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 October 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.

 

40,991,644 Common Shares as of November 30, 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

(Unaudited)

 

(In thousands, except share and per share data)

 

October 31,
2005

 

January 31,
2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

44,820

 

$

91,695

 

Accounts receivable, less allowance for doubtful receivables of $4,807 and $4,028, respectively

 

194,291

 

124,603

 

Inventories

 

280,655

 

234,984

 

Prepaid and other

 

52,032

 

43,832

 

Assets held for sale

 

3,027

 

3,949

 

Deferred income taxes

 

18,687

 

15,068

 

Total current assets

 

593,512

 

514,131

 

Property, plant and equipment, at cost:

 

 

 

 

 

Less accumulated depreciation of $263,334 and $262,685, respectively

 

233,100

 

258,896

 

Other assets:

 

 

 

 

 

Investments

 

3,282

 

3,446

 

Goodwill

 

247,612

 

246,182

 

Other intangible assets, net of accumulated amortization of $5,417 and $3,867, respectively

 

37,683

 

39,233

 

Deposits and other assets

 

12,858

 

13,932

 

 

 

301,435

 

302,793

 

Total assets

 

$

1,128,047

 

$

1,075,820

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

80,803

 

$

11,813

 

Current maturities of long-term debt

 

753

 

4,489

 

Accounts payable

 

66,538

 

81,333

 

Dividends payable

 

9,425

 

 

Accrued expenses

 

95,876

 

94,847

 

Income taxes

 

3,650

 

9,477

 

Total current liabilities

 

257,045

 

201,959

 

Deferred income taxes

 

51,167

 

47,740

 

Long-term debt, less current maturities

 

269,839

 

271,573

 

Other long-term liabilities

 

34,142

 

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 50,525,060 shares and 50,367,827 shares, respectively

 

1,010

 

1,007

 

Additional contributed capital

 

127,525

 

118,148

 

Retained earnings

 

670,285

 

651,156

 

Accumulated other comprehensive income

 

8,178

 

36,102

 

Unearned compensation on restricted stock

 

(3,405

)

 

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

 

(287,739

)

(285,064

)

Total stockholders’ equity

 

515,854

 

521,349

 

Total liabilities and stockholders’ equity

 

$

1,128,047

 

$

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)

 

Nine months ended October 31 (In thousands, except per share data)

 

2005

 

2004

 

Net sales

 

$

1,092,449

 

$

1,087,487

 

Cost of goods sold

 

599,125

 

557,685

 

Gross profit

 

493,324

 

529,802

 

Selling

 

318,726

 

322,199

 

Administrative

 

111,752

 

103,268

 

 

 

430,478

 

425,467

 

Operating profit

 

62,846

 

104,335

 

Other expense (income):

 

 

 

 

 

Interest expense

 

16,173

 

16,451

 

Other expense (income), net

 

340

 

(1,757

)

 

 

16,513

 

14,694

 

Earnings before income taxes and minority interest

 

46,333

 

89,641

 

Income tax expense

 

9,788

 

32,398

 

Earnings before minority interest

 

36,545

 

57,243

 

Minority interest

 

(611

)

(120

)

Net earnings

 

$

37,156

 

$

57,363

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.91

 

$

1.31

 

Weighted average number of shares

 

40,948

 

43,885

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.90

 

$

1.29

 

Weighted average number of shares

 

41,190

 

44,338

 

 

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 October 31 (In thousands, except per share data)

 

2005

 

2004

 

Net sales

 

$

444,527

 

$

439,444

 

Cost of goods sold

 

258,608

 

238,764

 

Gross profit

 

185,919

 

200,680

 

Selling

 

115,108

 

113,497

 

Administrative

 

37,096

 

36,121

 

 

 

152,204

 

149,618

 

Operating profit

 

33,715

 

51,062

 

Other expense (income):

 

 

 

 

 

Interest expense

 

5,519

 

6,193

 

Other (income), net

 

(136

)

(409

)

 

 

5,383

 

5,784

 

Earnings before income taxes and minority interest

 

28,332

 

45,278

 

Income tax expense

 

5,288

 

15,155

 

Earnings before minority interest

 

23,044

 

30,123

 

Minority interest

 

3

 

(120

)

Net earnings

 

$

23,041

 

$

30,243

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.56

 

$

0.74

 

Weighted average number of shares outstanding

 

40,978

 

40,893

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.56

 

$

0.73

 

Weighted average number of shares outstanding

 

41,141

 

