UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

 

x

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

For the fiscal year ended January 31, 2006

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

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

One East Weaver Street

 

 

Greenwich, Connecticut

 

06831

(Address of principal executive offices)

 

(Zip Code)

 

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

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

 

Name of each exchange

Title of each class

 

on which registered

Common Stock, par value $0.02 per share

 

New York Stock Exchange

 

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No þ

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 þ   No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   þ

 

Accelerated filer   o

 

Non-accelerated filer   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No þ

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $776.9 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on July 31, 2005 and based on the assumption, for purposes of this computation only, that all of the registrant’s directors and executive officers are affiliates.

As of March 31, 2006, there were 40,994,644 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2006 Proxy Statement for the Annual Meeting of Shareholders to be held on June 7, 2006 (Incorporated into Part III).

 




TABLE OF CONTENTS

 

PART I

 

 

Item 1.

 

Business

 

3

Item 1A.

 

Risk Factors

 

8

Item 1B.

 

Unresolved Staff Comments

 

10

Item 2.

 

Properties

 

11

Item 3.

 

Legal Proceedings

 

12

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

12

 

 

PART II

 

 

Item 5.

 

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

 

12

Item 6.

 

Selected Financial Data

 

14

Item 7.

 

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

 

15

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

30

Item 8.

 

Financial Statements and Supplementary Data

 

32

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 

 

71

Item 9A.

 

Controls and Procedures

 

71

Item 9B.

 

Other Information

 

74

 

 

PART III

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

74

Item 11.

 

Executive Compensation

 

74

Item 12.

 

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

 

74

Item 13.

 

Certain Relationships and Related Transactions

 

74

Item 14.

 

Principal Accountant Fees and Services

 

74

 

 

PART IV

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

75

 

2




PART I

Item 1.                        Business

(a)   General Development of Business

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

Blyth was incorporated in the state of Delaware in 1977 and became a publicly traded company in 1994, at which time net sales were approximately $157.5 million. Internal growth and acquisitions have contributed to significant overall growth since that time. Internal growth has been generated by increased sales of existing Home Expressions products to consumers and retailers, the introduction of new products and product line extensions and geographic expansion. The Company has also integrated numerous acquisitions into its operations since its formation in 1977.

In September 2005, we announced our proposed intention to spin off the Wholesale segment to our stockholders. We requested and received from the Internal Revenue Service a ruling on the tax-free status for the transaction. We intend to evaluate additional strategic opportunities that have been identified since the announcement of the spin off. We have engaged outside consultants to advise us on potential opportunities within the Wholesale segment, and we will likely focus on one or more of our European Wholesale businesses. Believing that substantial upside opportunities exist in the North American Wholesale business and having made significant investments in sales force integration and productivity, as well as new product development, we remain committed to the success of these and other initiatives despite challenging market conditions impacting the Home Expressions industry.

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

(b)   Financial Information about Segments

The Company reports its financial results in three business segments: the Direct Selling segment, the Wholesale segment and the Catalog & Internet segment. These segments accounted for approximately 45%, 43% and 12% of consolidated net sales, respectively, for the fiscal year ended January 31, 2006. Financial information relating to these business segments for the years ended January 31, 2004, 2005 and 2006 appears in Note 19 of the Company’s consolidated financial statements and is incorporated herein by reference.

3




(c)   Narrative Description of Business

Direct Selling Segment

In fiscal 2006, the Direct Selling segment represented approximately 45% of Blyth’s total sales. The Company’s principal Direct Selling business is PartyLite. PartyLiteâ brand products are marketed in North America, Europe and Australia through a network of independent sales consultants using the party plan method of direct selling. These products are designed, manufactured or sourced, marketed and distributed and include fragranced and non-fragranced candles, bath products and a broad range of related accessories.

In fiscal 2005, the Company introduced a party plan company called Purple Tree, which is focused on the craft industry, and, in fiscal 2006, the Company acquired a party plan company called Two Sisters Gourmet, which is focused on gourmet food. These two businesses represent substantially less than 1% of total sales from the Direct Selling segment. In the future, the Company may pursue other direct selling business opportunities.

United States Market

Within the United States market, PartyLite brand products are sold directly to consumers through a network of independent sales consultants. These consultants are compensated on the basis of PartyLite product sales at parties organized by them and parties organized by consultants recruited by them. Over 27,000 independent sales consultants located in the United States were selling PartyLite products at January 31, 2006. PartyLite products are designed, packaged and priced in accordance with their premium quality, exclusivity and the distribution channel through which they are sold.

International Market

In fiscal 2006, PartyLite products were sold internationally by more than 19,000 independent sales consultants located outside the United States. These consultants were the exclusive distributors of PartyLite brand products internationally. The following were PartyLite’s international markets during fiscal 2006: Australia, Austria, Canada, Denmark, Finland, France, Germany, Mexico, Switzerland and the United Kingdom.

