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, 2005

 

 

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $932 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on July 31, 2004 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 8, 2005, there were 40,923,411 outstanding shares of Common Stock, $0.02 par value.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the 2005 Proxy Statement for the Annual Meeting of Shareholders to be held on June 8, 2005 (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

17

 

 

 

Item 7.

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

18

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

Item 8.

Financial Statements and Supplementary Data

36

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

71

 

 

 

Item 9A.

Controls and Procedures

72

 

 

 

Item 9B.

Other Information

74

 

 

 

PART III

 

 

 

 

Item 10.

Directors and Executive Officers of the Registrant

74

 

 

 

Item 11.

Executive Compensation

74

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

74

 

 

 

Item 13.

Certain Relationships and Related Transactions

74

 

 

 

Item 14.

Principal Accountant Fees and Services

74

 

 

 

PART IV

 

 
 
 

Item 15.

Exhibits and Financial Statement Schedules

75

 

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 fragrance and decorative accessories industry.  The Company designs, markets and distributes an extensive array of candles, potpourri, decorative accessories, seasonal decorations and household convenience items, as well as tabletop lighting, accessories and chafing fuel for the Away From Home or foodservice trade.  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.  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 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 three business segments: the Direct Selling segment, the Wholesale segment, and the Catalog & Internet segment.  These segments accounted for approximately 46%, 41% and 12% of consolidated net sales, respectively, for the fiscal year ended January 31, 2005.*  Financial information relating to these business segments for the years ended January 31, 2005, 2004 and 2003 appears in Note 18 of the Company’s consolidated financial statements and is incorporated herein by reference.

 

Direct Selling Segment

 

In fiscal year 2005, this segment represented approximately 46% of

 


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

 

3



 

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 PartyLiteâ brand name.

 

United States Market

 

Within the United States market, PartyLiteâ brand products are sold directly to consumers through a network of independent sales consultants.  These consultants are compensated on the basis of PartyLite product sales at parties organized by them and parties organized by consultants recruited by them.  Over 32,000 independent sales consultants located in the U.S. were selling PartyLite products in the U.S. at fiscal 2005 year-end.  Our products are designed, packaged and priced in accordance with their premium quality, exclusivity and the distribution channel through which they are sold.

 

In fiscal year 2005, the Company introduced a party plan company called Purple Tree, which is focused on the crafting industry.  In the future, the Company may pursue other direct selling business opportunities.

 

International Market

 

In fiscal year 2005, products were sold internationally in this segment directly to consumers by more than 19,000 independent sales consultants located outside the U.S.  These consultants were the exclusive distributors of PartyLiteâ brand products internationally. The following were PartyLite’s international markets during fiscal year 2005: 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 and Canada, as well as in most of Europe.

 

Wholesale Segment

 

In fiscal year 2005, this segment represented approximately 41% of Blyth’s total sales. Products designed, manufactured or sourced, marketed and distributed within this segment include candles and other home fragrance products, a broad range of candle-related accessories, seasonal decorations such as ornaments, artificial trees and trim, and home décor products such as picture frames, lamps and textiles.  In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold in this segment.  Our wholesale products are sold to more than 40,000 retailers in multiple channels of distribution in North America and Europe under brand names that include Ambriaâ, Asp-Holmbladâ(1), Carolinaâ, CBKâ, Colonial™(1), Colonial Candle of Cape Codâ, Colonial at HOMEâ, Edelmanâ, Euro-Decorâ, Florasenseâ, Giesâ(1), HandyFuelâ, Impact™, Kaemingk™(2), Liljeholmensâ, Seasons of Cannon Fallsâ, Sternoâ and Triumph Treeâ(1).  Our wholesale products are designed, packaged and priced to satisfy the varying demands of retailers and

 

4



 

consumers within each distribution channel.

 

United States Market

 

Products sold in the Wholesale segment in the United States are marketed through the premium and mass consumer wholesale channels.  Within these channels, our wholesale products are sold to independent gift shops, specialty chains, department stores, food and drug outlets, mass retailers, hotels, restaurants and independent foodservice distributors through independent sales representatives, Company key account managers and Company sales managers.  Our sales force supports the Company’s customers with product catalogs and samples, merchandising programs and selective fixtures.  Our sales force also receives training on the marketing and proper use of our products.

 

International Market

 

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

 

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, hotels, restaurants and independent foodservice distributors.  The Company may expand its international presence through the establishment of additional non-U.S. 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 various management ordering systems. The Company’s independent sales representatives and sales managers in the premium wholesale channel are supported by advanced sales tools to support showroom, road and telephone sales efforts.

 

Recent Acquisitions

 

In September 2004, Blyth acquired Edelman B.V., a designer and marketer of everyday home, garden and seasonal décor, and Euro-Decor B.V., a designer and marketer of traditional and contemporary gift and florist products.  Edelman designs and sources more than 12,000 products including indoor and outdoor planters, candle accessories, tabletop items and a broad range of Christmas products, such as lighting, ornaments, collectibles and artificial trees.  Edelman sells to more than 4,800 active customers across Europe through showrooms, European trade shows, sales managers and independent sales agents.  Euro-Decor’s product lines feature

 

5



 

decorative supplies for the florist industry, glass and ceramic vases, baskets, floral arrangements, table centerpieces, wall decorations and plush animals.  Euro-Decor designs and sources more than 10,000 products for over 1,200 active customers.  Similar to Edelman, Euro-Decor markets its products through showrooms, European trade shows, independent sales agents and distributors.  The customer base of these acquisitions are similar to those of our other Wholesale businesses.

 

Catalog & Internet Segment

 

In fiscal year 2005, this segment represented approximately 12% 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 Exposuresâ, Miles Kimballâ, Walter Drakeâ, The Home Marketplaceâ and Directions…the path to better healthâ.

 

In fiscal year 2005, we completed the consolidation of the operations of Walter Drake into those of Miles Kimball.  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.

 

Product Brand Names

 

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

 

PartyLiteâ

Lavish by PartyLiteä

 

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

 

Ambriaâ

Asp-Holmblad®(1)

Carolinaâ

CBKâ

Colonialä(1)

Colonial Candle of Cape Codâ

Colonial at HOMEâ

Edelmanâ

Euro-Decorâ

Florasenseâ

Giesâ(1)

HandyFuelâ

Impact™

Kaemingkä(2)

Liljeholmensâ

Seasons of Cannon Fallsâ

Sternoâ

Triumph Treeâ(1)

 

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

 

Exposuresâ

Miles Kimballâ

The Home Marketplaceâ

Walter Drakeâ

Directions…the path to better healthâ

 

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

 

6



 

include technical research, consumer market research, fragrance studies, comparative analyses, the formulation of engineering specifications, feasibility studies, safety assessments, testing and evaluation.  New products typically account for at least 35% of our net sales in the first full year following their introduction.

 

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, the application of new technologies and process control systems, and consolidation and rationalization of equipment and facilities.  Capital expenditures over the past five years have totaled $94.4 million and are targeted to technological advancements or capital investments with short payback time frames.  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.

 

Blyth manufactures most of its candles and sources nearly all of its other products.  In fiscal year 2005, Blyth sourced approximately 70% of its products from independent manufacturers in the Pacific Rim, Europe and Mexico.  Blyth manufactures approximately 30% of its products using highly automated processes and technologies, as well as certain hand crafting and finishing.  Many of the Company’s products 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 most of Europe.  By fiscal 2005 year-end, show orders placed via the PartyLite Extranet had increased to over 85% of total show orders in the United States and over 90% of total show orders in Canada.  The system became available to additional PartyLite consultants in Europe throughout fiscal year 2005, and an average of approximately 40% of European 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.

