect to five reporting segments in fiscal 2004 and four in fiscal 2003 and 2002 (The increase in segments in fiscal 2004 was due to the acquisitions that were consummated in fiscal 2004).  The Company’s financial statement footnotes have been restated to reflect the revised segments.  In addition, due to the change in the Company’s reportable segments and the resulting change in reporting units under SFAS 142, the Company has restated its fiscal 2003 financial statements to reflect the recording of a  $27.2 million goodwill impairment charge related to the Wholesale Home Fragrance segment as of the February 1, 2002 adoption date of SFAS 142.  The Company’s reportable and operating segments are based on financial information regularly evaluated by the chief operating decision maker in determining resource allocation and assessing performance. The Company has operations outside of the United States and sells products in the Direct Selling and Wholesale Home Fragrance segments worldwide.  The majority of sales in the Wholesale Creative Expressions, Catalog & Internet and the All Other segments, are domestically based.

 

Within the Direct Selling segment, the Company designs, manufactures or sources and markets an extensive line of products including candle accessories, scented candles, fragranced bath gels and body lotions and other fragranced products.  These products are sold direct to the consumer under the PartyLite® brand in North America, Europe and Australia through a network of more than 56,000 independent sales consultants.

 

Within the Wholesale Home Fragrance segment, the Company designs, manufactures or sources and markets an extensive line of products including candle accessories, scented candles, potpourri and other fragranced products.  In addition, in Europe, the Company designs and markets seasonal decorations to independent and specialty

 

18



 

retailers.  Products in this segment are sold worldwide to retailers in the premium and specialty wholesale channels under the Ambria®, Carolina®, Colonial™(1), Colonial Candle of Cape Cod®, Colonial at HOME®, Kaemingk®(1), Kate’s™ and Liljeholmens® brands and in the mass retail channel under the Ambria®, FilterMate®, Florasense® and Gies®(1) brands.

 

Within the Wholesale Creative Expressions segment, the Company designs, sources and markets a broad range of home décor products under the CBK® brand, seasonal decorations under the Holiday365™, JMC Impact™ and Seasons of Cannon Falls™ brands, and until Jeanmarie was sold in April 2004, decorative gift bags under the Jeanmarie® brand. These products are sold primarily in North America.

 

Within the Catalog & Internet segment, the Company designs, sources and markets a broad range of household convenience items, premium photo albums, frames, holiday cards and gifts under the Exposures®, Miles Kimball® and Walter Drake® brands.  These products are sold primarily in North America.

 

Within the All Other segment,  the Company designs, manufactures or sources and markets a variety of chafing fuel, candles and tabletop lighting products to the Away From Home or foodservice trade under the brand names Ambria®, HandyFuel® and Sterno®.  These products are sold primarily in North America.

 

The following table sets forth, for the periods indicated, the percentage relationship to net sales and the percentage increase of certain items included in the Company’s consolidated statements of earnings:

 

 

 

 

 

 

 

 

 

Percentage Increase (Decrease)
from Prior Period

 

 

 

Percentage of Net Sales

 

Fiscal 2003

 

Fiscal 2004

 

 

 

Years Ended January 31

 

Compared

 

Compared

 

 

 

 

 

Restated

 

 

 

to Fiscal

 

to Fiscal

 

 

 

2002

 

2003

 

2004

 

2002

 

2003

 

Net sales

 

100.0

 

100.0

 

100.0

 

9.3

 

16.8

 

Cost of goods sold

 

51.1

 

50.3

 

51.9

 

7.7

 

20.6

 

Gross profit

 

48.9

 

49.7

 

48.1

 

11.0

 

13.0

 

Selling

 

28.4

 

28.2

 

27.7

 

8.7

 

14.8

 

Administrative

 

8.7

 

9.2

 

8.6

 

14.9

 

9.0

 

Operating profit

 

10.2

 

12.1

 

10.2

 

29.1

 

(1.6

)

Net earnings

 

5.8

 

4.5

 

5.7

 

(15.0

)

49.5

 

 

Fiscal 2004 Compared to Fiscal 2003

 

Net sales increased $217.0 million, or 17%, from $1,288.6 million in fiscal 2003 to $1,505.6 million in fiscal 2004.  Approximately 16 percentage points of the 17% increase in net sales is attributable to the positive sales impact of Miles Kimball, which Blyth acquired in April 2003, Kaemingk, which was acquired in June 2003, Walter Drake acquired in December 2003, and the positive impact of approximately twelve weeks of acquisition-related sales growth of CBK Styles, Inc., which Blyth acquired in May 2002.  The loss of sales from Wax Lyrical, which was closed in December 2002, had a negative impact on sales equal to approximately one percentage point.  The relative strength of foreign currencies versus the US dollar had a positive impact on fiscal 2004 sales growth equal to approximately 4 percentage points.  Management believes that a relatively weak holiday sales season in calendar 2002, geopolitical events including SARS and the outbreak of war in Iraq resulted in very cautious buying patterns by retailers, which negatively impacted Blyth’s sales throughout fiscal 2004.

 


(1)   Colonial, Gies and Kaemingk trademarks are registered and sold only outside the United States.

 

19



 

Net Sales - Direct Selling Segment

 

Net sales in the Direct Selling segment, represented by our PartyLite direct selling unit for candles, home fragrance products and related accessories, increased $47.1 million, or 7%, from $717.4 million in fiscal 2003 to $764.5 million in fiscal 2004.  The relative strength of foreign currencies versus the US dollar had a positive impact on sales in the direct selling segment equal to approximately 5 percentage points.  In PartyLite’s European markets, fiscal 2004 sales increased approximately 33%.  In local currencies, PartyLite’s European sales were 11% above the prior year, driven by sales growth in the developing markets of Austria, Switzerland, France and Finland.  In North America, PartyLite’s US sales were approximately equal to the prior year, while PartyLite Canada reported a 3% increase versus the prior year.  In local currency, PartyLite Canada’s sales declined 10% from the prior year.  We believe that PartyLite’s sales in the US and Canada were negatively impacted by cautious consumer spending resulting from economic and geopolitical concerns.

 

Management has expected and continues to expect that growth trends within PartyLite’s major markets will vary considerably over the long term.  In the more penetrated US and Canadian markets, low to mid-single digit growth is expected.  Within Europe, established countries such as Germany and the UK may experience single-digit growth, whereas newer markets typically experience double-digit or strong double-digit growth.

 

Net sales in the Direct Selling segment represented approximately 51% of total Blyth sales in fiscal 2004 compared to 56% in fiscal 2003.

 

Net Sales - Wholesale Home Fragrance Segment

 

Net sales in the Wholesale Home Fragrance segment increased $63.3 million, or 20%, from $310.2 million in fiscal 2003 to $373.5 million in fiscal 2004.  The primary cause of this increase was the acquisition of Kaemingk in June 2003, which had a positive effect of 23 percentage points.  The loss of sales of Wax Lyrical, which was closed in December 2002, had a negative impact on sales of approximately 5 percentage points.  The strengthening of foreign currency exchange rates versus the US dollar had a positive effect of 7 percentage points.  Net sales in the Wholesale Home Fragrance segment represented approximately 25% of total Blyth sales in fiscal 2004 compared to 24% in fiscal 2003.

 

In Europe, the Wholesale Home Fragrance segment experienced a sales increase of approximately 55% in fiscal 2004 versus fiscal 2003.  The acquisition of Kaemingk had a positive effect on sales of approximately 50 percentage points, and the closure of Wax Lyrical had a negative impact of approximately 11 percentage points on sales.  The strengthening of foreign currency exchange rates versus the US dollar had a positive effect of approximately 15 percentage points.  We believe that the increase in sales from pre-existing businesses was partially attributable to improved sales management programs in the European mass channel the effect of which was offset by a decline in the European premium channel, in which a consolidating retailer base was cautious in ordering inventory due to economic and geopolitical concerns.

 

In North America, the Wholesale Home Fragrance segment experienced a sales decline of 9% versus the prior year. This was principally due to decreased sales in the mass channel as management declined to participate this year in certain holiday programs that had unacceptable profit margins.  The growth of competitive direct import products also had a negative impact on this segment’s North American mass channel sales.  Segment sales in the premium channel in fiscal 2004 were slightly below the prior year, partly due to management’s decision to discontinue certain product lines in favor of a streamlined brand and SKU portfolio more appropriate to current channel and customer sales trends, as well as from retailer economic cautiousness.  In fiscal 2004, management focused its efforts on marketing the premium Colonial Candle of Cape Cod® brand, and sales of that brand showed positive results versus the prior year.

 

20



 

Net Sales - Wholesale Creative Expressions Segment

 

Net sales in the Wholesale Creative Expressions segment were flat at approximately $204.0 million in both fiscal 2003 and fiscal 2004.  The acquisition of CBK in May 2002 had a positive impact on sales equal to 10%.  Sales in both the premium and mass channels were impacted by delayed and reduced ordering by retailers following a relatively weak holiday sales period in calendar year 2002.  Net sales in the Wholesale Creative Expressions segment accounted for approximately 14% of Blyth’s total net sales in fiscal 2004 compared to 16% in fiscal 2003.

 

Net Sales - Catalog & Internet Segment

 

Net sales in the Catalog & Internet segment were $110.7 million in fiscal 2004 due entirely to the acquisitions of Miles Kimball and Walter Drake.  Blyth sought to enter this distribution channel for several years, as it was the primary strategic channel in which we did not yet have a sales presence.  With the initial acquisition of Miles Kimball and the addition of Walter Drake, the operations of which are being integrated into those of Miles Kimball, Blyth is now operating in all of its desired channels and we believe we can now reach consumers however they choose to shop.

 

Net sales in the Catalog & Internet segment were modestly below our pre-acquisition assumptions due in part to a delayed pre-holiday catalog drop date, the revamping of Miles Kimball’s Exposures® brand and product line and a lower than expected response rate to new targeted customer lists.  Net sales in the Catalog & Internet segment accounted for approximately 7% of Blyth’s total net sales in fiscal 2004 compared to 0% in fiscal 2003.

 

Net Sales - All Other Segment

 

Net sales in the All Other segment, which is comprised of sales of foodservice products in the Away From Home channel, were $52.9 million in fiscal 2004 a decrease of $4.1 million or 7%, when compared to $57.0 million in fiscal 2003.  This was consistent with overall sluggishness experienced in the US travel and hospitality market during fiscal year 2004, as well as additional competition from imported products.  Net sales in the All Other segment accounted for approximately 4% of Blyth’s total net sales in both fiscal 2004 and fiscal 2003.

