UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended July 31, 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)

 

(IRS Employer Identification No.)

 

 

 

One East Weaver Street, Greenwich, Connecticut

 

06831

(Address of principal executive offices)

 

(Zip Code)

 

(203) 661-1926

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes                            ý                                    No                                o

 

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

Yes                            ý                                    No                                o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                            o                                    No                                ý

 

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

 

40,977,144 Common Shares as of August 31, 2005

 

 



 

BLYTH, INC.

 

INDEX

 

Part I.      Financial Information

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2.

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

 

 

 

 

 

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 

Item 4.

Controls and Procedures

 

 

 

 

 

Part II.      Other Information
 
 
 
 
 

Item 1.

Legal Proceedings

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

Item 5.

Other Information

 

 

 

 

 

Item 6.

Exhibits

 

 

 

 

 

Signatures

 

 

 

2



 

Part I.   FINANCIAL INFORMATION

Item I.   FINANCIAL STATEMENTS

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

July 31,

 

January 31,

 

(In thousands, except share and per share data)

 

2005

 

2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

44,320

 

$

91,695

 

Accounts receivable, less allowance for doubtful receivables of $3,945 and $4,028, respectively

 

97,751

 

124,603

 

Inventories

 

295,113

 

234,984

 

Prepaid and other

 

49,653

 

43,832

 

Assets held for sale

 

4,092

 

3,949

 

Deferred income taxes

 

15,127

 

15,068

 

Total current assets

 

506,056

 

514,131

 

Property, plant and equipment, at cost:

 

 

 

 

 

Less accumulated depreciation of $276,878 and $262,685, respectively

 

238,082

 

258,896

 

Other assets:

 

 

 

 

 

Investments

 

3,203

 

3,446

 

Goodwill

 

243,501

 

246,182

 

Other intangible assets, net of accumulated amortization of $4,917 and $3,867, respectively

 

38,183

 

39,233

 

Deposits and other assets

 

14,144

 

13,932

 

 

 

299,031

 

302,793

 

Total assets

 

$

1,043,169

 

$

1,075,820

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

57,532

 

$

11,813

 

Current maturities of long-term debt

 

828

 

4,489

 

Accounts payable

 

64,009

 

81,333

 

Accrued expenses

 

71,015

 

94,847

 

Income taxes

 

 

9,477

 

Total current liabilities

 

193,384

 

201,959

 

Deferred income taxes

 

45,728

 

47,740

 

Long-term debt, less current maturities

 

269,988

 

271,573

 

Other long-term liabilities

 

32,495

 

33,199

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock - authorized 100,000,000 shares of $0.02 par value; issued 50,519,160 shares and 50,367,827 shares, respectively

 

1,010

 

1,007

 

Additional contributed capital

 

127,463

 

118,148

 

Retained earnings

 

656,669

 

651,156

 

Accumulated other comprehensive income

 

8,020

 

36,102

 

Unearned compensation on restricted stock

 

(3,958

)

 

Treasury stock, at cost, 9,533,416 shares and 9,468,416 shares, respectively

 

(287,630

)

(285,064

)

Total stockholders’ equity

 

501,574

 

521,349

 

Total liabilities and stockholders’ equity

 

$

1,043,169

 

$

1,075,820

 

 

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

 

3



 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

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

 

2005

 

2004

 

Net sales

 

$

647,922

 

$

648,043

 

Cost of goods sold

 

340,516

 

318,921

 

Gross profit

 

307,406

 

329,122

 

Selling

 

203,619

 

208,702

 

Administrative

 

74,658

 

67,147

 

 

 

278,277

 

275,849

 

Operating profit

 

29,129

 

53,273

 

Other expense (income):

 

 

 

 

 

Interest expense

 

10,653

 

10,258

 

Other expense (income), net

 

476

 

(1,348

)

 

 

11,129

 

8,910

 

Earnings before income taxes and minority interest

 

18,000

 

44,363

 

Income tax expense

 

4,500

 

17,243

 

Earnings before minority interest

 

13,500

 

27,120

 

Minority interest

 

(614

)

 

Net earnings

 

$

14,114

 

$

27,120

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.34

 

$

0.60

 

Weighted average number of shares

 

40,933

 

45,381

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.34

 

$

0.59

 

Weighted average number of shares

 

41,214

 

45,804

 

 

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

 

4



 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

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

 

2005

 

2004

 

Net sales

 

$

292,154

 

$

289,063

 

Cost of goods sold

 

153,093

 

142,952

 

Gross profit

 

139,061

 

146,111

 

Selling

 

91,758

 

93,627

 

Administrative

 

37,805

 

33,472

 

 

 

129,563

 

127,099

 

Operating profit

 

9,498

 

19,012

 

Other expense (income):

 

 

 

 

 

Interest expense

 

5,572

 

5,049

 

Other expense (income), net

 

(368

)

(480

)

 

 

5,204

 

4,569

 

Earnings before income taxes and minority interest

 

4,294

 

14,443

 

Income tax expense

 

525

 

5,048

 

Earnings before minority interest

 

3,769

 

9,395

 

Minority interest

 

(385

)

(50

)

Net earnings

 

$

4,154

 

$

9,445

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.10

 

$

0.21

 

Weighted average number of shares outstanding

 