 

In fiscal year 2005, Blyth’s consumer wholesale business in North America introduced two new technological advancements.  The first technological

 

7



 

advancement is a new business intelligence technology platform to support information gathering and data warehousing for sales and inventory and capture point-of-sale information at the retail store level for Blyth HomeScents International – North America.  This new technical capability enables BHI-NA to respond more quickly to retailers’ changing sales and inventory needs, track off-the-shelf product movement, and forecast product demand.  The second technological advancement is an Internet-based sales force automation initiative used by sales representatives of CBK Styles to expedite the order-writing process and improve accuracy while eliminating the need to key in orders manually and reducing the chance for errors.  As a result, orders are processed faster and sales representatives are able to focus on the customers’ needs and the products available to satisfy them.  This automation also provides customers with more accurate and up-to-date pricing information, product availability and the status of their order. In addition to improved order fulfillment, the system allows for improved customer marketing and re-ordering.  These new technological advancements, together with our multiple modes and forms of electronic data interchange (EDI), enable Blyth to respond quickly and accurately to the business needs of our retail customers.

 

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 segment customers include independent gift and department stores, garden centers, mass merchandisers, specialty chains, food and drug stores, foodservice distributors, hotels and restaurants.  No single customer accounts for 10% or more of Blyth’s sales.

 

Competition

 

All of the Company’s business segments are very competitive.  Principal 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 each of our 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, 2005, the Company had approximately 4,900 full-time employees, of whom approximately 35% are based outside of the United States.  Approximately 2,950 of the 4,900 employees are non-salaried.  Blyth does not have any unionized employees in the United States.  Approximately 50 employees 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 is in place for a period of one year from July 2004 until June 2005 and currently may be terminated by either party at the end of that period.  Approximately 40 employees are represented by the Chemical Union in the Company’s manufacturing and distribution facility located in Promol, Portugal.  The union contract is negotiated annually at the

 

8



 

beginning of each year and upon one year’s prior notice may be terminated by either side.  Liljeholmens has approximately 70 employees represented by the Industrifacket union, a manufacturing union, and the SIK union, a management union.  Both union agreements each have a three-year term (April 2004–March 2007).  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.  In fiscal year 2005, substantial cost increases for certain chemicals such as dyethelene glycol (DEG) and ethanol, as well as aluminum, negatively impacted profitability of certain products in the Wholesale business segment.  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 and patent registrations and applications in the United States Patent and Trademark Office related to its products.  Blyth also registers certain trademarks and patents 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 expenditures necessary to comply with applicable environmental laws and does not believe that such expenditures will have a material effect on the Company’s capital expenditures, earnings or competitive position.

 

Cautionary Factors That May Affect Future Results

 

The disclosure and analysis in this report and in Blyth’s 2005 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

 

9



 

written forward-looking statements in other public materials.

 

Any or all of the forward-looking statements in this report, in our 2005 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.  The Company’s ability to increase sales depends on numerous factors, including market acceptance of existing products, the successful introduction of new products, growth of consumer discretionary spending, 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 United States, Canadian 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,

 

10



 

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 health 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) sourcing adequate supplies of its products, (2) bringing new production and distribution capacity on line in a timely manner, (3) improving its ability to forecast product demand and fulfill customer orders promptly, (4) improving customer service-oriented management information systems and (5) 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 price changes, 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 products, particularly in the Direct Selling and Wholesale 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, as well as the members of the Office of the Chairman: Robert H. Barghaus, Vice President and Chief Financial Officer; Bruce G. Crain, Senior Vice President and President, Wholesale Group; Robert B. Goergen, Jr., Vice President and President, Catalog & Internet Group; and Frank P. Mineo, Senior Vice President and President, Direct Selling Group.  The Company does not have employment contracts with any of its key corporate management personnel except the Chairman and Chief Executive Officer, 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

 

11



 

fragmented with numerous suppliers serving one or more of the distribution channels served by the Company.  In addition, the Company competes for direct selling consultants with other direct selling companies.  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 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.

(2) 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

 

227,552

 

324,522

 

Almere-De Vaart, Netherlands

 

Distribution

 

Wholesale

 

122,760

 

 

 

Arndell Park, Australia

 

Distribution

 

Direct Selling

 

 

 

18,535

 

Batavia, Illinois

 

Manufacturing and Research & Development

 

Direct Selling and Wholesale

 

486,000

 

 

 

Caldas da Rainha, Portugal

 

Manufacturing and related distribution

 

Wholesale

 

230,000

 

 

 

Cannon Falls, Minnesota

 

Distribution

 

Wholesale

 

 

 

192,000

 

Carol Stream, Illinois

 

Distribution

 

Direct Selling

 

 

 

651,000

 

Clara City, Minnesota

 

Distribution

 

Wholesale

 

 

 

213,000

 

Colorado Springs, Colorado(1)

 

Manufacturing and related distribution

 

Catalog & Internet

 

211,200

 

 

 

Cumbria, England(2)

 

Manufacturing and related distribution

 

Direct Selling and Wholesale

 

223,000

 

70,000

 

Elkin, North Carolina

 

Manufacturing and related distribution

 

Wholesale

 

690,000

 

 

 

Glinde, Germany

 

Manufacturing and related distribution

 

Wholesale

 

172,000

 

 

 

Heidelberg, Germany

 

Distribution

 

Direct Selling

 

 

 

17,000

 

Memphis, Tennessee

 

Distribution

 

Wholesale

 

 

 

414,960

 

Monterrey, Mexico

 

Distribution

 

Direct Selling

 

 

 

45,000

 

Ontario, Canada

 

Distribution

 

Direct Selling

 

 

 

25,000

 

Oshkosh, Wisconsin

 

Distribution

 

Catalog & Internet

 

 

 

375,000

 

Oskarshamm, Sweden

 

Manufacturing and related distribution

 

Wholesale

 

 

 

122,000

 

Plymouth, Massachusetts

 

Distribution

 

Direct Selling

 

59,000

 

 

 

Reeuwijk, Netherlands(3)

 

Distribution

 

Wholesale

 

6,750

 

 

 

Roseville, Michigan

 

Warehouse and distribution

 

Direct Selling

 

 

 

9,000

 

Tampa, Florida

 

Warehouse and distribution

 

Direct Selling

 

 

 

12,000

 

Texarkana, Texas

 

Manufacturing and related distribution

 

Wholesale

 

154,000

 

65,000

 

Tilburg, Netherlands

 

Distribution

 

Direct Selling

 

327,000

 

 

 

Tijuana, Mexico

 

Manufacturing

 

Wholesale

 

 

 

150,355

 

Union City, Tennessee

 

Distribution

 

Wholesale

 

360,000

 

89,300

 

Woerden, Netherlands(3)

 

Distribution

 

Wholesale

 

 

 

15,500

 

 

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) This facility was closed on August 7, 2004.

(2) Represents four separate facilities as follows: 60,000 square feet, 73,000 square feet and 70,000 square feet used by Colony Gifts Corporation Limited; 90,000 square feet used by CCW Manufacturing Limited.

(3) Measured in square meters.

 

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.

 

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

 

None

 

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 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

 

 

 

 

Fiscal 2005

 

 

 

(Ended January 31, 2005)

 

 

 

HIGH

 

LOW

 

First Quarter

 

$

34.51

 

$

31.28

 

Second Quarter

 

$

36.00

 

$

30.46

 

Third Quarter

 

$

35.51

 

$

28.43

 

Fourth Quarter

 

$

32.72

 

$

27.80

 

 

As of April 8, 2005, there were 1,919 registered holders of record of the Company’s Common Stock.

 

On March 17, 2005, the Company’s Board of Directors declared a regular semi-annual cash dividend in the amount of $0.21 per share of Common Stock payable in the second quarter of fiscal year 2006.  During fiscal years 2005 and 2004, the Company’s Board of Directors declared dividends as follows: $0.17 per share of Common Stock payable in the second quarter of the fiscal year 2005; $0.19 per share of Common Stock payable in the fourth quarter of fiscal year 2005; $0.13 per share of Common Stock payable in the second quarter of fiscal year 2004; and $0.15 per share of Common Stock payable in the fourth quarter of fiscal year 2004.  Currently, the Company expects to pay comparable cash dividends in the future.