 

Blyth’s consolidated gross profit increased $83.4 million, or 13%, from $640.3 million in fiscal 2003 to $723.7 million in fiscal 2004.  The gross profit margin, however, declined from 49.7% in fiscal 2003 to 48.1% in fiscal 2004 principally due to the addition of Kaemingk, which has a lower gross margin than Blyth’s overall company average, as well as the sales mix among and within Blyth’s various businesses.

 

Blyth’s consolidated selling expense increased $54.0 million, or 15%, from $363.8 million in fiscal 2003 to $417.8 million in fiscal 2004.  Most of the increase in selling expense is a result of the expenses relating to the previously discussed acquisitions.  Selling expense as a percentage of net sales decreased from 28.2% in fiscal 2003 to 27.7% in fiscal 2004.  This decrease in selling expense, as a percentage of net sales, was primarily a result of the impact of the business models of recently acquired companies, which have lower selling expenses than the overall Company average.

 

21



 

Blyth’s consolidated administrative expenses increased $10.7 million, or 9%, from $118.3 million in fiscal 2003 to $129.0 million in fiscal 2004.  Most of such increase in administrative expenses relates to administrative expenses incurred in connection with acquisitions made in fiscal 2004.  As a percentage of net sales, administrative expenses decreased from 9.2% in fiscal 2003 to 8.6% in fiscal 2004, which decrease is due to the fact that the Company’s corporate resources have grown at a significantly lower rate than have the Company’s sales which have grown with acquisitions.

 

In fiscal 2004, the Company recorded pre-tax restructuring and impairment charges of approximately $23.8 million. Of the $23.8 million charge, $6.7 million related to the Direct Selling segment and the closure of the Company’s Hyannis, Massachusetts candle manufacturing facility, $16.7 million related to the Wholesale Home Fragrance segment and $0.4 million related to the Wholesale Creative Expressions segment.  The total charge of $23.8 million was reported as a component of operating expenses, which reduced operating profit margin by 1.6 percentage points, compared to a pre-tax charge of $2.6 million recorded in fiscal 2003 related to placing Wax Lyrical into administrative receivership, which reduced operating profit margin by 0.2 percentage points (See Note 5 to the Consolidated Financial Statements).

 

Blyth’s consolidated operating profit declined $2.4 million from $155.5 in fiscal 2003 to $153.1 million in fiscal 2004 principally due to fiscal 2004 restructuring and impairment charges of $23.8 million.  Restructuring and impairment charges of $2.6 million were recorded in fiscal 2003.

 

Operating Profit/Loss - Direct Selling Segment

 

Operating profit in the Direct Selling segment decreased $7.4 million, or 5%, from $149.7 million in fiscal 2003 to $142.3 million in fiscal 2004.  The pre-tax restructuring and impairment charges of $6.7 million in fiscal 2004 negatively impacted operating profit in this segment.  Additional promotional and sales incentive expenses, as well as higher shipping costs, also negatively impacted this segment’s operating profit.  Operating profit in the Direct Selling segment represented approximately 92% of total Company operating profit in fiscal 2004 compared to 96% in fiscal 2003.

 

Operating Profit/Loss - Wholesale Home Fragrance Segment

 

Operating loss in the Wholesale Home Fragrance segment improved from a loss of $24.9 million in fiscal 2003 to a loss of $10.7 million in fiscal 2004.  Pre-tax restructuring and impairment charges of $16.7 million in fiscal year 2004 versus $2.6 million in fiscal 2003 negatively impacted this segment’s operating results.  Of the total segment charges in fiscal 2004, $7.9 million (pre-tax) related to the write down of certain candle manufacturing equipment due to significant productivity increases in recent years, as well as a product shift from candle forms such as pillars and tapers towards filled containers, votives and tealights.  The moderation of growth in the home fragrance category has also resulted in industry-wide excess capacity and thus impacted the carrying value of certain equipment.  Of the total segment charges, $4.6 million (pre-tax) related primarily to severance and personnel costs associated with the North American restructuring in this segment, including the consolidation of our Temecula, California potpourri operations and the closure of five candle outlet stores.  Of the total segment charges, $4.2 million related to the discontinuation of the Canterbury® brand, one of several consumer wholesale brands acquired over the past decade.  The Company is focusing its sales and marketing resources on fewer brands.  In addition, fiscal 2004 operating profit was negatively impacted by $1.9 million of expenses related to the fire that destroyed our candle factory in Monterrey, Mexico.  Management expects to recoup these expenses through insurance in fiscal 2005.

 

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Operating Profit/Loss - Wholesale Creative Expressions Segment

 

Operating profit in the Wholesale Creative Expressions segment decreased 34% from $26.0 million in fiscal 2003 to $17.2 million in fiscal 2004.  The pre-tax restructuring and impairment charges of $0.4 million in fiscal 2004 negatively impacted operating profit in this segment.  Moreover, sales volume shortfalls resulting from significant retailer caution throughout 2004 translated into operating profit shortfalls.  These factors were partially offset by the full year effect of CBK, which was acquired in May 2002, which had a positive impact on operating profit.  Operating profit in the Wholesale Creative Expressions segment represented approximately 11% of total Company operating profit in fiscal 2004 compared to 17% in fiscal 2003.

 

Operating Profit/Loss - Catalog & Internet Segment

 

Operating profit in the Catalog & Internet segment was $5.2 million in 2004 due entirely to the fiscal 2004 acquisitions of Miles Kimball and Walter Drake.   Operating profit in the Catalog & Internet segment represented approximately 3% of total Company operating profit in fiscal 2004.

 

Operating Profit/Loss - All Other Segment

 

Operating profit in the All Other segment declined from a profit of $4.7 million in fiscal 2003 to a loss of $0.9 million in fiscal 2004.  Sales volume shortfalls resulting from overall industry sluggishness and a resulting decrease in factory overhead absorption were responsible for most of the decline in this segment’s operating profit.  Increased direct import competition also had a negative impact on this segment’s operating profit.  The All Other segment represented 0% of total Company operating profit in fiscal 2004 compared to 3% in fiscal 2003.

 

Interest expense increased $2.7 million, or 18%, from $14.7 million in fiscal 2003 to $17.4 million in fiscal 2004, mostly due to higher interest costs related to the $100 million of 5.5% Senior Notes issued in October 2003.  In addition, interest expense was impacted by the additions of Miles Kimball and Kaemingk.

 

Interest income and other decreased $0.4 million, from $1.7 million in fiscal 2003 to $1.3 million in fiscal 2004.  This decrease was primarily due to lower interest rates on short-term investments, as well as foreign currency charges.

 

Income tax expense decreased $2.6 million, or 5%, from $53.0 million in fiscal 2003 to $50.4 million in fiscal 2004.  The decrease in income tax expense is attributable to the decrease in pre-tax earnings as a result of the restructuring and impairment charges previously discussed.  The effective income tax rate was 36.8% for fiscal 2004 compared to 37.2% in fiscal 2003.  This decease in tax rate is a result of a larger amount of income being generated in jurisdictions with lower tax rates.

 

As a result of the foregoing, net earnings increased $28.6 million, or 49.5%, from $57.8 million in fiscal 2003 to $86.4 million in fiscal 2004.  Net earnings before the cumulative effect of change in accounting principle decreased $3.1 million, or 3%, from $89.5 million in fiscal 2003 to $86.4 million in fiscal 2004.  In the first quarter of fiscal 2003, the Company recorded an after-tax impairment charge of $4.5 million to reduce the carrying value of the goodwill related to the acquisition of the Sterno® brand in 1997.  The impairment of the Sterno Group’s goodwill was recorded as a cumulative effect of change in accounting principle.  In addition, due to the change in the Company’s reportable segments and the resulting change in reporting units under SFAS 142, the Company has restated its fiscal 2003 financial statements to reflect the recording of an additional $27.2 million goodwill impairment charge related to the Wholesale Home Fragrance segment as of the February 1, 2002 adoption date of SFAS 142.  This impairment reduced the carrying value of the goodwill related to the 1999 acquisition of the Gies Group by $20.9 million and reduced the carrying value of the goodwill related to the 1999 acquisition of the Colony Group by $6.3 million.  These impairment charges reduced the goodwill in the Wholesale Home Fragrance segment to zero at February 1, 2002.  The impairments of the Gies Group and Colony Group goodwill, which were not deductible for tax purposes, are now also recorded as a cumulative effect of change in accounting principle.

 

23



 

Basic earnings per share were $1.89 for fiscal 2004 compared to $1.25 for the same period the prior year.  The previously discussed restructuring and impairment charges in fiscal 2004 and 2003 and the cumulative effect of change in accounting principle in fiscal 2003 reduced earnings per share by approximately $0.31 in fiscal 2004 and $0.74 in fiscal 2003. Diluted earnings per share, based upon the potential dilution that could occur if options to issue common stock were exercised, were $1.88 for fiscal 2004 compared to $1.24 for the same period the prior year.

 

Fiscal 2003 Compared to Fiscal 2002

 

Net sales increased $109.8 million, or 9.3%, from $1,178.8 million in fiscal 2002 to $1,288.6 million in fiscal 2003. The positive sales impact of CBK, Ltd., LLC, which Blyth acquired in May 2002 (“CBK”), and the positive impact of approximately ten weeks of acquisition-related sales growth of Midwest of Cannon Falls, Inc., which Blyth acquired in April 2001 (“Midwest”), fiscal year 2003 accounted for approximately 5.9 percentage points of the increase.  We believe that several key factors affected fiscal year 2003 sales.  First, sales of our PartyLite direct selling business were positively impacted by the introduction of strong new products and redesigned catalogs, as well as improved training and recruiting materials and growth of PartyLite’s total active independent consultant base.  Second, the continued economic sluggishness, which has impacted North America and Europe in particular, has resulted in continued caution by independent, specialty and mass retailers in increasing inventory commitments.  Geopolitical concerns exacerbated this trend and impacted consumer spending in the fourth quarter, which is the Company’s largest quarter for sales and profits.  Third, the relative strength of European currencies versus the US dollar had a positive impact on fiscal 2003 sales growth equal to one full percentage point.  Finally, the Sterno Group, Blyth’s Away From Home business serving the foodservice industry, experienced significant recovery from the negative effects of the slowdown in the travel and hospitality industries following the tragic events of September 11, 2001.