40,962

 

45,097

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.10

 

$

0.21

 

Weighted average number of shares outstanding

 

41,207

 

45,502

 

 

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

 

5



 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

other

 

 

 

 

 

Common stock

 

contributed

 

Retained

 

Treasury

 

Unearned

 

comprehensive

 

 

 

 

 

Shares

 

Amount

 

capital

 

earnings

 

Stock

 

Compensation

 

income (loss)

 

Total

 

For the six months ended July 31, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2004

 

49,975,502

 

$

999

 

$

107,965

 

$

570,171

 

$

(105,389

)

$

 

$

15,224

 

$

588,970

 

Net earnings for the period

 

 

 

 

 

 

 

27,120

 

 

 

 

 

 

 

27,120

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,503

)

(3,503

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

(35

)

Net gain on cash flow hedging instruments (net of tax of $39)

 

 

 

 

 

 

 

 

 

 

 

 

 

(69

)

(69

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,513

 

Common stock issued in connection with long-term incentive plan

 

376,425

 

8

 

9,057

 

 

 

 

 

 

 

 

 

9,065

 

Tax benefit from stock options

 

 

 

 

 

630

 

 

 

 

 

 

 

 

 

630

 

Dividends

 

 

 

 

 

 

 

(7,758

)

 

 

 

 

 

 

(7,758

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(178,649

)

 

 

 

 

(178,649

)

Balance, July 31, 2004

 

50,351,927

 

$

1,007

 

$

117,652

 

$

589,533

 

$

(284,038

)

$

 

$

11,617

 

$

435,771

 

For the six months ended July 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2005

 

50,367,827

 

$

1,007

 

$

118,148

 

$

651,156

 

$

(285,064

)

$

 

$

36,102

 

$

521,349

 

Net earnings for the period

 

 

 

 

 

 

 

14,114

 

 

 

 

 

 

 

14,114

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,312

)

(29,312

)

Unrealized holding gains on certain investments (net of tax of $57)

 

 

 

 

 

 

 

 

 

 

 

 

 

151

 

151

 

Net gain on cash flow hedging instruments (net of tax of $441)

 

 

 

 

 

 

 

 

 

 

 

 

 

1,079

 

1,079

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,968

)

Common stock issued in connection with long-term incentive plan

 

151,333

 

3

 

3,399

 

 

 

 

 

 

 

 

 

3,402

 

Tax benefit from stock options

 

 

 

 

 

313

 

 

 

 

 

 

 

 

 

313

 

Issuance of restricted stock, net of cancellations

 

 

 

 

 

5,603

 

 

 

(495

)

(5,108

)

 

 

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

 

 

1,150

 

 

 

1,150

 

Dividends

 

 

 

 

 

 

 

(8,601

)

 

 

 

 

 

 

(8,601

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(2,071

)

 

 

 

 

(2,071

)

Balance, July 31, 2005

 

50,519,160

 

$

1,010

 

$

127,463

 

$

656,669

 

$

(287,630

)

$

(3,958

)

$

8,020

 

$

501,574

 

 

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

 

6



 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six months ended July 31 (In thousands)

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

14,114

 

$

27,120

 

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

 

 

 

 

 

Depreciation and amortization

 

18,843

 

17,756

 

Gain on disposition of fixed assets

 

(18

)

 

Tax benefit from stock options

 

313

 

630

 

Deferred income taxes

 

(1,120

)

1,679

 

Equity in earnings/loss of investee

 

243

 

(46

)

Minority interest

 

(674

)

(99

)

Gain on sale of assets held for sale

 

 

(364

)

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

 

 

 

 

 

Accounts receivable

 

20,700

 

18,748

 

Inventories

 

(70,394

)

(67,584

)

Prepaid and other

 

(7,438

)

3,466

 

Deposits and other assets

 

(128

)

(41

)

Goodwill disposed of due to sale of assets held for sale

 

 

(3,621

)

Accounts payable

 

(14,382

)

(18,858

)

Accrued expenses

 

(20,914

)

(22,276

)

Other liabilities

 

1,601

 

684

 

Income taxes

 

(8,913

)

251

 

Total adjustments

 

(82,281

)

(69,675

)

Net cash used in operating activities

 

(68,167

)

(42,555

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,445

)

(8,888

)

Purchases of long-term investments

 

 

(21,000

)

Proceeds from sale of assets held for sale

 

 

9,752

 

Purchase of businesses, net of cash acquired

 

(3,954

)

(6,757

)

Net cash used in investing activities

 

(11,399

)

(26,893

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

3,402

 

9,065

 

Purchases of treasury stock

 

(2,071

)

(178,649

)

Borrowings from bank line of credit

 

57,149

 

121,170

 

Repayments on bank line of credit

 

(10,094

)

(16,321

)

Repayments of long-term debt

 

(4,398

)

(4,468

)

Dividends paid

 

(8,601

)

(7,758

)

Net cash provided by (used in) financing activities

 

35,387

 

(76,961

)

Effect of exchange rate changes on cash

 

(3,196

)

880

 

Net decrease in cash and cash equivalents

 

(47,375

)

(145,529

)

Cash and cash equivalents at beginning of period

 

91,695

 

229,726

 

Cash and cash equivalents at end of period

 

$

44,320

 

$

84,197

 

 

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

 

7



 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Basis of Presentation

 

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.