41,287

 

 

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 nine months ended October 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

 

 

 

 

 

 

 

57,363

 

 

 

 

 

 

 

57,363

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,194

)

(1,194

)

Unrealized holding gains on certain investments (net of tax of $21)

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

37

 

Net loss on cash flow hedging instruments (net of tax of $474)

 

 

 

 

 

 

 

 

 

 

 

 

 

(869

)

(869

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55,337

 

Common stock issued in connection with long-term incentive plan

 

379,725

 

8

 

9,162

 

 

 

 

 

 

 

 

 

9,170

 

Tax benefit from stock options

 

 

 

 

 

640

 

 

 

 

 

 

 

 

 

640

 

Dividends

 

 

 

 

 

 

 

(15,528

)

 

 

 

 

 

 

(15,528

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(179,206

)

 

 

 

 

(179,206

)

Balance, October 31, 2004

 

50,355,227

 

$

1,007

 

$

117,767

 

$

612,006

 

$

(284,595

)

$

 

$

13,198

 

$

459,383

 

For the nine months ended October 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

 

 

 

 

 

 

 

37,156

 

 

 

 

 

 

 

37,156

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,702

)

(31,702

)

Unrealized holding gains on certain investments (net of tax of $40)

 

 

 

 

 

 

 

 

 

 

 

 

 

123

 

123

 

Net gain on hedging instruments (net of tax of $1,218)

 

 

 

 

 

 

 

 

 

 

 

 

 

3,655

 

3,655

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,232

 

Common stock issued in connection with long-term incentive plan

 

155,733

 

3

 

3,511

 

 

 

 

 

 

 

 

 

3,514

 

Tax benefit from stock options

 

 

 

 

 

316

 

 

 

 

 

 

 

 

 

316

 

Issuance of restricted stock, net of cancellations

 

1,500

 

 

 

5,550

 

 

 

(604

)

(4,946

)

 

 

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

 

 

1,541

 

 

 

1,541

 

Dividends

 

 

 

 

 

 

 

(18,027

)

 

 

 

 

 

 

(18,027

)

Treasury stock purchases

 

 

 

 

 

 

 

 

 

(2,071

)

 

 

 

 

(2,071

)

Balance, October 31, 2005

 

50,525,060

 

$

1,010

 

$

127,525

 

$

670,285

 

$

(287,739

)

$

(3,405

)

$

8,178

 

$

515,854

 

 

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

 

6



 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine months ended October 31 (In thousands)

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

37,156

 

$

57,363

 

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

 

 

 

 

 

Depreciation and amortization

 

27,170

 

26,080

 

Gain on disposition of fixed assets

 

(18

)

 

Tax benefit from stock options

 

316

 

640

 

Deferred income taxes

 

840

 

1,454

 

Equity in (earnings)/loss of investee

 

164

 

(108

)

Minority interest

 

(730

)

(253

)

Loss/(Gain) on assets held for sale

 

1,159

 

(364

)

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

 

 

 

 

 

Accounts receivable

 

(80,049

)

(85,689

)

Inventories

 

(56,004

)

(41,520

)

Prepaid and other

 

(9,503

)

5,299

 

Deposits and other assets

 

1,161

 

(493

)

Goodwill disposed of due to sale of assets held for sale

 

 

(3,621

)

Accounts payable

 

(11,411

)

(10,921

)

Accrued expenses

 

4,418

 

2,108

 

Other liabilities

 

2,213

 

1,102

 

Income taxes

 

(5,259

)

1,365

 

Total adjustments

 

(125,533

)

(104,921

)

Net cash used in operating activities

 

(88,377

)

(47,558

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(10,820

)

(14,338

)

Purchases of long-term investments

 

 

(21,000

)

Proceeds from sales of long term investments

 

 

21,000

 

Proceeds from sale of assets held for sale

 

 

9,752

 

Purchase of businesses, net of cash acquired

 

(7,121

)

(54,221

)

Net cash used in investing activities

 

(17,941

)

(58,807

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

3,514

 

9,170

 

Purchases of treasury stock

 

(2,071

)

(179,206

)

Borrowings from bank line of credit

 

115,008

 

177,201

 

Repayments on bank line of credit

 

(43,450

)

(72,747

)

Repayments of long-term debt

 

(4,613

)

(4,713

)

Dividends paid

 

(8,602

)

(7,758

)

Net cash provided by (used in) financing activities

 

59,786

 

(78,053

)