 

The following table sets forth, for the equity compensation plan categories listed below, information as of January 31, 2005:

 

14



 

Equity Compensation Plan Information

 

Plan Category

 

(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights(
1)

 

(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights(
1)

 

(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

1,525,433

 

$

25.80

 

3,183,691

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

Total

 

1,525,433

 

$

25.80

 

3,183,691

 

 


(1) The information in this column excludes 13,000 shares of restricted stock and 79,835 restricted stock units outstanding as of January 31, 2005.

 

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, 2005.

 

ISSUER PURCHASES OF EQUITY SECURITIES(1)

 

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, 2004 -
November 30, 2004

 

0

 

 

0

 

1,453,200 shares

 

Month #2
December 1, 2004 -
December 31, 2004

 

0

 

 

0

 

1,453,200 shares

 

Month #3
January 1, 2005 -January 31, 2005

 

15,000

 

$

30.63

 

15,000

 

1,438,200 shares

 

Total

 

15,000

 

$

30.63

 

15,000

 

1,438,200 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 was authorized to repurchase up to

 

15



 

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.  As of January 31, 2005, the Company has purchased a total of 4,561,800 shares of Common Stock under the Repurchase Program.  The Repurchase Program does not have an expiration date.  The Company intends to make further purchases under the Repurchase Program from time to time.

 

16



 

Item 6.

 

Selected Consolidated Financial Data

 

Set forth below are selected summary consolidated financial and operating data of the Company for fiscal years 2001 through 2005, which have been derived from our audited financial statements for those years.  The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our 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)

 

2001

 

2002

 

2003

 

2004

 

2005

 

Statement of Earnings Data: (1)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,178,813

 

$

1,178,771

 

$

1,288,583

 

$

1,505,573

 

$

1,586,297

 

Gross profit

 

596,101

 

577,005

 

640,302

 

723,675

 

771,680

 

Operating profit

 

145,244

 

120,490

 

155,517

 

153,077

 

169,330

 

Interest expense

 

15,876

 

17,237

 

14,664

 

17,443

 

22,138

 

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

 

130,690

 

108,289

 

142,557

 

136,893

 

149,076

 

Earnings before minority interest and cumulative effect of accounting change

 

80,715

 

68,006

 

89,525

 

86,516

 

96,154

 

Net earnings (3)

 

79,562

 

68,006

 

57,772

 

86,351

 

96,514

 

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

 

$

1.69

 

$

1.45

 

$

1.94

 

$

1.89

 

$

2.24

 

Cumulative effect of accounting change (3)

 

(0.02

)

 

(0.69

)

 

 

 

 

$

1.67

 

$

1.45

 

$

1.25

 

$

1.89

 

$

2.24

 

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

 

$

1.69

 

$

1.44

 

$

1.92

 

$

1.88

 

$

2.22

 

Cumulative effect of accounting change (3)

 

(0.02

)

 

(0.68

)

 

 

 

 

$

1.66

 

$

1.44

 

$

1.24

 

$

1.88

 

$

2.22

 

Cash dividends paid, per share

 

$

0.20

 

$

0.20

 

$

0.22

 

$

0.28

 

$

0.36

 

Basic weighted average number of common shares outstanding

 

47,629

 

47,056

 

46,256

 

45,771

 

43,136

 

Diluted weighted average number of common shares outstanding

 

47,902

 

47,205

 

46,515

 

46,027

 

43,556

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Gross profit margin

 

50.6

%

48.9

%

49.7

%

48.1

%

48.6

%

Operating profit margin

 

12.3

%

10.2

%

12.1

%

10.2

%

10.7

%

Capital expenditures

 

$

25,322

 

$

11,901

 

$

14,322

 

$

21,963

 

$

20,976

 

Depreciation and amortization

 

33,383

 

36,246

 

30,212

 

35,954

 

35,600

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

224,413

 

$

285,771

 

$

324,060

 

$

400,540

 

$

312,172

 

Total assets

 

770,974

 

804,781

 

860,084

 

1,127,963

 

1,075,820

 

Total debt

 

199,968

 

191,701

 

176,493

 

293,886

 

287,875

 

Total stockholders’ equity

 

421,794

 

468,063

 

507,852

 

588,970

 

521,349

 

 


(1)       Statement of Earnings Data includes the results of operations for periods subsequent to the respective purchase acquisitions of 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, Walter Drake acquired in December 2003 and Edelman B.V. and Euro-Decor B.V. acquired in September 2004, 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 U.S. 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 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 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 No. 142, “Goodwill and Other Intangible Assets.”  (See Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”).

 

 

17



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

 

Blyth is a designer and marketer of home fragrance products and accessories, home décor, seasonal decorations, household convenience items, personalized gifts and products for the foodservice trade.  We compete in the global Home Expressions industry, and our products can be found throughout North America, Europe and Australia.  Our financial results are reported in three segments - the Direct Selling segment, the Wholesale segment and the Catalog & Internet segment.  These reportable segments are based on similarities in distribution channels, customers and management oversight.

 

Today, on an annualized net sales basis considering the full year impact of recent acquisitions, Blyth is comprised of an approximately $740 million direct selling business, an approximately $720 million wholesale business and an approximately $200 million catalog and Internet business.  Sales and earnings growth differ in each segment depending on geographic location, market penetration, our relative market share and product and marketing execution, among other business factors.  Over the long term, all three segments should experience single-digit growth, most likely within the low to mid-single digit range, again depending on the business factors previously noted.

 

Our current focus is driving sales growth of our brands so we may more fully leverage our infrastructure.  New product development continues to be critical to all three segments of our business.  In the Direct Selling segment, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants.  In the Wholesale segment, we have numerous collaborative initiatives underway, which we believe will help drive sales and leverage the sales and marketing talents across this segment.  These initiatives include customer information sharing and leveraging our in-house sales forces, as well as ongoing global sourcing objectives and other organic strategic initiatives into which we are investing resources.

 

With the acquisitions of Miles Kimball in April 2003 and Walter Drake in December 2003, we entered the Catalog and Internet channel of distribution, giving us a presence in all of our desired channels.  The operations of Walter Drake have been integrated into those of Miles Kimball, and form the core of our Catalog & Internet segment.  This segment’s personalization capabilities and knowledge of the direct-to-consumer market are being leveraged across all three segments.

 

SEGMENTS

 

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories, fragranced bath gels and body lotions and other fragranced products. These products are sold directly to the consumer under the PartyLite® brand in North America, Europe and Australia through a network of independent sales consultants using the party plan method of direct selling.

 

Within the Wholesale segment, the Company designs, manufactures or sources, markets and distributes an extensive line of home fragrance products, candle-related accessories, seasonal decorations such as ornaments, artificial trees and trim, and home décor products such as picture frames, lamps and textiles.  Products in this segment are sold in North America and Europe to retailers in the premium, specialty and mass channels under the CBK®, Carolina®, Colonial®(1), Colonial Candle of Cape Cod®, Colonial at HOMEâ, Edelman®, Euro-Decor®(1), Florasense®,

 


(1) Colonial, Euro-Decor, Gies and Triumph Tree trademarks are registered and sold only outside the United States.

 

18



 

Gies®(1), Holiday 365™, Kaemingk™(2), Liljeholmens®, Seasons of Cannon Falls® and Triumph Tree®(1) brands.  In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold through this segment under the Ambria®, FilterMate®, HandyFuel® and Sterno® brands.