 

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.  The Company also operates a small direct selling craft company.  These products are sold directly to the consumer under the PartyLite® and Purple Tree™ brands through a network of independent sales consultants using the party plan method of direct selling.  PartyLite® is sold in North America, Europe and Australia.  Purple Tree™ is sold in North America.

 

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®, 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.  These products are sold directly to the consumer under the Exposuresâ, Miles Kimballâ, Walter Drakeâ, Home Marketplace® and Directions…the path to better healthâ brands.  These products are sold primarily in North America.

 

The condensed consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  Investments in companies that are not majority owned or controlled are reported using the equity method and are recorded in investments.  Other expense (income), net consists of interest income earned from investments, foreign currency gains and losses, gains and losses from sales of investments and the Company’s equity in the income or losses of unconsolidated investments.  Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to January 31.  European operations maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary for fair presentation of the Company’s consolidated financial position at July 31, 2005 and the consolidated results of its operations and cash flows for the six-month periods ended July 31, 2005 and 2004.  These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended January 31, 2005, as set forth in the Company’s Annual Report on Form 10-K.  Operating results for the six months ended July 31, 2005 are not necessarily indicative of the results that may be expected for the year ending January 31, 2006.

 


(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.

 

8



 

Employee Stock Options

 

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

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands except per share data)

 

2005

 

2004

 

2005

 

2004

 

Net earnings:

 

 

 

 

 

 

 

 

 

As reported

 

$

4,154

 

$

9,445

 

$

14,114

 

$

27,120

 

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

 

272

 

598

 

606

 

1,043

 

Pro forma

 

$

3,882

 

$

8,847

 

$

13,508

 

$

26,077

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

As reported:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

$

0.21

 

$

0.34

 

$

0.60

 

Diluted

 

0.10

 

0.21

 

0.34

 

0.59

 

Pro forma:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.20

 

$

0.33

 

$

0.57

 

Diluted

 

0.09

 

0.19

 

0.33

 

0.57

 

 

9



 

2.                                      Business Acquisitions

 

On September 10, 2004, the Company acquired 100% interests in Edelman B.V. (“Edelman”), a designer and marketer of everyday home, garden and seasonal décor, and Euro-Decor B.V. (“Euro-Decor”), a designer and marketer of traditional and contemporary gift and florist products.  The acquisitions align with one component of the Company’s overall growth strategy, which is to grow through selected acquisitions in the Home Expressions industry.  The cash purchase price was approximately $48.6 million less cash acquired of $1.1 million resulting in net cash paid of $47.5 million.  Included in the purchase price and recorded in fiscal 2005 is a $9.2 million earn out, based on a multiple of 2004 earnings before interest and income taxes that the combined companies had achieved.  The earn out was paid in the first quarter of fiscal 2006.  The Company also assumed Edelman and Euro-Decor’s long-term debt of approximately $7.2 million.  During the fourth quarter of fiscal 2005, an adjustment was recorded to reflect the final appraised value of the acquired property, plant and equipment for $3.8 million, as well as the net pension asset of $0.6 million.  The excess of the purchase price over the estimated fair value of the net assets acquired approximated $33.0 million, which will not be deductible for income tax purposes.  The results of operations of Edelman and Euro-Decor have been included in the Condensed Consolidated Statements of Earnings of the Company since September 11, 2004.  For segment reporting purposes, Edelman and Euro-Decor are included in the Wholesale segment.

 

The following provides an allocation of the purchase price of Edelman and Euro-Decor (in thousands):

 

 

 

 

 

 

Cash Purchase Price

 

$

48,609

 

Less: Assets acquired

 

 

 

Cash

 

1,112

 

Accounts receivable

 

23,684

 

Inventories

 

16,964

 

Prepaid and other

 

4,044

 

Property, plant and equipment

 

10,109

 

Other assets

 

624

 

Total assets acquired

 

56,537

 

Plus: Liabilities assumed

 

 

 

Bank line of credit

 

18,523

 

Accounts payable

 

3,227

 

Accrued expenses

 

11,911

 

Other liabilities

 

22

 

Debt

 

7,195

 

Total liabilities assumed

 

40,878

 

Unallocated purchase price (goodwill)

 

$

32,950

 

 

10



 

The following unaudited pro forma summary financial information summarizes the estimated combined results of operations of the Company, Edelman and Euro-Decor assuming that the acquisitions of Edelman and Euro-Decor had taken place on February 1, 2004.  The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of Edelman and Euro-Decor and no representation is made by the Company with respect to the accuracy of such information.  The pro forma combined results of operations reflect adjustments for interest income, additional depreciation based on the fair market value of Edelman’s and Euro-Decor’s property, plant, and equipment, and income tax expense.

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands except per share data)

 

2005

 

2004

 

2005

 

2004

 

Net sales

 

$

292,154

 

$

300,951

 

$

647,922

 

$

682,339

 

Net earnings

 

4,154

 

8,107

 

14,114

 

26,302

 

Basic:

 

 

 

 

 

 

 

 

 

Net earnings per common share

 

$

0.10

 

$

0.18

 

$

0.34

 

$

0.58

 

Diluted:

 

 

 

 

 

 

 

 

 

Net earnings per common share

 

$

0.10

 

$

0.18

 

$

0.34

 

$

0.57

 

 

The unaudited pro forma combined results of operations are not necessarily indicative of, and do not purport to represent, what the Company’s results of operations or financial condition actually would have been had the acquisitions been made as of February 1, 2004.