 

Net Sales - Direct Selling Segment

 

Net sales in the Direct Selling segment increased $51.4 million, or 8%, from $666.0 million in fiscal 2002 to $717.4 million in fiscal 2003.  PartyLite, our direct selling unit, experienced a sales increase in North America of approximately 4% in fiscal 2003 compared to the prior year, while sales in PartyLite’s European markets increased approximately 24% in fiscal 2003 compared to the prior year.  We believe that PartyLite’s growth was fueled by the introduction of strong new products and redesigned catalogs, as well as improved training and recruiting materials, which we believe improved the rate of attraction and retention of new independent sales consultants versus the prior year.  We also believe that sales growth was tempered somewhat by a slowdown in consumer spending resulting from economic and geopolitical concerns, particularly in the fourth quarter, which is PartyLite’s largest quarter for sales.  Net sales in the Direct Selling segment represented 56% of total sales in fiscal 2003 compared to 57% in fiscal 2002.

 

Net Sales - Wholesale Home Fragrance Segment

 

The Wholesale Home Fragrance segment experienced a total sales decline of $12.1 million, or 4%, from $322.3 million in fiscal 2002 to $310.2 million in fiscal 2003.  In the North American channels of distribution, sales declined 6% versus prior year. While we believe that overall weak economic conditions negatively impacted this segment’s North American sales, we believe that some of the fiscal 2003 sales decline was related to relatively weak new product introductions and execution in the premium channel.  Mass channel customer bankruptcies and the absence of sales to certain mass channel customers due to bankruptcy filings last year also negatively impacted this segment’s North American sales.  Also, during fiscal year 2003, the North American premium and mass channel businesses were integrated, and new management represented four of the five most senior positions.  While we believe the long-term benefits of this integration will be positive, the disruption to the business during the integration period was notable. Net sales in the Wholesale Home Fragrance segment represented approximately 24% of total Blyth sales in fiscal 2003 compared to 27% in fiscal 2002.

 

24



 

In the European channels of distribution sales increased approximately 4% in fiscal 2003 versus fiscal 2002.  The European premium and mass channels both reported sales increases versus the prior year, partially offset by a decline of sales in the Wax Lyrical retail channel.   The strength of European currencies versus the US dollar had a favorable impact of approximately 5% on reported results.  In local currencies, sales of the premium channel consumer wholesale business increased modestly versus the prior year, with strong new product introductions being well received by retailers.  The Colonial at HOME® brand, introduced in Europe at the end of fiscal year 2002, was well received in its first full year of sales, and distribution was expanded beyond the UK market.  Sales in local currency for the mass channel consumer wholesale business were flat versus the prior year.  Germany was the largest market for this segment’s European mass channel business, and sales results were indicative of the significant economic challenges facing that country.  The introduction of new fragranced products continued to result in positive sales growth in the mass channel in fiscal 2003, but sales of fragranced products still accounted for less than 16% of total European mass channel sales.

 

In December 2002, following the end of the 2002 holiday season, the Company placed its UK-based specialty retail chain Wax Lyrical Limited (“Wax Lyrical”) into administrative receivership.  Wax Lyrical had 35 retail stores and annualized net sales of approximately $16 million.  The Company made its initial investment in Wax Lyrical in 1998, acquired majority interest in February 2000 and owned nearly all of its outstanding shares.  During that time, Wax Lyrical had been unable to achieve sustained profitability, generating operating losses of approximately $2 - 3 million annually, largely due to the fact that distribution of candles and related accessories had become increasingly more mainstream in the UK, with major retail chains and specialty retailers offering a wide variety of competitive products.  We recorded an after-tax impairment charge of approximately $2.1 million in the fourth quarter of fiscal year 2003 related to placing Wax Lyrical into administrative receivership.  Net sales in the Wholesale Home Fragrance segment represented approximately 24% of total Blyth sales in fiscal 2003 compared to 27% in fiscal 2002.

 

Net Sales - Wholesale Creative Expressions Segment

 

Net sales in the Wholesale Creative Expressions segment increased $68.0 million, or 50.0%, from $136.0 million in fiscal 2002 to $204.0 million in fiscal 2003.  This increase was primarily due to the inclusion of sales from CBK, which was acquired in May 2002. Sales of CBK and the acquisition-related growth from Midwest, which was acquired in April 2001, accounted for most of the increase in segment sales in fiscal year 2003 as premium channel sales growth at Midwest was offset by declines in JMC Impact, Inc.’s (“JMC Impact”) mass channel sales.  We believe that JMC Impact’s sales decline was due in large part to business lost due to customer bankruptcies and retailer consolidation, as well as to increased import competition in this channel.  Net sales in the Wholesale Creative Expressions segment accounted for approximately 16% of Blyth’s total net sales in fiscal 2003 compared to 12% in fiscal 2002.

 

Net Sales - All Other Segment

 

Sales of foodservice products in the All Other segment, increased approximately 5% in fiscal 2003 compared to fiscal 2002.  This business unit experienced a strong recovery after the sharp sales decline that accompanied the downturn in the travel and hospitality industries that followed the September 11, 2001 tragedy.  Net sales in the All Other segment represented approximately 4% of total Blyth sales in fiscal 2003 compared to 5% in fiscal 2002.

 

Gross profit increased $63.3 million, or 11.0%, from $577.0 million in fiscal 2002 to $640.3 million in fiscal 2003. Gross profit margin increased from 48.9% for fiscal 2002 to 49.7% for fiscal 2003.  The key factors that we believe positively impacted the gross profit margin were a shift in sales mix among our business units and a decrease versus the prior year in sales of obsolete inventory.  Partially offsetting these positive margin impacts was the effect of margin compression experienced in the North American mass channel of both the Wholesale Home Fragrance and Wholesale Creative Expressions segments, as well as the European consumer wholesale mass channel, which impacted the Wholesale Home Fragrance segment.

 

25



 

Selling expense increased $29.1 million, or 8.7%, from $334.7 million in fiscal 2002 to $363.8 million in fiscal 2003.  The increase in selling expense was primarily due to the mix shift towards direct selling channel sales, for which selling expenses are relatively higher, the addition of CBK and the full year impact of Midwest.  Selling expense as a percentage of net sales decreased from 28.4% in fiscal 2002 to 28.2% in fiscal 2003.  This decrease in selling expense, as a percent of sales, was a result of sales increasing at a faster rate than the selling expenses necessary to support such sales increases.

 

Administrative expenses increased $15.3 million, or 14.9%, from $103.0 million in fiscal 2002 to $118.3 million in fiscal 2003.  Approximately 5.1 percentage points of this increase was attributable to the administrative expenses of CBK, acquired in May 2002 while the Company’s continued investment in research and development and technology also played a role.  In fiscal year 2002, administrative expenses were lower as the senior management of Blyth and many of the Company’s business unit managers did not receive bonuses.

 

The Company recorded a pre-tax impairment charge of approximately $2.6 million, as a result of putting Wax Lyrical into administrative receivership, reported as a component of operating expenses in fiscal 2003, which reduced the operating profit margin by 0.2%, compared to charges of $14.1 million recorded in fiscal 2002, which reduced operating profit margin by 1.2%.

 

There was no goodwill amortization recorded in fiscal 2003 compared to $4.7 million in fiscal 2002.  This decrease was a result of the Company’s adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”, which calls for among other things the cessation of goodwill amortization (See Note 1 to the Consolidated Financial Statements).

 

Operating Profit/(Loss) - Direct Selling Segment

 

Operating profit in the Direct Selling segment increased $10.6 million, or 7.6%, from $139.1 million in fiscal 2002 to $149.7 million in fiscal 2003.  The increase in operating profit was due to the same factors that affected net sales.  Operating profit in the Direct Selling segment represented approximately 96% of total Company operating profit in fiscal 2003 compared to 115% in fiscal 2002.

 

Operating Profit/(Loss) - Wholesale Home Fragrance Segment

 

The Wholesale Home Fragrance segment experienced an approximately $10.2 million smaller operating loss, from a $35.1 million loss in fiscal 2002 to a $24.9 million operating loss in fiscal 2003.  This improvement was due to substantially fewer restructuring and impairment charges in fiscal 2003 versus fiscal 2002.  Specifically, operating profit in this segment was impacted by the $2.6 million pre-tax impairment charge recorded as a result of putting Wax Lyrical into administrative receivership in fiscal 2003 compared to $12.6 million of fiscal 2002 restructuring and impairment charges.

 

Operating Profit/(Loss) - Wholesale Creative Expressions Segment

 

Operating profit in the Wholesale Creative Expressions segment increased $10.3 million, or 65.6%, from $15.7 million in fiscal 2002 to $26.0 million in fiscal 2003.  Operating profit in the Wholesale Creative Expressions segment represented approximately 17% of total Company operating profit in fiscal 2003 compared to 13% in fiscal 2002.  The key factor affecting operating profit in this segment was the acquisition of CBK in May 2002.  Additional factors included organic growth experienced in the premium consumer wholesale channel of this segment, which was offset by declines in the mass consumer wholesale channel of this segment, as well as overall economic weakness in the US wholesale marketplace.

 

26



 

Operating Profit/(Loss) - All Other Segment

 

Operating profit in the All Other segment increased $3.9 million from $0.8 million in fiscal 2002 to $4.7 million in fiscal 2003.  The increase in operating profit was due to the same factors that affected net sales.  Operating profit in the All Other segment represented approximately 3% of total Company operating profit in fiscal 2003 compared to less than 1% in fiscal 2002.

 

Interest expense decreased $2.5 million, or 14.5%, from $17.2 million in fiscal 2002 to $14.7 million in fiscal 2003. The lower interest expense was primarily a result of an interest rate swap entered into in March 2002, which accounted for approximately $1.4 million of such decrease and a lower level of borrowings during fiscal 2003.

 

Interest income and other decreased $3.3 million, from $5.0 million in fiscal 2002 to $1.7 million in fiscal 2003.  This decrease was primarily due to gains on sales of long-term investments of $3.8 million that occurred in fiscal 2002.

 

Income tax expense increased $12.7 million, or 31.5%, from $40.3 million in fiscal 2002 to $53.0 million in fiscal 2003.  The increase in income tax expense was attributable to the increase in pre-tax earnings.  The effective income tax rate was 37.2% for fiscal 2003, the same as fiscal 2002.