 

Within the Catalog & Internet segment, the Company designs, sources and markets a broad range of household convenience items, premium photo albums, frames, holiday cards, personalized gifts and kitchen accessories under the Exposuresâ, Miles Kimballâ, Walter Drakeâ, The Home Marketplace® and Directions…the path to better healthâ brands.  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

 

 

 

 

 

 

 

 

 

Fiscal 2004

 

Fiscal 2005

 

 

 

Percentage of Net Sales

 

Compared

 

Compared

 

 

 

Years Ended January 31

 

to Fiscal

 

to Fiscal

 

 

 

2003

 

2004

 

2005

 

2003

 

2004

 

Net sales

 

100.0

 

100.0

 

100.0

 

16.8

 

5.4

 

Cost of goods sold

 

50.3

 

51.9

 

51.4

 

20.6

 

4.2

 

Gross profit

 

49.7

 

48.1

 

48.6

 

13.0

 

6.6

 

Selling

 

28.2

 

27.7

 

28.9

 

14.8

 

9.8

 

Administrative

 

9.2

 

8.6

 

9.1

 

9.0

 

11.3

 

Operating profit

 

12.1

 

10.2

 

10.7

 

(1.6

)

10.6

 

Net earnings

 

4.5

 

5.7

 

6.1

 

49.5

 

11.8

 

 

Fiscal 2005 Compared to Fiscal 2004

 

Net sales increased $80.7 million, or 5%, from $1,505.6 million in fiscal 2004 to $1,586.3 million in fiscal 2005.  Approximately 10 percentage points of the increase in net sales is attributable to the positive sales impact of Edelman and Euro-Decor, which Blyth acquired in September 2004, the positive impact of approximately 46 weeks of acquisition-related sales growth of Walter Drake, which was acquired in December 2003, the positive sales impact of approximately 24 weeks of acquisition-related sales growth of Kaemingk, which was acquired in June 2003, and the positive sales impact of approximately 8 weeks of acquisition-related sales growth of Miles Kimball, which was acquired in April 2003.  The loss of sales from Jeanmarie Creations, which was divested in April 2004, had a negative impact on sales equal to approximately 2 percentage points.  So, excluding the impact of acquisitions and divestitures, sales were down 3% for the year.  The relative strength of foreign currencies versus the U.S. dollar had a positive impact on fiscal 2005 sales growth equal to approximately 3 percentage points.  Management believes that a significant increase in party plan competition in the United States and a weak North American wholesale environment, exacerbated by higher energy prices and economic uncertainty related to the U.S. presidential election, negatively impacted Blyth’s sales throughout fiscal 2005.

 


(1) Colonial, Euro-Decor, Gies and Triumph Tree trademarks are registered and sold only outside the United States.

(2) Kaemingk is sold only outside the United States.

 

19



 

Net Sales – Direct Selling Segment

 

Net sales in the Direct Selling segment decreased $28.6 million, or 4%, from $764.5 million in fiscal 2004 to $735.9 million in fiscal 2005.  PartyLite’s U.S. sales decreased approximately 12% compared to the prior year.  PartyLite Canada reported an approximately 7% decrease versus the prior year in U.S. dollars.  Management believes that sales in the U.S. and Canadian markets were negatively impacted by increased competition for hostesses and party guests due to a substantial increase in channel competition.  In addition, we believe PartyLite’s U.S. operations were negatively impacted by reduced discretionary income, resulting from higher gasoline prices.  The U.S. market also experienced a significant decrease in third quarter sales in Florida, PartyLite’s fourth largest market, due to the August and September hurricanes.  Management believes that this situation continued to have a negative impact into the fourth quarter given the loss of booking momentum due to cancelled parties.  In PartyLite’s European markets, sales increased approximately 20% in U.S. dollars (+9% in local currencies), driven by strong sales in the newest markets.  PartyLite Europe now represents approximately 30% of PartyLite Worldwide’s net sales.

 

Net sales in the Direct Selling segment represented approximately 46% of total Blyth sales in fiscal 2005 compared to 51% in fiscal 2004.  This decrease was primarily due to the growth of the Catalog & Internet segment.

 

Net Sales – Wholesale Segment

 

Net sales in the Wholesale segment increased $26.6 million, or 4%, from $630.3 million in fiscal 2004 to $656.9 million in fiscal 2005.  The primary reason for this increase was the acquisitions of Edelman and Euro-Decor in September 2004, which had a positive effect on sales of 6 percentage points, and the approximately 24 weeks of acquisition-related sales growth of Kaemingk, acquired in June 2003, which had a positive effect of 3 percentage points.  The loss of sales of Jeanmarie Creations, which was divested in April 2004, had a negative impact on sales of approximately 4 percentage points.  So, excluding acquisitions and divestitures, Wholesale segment sales were down approximately 2%.

 

In North America, the Wholesale segment experienced a sales decline of 10% versus the prior year.  Management believes softness was seen in the sales of premium home fragrance products and seasonal decorations as a result of independent retailers’ cautiousness in purchasing throughout the year.  Management also believes sales of home décor products in fiscal 2005 were slightly below the prior year due to retailers’ cautiousness.  In addition, the divestiture of Jeanmarie Creations had a negative impact on sales of approximately 6 percentage points.  In fiscal 2005, sales of chafing fuel and tabletop lighting to the foodservice trade improved significantly compared to the prior year, as the hospitality industry continued to rebound.

 

In Europe, the Wholesale segment experienced a sales increase of approximately 30% in fiscal 2005 versus fiscal 2004, due in part to the effect of the Edelman and Euro-Decor acquisitions and the full year of sales from Kaemingk, which had a positive effect on sales of 27 percentage points.  Increased sales of mass channel candles in fiscal 2005 offset sales declines in premium candles in Europe.

 

Net sales in the Wholesale segment represented approximately 41% of total Blyth sales in fiscal 2005 compared to 42% in fiscal 2004.  This decrease was primarily due to the growth of the Catalog & Internet segment.

 

20



 

Net Sales – Catalog & Internet Segment

 

Net sales in the Catalog & Internet segment increased $82.8 million, or 75%, from $110.7 million in fiscal 2004 to $193.5 million in fiscal 2005 due to the December 2003 acquisition of Walter Drake.  Net sales in this segment were modestly below our expectations due to decreased consumer discretionary spending and increased returns resulting from integration-related order processing delays.  Net sales in the Catalog & Internet segment accounted for approximately 12% of Blyth’s total net sales in fiscal 2005 compared to 7% in fiscal 2004.

 

Blyth’s consolidated gross profit increased $48.0 million, or 7%, from $723.7 million in fiscal 2004 to $771.7 million in fiscal 2005.  The gross profit margin increased from 48.1% in fiscal 2004 to 48.6% in fiscal 2005 as a result of the favorable sales mix among and within Blyth’s various businesses, reduced shipping and handling charges and the positive impact of an insurance recovery related to our Monterrey facility.

 

Blyth’s consolidated selling expense increased $40.9 million, or 10%, from $417.8 million in fiscal 2004 to $458.7 million in fiscal 2005.  Most of the increase in selling expense relates to the addition of selling expenses from the previously discussed fiscal 2005 acquisitions.  Selling expense as a percentage of net sales increased from 28% in fiscal 2004 to 29% in fiscal 2005.  This increase in selling expense, as a percentage of net sales, is principally due to increased promotional spending in the Direct Selling segment relative to sales, as well as the impact of Walter Drake’s business, which has a higher selling expense ratio than the overall Company average.

 

Blyth’s consolidated administrative expenses increased $14.7 million, or 11%, from $129.0 million in fiscal 2004 to $143.7 million in fiscal 2005.  Most of the increase relates to administrative expenses associated with acquisitions made in fiscal 2005.  As a percentage of net sales, administrative expenses remained relatively flat at 9% despite the Company’s spending for organic strategic initiatives and compliance costs associated with the Sarbanes-Oxley Act of 2002.

 

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 and $17.1 million related to the Wholesale segment.  The Wholesale segment charges principally related to the write down of certain candle manufacturing assets, severance and personnel charges related to the restructuring in North America, and the discontinuation of one brand.  The total charge of $23.8 million was reported as a component of operating expenses.