 

3.                                      Inventories

 

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

 

 

 

July 31, 2005

 

January 31, 2005

 

Raw materials

 

$

32,005

 

$

27,286

 

Work in process

 

1,285

 

2,641

 

Finished goods

 

261,823

 

205,057

 

 

 

$

295,113

 

$

234,984

 

 

11



 

4.                                      Goodwill and Other Intangibles

 

The following table shows changes in the carrying amount of goodwill for the six months ended July 31, 2005, by operating segment (in thousands):

 

 

 

 

 

 

 

Catalog &

 

 

 

 

 

Direct Selling

 

Wholesale

 

Internet

 

Total

 

Goodwill at January 31, 2005

 

$

307

 

$

171,353

 

$

74,522

 

$

246,182

 

Kaemingk earn out payment

 

$

 

$

3,932

 

$

 

3,932

 

Edelman and Euro-Decor acquisition costs

 

 

22

 

 

22

 

Foreign currency translation adjustment related to Kaemingk, Edelman and Euro-Decor goodwill

 

 

(6,635

)

 

(6,635

)

Total adjustments

 

 

(2,681

)

 

(2,681

)

Goodwill at July 31, 2005

 

$

307

 

$

168,672

 

$

74,522

 

$

243,501

 

 

Other intangible assets consisted of the following (in thousands):

 

 

 

July 31, 2005

 

January 31, 2005

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Indefinite-lived trade names and trademarks

 

$

28,100

 

$

 

$

28,100

 

$

28,100

 

$

 

$

28,100

 

Customer lists

 

15,000

 

4,917

 

10,083

 

15,000

 

3,867

 

11,133

 

Total

 

$

43,100

 

$

4,917

 

$

38,183

 

$

43,100

 

$

3,867

 

$

39,233

 

 

Estimated amortization expense for the next five fiscal years is as follows:  $2.1 million, $1.8 million, $1.5 million, $1.5 million and $1.2 million.

 

5.                                      Earnings per Share

 

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

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

 

 

2005

 

2004

 

2005

 

2004

 

Net earnings

 

$

4,154

 

$

9,445

 

$

14,114

 

$

27,120

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

40,962

 

45,097

 

40,933

 

45,381

 

Dilutive effect of stock options and restricted shares

 

245

 

405

 

281

 

423

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Diluted

 

41,207

 

45,502

 

41,214

 

45,804

 

 

For the three and six-month periods ended July 31, 2005, options to purchase 275,700 and 118,000 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be anti-dilutive.  Also, for the three and six-month periods ended July 31, 2004, options to purchase 3,000 and 13,000 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be anti-dilutive.

 

12



 

6.                                      Segment Information

 

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.

 

Operating profit in all segments represent net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments.  Other expense includes interest expense, interest income and equity in earnings of investees, which are not allocated to the business segments.  Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations.  Unallocated Corporate within the identifiable assets include corporate cash and cash equivalents, prepaid income tax, corporate fixed assets, deferred bond costs and other long-term investments, which are not allocated to the business segments.

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands)

 

2005

 

2004

 

2005

 

2004

 

Net Sales

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

141,185

 

$

150,309

 

$

314,435

 

$

340,172

 

Wholesale

 

116,340

 

103,313

 

262,659

 

231,076

 

Catalog & Internet

 

34,629

 

35,441

 

70,828

 

76,795

 

Total

 

$

292,154

 

$

289,063

 

$

647,922

 

$

648,043

 

Operating profit

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

20,908

 

$

25,051

 

$

48,904

 

$

63,053

 

Wholesale

 

(8,820

)

(4,255

)

(15,477

)

(6,934

)

Catalog & Internet

 

(2,590

)

(1,784

)

(4,298

)

(2,846

)

 

 

9,498

 

19,012

 

29,129

 

53,273

 

Other expense

 

(5,204

)

(4,569

)

(11,129

)

(8,910

)

Earnings before income taxes and minority interest

 

$

4,294

 

$

14,443

 

$

18,000

 

$

44,363

 

 

 

 

July 31, 2005

 

January 31, 2005

 

Identifiable Assets

 

 

 

 

 

Direct Selling

 

$

231,929

 

$

249,126

 

Wholesale

 

608,450

 

613,819

 

Catalog & Internet

 

175,956

 

164,237

 

Unallocated Corporate

 

26,834

 

48,638

 

Total

 

$

1,043,169

 

$

1,075,820

 

 

13



 

7.                                      Assets Held for Sale

 

During the third quarter of fiscal 2005, the Colorado Springs facility, purchased as part of the Walter Drake acquisition, became available for sale and management maintains an active program to locate a buyer.  The net realizable value of the building as of July 31, 2005 is $4.1 million, which approximates the carrying value less selling costs.  The building is classified as assets held for sale in the Condensed Consolidated Balance Sheet as of July 31, 2005 and January 31, 2005.