Effect of exchange rate changes on cash

 

(343

)

129

 

Net decrease in cash and cash equivalents

 

(46,875

)

(184,289

)

Cash and cash equivalents at beginning of period

 

91,695

 

229,726

 

Cash and cash equivalents at end of period

 

$

44,820

 

$

45,437

 

 

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 under the PartyLite® brand.  The Company also operates a small direct selling craft company under the name of Purple Tree and a small direct selling gourmet food company named Two Sisters Gourmet.  All direct selling products are sold directly to the consumer through a network of independent sales consultants using the party plan method of direct selling.  PartyLite® brand products are sold in North America, Europe and Australia.  Purple Tree™ and Two Sisters Gourmet™ brand products are 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), 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, kitchen accessories and gourmet coffee and tea.  These products are sold directly to the consumer under the Boca Java™, Easy Comforts™, Exposuresâ, Home Marketplace®, Miles Kimballâ and Walter Drakeâ 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 October 31, 2005 and the consolidated results of its operations for the three and nine-month periods and cash flows for the nine-month periods ended October 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 nine months ended October 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 October 31,

 

Nine months ended October 31,

 

(In thousands except per share data)

 

2005

 

2004

 

2005

 

2004

 

Net earnings:

 

 

 

 

 

 

 

 

 

As reported

 

$

23,041

 

$

30,243

 

$

37,156

 

$

57,363

 

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

 

293

 

506

 

899

 

1,555

 

Pro forma

 

$

22,748

 

$

29,737

 

$

36,257

 

$

55,808

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

As reported:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

$

0.74

 

$

0.91

 

$

1.31

 

Diluted

 

0.56

 

0.73

 

0.90

 

1.29

 

Pro forma:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

$

0.73

 

$

0.89

 

$

1.27

 

Diluted

 

0.55

 

0.72

 

0.88

 

1.26

 

 

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 lines 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 October 31,

 

Nine months ended October 31,

 

(In thousands except per share data)

 

2005

 

2004

 

2005

 

2004

 

Net sales

 

$

444,527

 

$

467,528

 

$

1,092,449

 

$

1,149,805

 

Net earnings

 

23,041

 

33,166

 

37,156

 

59,420

 

Basic:

 

 

 

 

 

 

 

 

 

Net earnings per common share

 

$

0.56

 

$

0.81

 

$

0.91

 

$

1.35

 

Diluted:

 

 

 

 

 

 

 

 

 

Net earnings per common share

 

$

0.56

 

$

0.80

 

$

0.90

 

$

1.34

 

 

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 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):

 

 

 

October 31, 2005

 

January 31, 2005

 

Raw materials

 

$

32,805

 

$

27,286

 

Work in process

 

909

 

2,641

 

Finished goods

 

246,941

 

205,057

 

Total

 

$

280,655

 

$

234,984

 

 

11



 

4.                                      Goodwill and Other Intangibles

 

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

 

(In thousands)

 

Direct Selling

 

Wholesale

 

Catalog &
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

 

Additional investment in Two Sisters Gourmet

 

1,992

 

 

 

 

 

1,992

 

Boca Java acquisition

 

 

 

 

 

2,512

 

2,512

 

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

 

 

 

(7,028

)

 

 

(7,028

)

Total adjustments

 

1,992

 

(3,074

)

2,512

 

1,430

 

Goodwill at October 31, 2005

 

$

2,299

 

$

168,279

 

$

77,034

 

$

247,612

 

 

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

 

 

 

October 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

 

5,417

 

9,583

 

15,000

 

3,867

 

11,133

 

Total

 

$

43,100

 

$

5,417

 

$

37,683

 

$

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 October 31,

 

Nine months ended October 31,

 

 

 

2005

 

2004

 

2005

 

2004

 

Net earnings

 

$

23,041

 

$

30,243

 

$

37,156

 

$

57,363

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

40,978

 

40,893

 

40,948

 

43,885

 

Dilutive effect of stock options and restricted shares

 

163

 

394

 

242

 

453

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Diluted

 

41,141

 

41,287

 

41,190

 

44,338

 

 

For the three and nine-month periods ended October 31, 2005, options to purchase 993,200 and 440,633 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 nine-month periods ended October 31, 2004, options to purchase 57,700 and 50,200 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 October 31,

 

Nine months ended October 31,

 

(In thousands)

 

2005

 

2004

 

2005

 

2004

 

Net Sales

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

154,711

 

$

156,087

 

$

469,147

 