 

As a result of the foregoing, net earnings before the cumulative effect of change in accounting principle increased $21.5 million, or 31.6%, from $68.0 million in fiscal 2002 to $89.5 million in fiscal 2003.  In the first quarter of fiscal 2003 the Company recorded an after tax impairment charge of $4.5 million to reduce the carrying value of the goodwill related to the acquisition of the Sterno® brand in 1997.  The impairment of the Sterno Group’s goodwill was recorded as a cumulative effect of change in accounting principle.   In addition, due to the change in the Company’s reportable segments and the resulting change in reporting units under SFAS 142, the Company has restated its fiscal 2003 financial statements to reflect the recording of an additional goodwill impairment charge of $27.2 million related to the Wholesale Home Fragrance segment as of the February 1, 2002 adoption date of SFAS 142.  This impairment reduced the carrying value of the goodwill related to the 1999 acquisition of the Gies Group by $20.9 million and reduced the carrying value of the goodwill related to the 1999 acquisition of the Colony Group by $6.3 million.  These impairment charges reduced the goodwill in the Wholesale Home Fragrance segment to zero at February 1, 2002.  The impairments of the Gies Group and Colony Group goodwill, which were not deductible for tax purposes, are now also recorded as a cumulative effect of change in accounting principle.  Net earnings after the cumulative effect of change in accounting principle decreased $10.2 million, or 15%, from $68.0 million in fiscal 2002 to $57.8 million in fiscal 2003.

 

Basic earnings per share based upon the weighted average number of shares outstanding were $1.25 for fiscal 2003 compared to $1.45 for the same period the prior year.  Diluted earnings per share, based upon the potential dilution that could occur if options to issue common stock were exercised, were $1.24 for fiscal 2003 compared to $1.44 for the same period the prior year.

 

Seasonality

 

Approximately 39% of the Company’s net sales occurred in the first and second fiscal quarters of 2004 down from 42% in fiscal 2003, with the larger balance experienced in the third and fourth fiscal quarters, generally due to consumer buying patterns. The increase in the percentage of shipments in the second half of the fiscal year is primarily due to the timing of the acquisitions made during fiscal 2004 and the seasonality of the newly acquired businesses.  The Company’s net sales are strongest in the third and fourth fiscal quarters due to increased shipments to meet year-end holiday season demand for the Company’s products.

 

27



 

Liquidity and Capital Resources

 

Cash and cash equivalents increased  $61.1 million, or 36% from $168.6 million at January 31, 2003 to $229.7 million at January 31, 2004 primarily due to increased earnings before non-cash restructuring and impairment charges, proceeds from debt issuance, reduced inventory levels and increased accounts payable and accrued expenses.   Inventory increased $20.7 million from $187.9 million at January 31, 2003 to $208.6 million at January 31, 2004.  All of such increase in inventory related to the inventory of acquired businesses, while the inventory of the Company relating to existing businesses at January 31, 2004 decreased by $4.8 million.  This decrease in inventory is due to a company-wide focus on inventory control and reduction.  Accounts receivable increased $21.6 million from $82.9 million at the end of fiscal 2003 to $104.5 million at the end of fiscal 2004.  Approximately $15.9 million of such increase relates to the accounts receivable from acquired businesses.  Accounts receivable for existing businesses increased approximately $5.7 million primarily due to the increased sales in our European mass channel in the fourth quarter of fiscal 2004.  The overall level of accounts receivable at January 31, 2004 was consistent with the Company’s historical pattern whereby accounts receivable are at or near the low point of the fiscal year due to the high level of seasonal sales and accounts receivable with dating terms that become due in the fourth fiscal quarter.  Accounts payable and accrued expenses increased $36.3 million from $139.5 million at the end of fiscal 2003 to $175.8 million at the end of fiscal 2004. Approximately $19 million of such increase related to accounts payable and accrued expenses for fiscal 2004 acquired businesses.  The increase is also due to higher interest accruals due to increased debt, accrued severance costs and accrued selling costs related to higher sales and earnings in the fourth quarter.

 

Capital expenditures for property, plant and equipment were approximately $22.0 million in fiscal 2004 up from $14.3 million in fiscal 2003.  This increase is primarily due to spending for information technology and upgrades to machinery and equipment in existing facilities. The Company anticipates total capital spending of approximately $25 million for fiscal 2005, which will be used primarily for upgrades to machinery and equipment in existing manufacturing and distribution facilities, information technology and research and development related equipment.

 

The Company has grown in part through acquisitions and, as part of its growth strategy, the Company expects to continue from time to time in the ordinary course of its business to evaluate and pursue acquisition opportunities as appropriate.  Our recent growth has been primarily acquisition related and in the future acquisitions may continue to contribute more to the Company’s overall sales growth rate than historically.  We expect our future growth in the Direct Selling and the Wholesale Home Fragrance segments, to be primarily organic, with the possibility of selective acquisitions.  In the Wholesale Creative Expressions, Catalog & Internet and All Other segments a significant portion of future growth may come through acquisitions.  We continue to pursue strategic acquisitions primarily in the following areas: home décor products, seasonal decorative accessories, and Foodservice products.  The Company acquired the Miles Kimball Company, Kaemingk B.V. and Walter Drake during fiscal 2004 as further described in Note 4 to the Consolidated Financial Statements, “Business Acquisitions.”

 

The Company has a $200 million unsecured revolving credit facility, which matures on August 5, 2005 (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 general corporate purposes, which includes funding for strategic acquisitions and seasonal working capital needs.  The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios including, among others, a minimum level of net worth and a maximum level of leverage.  The Credit Facility also imposes limitations on, among other things, certain payments, the imposition of liens on our assets, indebtedness that may be incurred by our subsidiaries, investments we may make and sales of our assets.  At January 31, 2004, the Company was in compliance with such covenants.  Amounts outstanding under the Credit Facility bear interest, at the Company’s option, at either the JPMorgan Chase Bank’s prime rate (4.0% at January 31, 2004) 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.  On January 31, 2004, $3.2 million letters of credit were outstanding under the Credit Facility.

 

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As of January 31, 2004, the Company had a total of $15.0 million available under an uncommitted bank line of credit with LaSalle 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 January 31, 2004.

 

At January 31, 2004, 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 January 31, 2004, approximately $0.1 million of letters of credit were outstanding under this credit line.

 

As of December 31, 2003, The Gies Group (“Gies”) had available lines of credit of approximately $44.3 million of which approximately $3.3 million was outstanding.  The amounts outstanding under the lines of credit bear interest at a weighted average rate of 3.1% at December 31, 2003.  The lines of credit are renewed annually.

 

As of December 31, 2003, Kaemingk had available lines of credit of approximately $34.6 million with ING Bank N.V.  The lines of credit are collateralized by certain real estate and equipment owned by Kaemingk.  At December 31, 2003, approximately $2.2 million was outstanding at a weighted average interest rate of 2.75%.

 

Colony Gift Corporation Limited (“Colony”) has a $21.4 million short-term revolving credit facility with Barclays Bank, which matures in June 2004.  As of December 31, 2003, Colony had borrowings under the credit facility of approximately $8.1 million, at a weighted average interest rate of 4.6%.

 

At January 31, 2004, Miles Kimball had approximately $10.4 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%.

 

At December 31, 2003, Kaemingk had approximately $8.6 million of long-term debt outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 5.8%.  The bank loans have maturity dates ranging from 2005 through 2020.  The loans are collateralized by certain real estate and equipment owned by Kaemingk.

 

In July 1995, the Company privately placed $25.0 million aggregate principal amount of 7.54% Senior Notes due 2005.  As of January 31, 2004, $7.1 million of principal remained outstanding.  Such senior notes contain, among other provisions, requirements for maintaining certain financial ratios and net worth.  At January 31, 2004, the Company was in compliance with such provisions.  Payment on the notes commenced in June 1999 and annual installments of principal and interest are required to be paid through June 2005.

 

In May 1999, the Company filed a shelf registration statement for issuance of up to $250.0 million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.4 million, which is being amortized over the life of the notes.  Such notes contain, among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  At January 31, 2004, the Company was in compliance with such provisions.  Interest is payable semi-annually on April 1 and October 1.  On October 20, 2003, the Company issued $100.0 million, 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes.  Such notes contain provisions and restrictions similar to those in the 7.90% Senior Notes.  At January 31, 2004, the Company was in compliance with such covenants.  Interest on the notes began accruing on October 23, 2003 and will be payable semiannually in arrears on May 1 and November 1 of each year, commencing May 1, 2004.  The notes may be redeemed in whole or in part at any time at a specified redemption price.  The proceeds of the debt issuance are used for general corporate purposes, which may include repayment of certain debt, acquisitions and working capital needs.

 

At January 31, 2004, CBK had $4.6 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

 

29


Salle Bank National Association.  The loan is collateralized by certain of CBK’s assets.  The amount outstanding under the IRB bears interest at short-term floating rates, which equaled a weighted average interest rate of 1.2% at January 31, 2004.

 

The estimated fair value of the Company’s $280.3 million and $169.1 million total long-term debt (including current portion) at January 31, 2004 and 2003 was approximately $290.4 million and $191.6 million, respectively.  The fair value is determined by quoted market prices, where available, and from analyses performed by investment bankers using current interest rates considering credit ratings and the remaining terms to maturity.

 

The following table summarizes the maturity dates of the contractual obligations of the Company as of January 31, 2004:

 

Payments Due by Period

 

(In thousands)

 

Contractual Obligations

 

Total

 

Less than
1 year

 

1 - 3 Years

 

3 - 5 Years

 

More than
5 Years

 

Interest

 

$

153,740

 

$

21,263

 

$

41,360

 

$

40,964

 

$

50,153

 

Capital Leases

 

336

 

163

 

173

 

 

 

Purchase Obligations (1)

 

40,861

 

40,861

 

 

 

 

Long-Term Debt

 

280,265

 

4,522

 

5,250

 

1,654

 

268,839

 

Operating Leases

 

65,612

 

18,421

 

25,819

 

11,542

 

9,830

 

Lines of Credit

 

13,621

 

13,621

 

 

 

 

Total Contractual Obligations

 

$

554,435

 

$

98,851

 

$

72,602

 

$

54,160

 

$

328,822

 

 


(1)   Purchase obligations consist of open purchase orders for inventory.

 

The Company does not utilize derivatives for trading purposes.

 

The Company leases certain office and warehouse space used in its businesses in the Wholesale Creative Expressions segment from related parties.  Under the terms of the leases, the Company is responsible for all real estate taxes, maintenance and insurance costs.  The lease rates were determined based on market rates for comparable property at the time of entering into the contract.