 

8.                                      Bank Lines of Credit

 

On June 2, 2005, the Company replaced its prior $200 million credit facility with a new $150 million unsecured revolving credit facility having a five year term (the “Credit Facility”).  The Company has the ability to increase the Credit Facility, under certain circumstances, by an additional $50 million.  The Credit Facility may be used for seasonal working capital needs and general corporate purposes, including strategic acquisitions.  The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments.  Amounts outstanding under the Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate or at the Eurocurrency rate plus a credit spread ranging from 0.360% to 0.800%, calculated on the basis of the Company’s senior unsecured long-term debt rating.  On July 31, 2005, approximately $46.8 million (including letters of credit) was outstanding under the Credit Facility.

 

9.                                      Tender Offer

 

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 prior $200 million Credit Facility.

 

10.                               Contingencies

 

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

 

14



 

Item 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS:

 

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 $700 million direct selling business, an approximately $700 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 leverage more fully 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 direct to consumer 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.

 

15



 

Net Sales

 

Net Sales in the six months ended July 31, 2005, decreased $0.1 million to $647.9 million from $648.0 million in the same period a year earlier.  Net sales increased $3.1 million, or 1.1%, to $292.2 million in the second quarter of fiscal 2006 from $289.1 million in the second quarter of fiscal 2005.  The increase in net sales was primarily due to the acquisitions of Edelman and Euro-Decor, which had a positive impact of 4 percentage points.  Additionally, sales in the quarter benefited from the reversal of a contingent reserve in the amount of $5.5 million for a state settlement of an unclaimed property matter in the quarter, associated with gift cards sold since the inception of the gift card program in the Direct Selling business.  The settlement related to unclaimed property amounts for historical periods.  The $5.5 million is due to the reversal of reserves for these historical periods as well as the adjustment of reserves for gift cards not yet escheatable based on amounts of unclaimed property expected to be remitted in future periods, as a result of this settlement and historical redemption patterns for gift cards.  These increases were partially offset by a decrease in sales primarily driven by the results of the Direct Selling Segment as discussed below.

 

Net Sales - Direct Selling Segment

 

Net Sales in the Direct Selling segment for the first six months of fiscal 2006, decreased $25.8 million, or 7.6%, to $314.4 million from $340.2 million a year earlier.  Net Sales in the Direct Selling segment for the quarter ended July 31, 2005 decreased $9.1 million, or 6.1%, to $141.2 million, from $150.3 million in the quarter ended July 31, 2004.  PartyLite’s U.S. sales decreased approximately 13% compared to the prior year, which includes the effect of the aforementioned unclaimed property settlement in the quarter resulting in the reversal of $5.5 million of reserves.  Excluding the reversal of the contingent reserve, PartyLite’s U.S. sales declined 19%.  Management believes that sales in the U.S. market continue to be negatively impacted by increased competition for hostesses and party guests in the Direct Selling channelDecreases in consultant count and in the number of shows continued in the U.S. market.  PartyLite Canada reported an approximate 6% increase versus the prior year in U.S. dollars (sales were down approximately 3% in local currency).  In PartyLite’s European markets, sales increased approximately 5% in U.S. dollars (sales were approximately flat in local currencies).

 

Net Sales - Wholesale Segment

 

Net Sales in the Wholesale segment increased $31.6 million, or 13.7%, to $262.7 million in the six months ended July 31, 2005 from $231.1 million in the six months ended July 31, 2004.  Net Sales in the Wholesale segment in the quarter ended July 31, 2005, increased $13.0 million, or 12.6%, to $116.3 million from $103.3 million in the same period a year earlier.  The increase in this segment is largely due to the addition of sales from Edelman and Euro-Decor, which were acquired in September 2004.

 

Net Sales - Catalog & Internet Segment

 

Net Sales in the Catalog & Internet segment for the first six months of fiscal 2006, decreased $6.0 million, or 7.8%, to $70.8 million from $76.8 million in the same period a year earlier.  Net Sales in the Catalog & Internet segment decreased $0.8 million, or 2.3%, to $34.6 million in the quarter ended July 31, 2005, compared with $35.4 million in the same period in fiscal 2005.  The decline from last year is primarily due to a sales shortfall of the Walter Drake catalog.

 

Gross Profit

 

Gross profit in the first six months of fiscal 2006 decreased $21.7 million, or 6.6% to $307.4 million, from $329.1 million in the first half of fiscal 2005.  Gross profit margin decreased from 50.8% in the first half of fiscal 2005 to 47.4% in first half of fiscal 2006.  Gross profit decreased $7.0 million, or 4.8% from $146.1 million in the quarter ended July 31, 2004 to $139.1 million in the quarter ended July 31, 2005.  Gross profit margin decreased from 50.5% for the second quarter of fiscal 2005 to 47.6% in the second quarter of fiscal 2006.  This decline is principally due to the previously mentioned sales shortfalls in the PartyLite U.S. business, the margins of which are higher than other Blyth businesses, as well as higher commodity costs.

 

16



 

Selling Expense

 

Selling expense decreased $5.1 million, or 2.4%, from $208.7 million in the first six months of fiscal 2005, when selling expense was 32.2% of net sales, to $203.6 million in the same period in fiscal 2006, or 31.4% of net sales.  Selling expense decreased $1.8 million, or 1.9%, from $93.6 million in the quarter ended July 31, 2004 to $91.8 million in the quarter ended July 31, 2005 primarily due to reduced sales.  As a percent of sales, selling expense was 31.4% in the most recent quarter compared to 32.4% a year earlier primarily due to sales mix.