$

496,259

 

Wholesale

 

238,155

 

229,234

 

500,814

 

460,310

 

Catalog & Internet

 

51,661

 

54,123

 

122,488

 

130,918

 

Total

 

$

444,527

 

$

439,444

 

$

1,092,449

 

$

1,087,487

 

Operating profit

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

12,173

 

$

19,334

 

$

61,077

 

$

82,387

 

Wholesale

 

21,507

 

28,354

 

6,032

 

21,420

 

Catalog & Internet

 

35

 

3,374

 

(4,263

)

528

 

 

 

33,715

 

51,062

 

62,846

 

104,335

 

Other expense

 

(5,383

)

(5,784

)

(16,513

)

(14,694

)

Earnings before income taxes and minority interest

 

$

28,332

 

$

45,278

 

$

46,333

 

$

89,641

 

 

 

 

October 31, 2005

 

January 31, 2005

 

Identifiable Assets

 

 

 

 

 

 

 

 

 

Direct Selling

 

 

 

$

234,726

 

 

 

$

249,126

 

Wholesale

 

 

 

683,647

 

 

 

613,819

 

Catalog & Internet

 

 

 

177,828

 

 

 

164,237

 

Unallocated Corporate

 

 

 

31,846

 

 

 

48,638

 

Total

 

 

 

$

1,128,047

 

 

 

$

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.  During the third quarter of fiscal 2006, the Company recorded an impairment charge in relation to the facility of $1.2 million due to the deterioration of local real estate market conditions.  The net realizable value of the building as of October 31, 2005 is $3.0 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 October 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 October 31, 2005, approximately $46.6 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.                               Hedges of Net Investments in Foreign Operations

 

Management reevaluated its net investment hedging strategy in the third quarter of fiscal 2006 and decided to hedge the net assets of certain of its foreign operations through foreign currency forward contracts.  Any increase or decrease in the fair value of the forwards related to changes in the spot foreign exchange rates is offset by the change in the value of the hedged net assets of the foreign operations relating to changes in spot foreign exchange rates.  The net after-tax gain related to the derivative net investment hedge instruments recorded in OCI totaled $3.3 million as of October 31, 2005.

 

11.                               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.  As part of our strategy to invest in strategic initiatives we have developed Purple Tree, a new direct selling company, which markets crafts.  In addition we completed the acquisition of a small gourmet food company, Two Sisters Gourmet that also markets its products through the direct selling channel.  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.  We entered the Catalog and Internet channel of direct to consumer distribution, giving us a presence in all of our desired channels in 2003.  Our latest acquisition, Boca Java, a small gourmet coffee and tea company was in this segment.

 

Recent Developments

 

In September 2005, the Company announced its proposed intention to spin off the Wholesale segment to its stockholders.  The Company expects to receive a ruling from the Internal Revenue Service relating to certain aspects of the proposed tax-free spin off prior to the end of the calendar year.  Management intends to evaluate additional strategic opportunities that have been identified since the announcement of the spin off.  Initiatives intended to separate the Wholesale segment continue, though management has paused in its immediate efforts to complete the spin off.

 

15



 

Net Sales

 

Net Sales in the nine months ended October 31, 2005 increased $4.9 million to $1,092.4 million from $1,087.5 million in the same period a year earlier.  This increase in net sales is primarily due to the acquisitions of Edelman and Euro-Decor, which were partially offset by lower sales in the Direct Selling segment and most Wholesale businesses.

 

Net sales increased $5.1 million, or 1.2%, to $444.5 million in the third quarter of fiscal 2006 from $439.4 million in the third quarter of fiscal 2005.  The increase in net sales was primarily due to the acquisitions of Edelman and Euro-Decor, and increased sales of North American mass channel home fragrance products.  These increases were partially offset by decreased sales in PartyLite U.S., across the remaining Wholesale product lines and within the Catalog and Internet businesses.

 

Net Sales - Direct Selling Segment

 

Net Sales in the Direct Selling segment for the first nine months of fiscal 2006 decreased $27.2 million, or 5.5%, to $469.1 million from $496.3 million a year earlier.  PartyLite’s U.S. sales decreased 12.5%, which includes the effect of the unclaimed property settlement in the second quarter resulting in the reversal of $5.5 million of reserves.  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 channel.  PartyLite Canada’s sales increased 6.8% and PartyLite Europe’s sales increased 5.8%.