 

Net cash provided by operating activities amounted to $173 million in fiscal 2004 compared to $172 million in fiscal 2003, an increase of $1 million.  Although fiscal 2004 net earnings were approximately $29 million higher than the prior year, for purposes of determining net cash from operating activities, non-cash after tax goodwill impairment charges of $32 million in fiscal 2003 were added back to cash flows from operations whereas, in fiscal 2004, non-cash restructuring and impairment charges of $20 million were added back to cash flows from operations.  Other items that contributed to cash flows from operations were an inventory reduction of $25 million and increases in accounts payable and accrued expenses of $10 million, offset by an increase in accounts receivable due to the timing of sales in our European markets including the accounts receivable of Kaemingk acquired in June 2003.  Fourth quarter cash flow from operations was particularly strong, providing cash in the amount of approximately $200 million, which was primarily attributable to strong seasonal and acquisition related sales and earnings, accounts receivable collections of $95 million, and an inventory reduction of $52 million.  Cash used in investing activities amounted to $168 million in fiscal 2004 versus a use of $69 million in fiscal 2003.  This use was related to the acquisitions in fiscal 2004 of Miles Kimball, Kaemingk and Walter Drake and capital spending of $22 million. Cash provided by financing activities amounted to $61 million in fiscal 2004 compared to a use of $68 million in fiscal 2003.  The primary source of cash from financing was the proceeds from the issuance of $100 million of senior notes by the Company in October 2003 partially offset by repayments of long-term debt of $11 million, purchases of treasury stock of $19 million and payment of dividends of $13 million.  There were additional borrowings of $30 million under our Credit Facility during fiscal 2004 that were repaid prior to year-end.

 

30



 

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.  The Company repurchases shares to offset grants of restricted stock and shares issued upon exercise of stock options and to decrease shares outstanding.  During fiscal 2004, a total of 701,000 shares were repurchased for a total cost of approximately $18.8 million.  As of January 31, 2004, the Company had cumulatively purchased on the open market 4,345,100 common shares for a total cost of approximately $105.4 million.  The acquired shares are held as common stock in treasury at cost.

 

On March 31, 2004, the Company announced that it has declared a cash dividend of $0.17 per share of the Company’s common stock for the six months ended January 31, 2004.  The dividend, authorized at the Company’s March 31, 2004 Board of Directors meeting, will be payable to shareholders of record as of April 30, 2004, and will be paid on May 14, 2004.

 

The Company’s primary capital requirements are for working capital to fund the levels of inventory and accounts receivable necessary to sustain the Company’s sales growth, and for capital expenditures and acquisitions.  The Company believes that cash on hand, cash from operations and available borrowings under the current Credit Facility and lines of credit will be sufficient to fund its operating requirements, capital expenditures, stock repurchase program, dividends, long-term debt repayments and all other obligations for the foreseeable future.

 

We do not maintain any off balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to a have a material current or future effect upon our financial statements.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, income taxes, restructuring and impairments and contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements.  Note 1 to the Consolidated Financial Statements, included elsewhere in this Annual Report on Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.  The following is a brief discussion of the more significant accounting policies and methods used by us.

 

Revenue recognition – Revenues consist of sales to customers, net of returns and allowances.  The Company recognizes revenue upon delivery, when both title and risk of loss are transferred to the customer.

 

Generally, sales orders are received via signed customer purchase orders with stated fixed prices based on published price lists.  The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions.  Should market conditions decline, the Company may increase customer incentives with respect to future sales.  The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damage in transit or for other reasons that can only

 

31



 

become known subsequent to recognizing the revenue.  If the amount of actual customer returns and chargebacks were to increase significantly from the estimated amount, revisions to the estimated allowance would be required.

 

In some instances, the Company receives payment in advance of product shipments.  Such advance payments occur primarily in our direct selling and direct marketing channels and are recorded as deferred revenue.  Upon delivery of product shipments for which advance payment has been made, the related deferred revenue is reclassified to revenue.

 

Most of the Company’s sales made on credit are made to an established list of customers.  Although the collectibility of sales made on credit is reasonably assured, the Company has established an allowance for doubtful accounts for its trade and note receivables.  The allowance is determined based on the Company’s evaluation of specific customers’ ability to pay, aging of receivables, historical experience and the current economic environment.  While the Company believes it has appropriately considered known or expected outcomes, its customers’ ability to pay their obligations, including those to the Company, could be adversely affected by declining sales at retail resulting from such factors as contraction in the economy or a general decline in consumer spending.

 

Some of the Company’s business units offer seasonal dating programs pursuant to which customers that qualify for such programs are offered extended payment terms for seasonal product shipments.  As with other customers, customer orders pursuant to such seasonal dating programs are generally received in the form of a written purchase order signed by an authorized representative of the customer.  Sales made pursuant to seasonal dating programs are recorded as revenue only upon delivery either to the customer or to an agent of the customer depending on the freight terms for the particular shipment and consistent with the concept of “risk of loss.”  The sales price for the Company’s products sold pursuant to such seasonal dating programs is fixed prior to the time of shipment to the customer.  Customers do not have the right to return product except for rights to return that the Company believes are typical of our industry for such reasons as damaged goods, shipping errors or similar occurrences. The Company is not required to repurchase products from its customers, nor does the Company have any regular practice of doing so.  The Company believes that it is reasonably assured of payment for products sold pursuant to such seasonal dating programs based on its historical experience with the established list of customers eligible for such programs.  In addition, the Company minimizes its exposure to bad debts by utilizing established credit limits for each customer.  If, however, product sales by our customers during the seasonal selling period should fall significantly below expectations, such customers’ financial condition could be adversely affected, increasing the risk of not collecting these seasonal dating receivables and, possibly, resulting in additional bad debt charges.   The Company does not make any sales under consignment or similar arrangements.

 

Inventory valuation – Inventories are valued at the lower of cost or market.  Cost is determined by the first-in, first-out method.  The Company writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts.  If market acceptance of our existing products or the successful introduction of new products should significantly decrease, additional inventory write-downs could be required.  Potential additional inventory write-downs could result from unanticipated additional quantities of obsolete finished goods and raw materials, and/or from lower disposition values offered by the parties who normally purchase surplus inventories.  At January 31, 2004 the Company had obsolete inventory reserves totaling approximately $23.0 million.

 

32



 

Restructuring and impairment charges – In response to changing market conditions and competition, the Company’s management regularly updates its business model and market strategies, including the evaluation of facilities, personnel and products.  Future adverse changes in economic and market conditions could result in additional organizational changes and possibly additional restructuring and impairment charges.  In fiscal 2004, 2003 and 2002, the Company recorded charges related to asset impairments, product line discontinuances, severance payments to employees, lease write-offs, bad debt write-offs and inventory write-downs.  (See Note 5 to the Consolidated Financial Statements).  The Company recorded restructuring and impairment charges in fiscal 2004 totaling $23.8 million.  The most significant charges recorded in fiscal 2004 included an asset impairment loss of $8.4 million for long-lived assets disposed of and an impairment loss of $2.3 million for long-lived assets to be held and used in the Company’s primary North American manufacturing facilities, a $4.2 million impairment charge related to the Canterbury® brand acquired in 1997 and a $3.9 million impairment on facilities and equipment and employee severance related to the closing of our Hyannis manufacturing facility.  As a result of the asset impairments and employee terminations the Company expects to realize future annual savings in cost of goods sold in excess of $1.0 million. In the fourth quarter of fiscal 2003, the Company recorded a pre-tax impairment charge of $2.6 million as a result of putting Wax Lyrical, its UK retail business, in administrative receivership. Historically, the Company has reviewed long-lived assets, including property, plant and equipment and goodwill and other intangibles for impairment periodically and whenever events or changes in circumstances indicated that the carrying amount of such an asset might not be recoverable.  Management determines whether there has been a permanent impairment on fixed assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or asset group, to the carrying value of the asset.  The amount of any resulting impairment is calculated by comparing the carrying value to the fair value, which may be estimated using the present value of the same cash flows.  Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value.

 

Goodwill and other indefinite lived intangibles - In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Prior to February 1, 2002, excess of costs of acquisitions over fair value of identifiable net assets acquired less liabilities assumed (“goodwill”) was being amortized on a straight-line basis over estimated lives ranging from 15-40 years. Amortization of goodwill ceased on February 1, 2002, upon adoption of the new goodwill rules under SFAS 142.  Under SFAS No. 142, goodwill and any other intangibles deemed to have indefinite lives are no longer subject to amortization; however, goodwill is subject to an assessment for impairment using a two-step fair value-based test and such other intangibles are also subject to impairment reviews, which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired. The Company performs its annual assessment of impairment in the fourth fiscal quarter.  For goodwill the first step compares the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the fair value of the goodwill.  If fair value is less than the carrying amount, an impairment loss is reported as a reduction to the asset and a charge to operating expense, except at the transition date, when the loss was reflected as a cumulative effect of a change in accounting principle.

 

As of January 31, 2002, Blyth’s Consolidated Balance Sheets reflected approximately $108.1 million in goodwill net of accumulated amortization, including $27.2 million related to the Wholesale Home Fragrance segment businesses, $42.2 million related to the All Other segment and $38.7 million related to the Wholesale Creative Expressions segment businesses. The Company adopted SFAS 142 effective February 1, 2002. In accordance with the new standard, Blyth ceased amortization of goodwill and performed an assessment for impairment of its

 

33



 

goodwill. As a result of the impairment review, Blyth reduced the carrying value of the goodwill related to its 1997 acquisition of the Sternoâ brand by $7.4 million, which is included in the All Other segment.  In addition, a recent revision of its operating and reporting segments by the Company (See Note 2 to the Consolidated Financial Statements), required changes in the Company’s reporting units for purposes of goodwill impairment reviews under SFAS 142, retroactive to the February 1, 2002 adoption date of SFAS 142.  This resulted in the need to perform impairment reviews of several additional reporting units as of February 1, 2002 and each subsequent year-end balance sheet date thereafter.  These impairment reviews have indicated the need to record additional impairment charges as of the February 1, 2002 adoption of SFAS 142, specifically to write-off $20.9 million in goodwill associated with the 1999 acquisition of the Gies Group and $6.3 million in goodwill associated with the 1999 acquisition of the Colony Group.  Both of these businesses are components of the Wholesale Home Fragrance Segment, and the impairment charges reduced goodwill in that segment to zero at February 1, 2002. The fair values of the Sterno Group, the Gies Group and the Colony Group were determined through independent valuations 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 models. These cash flows were discounted to February 1, 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 by $4.5 million (after tax) or $0.10 per share.  The impairments of the Gies Group and Colony Group goodwill, which were not deductible for tax purposes, were, via restatement of the fiscal 2003 financial statements, also recorded as a cumulative effect of change in accounting principle, and had the effect of reducing net income by $27.2 million or $0.58 per share. The carrying amount of goodwill on the Company’s Consolidated Balance Sheet increased approximately $5.4 million, from $108.1 million at January 31, 2002 to $113.5 million at January 31, 2003.  The change in goodwill was the result of the acquisition of CBK (See Note 4 to the Consolidated Financial Statements), which increased goodwill by approximately $40.0 million, offset by the previously discussed impairment charges, which decreased goodwill by $34.6 million.