 

Administrative Expense

 

Administrative expense increased $7.6 million, or 11.3%, from $67.1 million in the first six months of fiscal 2005 to $74.7 million in the same period of fiscal 2006.  As a percent of sales, administrative expense was 11.5% in the first half of fiscal 2006 versus 10.4% in the same period last year.  Administrative expense increased $4.3 million or 12.8% from $33.5 million in the quarter ended July 31, 2004 to $37.8 million in quarter ended July 31, 2005.  As a percent of sales, administrative expense was 12.9% in the second quarter of fiscal 2006 versus 11.6% in the same period last year.  Administrative expenses primarily increased due to the acquisitions of Edelman and Euro-Decor, which were acquired in the third quarter of fiscal 2005.

 

Operating Profit

 

Operating profit decreased $24.2 million, or 45.4%, from $53.3 million in the first six months of fiscal 2005 to $29.1 million in the same period of fiscal 2006.  Operating profit decreased $9.5 million, or 50.0%, from $19.0 million in the quarter ended July 31, 2004 to $9.5 million in the quarter ended July 31, 2005.  The previously mentioned sales shortfalls in the Direct Selling segment, planned seasonal losses for Edelman and Euro-Decor and investments in organic strategic initiatives are the primary reasons for the decrease in operating profit, which more than offset the reversal of the contingent reserve of $5.5 million for the settlement of an unclaimed property matter in the quarter.

 

Operating Profit - Direct Selling Segment

 

Operating profit in the Direct Selling segment for the first six months of fiscal 2006, decreased $14.2 million, or 22.5%, to $48.9 million from $63.1 million in the same period a year earlier.  Operating profit in the quarter ended July 31, 2005 in the Direct Selling segment decreased $4.2 million, or 16.7%, to $20.9 million when compared to $25.1 million in the same period a year earlier.  As noted above, the decreased profitability resulted from sales shortfalls in PartyLite’s U.S. operations, as well as continued investments in organic strategic initiatives, which more than offset the unclaimed property settlement.

 

Operating Loss - Wholesale Segment

 

Operating loss in the Wholesale segment was $15.5 million in the six months ended July 31, 2005 compared to a loss of $6.9 million in the six months ended July 31, 2004.  Operating loss in the quarter ended July 31, 2005 in the Wholesale segment was $8.8 million versus a loss of $4.3 million the same period a year earlier.  Edelman and Euro-Decor seasonal losses and continued pressure on gross margins due to increased raw material costs were primary contributors to the operating loss in this segment.

 

17



 

Operating Loss - Catalog & Internet Segment

 

Operating loss in the Catalog & Internet segment was $4.3 million in the six months ended July 31, 2005 compared to a loss of $2.8 million in the six months ended July 31, 2004.  Operating loss in the quarter ended July 31, 2005 in the Catalog & Internet segment was $2.6 million versus a loss of $1.8 million in the same period a year earlier.  Operating loss was above prior year primarily due to the impact of reduced sales of the Walter Drake catalog.

 

Interest Expense

 

Interest expense increased approximately $0.4 million from $10.3 million in the first six months of fiscal 2005 to $10.7 million in the same period of fiscal 2006.  Interest expense increased $0.6 million from $5.0 million in the quarter ended July 31, 2004 to $5.6 million in the quarter ended July 31, 2005.  This increase is due to a higher interest rate on revolver borrowings and lower cash balances.

 

Income Taxes

 

Income tax expense decreased $12.7 million, or 73.8%, from $17.2 million in the first six months of fiscal 2005 to $4.5 million in the same period in the current fiscal year.  Income tax expense decreased $4.5 million, or 90.0%, from $5.0 million in the quarter ended July 31, 2004 to $0.5 million in quarter ended July 31, 2005.  The effective tax rate for the quarter ended July 31, 2005 was approximately 12.2% compared to 35.0% in the second quarter of fiscal 2005.  These decreases are primarily due to the decrease in U.S. earnings versus higher foreign sourced earnings, which are taxed at a lower rate than U.S. earnings and an adjustment to bring the year-to-date income tax expense to the projected estimated full year effective rate of 25.0%.

 

Net Earnings

 

As a result of the foregoing, net earnings decreased $13.0 million, or 48.0%, from $27.1 million in the first six months of fiscal 2005 to $14.1 million for the same period in fiscal 2006.  Net earnings decreased $5.2 million, or 55.3%, from $9.4 million in the second quarter of fiscal 2005 to $4.2 million in the second quarter of fiscal 2006.

 

Basic earnings per share based on the weighted average number of shares outstanding for the six months ended July 31, 2005, were $0.34, a decrease of $0.26, or 43.3%, compared to $0.60 for the six months ended July 31, 2004.  Basic earnings per share for the quarter ended July 31, 2005, were $0.10, a decrease of $0.11, or 52.4%, compared to $0.21 for the quarter ended July 31, 2004.  Diluted earnings per share based on the potential dilution that could occur if options to issue common stock were exercised, were $0.34 for the six months ended July 31, 2005, compared to $0.59 for the same period last year, a decrease of $0.25, or 42.4%.  Diluted earnings per share were $0.10 for the quarter ended July 31, 2005, compared to $0.21 for the same period last year, a decrease of $0.11, or 52.4%.