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

Wholesale Segment

In fiscal 2006, this segment represented approximately 43% of Blyth’s total sales. Products designed, manufactured or sourced, marketed and distributed within this segment include candles and other home fragrance products, a broad range of candle-related accessories, seasonal decorations such as ornaments, artificial trees and trim, and home décor products such as picture frames, lamps and textiles. In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold in this segment. Our wholesale products are sold to more than 40,000 retailers in multiple channels of distribution in North America and Europe under brand names that include Ambria®, Asp-Holmblad®(1), Carolina®, CBK®, Colonial™(1), Colonial Candle of Cape Cod®, Colonial at HOME®, Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), HandyFuel™, Kaemingk™(2), Liljeholmens®, Seasons of Cannon Falls®, Sterno® and Triumph Tree®(1). Our wholesale products are designed, packaged and priced to satisfy the varying demands of retailers and consumers within each distribution channel.


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

(2)             Sold outside the United States only.

4




United States Market

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

International Market

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

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

The Company effectively supports customers with inventory management and control and satisfies delivery requirements through various management ordering systems. The Company’s independent sales representatives and sales managers in the premium wholesale channel are supported by advanced sales tools to support showroom, road and telephone sales efforts.

Recent Dispositions

In January 2006, we sold our Impact Plastics seasonal decorations business to the former owner of that business.

Catalog & Internet Segment

In fiscal 2006, this segment represented approximately 12% of Blyth’s total sales. Blyth designs, markets and distributes a wide range of household convenience items, personalized gifts and photo storage products within this segment. These products are sold through the catalog and Internet distribution channel under brand names that include Easy Comforts™, Exposures®, Home Marketplace®, Miles Kimball® and Walter Drake®.

5




Product Brand Names

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

PartyLite®

Well Being by PartyLite™

 

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

Ambria®

 

Florasense®

Asp-Holmblad®

 

Gies®

Carolina®

 

HandyFuel™

CBK®

 

Kaemingk™

Colonial™

 

Liljeholmens®

Colonial Candle of Cape Cod®

 

Seasons of Cannon Falls®

Colonial at HOME®

 

Sterno®

Edelman®

 

Triumph Tree®

Euro-Decor®

 

 

 

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

Easy Comforts™

Exposures®

Home Marketplace®

Miles Kimball®

Walter Drake®

 

New Product Development

Concepts for new products and product line extensions are directed to the marketing departments of our business units from within all areas of the Company, as well as from the Company’s independent sales representatives and worldwide product manufacturing partners. The new product development process may include technical research, consumer market research, fragrance studies, comparative analyses, the formulation of engineering specifications, feasibility studies, safety assessments, testing and evaluation. New products typically account for at least 40% of our net sales in the first full year following their introduction.

Manufacturing, Sourcing and Distribution

In all of our business segments, management continuously works to increase value and lower costs through increased efficiency in worldwide production, sourcing and distribution practices, the application of new technologies and process control systems, and consolidation and rationalization of equipment and facilities. Capital expenditures over the past five years have totaled $86.4 million and are targeted to technological advancements or capital investments with short payback time frames. Management has also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions.

Blyth manufactures most of its candles and sources nearly all of its other products. In fiscal 2006, Blyth sourced approximately 65% of its products from independent manufacturers in the Pacific Rim, Europe and Mexico. Blyth manufactures approximately 35% of its products using highly automated processes and technologies, as well as certain hand crafting and finishing. Many of the Company’s products are manufactured by others based on Blyth’s design specifications, making the Company’s global supply chain approach critically important to its new product development process, quality control and cost

6




management. Management has also built a network of stand-alone highly automated distribution facilities in its core markets.

Technological Advancements

The Company continues to see the benefit of its substantial investment in technological initiatives, particularly Internet-based ordering technology. An Internet-based order-entry and business management system is available to all PartyLite independent sales consultants in the United States, Canada and most of Europe. By fiscal 2006 year-end, show orders placed via the PartyLite Extranet had increased to over 85% of total show orders in North America and over 40% of total show orders in Europe. The Extranet’s automated features eliminate errors common on hand-written paper forms and speed orders through processing and distribution, improving customer service. Furthermore, by easing the administrative workload and providing tools with which to track sales and programs, the Extranet has helped PartyLite independent sales consultants build their businesses more efficiently. The improved accuracy of the automated system also results in administrative savings for the Company.

Customers

Customers in the Direct Selling segment are individual consumers served by independent sales consultants. Sales within the Catalog & Internet segment are also made directly to consumers. Blyth’s Wholesale segment customers include independent gift and department stores, garden centers, mass merchandisers, specialty chains, food and drug stores, foodservice distributors, hotels and restaurants. No single customer accounts for 10% or more of Blyth’s sales.