 

Net Sales in the Direct Selling segment for the quarter ended October 31, 2005 decreased $1.4 million, or 0.9%, to $154.7 million, from $156.1 million in the quarter ended October 31, 2004.  PartyLite’s U.S. sales decreased approximately 7.4% compared to the prior year.  PartyLite Canada reported an approximate 25.2% increase versus the prior year due to the strength of the holiday product line and successful promotions to recruit new consultantsIn PartyLite’s European markets, sales increased approximately 4.5% as a result of strong holiday product line sales in most markets.

 

Net Sales - Wholesale Segment

 

Net Sales in the Wholesale segment increased $40.5 million, or 8.8%, to $500.8 million in the nine months ended October 31, 2005 from $460.3 million in the nine months ended October 31, 2004.  Edelman and Euro-Decor, which were acquired in September 2004, contributed an increase in net sales of $59.3 million to the segment.  This increase was partially offset by sales declines in most of the other Wholesale businesses, which the company believes is caused by a reluctance of retailers to make significant purchases due to widespread reduced consumer spending.

 

Net Sales in the Wholesale segment in the quarter ended October 31, 2005 increased $9.0 million, or 3.9%, to $238.2 million from $229.2 million in the same period a year earlier.  Edelman and Euro-Decor contributed increased sales of $24.5 million.  Additionally, net sales of our North American mass channel home fragrance products increased.  These increases were partially offset by decreased sales across the remaining Wholesale product lines and markets in the quarter.  The Company believes these decreased sales were caused by continued hesitation of retailers to make purchases because of reduced consumer spending due to higher fuel and commodity costs.

 

Net Sales - Catalog & Internet Segment

 

Net Sales in the Catalog & Internet segment for the first nine months of fiscal 2006 decreased $8.4 million, or 6.4%, to $122.5 million from $130.9 million in the same period a year earlier.  This decline from last year is

 

16



 

attributable to sales shortfalls in our primary catalogs, which the Company believes is due to limited discretionary spending by consumers as mentioned in the Wholesale segment.

 

Net Sales in the Catalog & Internet segment decreased $2.4 million, or 4.4%, to $51.7 million in the quarter ended October 31, 2005, compared with $54.1 million in the same period in fiscal 2005.  The decline from last year is driven by lower sales in all four major catalogs, which as previously mentioned, the Company believes is due to limitations on discretionary consumer spending.

 

Gross Profit

 

Gross profit in the first nine months of fiscal 2006 decreased $36.5 million, or 6.9% to $493.3 million, from $529.8 million in the first nine months of fiscal 2005.  Gross profit margin decreased from 48.7% for the first nine months of fiscal 2005 to 45.2% for the first nine months of fiscal 2006.  The decrease from prior year is principally due to sales shortfalls within PartyLite U.S., the margins of which are higher than Blyth’s overall average, as well as higher commodity costs.

 

Gross profit decreased $14.8 million, or 7.4% from $200.7 million in the quarter ended October 31, 2004 to $185.9 million in the quarter ended October 31, 2005.  Gross profit margin decreased from 45.7% for the third quarter of fiscal 2005 to 41.8% in the third quarter of fiscal 2006.  This decline is primarily due to lower PartyLite U.S. sales, and higher commodity costs across all business units.

 

Selling Expense

 

Selling expense decreased $3.5 million, or 1.1%, from $322.2 million in the first nine months of fiscal 2005, when selling expense was 29.6% of net sales, to $318.7 million in the same period in fiscal 2006, or 29.2% of net sales.  The decrease in selling expense is primarily due to reduced sales in the North American Direct Selling channel, which was offset by the full year impact of the September 2004 acquisitions of Edelman and Euro-Decor.

 

Selling expense increased $1.6 million, or 1.4%, from $113.5 million in the quarter ended October 31, 2004 to $115.1 million in the quarter ended October 31, 2005.  As a percent of sales, selling expense was essentially flat at 25.9% in the most recent quarter compared to 25.8% a year earlier.  As previously mentioned, the increase is primarily due to a full quarter of Edelman and Euro-Decor selling expenses.

 

Administrative Expense

 

Administrative expense increased $8.5 million, or 8.2%, from $103.3 million in the first nine months of fiscal 2005 to $111.8 million in the same period of fiscal 2006.  As a percent of sales, administrative expense was 10.2% in the first nine months of fiscal 2006 versus 9.5% in the same period last year.  The increase in administrative expenses versus the prior year is primarily due to the acquisitions of Edelman and Euro-Decor.