 

18



 

Liquidity and Capital Resources

 

Net cash used in operations increased to $68.2 million in the first six months of fiscal 2006 from $42.6 million in the same period of fiscal 2005.  The increase in cash used in operations in fiscal 2006 was primarily due to the reduction in net earnings.

 

Capital expenditures for property, plant and equipment were $7.4 million in the six months ended July 31, 2005 compared to $8.9 million in the prior year period.  Capital expenditures consisted primarily of investments in information technology and upgrades of equipment and facilities.  The Company expects total capital spending of approximately $20.0 million for fiscal 2006.

 

On June 2, 2005, the Company replaced its prior $200 million credit facility with a new $150 million unsecured revolving credit facility having a five year term (the “Credit Facility”).  The Company has the ability to increase the Credit Facility, under certain circumstances, by an additional $50 million.  The Credit Facility may be used for seasonal working capital needs and general corporate purposes, including strategic acquisitions.  The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments.  Amounts outstanding under the Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate or at the Eurocurrency rate plus a credit spread ranging from 0.360% to 0.800%, calculated on the basis of the Company’s senior unsecured long-term debt rating.  On July 31, 2005, approximately $46.8 million (including letters of credit) was outstanding under the Credit Facility.

 

As of July 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 2006.  Amounts outstanding under the line of credit bear interest at prime or LIBOR plus 0.90%.  No amounts were outstanding under the uncommitted line of credit at July 31, 2005.

 

At July 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 July 31, 2005, approximately $2.8 million of letters of credit were outstanding under this credit line.

 

As of June 30, 2005, The Gies Group (“Gies”) had available lines of credit of approximately $32.4 million of which approximately $2.0 million was outstanding.  The amounts outstanding under the lines of credit bear interest at a weighted average rate of 2.9% at June 30, 2005.  The lines of credit are renewed annually.

 

As of June 30, 2005, Kaemingk had available lines of credit of approximately $33.3 million with ING Bank N.V.  The lines of credit are collateralized by certain real estate and equipment owned by Kaemingk.  $4.6 million was outstanding at June 30, 2005.

 

As of June 30, 2005, Colony Gift Corporation Limited (“Colony”) had a $9.0 million short-term revolving credit facility with Barclays Bank, which matures in August 2006.  Colony had borrowings under the credit facility of approximately $1.4 million, at a weighted average interest rate of 6.4%, as of June 30, 2005.

 

As of June 30, 2005, Edelman B.V. and Euro-Decor B.V. had available lines of credit of approximately $30.3 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.  At June 30, 2005, approximately $6.3 million was outstanding at a weighted average interest rate of 2.9%.

 

At July 31, 2005, Miles Kimball had approximately $9.7 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%.

 

19



 

At June 30, 2005, Kaemingk had approximately $7.3 million of long-term debt outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 5.0%.  The bank loans have maturity dates ranging from 2008 through 2020.  The loans are collateralized by certain real estate and equipment owned by Kaemingk.

 

In July 1995, the Company privately placed $25.0 million aggregate principal amount of 7.54% Senior Notes due 2005.  The final payment on the notes was made on June 30, 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 July 31, 2005, the Company was in compliance with such provisions.  Interest is payable semi-annually in arrears 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 July 31, 2005, the Company was in compliance with such provisions.  Interest is payable semi-annually 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.

 

At July 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 3.5% at July 31, 2005.  Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

 

The Company’s Board of Directors has authorized the Company to repurchase up to 6,000,000 shares of common stock under the Company’s share repurchase program.  Since January 31, 2005, the Company has purchased an additional 65,000 shares on the open market for a cost of $2.1 million, bringing the cumulative total purchased shares to 4,626,800 as of July 31, 2005 for a total cost of approximately $114.5 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 prior $200 million credit facility.

 

On September 8, 2005, the Company announced that it had declared a cash dividend of $0.23 per share of common stock for the six months ended July 31, 2005.  The dividend authorized at the Company’s September 8, 2005 Board of Directors meeting, is payable to shareholders of record as of November 1, 2005, and will be paid on November 15, 2005.

 

Critical Accounting Policies

 

There were no changes to our critical accounting policies in the second quarter of fiscal 2006.  For a discussion of the Company’s critical accounting policies see our Annual Report on Form 10-K for the fiscal year ended January 31, 2005.

 

20



 

Recent Accounting Pronouncements

 

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 Company is still analyzing the effect of this standard, however, management does not believe the implementation of this standard will have a material impact on the financial statements.

 

21



 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

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

 

Interest Rate Risk

 

As of July 31, 2005, the Company is subject to interest rate risk on approximately $64.8 million of variable rate debt.  Each 1-percentage point change in the interest rate would impact pre-tax earnings by approximately $0.6 million if applied to the total.

 

On July 10, 2003, the Company terminated the interest rate swap agreement in relation to $50.0 million of our outstanding 7.90% Senior Notes, which mature on October 1, 2009.  This termination resulted in a deferred gain of approximately $5.0 million, which 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 $1.1 million of hedge gains are included in accumulated OCI at July 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.