 

As of January 31, 2003, the $113.5 million in goodwill was comprised of $34.8 million related to the All Other segment and $78.7 million related to the Wholesale Creative Expressions segment businesses. The carrying amount of goodwill on the Company’s Consolidated Balance Sheet increased approximately $90.6 million, from $113.5 million at January 31, 2003 to $204.1 million at January 31, 2004.  The change in goodwill was primarily the result of the acquisitions of Miles Kimball, Kaemingk and Walter Drake (See Note 4 to the Consolidated Financial Statements), which increased goodwill by approximately $45.6 million, $17.6 million and $25.4 million, respectively, together with an increase in goodwill resulting from a foreign currency translation adjustment of approximately $2.0 million.  Of the $204.1 million of goodwill on the balance sheet as of January 31, 2004, $34.8 million is related to the All Other segment, $19.6 million is related to the Wholesale Home Fragrance segment, $78.7 million is related to the Wholesale Creative Expressions segment and $71.0 million is related to the Catalog & Internet segment.

 

Accounting for income taxes - As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax exposure (state, federal and foreign), together with assessing permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property and equipment, and valuation of inventories.  Temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income.  Actual results could differ from this assessment if sufficient taxable income is not generated in future periods.  To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we must include an expense within the tax provision in the accompanying consolidated statement of operations.  The management of the corporation, along with third-party advisers, periodically estimates the probable tax obligations of the corporation using historical experience in tax jurisdictions and informed judgments.  There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the corporation transacts business.  The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations.  If such changes take place, there is a risk that the tax rate may increase or decrease in any period.

 

34



 

Impact of Adoption of Recently Issued Accounting Standards

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).”  This standard has been adopted by the Company for exit and disposal activities initiated after December 31, 2002.

 

In November 2002, the FASB issued Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The implementation of this interpretation did not have an impact on our financial statements.

 

In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.  FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.”  FIN 46 requires consolidation of entities in which the Company absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.  Previously, entities were consolidated only when the Company had a controlling financial interest through ownership of a majority voting interest in an entity.  The interpretation was immediately applicable to variable interest entities (“VIEs”) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date.  As originally issued, it applied in the fiscal year or interim period beginning after June 15, 2003, for VIEs in which an enterprise acquired a variable interest prior to February 1, 2003.  In December 2003, the FASB issued FIN 46R, which defers the effective date for FIN 46 to the first interim or annual period ending after December 15, 2003 for VIEs created before February 1, 2003.    The implementation of this standard has not had and is not expected to have a material 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.”  As originally issued, SFAS 150 is effective for mandatorily redeemable financial instruments of public entities entered into or modified after May 31, 2003, and for all other instruments for interim periods beginning after June 15, 2003.  In November 2003, the FASB issued FASB Staff Position No. 150-3, “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150”, which defers indefinitely the classification and measurement provisions for certain mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries pending further FASB action.  For other mandatorily redeemable noncontrolling interests that were issued before November 5, 2003, only the measurement provisions of SFAS 150 are deferred indefinitely, both for the parent in consolidated financial statements and for the subsidiary that issued the instruments that result in the mandatorily redeemable noncontrolling interest, pending further FASB action.  The original implementation of SFAS 150 had no impact on our financial statements and we do not expect the deferral provisions of FSP FAS 150-3 to have a significant impact on our financial statements.

 

35



 

Forward-looking and Cautionary Statements

 

Certain statements contained in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully elsewhere in this Annual Report on Form 10-K and in the Company’s previous filings with the Securities and Exchange Commission.

 

36



 

Item 7A.

 

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 interest rates, foreign currency exchange rates, commodity prices and transportation interruptions.  These financial exposures are actively monitored and, where considered appropriate, managed by the Company.

 

Interest Rate Risk

 

As of January 31, 2004 the Company is subject to interest rate risk on approximately $18.2 million of variable rate debt.  Each 1-percentage point increase in the interest rate would impact pre-tax earnings by approximately $0.2 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.

 

With regard to commitments for machinery and equipment in foreign currencies, upon payment of each commitment the underlying forward contract is closed and the corresponding gain or loss is included in the measurement of the cost of the acquired asset.  With regard to forward exchange contracts used to hedge Canadian intercompany payables and foreign purchases of inventory, gain or loss on such hedges is recognized in earnings in the period in which the underlying hedged transaction is settled.  Gains or losses on foreign currency forward contracts related to intercompany loans are recognized currently through income and generally offset the transaction gains or losses in the foreign currency cash flows that they are intended to hedge.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred 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 in earnings.  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.  Approximately $820,000 of hedge losses are included in accumulated OCI at January 31, 2004, and are expected to be transferred into earnings within the next twelve months.

 

The following table provides information about the Company’s foreign exchange forward contracts at January 31, 2004.

 

(In thousands, except average contract rate)

 

US Dollar
Notional Amount

 

Average
Contract Rate

 

Estimated
Fair Value

 

Canadian Dollar

 

$

8,889

 

1.35

 

$

(154

)

Euro

 

32,182

 

1.20

 

(1,244

)

Pound Sterling

 

6,546

 

1.64

 

(707

)

 

 

$

47,617

 

 

 

$

(2,105

)

 

The foreign exchange contracts outstanding as of January 31, 2004 had maturity dates ranging from February 2004 through July 2004.

 

37



 

Report of Independent Auditors

 

To the Board of Directors and Stockholders of Blyth, Inc:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Blyth, Inc. and Subsidiaries (the “Company”) at January 31, 2004 and January 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets in fiscal 2003.  As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities in fiscal 2002.

 

As discussed in Note 2 to the consolidated financial statements, the Company has restated its segment disclosures for the years ended January 31, 2003 and January 31, 2002 to reflect a revision in its reportable segments.  Additionally, as also discussed in Note 2, the Company has restated its consolidated financial statements for the year ended January 31, 2003 to reflect an increase in the cumulative effect of the change in accounting relating to the adoption of SFAS 142 “Goodwill and Other Intangible Assets.”

 

 

/s/ PricewaterhouseCoopers LLP

 

 

PRICEWATERHOUSECOOPERS LLP

 

Stamford, Connecticut

April 26, 2004

 

38



 

Item 8.

 

BLYTH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

January 31, (In thousands, except share and per share data)

 

2003

 

2004

 

 

 

Restated (Note 2)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

168,596

 

$

229,726

 

Accounts receivable, less allowance for doubtful receivables $4,093 in 2003 and $4,470 in 2004

 

82,913

 

104,502

 

Inventories

 

187,935

 

208,581

 

Prepaid and other

 

23,044

 

40,302

 

Assets held for sale

 

690

 

9,437

 

Deferred income taxes

 

14,297

 

14,191

 

Total current assets

 

477,475

 

606,739

 

Property, plant and equipment, at cost:

 

 

 

 

 

Land and buildings

 

133,364

 

160,920

 

Leasehold improvements

 

15,620

 

20,601

 

Machinery and equipment

 

201,958

 

182,472

 

Office furniture, data processing equipment and software

 

68,984

 

106,426

 

Construction in progress

 

3,269

 

1,039

 

 

 

423,195

 

471,458

 

Less accumulated depreciation

 

178,397

 

210,961

 

 

 

244,798

 

260,497

 

Other assets:

 

 

 

 

 

Investments

 

3,564

 

3,510

 

Excess of cost over fair value of assets acquired

 

113,534

 

204,093

 

Other intangible assets, net of accumulated amortization of $1,500 in 2004

 

4,219

 

41,600

 

Deposits and other assets

 

16,494

 

11,524

 

 

 

137,811

 

260,727

 

Total assets

 

$

860,084

 

$

1,127,963

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

7,377

 

$

13,621

 

Current maturities of long-term debt

 

4,037

 

4,522

 

Accounts payable

 

58,571

 

78,407

 

Accrued expenses

 

80,953

 

97,395

 

Liability associated with assets held for sale

 

 

508

 

Income taxes

 

2,477

 

11,746

 

Total current liabilities

 

153,415

 

206,199

 

Deferred income taxes

 

20,810

 

33,773

 

Long-term debt, less current maturities

 

165,079

 

275,743

 

Other liabilities

 

12,928

 

23,278

 

Commitments and contingencies Stockholders’ equity:

 

 

 

 

 

Preferred stock — authorized 10,000,000 shares of $0.01 par value; no shares issued

 

 

 

Common stock — authorized 100,000,000 shares of $0.02 par value; issued 49,703,682 shares in 2003 and 49,975,502 in 2004

 

994

 

999

 

Additional contributed capital

 

101,567

 

107,965

 

Retained earnings

 

496,627

 

570,171

 

Accumulated other comprehensive income (loss)

 

(4,751

)

15,224

 

Treasury stock, at cost, 3,644,100 shares in 2003 and 4,345,100 shares in 2004

 

(86,585

)

(105,389

)

Total stockholders’ equity

 

507,852

 

588,970

 

Total liabilities and stockholders’ equity

 

$

860,084

 

$

1,127,963

 

 

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

 

39



 

BLYTH, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

 

Year ended January 31, (In thousands, except per share data)

 

2002

 

2003

 

2004

 

 

 

Restated (Note 2)

 

Net sales

 

$

1,178,771

 

$

1,288,583

 

$

1,505,573

 

Cost of goods sold

 

601,766

 

648,281

 

781,898

 

Gross profit

 

577,005

 

640,302

 

723,675

 

Selling

 

334,715

 

363,835

 

417,768

 

Administrative

 

103,014

 