 

Blyth’s consolidated operating profit increased $16.2 million from $153.1 in fiscal 2004 to $169.3 million in fiscal 2005 principally due to the impact of the fiscal 2004 restructuring and impairment charges on the year to year comparison.

 

Operating Profit/Loss - Direct Selling Segment

 

Operating profit in the Direct Selling segment decreased $4.5 million, or 3%, from $136.4 million in fiscal 2004 to $131.9 million in fiscal 2005.  The decrease resulted from the sales shortfalls in North America.  Additional promotional and sales incentive expenses also negatively impacted this segment’s operating profit.  Operating profit in the Direct Selling segment represented approximately 78% of total Company operating profit in fiscal 2005 compared to 89% in fiscal 2004.

 

21



 

Operating Profit/Loss – Wholesale Segment

 

Operating profit in the Wholesale segment increased from $10.0 million in fiscal 2004 to $30.7 million in fiscal 2005.  Fiscal 2004 includes restructuring and impairment charges of $17.1 million.  Additional increases in operating profit were attributable to profit improvements in the North American home fragrance business, the fiscal 2005 acquisitions of Edelman and Euro-Decor, and as previously mentioned, a $2.2 million insurance recovery benefit related to the fiscal 2004 Monterrey fire claim received in fiscal 2005 versus the negative impact of $1.9 million of expense recorded in fiscal 2004 for the fire.  Operating profit in the Wholesale segment represented approximately 18% of total Company operating profit in fiscal 2005 compared to 7% in fiscal 2004.

 

Operating Profit/Loss – Catalog & Internet Segment

 

Operating profit in the Catalog & Internet segment increased from $6.6 million in fiscal 2004 to $6.7 million in fiscal 2005.  Operating profit in the Catalog & Internet segment represented approximately 4% of total Company operating profit in both fiscal 2004 and fiscal 2005.

 

Interest expense increased $4.7 million, or 27%, from $17.4 million in fiscal 2004 to $22.1 million in fiscal 2005, primarily due to higher interest costs related to the $100 million of 5.5% Senior Notes issued in October 2003 and borrowings associated with the July 2004 Dutch tender offer.

 

Interest income and other increased $0.3 million, from $1.3 million in fiscal 2004 to $1.6 million in fiscal 2005.  This increase was primarily due to favorable foreign currency exchange gains.

 

Income tax expense increased $2.5 million, or 5%, from $50.4 million in fiscal 2004 to $52.9 million in fiscal 2005.  The increase in income tax expense is attributable to the increase in pre-tax earnings.  The effective income tax rate was 35.5% for fiscal 2005 compared to 36.8% in fiscal 2004.  This decrease in tax rate is a result of more income being earned in lower tax jurisdictions.

 

As a result of the foregoing, net earnings increased $10.1 million, or 12%, from $86.4 million in fiscal 2004 to $96.5 million in fiscal 2005.

 

Basic earnings per share were $2.24 for fiscal 2005 compared to $1.89 for fiscal 2004.  The previously discussed restructuring and impairment charges reduced earnings per share by approximately $0.31 in fiscal 2004.  Diluted earnings per share were $2.22 for fiscal 2005 compared to $1.88 for fiscal 2004.

 

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 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, which was acquired in December 2003, and the positive impact of approximately twelve weeks of acquisition-related sales growth of CBK Styles, Inc. (“CBK”), which was 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 U.S. 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.

 

22



 

Net Sales – Direct Selling Segment

 

Net sales in the Direct Selling segment 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 U.S. 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 U.S. 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 U.S. and Canada were negatively impacted by cautious consumer spending resulting from economic and geopolitical concerns.

 

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 Segment

 

Net sales in the Wholesale segment increased $59.2 million, or 10%, from $571.1 million in fiscal 2003 to $630.3 million in fiscal 2004.  The primary reason for this increase was the acquisition of Kaemingk in June 2003, which had a positive effect of 12 percentage points, and the acquisition of CBK in May 2002, which had a positive effect of 2 percentage points.  The loss of sales of Wax Lyrical, which was closed in December 2002, had a negative impact on sales of approximately 4 percentage points.  The strengthening of foreign currency exchange rates versus the U.S. dollar had a positive effect of 3 percentage points.  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.

 

In North America, the Wholesale segment experienced a sales decline of 4% versus the prior year.  This was principally due to decreased sales in the mass channel as management declined to participate in certain fiscal 2004 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.  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.

 

In Europe, the Wholesale 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 51 percentage points, and the closure of Wax Lyrical had a negative impact of approximately 20 percentage points on sales.  The strengthening of foreign currency exchange rates versus the U.S. dollar had a positive effect of approximately 16 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.

 

Net sales in the Wholesale segment represented approximately 42% of total Blyth sales in fiscal 2004 compared to 44% in fiscal 2003.

 

23



 

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 have been 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.

 

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.

 

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 the increase in administrative expenses related 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 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 and $17.1 million related to the Wholesale 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 4 to the Consolidated Financial Statements).

 

Blyth’s consolidated operating profit declined $2.4 million from $155.5 million 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.

 

24



 

Operating Profit - Direct Selling Segment

 

Operating profit in the Direct Selling segment decreased $8.8 million, or 6%, from $145.2 million in fiscal 2003 to $136.4 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 89% of total Company operating profit in fiscal 2004 compared to 93% in fiscal 2003.

 

Operating Profit – Wholesale Segment

 

Operating profit in the Wholesale segment decreased slightly from $10.3 million in fiscal 2003 to $10.0 million in fiscal 2004.  Pre-tax restructuring and impairment charges of $17.1 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, $8.3 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 in candle forms from 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 has recouped these expenses through insurance in fiscal 2005.

 

Sales volume shortfalls in our creative expressions businesses 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, and had a positive impact on operating profit.  Sales volume shortfalls in our food service business resulting from overall industry sluggishness and a resulting decrease in factory overhead absorption were responsible for most of the profit decline.  Increased direct import competition also had a negative impact on operating profit.

 

Operating profit in the Wholesale segment represented approximately 7% of total Company operating profit in both fiscal 2004 and fiscal 2003.

 

Operating Profit – Catalog & Internet Segment

 

Operating profit in the Catalog & Internet segment was $6.6 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 4% of total Company operating profit in fiscal 2004.

 

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.

 

25



 

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 was 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 was 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.  As of the February 1, 2002 adoption date of SFAS No. 142, the Company recorded a $31.8 million impairment of goodwill as a cumulative effect of change in accounting principle.  This impairment reduced the carrying value of the goodwill related to the 1999 acquisition of the Gies Group by $20.9 million, the carrying value of the goodwill related to the 1999 acquisition of the Colony Group by $6.3 million and the carrying value of the goodwill related to the 1997 acquisition of the Sterno® brand by $4.6 million (after-tax).

 

Basic earnings per share were $1.89 for fiscal 2004 compared to $1.25 for fiscal 2003.  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 were $1.88 for fiscal 2004 compared to $1.24 for fiscal 2003. 

 

Seasonality

 

Approximately 41% of the Company’s net sales occurred in the first and second fiscal quarters of 2005 up from 39% in fiscal 2004, with the larger balance experienced in the third and fourth fiscal quarters, generally due to consumer buying patterns. The decrease in the percentage of shipments in the second half of the fiscal year is primarily due to the seasonality of the recently 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.

 

26



 

Liquidity and Capital Resources

 

Cash and cash equivalents decreased $138.0 million, or 60%, from $229.7 million at January 31, 2004 to $91.7 million at January 31, 2005, following the use of $172.6 million of cash to repurchase shares of the Company’s common stock in the July 2004 Dutch tender offer and the September 2004 acquisitions of Edelman and Euro-Decor.

 

The Company typically generates positive cash flow from operations due to favorable gross margins and the variable nature of selling expenses, which constitute a significant percentage of operating expenses.  The Company generated $138.5 million in cash from operations in fiscal 2005 compared to $173.1 million in fiscal 2004.  This decrease was primarily due to decreased earnings before non-cash restructuring and impairment charges and timing matters that resulted in a usage of cash to fund working capital needs in fiscal 2005 versus cash generated from working capital in fiscal 2004.