 

22



 

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

 

 

 

U.S. Dollar

 

Average

 

Estimated

 

(In thousands, except average contract rate)

 

Notional Amount

 

Contract Rate

 

Fair Value

 

Canadian Dollar

 

$

5,500

 

0.85

 

$

(38

)

Pound Sterling

 

7,744

 

1.80

 

99

 

Euro

 

28,175

 

1.28

 

1,458

 

 

 

$

41,419

 

 

 

$

1,519

 

 

The foreign exchange contracts outstanding have maturity dates through 2006.

 

23



 

Item 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of July 31, 2005.

 

(b) Remediation of material weakness.

 

As discussed in Item 9A. Controls and Procedures-Management’s Report on Internal Control over Financial Reporting in our Form 10-K, as of January 31, 2005, there was a material weakness in our internal control over financial reporting related to our income tax accounting and reconciliation processes, procedures and controls, including the identification of income tax contingencies.  In fiscal 2005, and through the date of this filing, we have taken the following steps to improve our internal controls around our income tax accounting and reconciliation processes, procedures and controls:

 

                                          Enhanced the levels of review in and accelerated the timing of the preparation of the quarterly and annual income tax provision;

 

                                          Formalized processes, procedures and documentation standards relating to income tax provisions;

 

                                          Enhanced and restructured our Tax Department to ensure appropriate segregation of duties regarding preparation and review of the quarterly and annual income tax provision; and

 

                                          Engaged Ernst & Young LLP to assist the Company in its accounting for income taxes.

 

We believe we have taken steps necessary to remediate this material weakness relating to our income tax accounting and reconciliation processes, procedures and controls, however, certain of the corrective processes, procedures and controls relate to annual controls that cannot be tested until the preparation of our 2006 annual income tax provision.  Accordingly, we will continue to monitor the effectiveness of our internal controls over financial reporting related to the accounting for income taxes and will make any further changes management determines appropriate.

 

(c) Changes in internal control over financial reporting.

 

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

 

24



 

Part II.  OTHER INFORMATION

 

Item 1.           Legal Proceedings

 

None.

 

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the second quarter of the fiscal year ending January 31, 2006.

 

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

 

May 1, 2005 – May 31, 2005

 

0

 

$

0

 

0

 

1,373,200 shares

 

June 1, 2005 – June 30, 2005

 

0

 

$

0

 

0

 

1,373,200 shares

 

July 1, 2005 – July 31, 2005

 

0

 

$

0

 

0

 

1,373,200 shares

 

Total

 

0

 

$

0

 

0

 

1,373,200 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 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 July 31, 2005, the Company has purchased a total of 4,626,800 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.

 

25



 

Item 3.           Defaults upon Senior Securities

 

None

 

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

 

The following matters were voted upon at the Annual Meeting of Stockholders held on June 8, 2005, and received the votes set forth below:

 

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

 

 

 

For

 

Against

 

Withheld

 

Abstentions

 

John W. Burkhart

 

38,289,434

 

0

 

893,253

 

0

 

Wilma H. Jordan

 

38,532,442

 

0

 

650,245

 

0

 

Jim McTaggart

 

38,533,530

 

0

 

649,157

 

0

 

 

In addition to the directors elected at the meeting, the directors of the Company whose terms of office continued after the meeting are:  Roger A. Anderson, Robert B. Goergen, Pamela M. Goergen, Neal I. Goldman, Carol J. Hochman and Howard E. Rose.

 

2)              A proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors received 38,868,391 votes for, 257,815 votes against, 0 votes withheld and 56,481 abstentions.

 

Item 5.           Other Information

 

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

 

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

 

26



 

Risk of Inability to Maintain Sales Growth Rate

 

The Company has experienced significant sales growth in past years.  While management expects continued growth, our future growth rate will likely be less than our 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 our 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.  Our sales and earnings results can be negatively impacted by the worldwide economic environment, particularly the Canadian, United States and European economies.  There can be no assurances that the Company’s financial results will not be materially adversely affected by these factors in the future.

 

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

 

Risks Associated with International Sales and Foreign-Sourced Products

 

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

 

Ability to Respond to Increased Product Demand

 

The Company’s ability to meet future product demand in all of its business segments will depend upon its success in (1) 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 our 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 our products, particularly in the Direct Selling and Wholesale business segments.

 

27



 

Dependence on Key Corporate Management Personnel

 

Our success depends in part on the contributions of key corporate management, including our 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

 

Our business is highly competitive both in terms of pricing and new product introductions.  The worldwide market for Home Expressions products is highly fragmented with numerous suppliers serving one or more of the distribution channels served by the Company.  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 our 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 us.  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

 

Our 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.  Our 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 our 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.

 

28



 

Item 6.           Exhibits

 

Exhibits

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

29



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

BLYTH, INC.

 

 

 

 

 

 

 

 

 

 

 

 

Date:

September 9, 2005

 

By:

/s/Robert B. Goergen

 

 

 

 

 

Robert B. Goergen

 

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

September 9, 2005

 

By:

/s/Robert H. Barghaus

 

 

 

 

Robert H. Barghaus

 

 

 

 

Vice President and Chief Financial Officer

 

30