118,329

 

129,021

 

Amortization of goodwill

 

4,702

 

 

 

Restructuring and impairment charges

 

14,084

 

2,621

 

23,809

 

 

 

456,515

 

484,785

 

570,598

 

Operating profit

 

120,490

 

155,517

 

153,077

 

Other expense (income):

 

 

 

 

 

 

 

Interest expense

 

17,237

 

14,664

 

17,443

 

Interest income and other

 

(5,014

)

(1,737

)

(1,330

)

Equity in earnings of investees

 

(22

)

33

 

71

 

 

 

12,201

 

12,960

 

16,184

 

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

 

108,289

 

142,557

 

136,893

 

Income tax expense

 

40,283

 

53,032

 

50,377

 

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

 

68,006

 

89,525

 

86,516

 

Minority Interest

 

 

 

165

 

Earnings before cumulative effect of change in accounting principle

 

68,006

 

89,525

 

86,351

 

Cumulative effect of change in accounting principle, net of taxes of $2,887 in 2003

 

 

(31,753

)

 

Net earnings

 

$

68,006

 

$

57,772

 

$

86,351

 

Basic:

 

 

 

 

 

 

 

Net earnings per common share before cumulative effect of change in accounting principle

 

$

1.45

 

$

1.94

 

$

1.89

 

Cumulative effect of change in accounting principle

 

 

(0.69

)

 

 

 

$

1.45

 

$

1.25

 

$

1.89

 

Weighted average number of shares outstanding

 

47,056

 

46,256

 

45,771

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

Net earnings per common share before cumulative effect of change in accounting principle

 

$

1.44

 

$

1.92

 

$

1.88

 

Cumulative effect of change in accounting principle

 

 

(0.68

)

 

 

 

$

1.44

 

$

1.24

 

$

1.88

 

Weighted average number of shares outstanding

 

47,205

 

46,515

 

46,027

 

 

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

 

40



 

BLYTH, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Accumulated
other

 

 

 

 

 

Common stock

 

contributed

 

Retained

 

Treasury stock

 

comprehensive

 

 

 

 

 

Shares

 

Amount

 

capital

 

earnings

 

Shares

 

Amount

 

income (loss)

 

Total

 

Balance at January 31, 2001

 

49,431,576

 

$

989

 

$

96,912

 

$

390,447

 

(2,356,800

)

$

(56,959

)

$

(9,595

)

$

421,794

 

Net earnings for the year

 

 

 

 

 

 

 

68,006

 

 

 

 

 

 

 

68,006

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,003

)

(6,003

)

Reclassification adjustment for gains included in net income (net of tax of $737)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,244

)

(1,244

)

Unrealized loss on certain investments (net of tax of $94)

 

 

 

 

 

 

 

 

 

 

 

 

 

(159

)

(159

)

Net gain on cash flow hedging instruments (net of tax of $63)

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

107

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,707

 

Common stock issued in connection with long-term incentive plan

 

78,200

 

1

 

584

 

 

 

 

 

 

 

 

 

585

 

Tax benefit from stock options

 

 

 

 

 

383

 

 

 

 

 

 

 

 

 

383

 

Dividends paid ($0.20 per share)

 

 

 

 

 

 

 

(9,415

)

 

 

 

 

 

 

(9,415

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(274,100

)

(5,991

)

 

 

(5,991

)

Balance at January 31, 2002

 

49,509,776

 

990

 

97,879

 

449,038

 

(2,630,900

)

(62,950

)

(16,894

)

468,063

 

Net earnings for the year - Restated (Note 2)

 

 

 

 

 

 

 

57,772

 

 

 

 

 

 

 

57,772

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments  - Restated (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

12,470

 

12,470

 

Unrealized loss on certain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investments (net of tax of $33)

 

 

 

 

 

 

 

 

 

 

 

 

 

(56

)

(56

)

Net loss on cash flow hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

instruments (net of tax of $160)

 

 

 

 

 

 

 

 

 

 

 

 

 

(271

)

(271

)

Comprehensive income - Restated (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,915

 

Common stock issued in connection with long-term incentive plan

 

193,906

 

4

 

3,367

 

 

 

 

 

 

 

 

 

3,371

 

Tax benefit from stock options

 

 

 

 

 

321

 

 

 

 

 

 

 

 

 

321

 

Dividends paid ($0.22 per share)

 

 

 

 

 

 

 

(10,183

)

 

 

 

 

 

 

(10,183

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(1,013,200

)

(23,635

)

 

 

(23,635

)

Balance at January 31, 2003-Restated
(Note 2
)

 

49,703,682

 

994

 

101,567

 

496,627

 

(3,644,100

)

(86,585

)

(4,751

)

507,852

 

Net earnings for the year

 

 

 

 

 

 

 

86,351

 

 

 

 

 

 

 

86,351

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

21,120

 

21,120

 

Unrealized loss on certain investments (net of tax of $189)

 

 

 

 

 

 

 

 

 

 

 

 

 

(325

)

(325

)

Net loss on cash flow hedging instruments (net of tax of $477)

 

 

 

 

 

 

 

 

 

 

 

 

 

(820

)

(820

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

106,326

 

Common stock issued in connection with long-term incentive plan

 

271,820

 

5

 

5,840

 

 

 

 

 

 

 

 

 

5,845

 

Tax benefit from stock options

 

 

 

 

 

558

 

 

 

 

 

 

 

 

 

558

 

Dividends paid ($0.28 per share)

 

 

 

 

 

 

 

(12,807

)

 

 

 

 

 

 

(12,807

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(701,000

)

(18,804

)

 

 

(18,804

)

Balance at January 31, 2004

 

49,975,502

 

$

999

 

$

107,965

 

$

570,171

 

(4,345,100

)

$

(105,389

)

$

15,224

 

$

588,970

 

 

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

 

41



 

BLYTH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

Year ended January 31, (In thousands)

 

2002

 

2003

 

2004

 

 

 

Restated (Note 2)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net earnings

 

$

68,006

 

$

57,772

 

$

86,351

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle, net of tax

 

 

31,753

 

 

Depreciation and amortization

 

36,246

 

30,212

 

35,954

 

Loss on disposition of fixed assets

 

 

 

2,739

 

Tax benefit from stock options

 

383

 

321

 

558

 

Deferred income taxes

 

(2,640

)

4,711

 

(584

)

Equity in earnings of investees

 

(22

)

33

 

71

 

Minority interest

 

 

 

165

 

Restructuring and impairment charges

 

9,292

 

2,621

 

20,229

 

Gain on sale of long-term investments

 

(1,981

)

 

(497

)

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

 

 

 

 

 

 

 

Accounts receivable

 

(3,828

)

14,896

 

(12,935

)

Inventories

 

35,592

 

(1,109

)

24,718

 

Prepaid and other

 

2,174

 

1,452

 

(2,422

)

Deposits and other assets

 

(3,266

)

913

 

5,611

 

Accounts payable

 

751

 

8,407

 

3,236

 

Accrued expenses

 

1,961

 

11,970

 

6,937

 

Other liabilities

 

1,701

 

9,356

 

2,093

 

Income taxes

 

(10,960

)

(1,121

)

833

 

Total adjustments

 

65,403

 

114,415

 

86,706

 

Net cash provided by operating activities

 

133,409

 

172,187

 

173,057

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(11,901

)

(14,322

)

(21,963

)

Purchases of long-term investments

 

 

 

(1,377

)

Proceeds from sale of long-term investments

 

11,734

 

26

 

1,874

 

Cash impact of Wax Lyrical receivership

 

 

(3,253

)

1,902

 

Purchase of businesses, net of cash acquired

 

(61,735

)

(51,658

)

(148,584

)

Net cash used in investing activities

 

(61,902

)

(69,207

)

(168,148

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

585

 

3,371

 

5,845

 

Purchases of treasury stock

 

(5,991

)

(23,635

)

(18,804

)

Borrowings from bank line of credit

 

61,634

 

71,961

 

67,833

 

Repayments on bank line of credit

 

(75,685

)

(90,655

)

(70,931

)

Borrowings on long-term debt

 

4,791

 

517

 

130,506

 

Repayments on long-term debt

 

 

(19,872

)

(40,663

)

Dividends paid

 

(9,415

)

(10,183

)

(12,807

)

Net cash provided by (used in) financing activities

 

(24,081

)

(68,496

)

60,979

 

Effect of exchange rate changes on cash

 

(5,105

)

(1,245

)

(4,758

)

Net increase in cash and cash equivalents

 

42,321

 

33,239

 

61,130

 

Cash and cash equivalents at beginning of year

 

93,036

 

135,357

 

168,596

 

Cash and cash equivalents at end of year

 

$

135,357

 

$

168,596

 

$

229,726

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

17,237

 

$

15,355

 

$

10,800

 

Income taxes, net of refunds

 

43,635

 

47,741

 

47,460

 

 

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

 

42



 

BLYTH, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note  1.                               Summary of Significant Accounting Policies

 

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Blyth, Inc. and its direct and indirect subsidiaries,  (the “Company”).  The company consolidates entities in which it owns or controls more than 50% of the voting shares.  The unowned portion is reflected as minority interest.  Investments in companies that are not consolidated are reported using the equity method and are recorded in other assets in the Consolidated Balance Sheet.  All significant inter-company balances and transactions have been eliminated in consolidation.  In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (FIN 46).  FIN 46 requires that factors in addition to the voting interest in an entity be considered in determining whether an entity should be consolidated.  In preparing these financial statements, the company was required to apply the provisions of FIN 46.

 

Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday nearest to January 31.  European operations maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period.

 

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Areas of the financial statements involving significant estimates include inventory reserves, bad debt reserves, chargeback reserves, impairment charges, taxes, and other accrued liabilities.

 

Credit Concentration

 

The Company’s credit sales are principally to department and gift stores, mass merchandisers and distributors, which purchase the Company’s products for resale.  The Company performs ongoing credit evaluations of its customers and generally does not require collateral.  The Company makes provisions for estimated credit losses.

 

Foreign Currency Translation

 

The Company’s international subsidiaries use their local currency as their functional currency.  Therefore, all balance sheet accounts of international subsidiaries are translated into US dollars at the year-end rate of exchange, and statement of earnings items are translated at the weighted average exchange rates for the period.  Resulting translation adjustments are included in accumulated other comprehensive income (loss). Gains and losses on foreign currency transactions, which are included in income, were not material.