 

Administrative expense increased $1.0 million or 2.8% from $36.1 million in the quarter ended October 31, 2004 to $37.1 million in quarter ended October 31, 2005.  As a percent of sales, administrative expense was 8.3% in the third quarter of fiscal 2006 versus 8.2% in the same period last year.  Administrative expenses primarily increased due to the acquisitions of Edelman and Euro-Decor and the $1.2 million write-down of the Colorado Springs facility, which is currently held for sale.  This increase was offset by a reduction in administrative expenses in the Direct Selling segment and the U.S. Wholesale businesses.

 

17



 

Operating Profit

 

Operating profit decreased $41.5 million, or 39.8%, from $104.3 million in the first nine months of fiscal 2005 to $62.8 million in the same period of fiscal 2006.  This decline is primarily due to lower PartyLite U.S., Wholesale and Catalog & Internet segment sales, investments in organic strategic initiatives and higher commodity costs across our businesses.

 

Operating profit decreased $17.4 million, or 34.1%, from $51.1 million in the quarter ended October 31, 2004 to $33.7 million in the quarter ended October 31, 2005.  The decrease is primarily due to reduced sales at PartyLite U.S., in many of our Wholesale businesses and in the Catalog & Internet segment, as well as higher commodity costs.

 

Operating Profit - Direct Selling Segment

 

Operating profit in the Direct Selling segment for the first nine months of fiscal 2006 decreased $21.3 million, or 25.8%, to $61.1 million from $82.4 million in the same period a year earlier.  This decrease was primarily driven by the previously mentioned 12.5% sales shortfall of PartyLite U.S., increased commodity costs, and the ongoing investments being made in the organic strategic initiatives, Purple Tree and Two Sisters Gourmet.  These items more than offset the favorable impact of the reversal of the contingent reserve for the settlement of an unclaimed property matter in the second quarter.

 

Operating profit in the quarter ended October 31, 2005 in the Direct Selling segment decreased $7.1 million, or 36.8%, to $12.2 million when compared to $19.3 million in the same period a year earlier.  This decline was due to the impact of the previously discussed 7.4% decrease in PartyLite U.S. sales, lower gross margins as a result of higher commodity costs, and this year’s expenses related to the North American and European national conferences, which were higher than the previous year.

 

Operating Profit - Wholesale Segment

 

Operating profit in the Wholesale segment decreased $15.4 million, or 72.0% in the nine months ended October 31, 2005 to $6.0 million compared to a profit of $21.4 million in the nine months ended October 31, 2004.  Sales shortfalls in most Wholesale businesses as well as continued pressure on gross margins due to increased raw material costs were the primary contributors to the decrease in operating profit in this segment compared to the prior year.

 

Operating profit in the quarter ended October 31, 2005 in the Wholesale segment decreased $6.9 million, or 24.3% to $21.5 million versus a profit of $28.4 million the same period a year earlier.  The decline from last year was due to the impact of reduced sales and gross margins in almost all of the businesses.  Also, prior year results included a positive gain of $2.2 million from the Monterrey fire insurance recovery.

 

Operating Loss/Profit- Catalog & Internet Segment

 

Operating loss in the Catalog & Internet segment was $4.3 million in the nine months ended October 31, 2005 compared to a profit of $0.5 million in the nine months ended October 31, 2004.  The decrease in profitability compared to the prior year is primarily due to the impact of the previously mentioned reduced sales and write-down of the Colorado Springs facility.

 

Operating profit in the quarter ended October 31, 2005 in the Catalog & Internet segment decreased $3.3 million, or 97.1% to $0.1 million versus a profit of $3.4 million in the same period a year earlier.  The decrease from prior year is primarily due to sales declines and the write-down of the Colorado Springs facility.

 

18



 

Interest Expense

 

Interest expense decreased approximately $0.3 million, or 1.8% from $16.5 million in the first nine months of fiscal 2005 to $16.2 million in the same period of fiscal 2006.  This decrease is mainly due to a decrease in borrowings.

 

Interest expense decreased $0.7 million, or 11.3% from $6.2 million in the quarter ended October 31, 2004 to $5.5 million in the quarter ended October 31, 2005.  This decrease is mainly due to interest expense incurred last year on additional debt used to fund the Dutch tender offer and the acquisitions of Edelman and Euro-Decor.