 

Capital expenditures for property, plant and equipment were approximately $21.0 million in fiscal 2005 down from $22.0 million in fiscal 2004.  The decrease from historical levels is due to the Company continuing to reduce spending for manufacturing while moving to more of an outsourced product supply model.  The Company anticipates total capital spending of approximately $20.0 million to $25.0 million for fiscal 2006, 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 Wholesale segments to be primarily organic, with the possibility of selective acquisitions.  We continue to pursue strategic Wholesale acquisitions primarily in the following areas: home décor products and seasonal decorative accessories.  In the Catalog & Internet segment, a significant portion of future growth may come through acquisitions.  The Company acquired Edelman B.V. and Euro-Decor B.V. during fiscal 2005, and the Miles Kimball Company, Kaemingk B.V. and Walter Drake during fiscal 2004, as further described in Note 3 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, 2005, the Company was in compliance with such covenants.  Amounts outstanding under the Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate (5.25% at January 31, 2005) 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, 2005, $3.3 million letters of credit were outstanding under the Credit Facility.  The Company intends to renew the credit arrangement before the August maturity date.

 

As of January 31, 2005, 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 2005.  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, 2005.

 

27



 

At January 31, 2005, 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, 2005, approximately $0.1 million of letters of credit were outstanding under this credit line.

 

As of December 31, 2004, The Gies Group (“Gies”) had available lines of credit of approximately $44.5 million.  No amounts were outstanding at December 31, 2004.  The lines of credit are renewed annually.

 

As of December 31, 2004, Kaemingk had available lines of credit of approximately $37.3 million with ING Bank N.V.  No amounts were outstanding at December 31, 2004.  The lines of credit are collateralized by certain real estate and equipment owned by Kaemingk.

 

Colony Gift Corporation Limited (“Colony”) has a $23.0 million short-term revolving credit facility with Barclays Bank, which matures in June 2005.  As of December 31, 2004, Colony had borrowings under the credit facility of approximately $4.9 million, at a weighted average interest rate of 5.8%.

 

As of December 31, 2004, Edelman B.V. and Euro-Decor B.V. had available lines of credit of approximately $33.9 million with ABN Amro Bank N.V.  The lines of credit are collateralized by inventory and receivables owned by Edelman B.V. and Euro-Decor B.V.  As of December 31, 2004, approximately $6.9 million was outstanding under the credit line.

 

At January 31, 2005, Miles Kimball had approximately $9.9 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, 2004, Kaemingk had approximately $8.8 million of long-term debt outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 5.1%.  The bank loans have maturity dates ranging from 2006 through 2021.  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 June 2005.  As of January 31, 2005, $3.6 million of principal remained outstanding.  Such senior notes contain, among other provisions, requirements for maintaining certain financial ratios and net worth.  At January 31, 2005, 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, 2005, 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, 2005, the Company was in compliance with such covenants.  Interest is payable semiannually in arrears on May 1 and November 1.  The notes may be redeemed in whole or in part at any time at a specified redemption price.  The proceeds of the debt issuance were used for general corporate purposes.

 

28



 

At January 31, 2005, CBK had $4.5 million of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letter of credit issued by La Salle Bank National Association.  The 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 2.6% at January 31, 2005.  Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

 

The estimated fair value of the Company’s $280.3 million and $276.1 million total long-term debt (including current portion) at January 31, 2004 and 2005 was approximately $312.8 million and $303.0 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, 2005:

 

Payments Due by Period

 

 

 

Contractual Obligations (In thousands)

 

Total

 

Less than
1 year

 

1 - 3 Years

 

3 -5 Years

 

More than
5 Years

 

Interest

 

$

111,972

 

$

18,330

 

$

36,341

 

$

32,247

 

$

25,054

 

Capital Leases

 

217

 

172

 

27

 

17

 

1

 

Purchase Obligations (1)

 

40,944

 

39,289

 

1,655

 

 

 

Long-Term Debt

 

276,062

 

4,489

 

1,630

 

153,877

 

116,066

 

Operating Leases

 

65,793

 

19,871

 

26,900

 

11,515

 

7,507

 

Lines of Credit

 

11,813

 

11,813

 

 

 

 

Other(2)

 

8,508

 

7,030

 

1,362

 

116

 

 

Total Contractual Obligations

 

$

515,309

 

$

100,994

 

$

67,915

 

$

197,772

 

$

148,628

 

 


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

(2)  Other primarily consists of 401(k), profit sharing and pension obligations.

 

The Company does not utilize derivatives for trading purposes.

 

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

 

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 2005, the Company purchased an additional 216,700 shares on the open market for a cost of $7.1 million, bringing the cumulative total purchased shares to 4,561,800 as of January 31, 2005 for a total cost of approximately $112.5 million.  The acquired shares are held as common stock in treasury at cost.

 

On June 7, 2004 the Company announced that its Board of Directors approved a repurchase of up to 4,000,000 outstanding shares of the Company’s common stock, with the right to repurchase up to an additional 2% of the Company’s outstanding shares, at a price per share not greater than $35.00 nor less than $30.00 through a Dutch auction cash tender offer.  The final number of shares repurchased under the tender offer, which expired on July 9, 2004, was 4,906,616 shares for an aggregate purchase price of $172.6 million including fees and expenses.  The tender offer was funded with $86.1 million of available cash and $86.5 million of borrowings against our $200 million Credit Facility.  The Company does not expect the tender offer to affect its share repurchase program, capital expenditures, dividend policy or acquisitions.

 

29



 

On March 17, 2005, the Company announced that it has declared a cash dividend of $0.21 per share of the Company’s common stock for the six months ended January 31, 2005.  The dividend, authorized at the Company’s March 17, 2005 Board of Directors meeting, will be payable to shareholders of record as of April 29, 2005, and will be paid on May 13, 2005.

 

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 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.

 

30



 

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, 2005 the Company had obsolete inventory reserves totaling approximately $22.4 million.

 

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.  The Company did not record any restructuring and impairment charges in fiscal 2005.  In fiscal 2004 and 2003, 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 4 to the Consolidated Financial Statements).  The Company recorded restructuring and impairment charges in fiscal 2004 totaling $23.8 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

 

31



 

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” (“SFAS No. 142”).  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 No. 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.  For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the future cash flows of the unit.  If the fair value of the reporting unit exceeds the carrying value, no further analysis is necessary.  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.

 

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 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.

 

Impact of Adoption of Recently Issued Accounting Standards

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43”. This Standard requires abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to be recognized as current period charges. Additionally, it requires that allocation of fixed production overhead costs be allocated to inventory based on the normal capacity of the production facility. The provisions of this Standard apply prospectively and are effective for us for inventory costs incurred after February 1, 2006. While we believe this Standard will not have a material effect on our financial statements, the impact of adopting these new rules is dependent on events that could occur in future periods, and as such, an estimate of the impact cannot be determined until the event occurs in future periods.

 

32



 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share-Based Payment”. This Standard requires companies to measure share-based payments at grant-date fair value and recognize the compensation expense in their financial statements.  While we previously adopted, for disclosure purposes only, the fair value based method of accounting pursuant to SFAS No. 123, “Accounting for Stock Based Compensation”, SFAS No. 123R requires a forfeiture assumption for our unvested awards. Additionally, SFAS No. 123R amends the presentation of the statement of cash flows and requires additional annual disclosures.  We will apply the provisions of this Standard using the modified prospective method for the unvested portion of previously issued awards that remain outstanding at February 1, 2006.  The implementation of this standard is not expected to have a material impact on our financial statements.

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004” (“AJCA”).  The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS109-2 provides accounting and disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately, we do not expect to be able to complete our evaluation of the repatriation provision until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first of a series of clarifying guidance documents related to this provision. We expect to complete our evaluation of the effects of the repatriation provision sometime during fiscal 2006.