 

Reclassifications

 

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

 

Investments

 

The Company makes investments from time to time in the ordinary course of its business that may include selected assets and product lines, long-term investments and/or joint ventures that either complement or expand its existing business.  The equity method of accounting is used to account for investments in common stock in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee.

 

43



 

Derivatives and Other Financial Instruments

 

The Company applies the provisions of Financial Accounting Standards Board Statement No. 133 (SFAS 133), “Accounting for Derivative and Hedging Activities” and its corresponding amendment under SFAS 138. These statements establish the accounting and reporting standards for derivative instruments and hedging activities and require that all derivative instruments be recorded on the balance sheet at fair value.  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.

 

With regard to commitments for machinery and equipment in foreign currencies, upon payment of each commitment the underlying forward contract is closed and the corresponding gain or loss is included in the measurement of the cost of the acquired asset.  With regard to forward exchange contracts used to hedge Canadian intercompany payables and foreign purchases of inventory, gain or loss on such hedges is recognized in earnings in the period in which the underlying hedged transaction is settled.  Gains or losses on foreign currency forward contracts related to intercompany loans are recognized currently through income and generally offset the transaction gains or losses in the foreign currency cash flows which they are intended to hedge.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred 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 in earnings.  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.  Approximately $820,000 of hedge losses are included in accumulated OCI at January 31, 2004, and are expected to be transferred into earnings within the next twelve months.

 

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.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments include accounts receivable, accounts payable, short-term and long-term debt.  Management believes the carrying value of these items approximates their estimated fair values, except for long-term debt, as discussed in Note 11 to the Consolidated Financial Statements.

 

Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Inventories

 

Inventories are valued at the lower of cost or market.  Cost is determined by the first-in, first-out method.  The elements of cost are primarily material, labor and overhead.

 

Shipping and Handling

 

The Company classifies shipping and handling fees billed to customers in revenue, and shipping and handling costs are classified as cost of goods sold.

 

44



 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are provided principally by use of the straight-line method for financial reporting purposes.  Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.  The Company records gains and losses from the sale of property, plant and equipment in interest income and other.

 

The principal estimated lives used in determining depreciation and amortization are as follows:

 

Buildings

 

27 to 40 years

 

Leasehold improvements

 

5 to 10 years

 

Machinery and equipment

 

5 to 12 years

 

Office furniture, data processing equipment and software

 

3 to7 years

 

 

Excess of Cost Over Fair Value of Assets Acquired

 

Prior to February 1, 2002, excess of costs of acquisitions over fair value of identifiable net assets acquired less liabilities assumed (“goodwill”) was being amortized on a straight-line basis over estimated lives ranging from 15-40 years. Amortization of goodwill ceased on February 1, 2002, upon adoption of the new goodwill rules under SFAS 142.

 

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and any other intangibles deemed to have indefinite lives are no longer subject to amortization; however, goodwill is subject to an assessment for impairment using a two-step fair value-based test and such other intangibles are also subject to impairment reviews, which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired. The Company performs its annual assessment of impairment in the fourth fiscal quarter.  For goodwill the first step compares the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the fair value of the goodwill.  If fair value is less than the carrying amount, an impairment loss is reported as a reduction to the asset and a charge to operating expense, except at the transition date, when the loss was reflected as a cumulative effect of a change in accounting principle.

 

As of January 31, 2002, Blyth’s Consolidated Balance Sheets reflected approximately $108.1 million in goodwill net of accumulated amortization, including $27.2 million related to the Wholesale Home Fragrance segment businesses, $42.2 million related to the All Other segment and $38.7 million related to the Wholesale Creative Expressions segment businesses. The Company adopted SFAS 142, 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 1997 acquisition of the Sternoâ brand  by $7.4 million, which is included in the All Other segment.  In addition, a recent revision of its operating and reporting segments by the Company (See Note 2), required changes in the Company’s reporting units for purposes of goodwill impairment reviews under SFAS 142, retroactive to the February 1, 2002 adoption date of SFAS 142.  This resulted in the need to perform impairment reviews of several additional reporting units as of February 1, 2002 and each subsequent year-end balance sheet date thereafter.  These impairment reviews have indicated the need to record additional impairment charges as of the February 1, 2002 adoption of SFAS 142, specifically to write-off $20.9 million in goodwill associated with the 1999 acquisition of the Gies Group and $6.3 million in goodwill associated with the 1999 acquisition of the Colony Group.   Both of these businesses are components of the Wholesale Home Fragrance Segment, and the impairment charges reduced goodwill in that segment to zero at February 1, 2002.  The fair values of the Sterno Group, the Gies Group and the Colony Group were determined through independent valuations utilizing market-comparable analysis, as well as

 

45



 

discounted cash flow models reflecting the expected range of future cash flow outcomes over the life of the models. These cash flows were discounted to February 1, 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 by $4.5 million (after tax) or $0.10 per share.  The impairments of the Gies Group and Colony Group goodwill, which were not deductible for tax purposes, were, via restatement of the fiscal 2003 financial statements, also recorded as a cumulative effect of change in accounting principle, and had the effect of reducing net income by $27.2 million or $0.58 per share. The carrying amount of goodwill on the Company’s Consolidated Balance Sheet increased approximately $5.4 million, from $108.1 million at January 31, 2002 to $113.5 million at January 31, 2003.  The change in goodwill was the result of the acquisition of CBK (See Note 4 to the Consolidated Financial Statements), which increased goodwill by approximately $40.0 million, offset by the previously discussed impairment charges, which decreased goodwill by $34.6 million.

 

As of January 31, 2003, the $113.5 million in goodwill was comprised of $34.8 million related to the All Other segment and $78.7 million related to the Wholesale Creative Expressions segment businesses. The carrying amount of goodwill on the Company’s Consolidated Balance Sheet increased approximately $90.6 million, from $113.5 million at January 31, 2003 to $204.1 million at January 31, 2004.  The change in goodwill was primarily the result of the acquisitions of Miles Kimball, Kaemingk and Walter Drake (See Note 4 to the Consolidated Financial Statements), which increased goodwill by approximately $45.6 million, $17.6 million and $25.4 million, respectively, together with an increase in goodwill resulting from a foreign currency translation adjustment of approximately $2.0 million.  Of the $204.1 million of goodwill on the balance sheet as of January 31, 2004, $34.8 million is related to the All Other segment, $19.6 million is related to the Wholesale Home Fragrance segment, $78.7 million is related to the Wholesale Creative Expressions segment and $71.0 million is related to the Catalog & Internet segment.

 

46



 

The following table sets forth Blyth’s net income and earnings per share adjusted to exclude fiscal 2002 amortization expense related to goodwill and certain other intangibles that are no longer being amortized and to reflect the cumulative effect of change in accounting principle related to the adoption of SFAS 142 recorded in fiscal 2003.

 

Year ended January 31, (In thousands, except per share data)

 

2002

 

2003

 

2004

 

 

 

Restated (Note 2)

 

Reported earnings before cumulative effect of change in accounting principle

 

$

68,006

 

$

89,525

 

$

86,351

 

Cumulative effect of change in accounting principle, net of taxes of $2,887 in 2003

 

 

(31,753

)

 

Reported net income

 

68,006

 

57,772

 

86,351

 

Goodwill amortization, net of taxes of $1,749 in 2002

 

2,953

 

 

 

Adjusted net income

 

$

70,959

 

$

57,772

 

$

86,351

 

Basic earnings per common share:

 

 

 

 

 

 

 

Reported earnings before cumulative effect of change in accounting principle

 

$

1.45

 

$

1.94

 

$

1.89

 

Cumulative effect of change in accounting principle, net of taxes

 

 

(0.69

)

 

Reported net income

 

1.45

 

1.25

 

1.89

 

Goodwill amortization, net of taxes

 

0.06

 

 

 

Adjusted earnings per share

 

$

1.51

 

$

1.25

 

$

1.89

 

Diluted earnings per common share:

 

 

 

 

 

 

 

Reported earnings before cumulative effect of change in accounting principle

 

$

1.44

 

$

1.92

 

$

1.88

 

Cumulative effect of change in accounting principle, net of taxes

 

 

(0.68

)

 

Reported net income

 

1.44

 

1.24

 

1.88

 

Goodwill amortization, net of taxes

 

0.06

 

 

 

Adjusted earnings per share

 

$

1.50

 

$

1.24

 

$

1.88

 

 

47



 

Impairment of Long-Lived Assets

 

We review long-lived assets, including property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable.  Management will determine whether there has been a permanent impairment on such assets held for use in the business by comparing anticipated undiscounted future cash flows from the use and eventual disposition of the asset or asset group to the carrying value of the asset.  The amount of any resulting impairment will be calculated by comparing the carrying value to the fair value, which may be estimated using the present value of the same cash flows.  Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value.

 

Comprehensive Income

 

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss).  Other comprehensive income (loss) is classified separately into foreign currency items, unrealized gains and losses on certain investments in debt and equity securities and the net gains and losses on cash flow hedging instruments.  The Company reports, by major components and as a single total, the change in comprehensive income (loss) during the period as part of the Consolidated Statements of Stockholders’ Equity.

 

The following table presents the components of the Company’s accumulated other comprehensive income (loss), net of tax, for the years ended January 31, 2002, 2003 and 2004:

 

(In thousands)

 

Foreign
currency
translation
adjustments

 

Unrealized
gain (loss)
on certain
investments

 

Net
gain (loss)
on cash flow
hedges

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at January 31, 2001

 

$

(10,839

)

$

1,244

 

$

 

$

(9,595

)

Foreign currency translation adjustments

 

(6,003

)

 

 

 

 

(6,003

)

Reclassification adjustment for gains included in net income (net of tax $737)

 

 

 

(1,244

)

 

 

(1,244

)

Unrealized loss on certain investments (net of tax $94)

 

 

 

(159

)

 

 

(159

)

Net gain on cash flow hedging instruments (net of tax $63)

 

 

 

 

 

107

 

107

 

Balance at January 31, 2002

 

(16,842

)

(159

)

107

 

(16,894

)

Foreign currency translation adjustments - Restated
(Note 2)

 

12,470

 

 

 

 

 

12,470

 

Unrealized loss on certain investments (net of tax $33)

 

 

 

(56

)

 

 

(56

)

Net loss on cash flow hedging instruments (net of tax $160)

 

 

 

 

 

(271

)

(271

)

Balance at January 31, 2003 - Restated (Note 2)

 

(4,372

)

(215

)

(164