 

Income Taxes

 

Income tax expense decreased $22.6 million, or 69.8%, from $32.4 million in the first nine months of fiscal 2005 to $9.8 million in the same period in the current fiscal year.  The effective tax rate for the nine months ended October 31, 2005 was approximately 21.1% compared to 36.1% in the prior year.  The decrease in the tax rate is 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.  Based on our current estimates, we anticipate that our full year effective income tax rate for fiscal 2006 will be approximately 22%.

 

Income tax expense decreased $9.9 million, or 65.1%, from $15.2 million in the quarter ended October 31, 2004 to $5.3 million in quarter ended October 31, 2005.  The effective tax rate for the quarter ended October 31, 2005 was approximately 18.7% compared to 33.5% in the third quarter of fiscal 2005.  The decrease in the tax rate is primarily due to the decrease in U.S. earnings versus higher foreign sourced earnings, as previously mentioned, and the reversal of tax reserves as a result of the favorable resolution of tax contingencies during the quarter.

 

Net Earnings

 

As a result of the foregoing, net earnings decreased $20.2 million, or 35.2%, from $57.4 million in the first nine months of fiscal 2005 to $37.2 million for the same period in fiscal 2006.  Net earnings decreased $7.2 million, or 23.8%, from $30.2 million in the third quarter of fiscal 2005 to $23.0 million in the third quarter of fiscal 2006.

 

Basic earnings per share based on the weighted average number of shares outstanding for the nine months ended October 31, 2005, were $0.91, a decrease of $0.40, or 30.5%, compared to $1.31 for the nine months ended October 31, 2004.  Basic earnings per share for the quarter ended October 31, 2005, were $0.56, a decrease of $0.18, or 24.3%, compared to $0.74 for the quarter ended October 31, 2004.  Diluted earnings per share based on the potential dilution that could occur if options to issue common stock were exercised, were $0.90 for the nine months ended October 31, 2005, compared to $1.29 for the same period last year, a decrease of $0.39, or 30.2%.  Diluted earnings per share were $0.56 for the quarter ended October 31, 2005, compared to $0.73 for the same period last year, a decrease of $0.17, or 23.3%.

 

Liquidity and Capital Resources

 

Net cash used in operations increased to $88.4 million in the first nine months of fiscal 2006 from $47.6 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 and increases in inventory and prepaids that have resulted in a higher usage of cash to fund working capital needs in fiscal 2006.

 

Capital expenditures for property, plant and equipment were $10.8 million in the nine months ended October 31, 2005 compared to $14.3 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 $15.0 million for fiscal 2006.

 

19



 

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 October 31, 2005, approximately $46.6 million (including letters of credit) was outstanding under the Credit Facility.

 

As of October 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 October 31, 2005.

 

At October 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 October 31, 2005, approximately $2.3 million of letters of credit were outstanding under this credit line.

 

As of September 30, 2005, The Gies Group (“Gies”) had available lines of credit of approximately $39.9 million of which approximately $6.4 million was outstanding.  The amounts outstanding under the lines of credit bear interest at a weighted average rate of 3.1% at September 30, 2005.  The lines of credit are renewed annually.

 

As of September 30, 2005, Kaemingk had an available line of credit of approximately $33.0 million with ING Bank N.V.  The line of credit is collateralized by certain real estate and equipment owned by Kaemingk.  $10.3 million was outstanding at September 30, 2005, at an interest rate of 3.65%.

 

As of September 30, 2005, Colony Gift Corporation Limited (“Colony”) had an $8.8 million short-term revolving credit facility with Barclays Bank, which matures in August 2006.  Colony had borrowings under the credit facility of approximately $3.3 million, at a weighted average interest rate of 5.6%, as of September 30, 2005.

 

As of September 30, 2005, Edelman B.V. and Euro-Decor B.V. had available lines of credit of approximately $30.0 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 September 30, 2005, approximately $17.8 million was outstanding at a weighted average interest rate of 3.0%.

 

At October 31, 2005, Miles Kimball had approximately $9.5 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 September 30, 2005, Kaemingk had approximately $7.1 million of long-term debt outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 4.97%.  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

 

20



 

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 October 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 October 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 October 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 4.1% at October 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 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 October 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, was payable to shareholders of record as of November 1, 2005, and was paid on November 15, 2005.  The total payment was $9.4 million.