 

The range of possible amounts that we are considering for repatriation under this provision is between zero and $100 million. While we estimate that the related potential range of additional income tax is between zero and $11 million, this estimation is subject to change following technical correction legislation that we believe is forthcoming from Congress. The amount of additional income tax would be reduced by the part of the eligible dividend that is attributable to foreign earnings on which a deferred tax liability had been previously accrued.

 

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.

 

33



 

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 and commodity prices.  These financial exposures are actively monitored and, where considered appropriate, managed by the Company.

 

Interest Rate Risk

 

As of January 31, 2005, the Company is subject to interest rate risk on approximately $19.4 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 its outstanding 7.90% Senior Notes, which mature on October 1, 2009.  This termination resulted in a deferred gain of approximately $5.0 million, which is being amortized over the remaining term of the Notes.

 

Foreign Currency Risk

 

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

 

The Company has designated its forward exchange and options contracts on forecasted intercompany purchases and future purchase commitments as cash flow hedges and, as such, as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in accumulated other comprehensive income (loss) (“OCI”) until earnings are affected by the variability of the cash flows being hedged.  With regard to commitments for inventory purchases, upon payment of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from accumulated OCI and is included in the measurement cost of the acquired asset.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in accumulated OCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  Approximately $1.6 million of hedge losses are included in accumulated OCI at January 31, 2005 and are expected to be transferred into earnings within the next twelve months upon payment of the underlying commitment.

 

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

 

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

 

34



 

The following table provides information about the Company’s foreign exchange forward and options contracts at January 31, 2005:

 

(In thousands, except average contract rate)

 

US Dollar
Notional Amount

 

Average
Contract Rate

 

Estimated
Fair Value

 

Canadian Dollar

 

$

9,929

 

0.78

 

$

(310

)

Euro

 

36,585

 

1.28

 

(1,877

)

Mexican Peso

 

4,000

 

0.09

 

(97

)

Australian Dollar

 

1,465

 

0.73

 

(91

)

Pound Sterling

 

500

 

1.81

 

(32

)

 

 

$

52,479

 

 

 

$

(2,407

)

 

The foreign exchange contracts outstanding have maturity dates through December 2005.

 

35



 

Item 8.    Financial Statements and Supplementary Data.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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

 

We have audited the accompanying consolidated balance sheet of Blyth, Inc. and subsidiaries (the “Company”) as of January 31, 2005, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the fiscal year then ended. Our audit also included the financial statement schedule listed in the index in Item 15 in the Company’s Annual Report on Form 10-K for the year ended January 31, 2005. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.  The financial statements of Blyth, Inc. for the years ended January 31, 2004 and 2003 were audited by other auditors whose report, dated April 26, 2004, except for Note 18, as to which the date is April 8, 2005, on those statements expressed an unqualified opinion and included an explanatory paragraph regarding the change in the Company’s method for accounting for goodwill and intangible assets in fiscal 2003 as discussed in Note 1 to the financial statements.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2005, and the results of its operations and its cash flows for the period ended January 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 15, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

 

/s/ Deloitte & Touche LLP

 

 

DELOITTE & TOUCHE LLP

 

 

April 15, 2005

Chicago, Illinois

 

36



 

Report of Independent Registered Public Accounting Firm

 

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

 

In our opinion, the accompanying consolidated balance sheet as of January 31, 2004 and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the two years in the period ended January 31, 2004 present fairly, in all material respects, the financial position, results of operations and cash flows of Blyth, Inc. and Subsidiaries (the “Company”) at January 31, 2004 and for each of the two 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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards 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.

 

 

 

/s/ PricewaterhouseCoopers LLP

 

 

PRICEWATERHOUSECOOPERS LLP

 

Stamford, Connecticut

April 26, 2004, except for Note 18, as to which the date is April 8, 2005

 

37



 

BLYTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

 

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

 

2004

 

2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

229,726

 

$

91,695

 

Accounts receivable, less allowance for doubtful receivables $4,470 in 2004 and $4,028 in 2005

 

104,502

 

124,603

 

Inventories

 

208,581

 

234,984

 

Prepaid and other

 

40,302

 

43,832

 

Assets held for sale

 

9,437

 

3,949

 

Deferred income taxes

 

14,191

 

15,068

 

Total current assets

 

606,739

 

514,131

 

Property, plant and equipment, at cost:

 

 

 

 

 

Land and buildings

 

160,920

 

190,198

 

Leasehold improvements

 

20,601

 

19,797

 

Machinery and equipment

 

182,472

 

210,674

 

Office furniture, data processing equipment and software

 

106,426

 

97,750

 

Construction in progress

 

1,039

 

3,162

 

 

 

471,458

 

521,581

 

Less accumulated depreciation

 

210,961

 

262,685

 

 

 

260,497

 

258,896

 

Other assets:

 

 

 

 

 

Investments

 

3,510

 

3,446

 

Excess of cost over fair value of assets acquired

 

204,093

 

246,182

 

Other intangible assets, net of accumulated amortization of $1,500 in 2004 and $3,867 in 2005

 

41,600

 

39,233

 

Deposits and other assets

 

11,524

 

13,932

 

 

 

260,727

 

302,793

 

Total assets

 

$

1,127,963

 

$

1,075,820

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

13,621

 

$

11,813

 

Current maturities of long-term debt

 

4,522

 

4,489

 

Accounts payable

 

78,407

 

81,333

 

Accrued expenses

 

97,395

 

94,847

 

Liability associated with assets held for sale

 

508

 

 

Income taxes

 

11,746

 

9,477

 

Total current liabilities

 

206,199

 

201,959

 

Deferred income taxes

 

33,773

 

47,740

 

Long-term debt, less current maturities

 

275,743

 

271,573

 

Other liabilities

 

23,278

 

33,199

 

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 49,975,502 shares in 2004 and 50,367,827 shares in 2005

 

999

 

1,007

 

Additional contributed capital

 

107,965

 

118,148

 

Retained earnings

 

570,171

 

651,156

 

Accumulated other comprehensive income

 

15,224

 

36,102

 

Treasury stock, at cost, 4,345,100 shares in 2004 and 9,468,416 shares in 2005

 

(105,389

)

(285,064

)

Total stockholders’ equity

 

588,970

 

521,349

 

Total liabilities and stockholders’ equity

 

$

1,127,963

 

$

1,075,820

 

 

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

 

 

38



 

 

BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings

 

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

 

2003

 

2004

 

2005

 

Net sales

 

$

1,288,583

 

$

1,505,573

 

$

1,586,297

 

Cost of goods sold

 

648,281

 

781,898

 

814,617

 

Gross profit

 

640,302

 

723,675

 

771,680

 

Selling

 

363,835

 

417,768

 

458,690

 

Administrative

 

118,329

 

129,021

 

143,660

 

Restructuring and impairment charges

 

2,621

 

23,809

 

 

 

 

484,785

 

570,598

 

602,350

 

Operating profit

 

155,517

 

153,077

 

169,330

 

Other expense (income):

 

 

 

 

 

 

 

Interest expense

 

14,664

 

17,443

 

22,138

 

Interest income and other

 

(1,737

)

(1,330

)

(1,565

)

Equity in (earnings)/losses of investees

 

33

 

71

 

(319

)

 

 

12,960

 

16,184

 

20,254

 

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

 

142,557

 

136,893

 

149,076

 

Income tax expense

 

53,032

 

50,377

 

52,922

 

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

 

89,525

 

86,516

 

96,154

 

Minority Interest

 

 

165

 

(360

)

Earnings before cumulative effect of change in accounting principle

 

89,525

 

86,351

 

96,514

 

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

 

(31,753

)

 

 

Net earnings

 

$

57,772

 

$

86,351

 

$

96,514

 

Basic:

 

 

 

 

 

 

 

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

 

$

1.94

 

$

1.89

 

$

2.24

 

Cumulative effect of change in accounting principle

 

(0.69

)

 

 

 

 

$

1.25

 

$

1.89

 

$

2.24

 

Weighted average number of shares outstanding

 

46,256

 

45,771

 

43,136

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

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

 

$

1.92

 

$

1.88

 

$

2.22

 

Cumulative effect of change in accounting principle

 

(0.68

)

 

 

 

 

$

1.24

 

$

1.88

 

$

2.22

 

Weighted average number of shares outstanding

 

46,515

 

46,027

 

43,556

 

 

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

 

39



 

BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity

 

(In thousands, except share and per share data)

 

 

 

Common stock

 

Additional
contributed
capital

 

Retained
earnings

 



Treasury stock

 

Accumulated
other
comprehensive
income (loss)

 

Total

 

Shares

 

Amount

Shares

 

Amount

Balance at February 1, 2002

 

49,509,776

 

$

990

 

$

97,879

 

$

449,038

 

(2,630,900

)

$

(62,950

)

$

(16,894

)

$

468,063

 

Net earnings for the year

 

 

 

 

 

 

 

57,772

 

 

 

 

 

 

 

57,772

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

Net earnings for the year

 

 

 

 

 

 

 

96,514

 

 

 

 

 

 

 

96,514

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

21,311

 

21,311

 

Unrealized gain on certain investments (net of tax of $75)

 

 

 

 

 

 

 

 

 

 

 

 

 

135

 

135

 

Net loss on cash flow hedging instruments (net of tax of $280)

 

 

 

 

 

 

 

 

 

 

 

 

 

(568

)

(568

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117,392

 

Common stock issued in connection with long-term incentive plan

 

392,325

 

8

 

9,463

 

 

 

 

 

 

 

 

 

9,471

 

Tax benefit from stock options

 

 

 

 

 

720

 

 

 

 

 

 

 

 

 

720

 

Dividends paid ($0.36 per share)

 

 

 

 

 

 

 

(15,529

)

 

 

 

 

 

 

(15,529

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(5,123,316

)

(179,675

)

 

 

(179,675

)

Balance at January 31, 2005

 

50,367,827

 

$

1,007

 

$

118,148

 

$

651,156

 

(9,468,416

)

$

(285,064

)

$

36,102

 

$

521,349

 

 

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

 

40



 

BLYTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

 

Year ended January 31, (In thousands)

 

2003

 

2004

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net earnings

 

$

57,772

 

$

86,351

 

$

96,514

 

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

 

30,212

 

35,954

 

35,600

 

Loss on disposition of fixed assets

 

 

2,739

 

1,070

 

Tax benefit from stock options

 

321

 

558

 

720

 

Deferred income taxes

 

4,711

 

(584

)

12,407

 

Equity in (earnings)/losses of investees

 

33

 

71

 

(319

)

Minority interest

 

 

165

 

(528

)

Restructuring and impairment charges

 

2,621

 

20,229

 

 

Gain on sale of long-term investments

 

 

(497

)

 

Gain on sale of assets held for sale

 

 

 

(492

)

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

 

 

 

 

 

 

 

Accounts receivable

 

14,896

 

(12,935

)

10,106

 

Inventories

 

(1,109

)

24,718

 

(3,391

)

Prepaid and other

 

1,452

 

(2,422

)

(10,429

)

Deposits and other assets

 

913

 

5,611

 

(1,235

)

Goodwill disposed of due to sale of assets held for sale

 

 

 

(3,621

)

Accounts payable

 

8,407

 

3,236

 

(3,199

)

Accrued expenses

 

11,970

 

6,937

 

(12,496

)

Other liabilities

 

9,356

 

2,093

 

6,565

 

Income taxes

 

(1,121

)

833

 

11,250

 

Total adjustments

 

114,415

 

86,706

 

42,008

 

Net cash provided by operating activities

 

172,187

 

173,057

 

138,522

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(14,322

)

(21,963

)

(20,976

)

Purchases of long-term investments

 

 

(1,377

)

(21,000

)

Proceeds from sale of long-term investments

 

26

 

1,874

 

21,000

 

Proceeds from sale of assets held for sale

 

 

 

13,470

 

Cash impact of Wax Lyrical receivership

 

(3,253

)

1,902

 

 

Purchase of businesses, net of cash acquired

 

(51,658

)

(148,584

)

(54,221

)

Net cash used in investing activities

 

(69,207

)

(168,148

)

(61,727

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

3,371

 

5,845

 

9,471

 

Purchases of treasury stock

 

(23,635

)

(18,804

)

(179,675

)

Borrowings from bank line of credit

 

71,961

 

67,833

 

158,761

 

Repayments on bank line of credit

 

(90,655

)

(70,931

)

(187,649

)

Borrowings on long-term debt

 

517

 

130,506

 

 

Repayments on long-term debt

 

(19,872

)

(40,663

)

(5,044

)

Dividends paid

 

(10,183

)

(12,807

)

(15,529

)

Net cash provided by (used in) financing activities

 

(68,496

)

60,979

 

(219,665

)

Effect of exchange rate changes on cash

 

(1,245

)

(4,758

)

4,839

 

Net increase in cash and cash equivalents

 

33,239

 

61,130

 

(138,031

)

Cash and cash equivalents at beginning of year

 

135,357

 

168,596

 

229,726

 

Cash and cash equivalents at end of year

 

$

168,596

 

$

229,726

 

$

91,695

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

15,355

 

$

10,800

 

$

22,380

 

Income taxes, net of refunds

 

47,741

 

47,460

 

37,270

 

 

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

 

41



 

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 and investments where the Company has been determined to be the primary beneficiary.  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.

 

Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday nearest to January 31.  Most foreign 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 U.S. 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.

 

42



 

Derivatives and Other Financial Instruments

 

The Company applies the provisions of Statement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accounting for Derivative and Hedging Activities” and its corresponding amendment under SFAS No. 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 foreign exchange forward and options contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, intercompany payables and certain intercompany loans. The Company does not hold or issue derivative financial instruments for trading purposes.

 

The Company has designated its forward exchange and options contracts on forecasted intercompany purchases and future purchase commitments as cash flow hedges and, as such, as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in accumulated other comprehensive income (loss) (“OCI”) until earnings are affected by the variability of the cash flows being hedged.  With regard to commitments for inventory purchases, upon payment of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from accumulated OCI and is included in the measurement cost of the acquired asset.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in accumulated OCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  Approximately $1.6 million of hedge losses are included in accumulated OCI at January 31, 2005 and are expected to be transferred into earnings within the next twelve months upon payment of the underlying commitment.

 

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

 

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

 

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 is being 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 values of these items approximate 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.

 

43



 

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.

 

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 operating profit.

 

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 to 7 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 to 40 years. Amortization of goodwill ceased on February 1, 2002, upon adoption of the new goodwill rules under SFAS No. 142 “Goodwill and Other Intangible Assets.”

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 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.  For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the future cash flows of the unit.  If the fair value of the reporting unit exceeds the carrying value, no further analysis is necessary.  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.

 

The Company adopted SFAS No. 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 initial impairment review, Blyth reduced the carrying value of its goodwill by $34.6 million to write-off $20.9 million in goodwill associated with the 1999 acquisition of the Gies Group, $6.3 million in goodwill associated with the 1999 acquisition of the Colony Group and $7.4 million in goodwill associated with the Sterno® brand, all of which are included in the Wholesale segment.

 

44



 

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 charge, which was partially deductible for tax purposes, was recorded in the cumulative effect of change in accounting principle and had the effect of reducing net income by $31.8 million or $0.69 per share.

 

The following table shows changes in the carrying amount of goodwill for the years ended January 31, 2004 and 2005, by operating segment:

 

(In thousands)

 

Direct Selling

 

Wholesale

 

Catalog &
Internet

 

Total

 

Goodwill at February 1, 2003

 

$