 

The Board of Directors, at its December 9, 2005 meeting, approved the acceleration of the vesting of all outstanding, unvested stock options.  The Board of Directors decided it was in the best interests of stockholders to accelerate these options as the Company will avoid compensation expense of approximately $2.7 million (pre-tax) in future periods that would otherwise result from the effectiveness of SFAS 123R for periods beginning subsequent to February 1, 2006.  As a result, options to purchase approximately 350,000 shares became exercisable immediately.  Based on the December 9, 2005 closing stock price of $20.11, virtually all of the stock options had an exercise price below fair market value at the acceleration date, and the Company will record an expense of less than $1,000 in the fourth quarter in connection with the accelerated vesting.

 

Subject to Board approval, the Company intends to repatriate up to €104 million (approximately $130 million) in foreign earnings, which were previously considered permanently reinvested in non-U.S. legal entities, under the American Jobs Creation Act of 2004.  The funds are expected to be brought back to the United States late in the fourth quarter and will receive the favorable tax treatment provided by the Act.  The Company expects to record a one-time tax expense of up to approximately $9.8 million, or $0.24 per share, in the fourth quarter to recognize the income tax liability associated with repatriating these funds.  As part of its repatriation plan, the Company intends to make a domestic investment of the repatriated amount in a wide range of initiatives, including the hiring and training of U.S. workers, research and development efforts, qualified retirement plan funding, capital expenditures to support the U.S. businesses, advertising and marketing with respect to its various trademarks, brand names and rights to intangible property, and acquisitions of U.S.-based businesses, all consistent with the requirements of the legislation.

 

Critical Accounting Policies

 

There were no changes to our critical accounting policies in the third 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.

 

21



 

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.  As described above, the Board of Directors approved the acceleration of all outstanding unvested stock options on December 9, 2005.  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.

 

22



 

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 October 31, 2005, the Company is subject to interest rate risk on approximately $88.0 million of variable rate debt.  Each 1-percentage point change in the interest rate would impact pre-tax earnings by approximately $0.9 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 the net assets of certain of its foreign operations, 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 hedged the net assets of certain of its foreign operations through foreign currency forward contracts.  Any increase or decrease in the fair value of the forwards related to changes in the spot foreign exchange rates is offset by the change in the value of the hedged net assets of the foreign operations relating to changes in spot foreign exchange rates.  The net after-tax gain related to the derivative net investment hedge instruments recorded in OCI totaled $3.3 million as of October 31, 2005.

 

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 $0.3 million of hedge gains related to cash flow hedges are included in accumulated OCI at October 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.

 

23



 

The following table provides information about the Company’s foreign exchange forward and options contracts at October 31, 2005 related to cash flow hedges:

 

 

 

U.S. Dollar

 

Average

 

Estimated

 

(In thousands, except average contract rate)

 

Notional Amount

 

Contract Rate

 

Fair Value

 

Canadian Dollar

 

$

8,850

 

0.84

 

$

(93

)

Pound Sterling

 

5,368

 

1.79

 

119

 

Euro

 

19,100

 

1.23

 

395

 

 

 

$

33,318

 

 

 

$

421

 

 

The foreign exchange contracts outstanding have maturity dates through 2006.

 

24



 

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 October 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.

 

The steps above will assist the Company in improving its internal controls in its income tax accounting and reconciliation processes, procedures and controls.  We believe that we continue to improve the design and operating effectiveness of such internal controls to remediate the material weakness previously identified.  Certain of the corrective processes, procedures and controls have yet to be tested, some of which relate to annual controls that cannot be tested until the preparation of our fiscal 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.

 

25



 

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 third 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

 

 

 

 

 

 

 

 

 

 

 

 

August 1, 2005 – August 31, 2005

 

0

 

$

0

 

0

 

1,373,200 shares

 

 

 

 

 

 

 

 

 

 

 

 

September 1, 2005 – September 30, 2005

 

0

 

$

0

 

0

 

1,373,200 shares

 

 

 

 

 

 

 

 

 

 

 

 

October 1, 2005 – October 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 October 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.

 

26



 

Item 3.        Defaults upon Senior Securities

 

None

 

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

 

None

 

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.

 

27



 

Risk of Inability to Maintain Sales Growth Rate

 

The Company experienced significant sales growth in past years.  While management expects continued growth, our future growth rate will likely be more gradual 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.

 

28



 

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.

 

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.

 

29



 

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.

 

30



 

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:

December 12, 2005

 

By:

/s/Robert B. Goergen

 

 

Robert B. Goergen

 

Chairman and Chief Executive Officer

 

 

 

 

Date:

December 12, 2005

 

By:

/s/Robert H. Barghaus

 

 

Robert H. Barghaus

 

Vice President and Chief Financial Officer

 

31