Competition

All of the Company’s business segments are 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 Blyth’s business segments, the Company may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to Blyth. Competition includes companies selling candles manufactured at low cost outside of the United States. Moreover, certain competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

Employees

As of January 31, 2006, we had approximately 5,500 full-time employees, of whom approximately 29% are based outside of the United States. Approximately 75% of our employees are non-salaried. Blyth does not have any unionized employees in the United States. Approximately 50 employees are represented by the IG Chemie labor union in our German facility at Gies Kerzen and have a General Agreement in place with no termination period. A Wages Agreement is in place for a period of one year from July 2005 until June 2006 and currently may be terminated by either party at the end of that period. Approximately 40 employees are represented by the Chemical Union in our manufacturing and distribution facility located in Promol, Portugal. The union contract has been terminated and the facility is applying the general labor law. Liljeholmens, Sweden has approximately 70 employees represented by the Industrifacket union, a manufacturing union, and the SIF union, a management union. Both union agreements each have a three-year term (April 2004 to March 2007). Management believes that relations with the Company’s employees are good. Since its formation in 1977, Blyth has never experienced a work stoppage.

7




Raw Materials

All of the raw materials used by Blyth for its candles, home fragrance products and chafing fuel, principally petroleum-based wax, fragrance, glass containers and corrugate, have historically been available in adequate supply from multiple sources. In fiscal 2006, substantial cost increases for certain raw materials, such as paraffin, dyethelene glycol (DEG) and ethanol, as well as aluminum and paper, negatively impacted profitability of certain products in all three segments.

Seasonality

Our business is highly seasonal, and our net sales are strongest in the third and fourth fiscal quarters due to increased shipments to meet year-end holiday season demand for our products. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality.”

Trademarks and Patents

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

Environmental Law Compliance

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

(d)   Financial Information about Geographic Areas

For information on net sales from external customers attributed to the United States and foreign countries and on long-lived assets located in the United States and outside the United States, see Note 19 of Notes to Consolidated Financial Statements.

Item 1A.                Risk Factors

Risk of Inability to Maintain Growth Rate

The Company has experienced significant sales growth in past years. While management expects continued growth, Blyth’s future growth rate will likely be less than its historical growth rate. The Company expects faster sales growth in its international market versus its United States market. The Company’s ability to increase sales depends on numerous factors, including market acceptance of existing products, the successful introduction of new products, growth of consumer discretionary spending, the ability to recruit new independent sales consultants, sourcing of raw materials and demand-driven increases in production and distribution capacity. Business in all of Blyth’s segments is driven by consumer preferences. Accordingly, there can be no assurances that the Company’s current or future products will maintain or achieve market acceptance. Blyth’s sales and earnings results can be negatively impacted by the worldwide economic environment, particularly the United States, Canadian and European economies. There can be no assurances that the Company’s financial results will not be materially adversely affected by these factors in the future.

8




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

Risks Associated With International Sales and Foreign-Sourced Products

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

Ability to Respond to Increased Product Demand

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

Risk of Shortages of Raw Materials

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

Dependence on Key Corporate Management Personnel

Blyth’s success depends in part on the contributions of key corporate management, including its Chairman and Chief Executive Officer, Robert B. Goergen, as well as the members of the Office of the Chairman: Robert H. Barghaus, Vice President and Chief Financial Officer; Bruce G. Crain, Senior Vice President and President, Wholesale Group; Robert B. Goergen, Jr., Vice President and President, Catalog & Internet Group; and Frank P. Mineo, Senior Vice President and President, Direct Selling Group. The Company does not have employment contracts with any of its key corporate management personnel except the Chairman and Chief Executive Officer, nor does it maintain any key person life insurance policies. The loss of any of the key corporate management personnel could have a material adverse effect on the Company.

Risk of Increased Competition

Blyth’s business is highly competitive both in terms of pricing and new product introductions. The worldwide market for Home Expressions products is highly fragmented with numerous suppliers serving one or more of the distribution channels served by the Company. In addition, the Company competes for

9




direct selling consultants with other direct selling companies. Because there are relatively low barriers to entry in all of Blyth’s business segments, the Company may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to Blyth. Competition includes companies selling candles manufactured at low cost outside of the United States. Moreover, certain competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

Risks Related to Information Technology Systems

Blyth’s information technology systems are dependent on global communications providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have experienced significant system failures and outages in the past. Blyth’s systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. Despite the implementation of network security measures, our systems are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our 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 our information systems.

Item 1B.               Unresolved Staff Comments.

None.

10




Item 2.                        Properties

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

 

 

 

 

 

 

Approximate Square Feet

Location

 

 

 

Use

 

Business Segment

 

Owned

 

Leased

Aalten, Netherlands

 

Distribution

 

Wholesale

 

227,552

 

324,522

Almere-De Vaart, Netherlands(3)

 

Distribution

 

Wholesale

 

132,077

 

Arndell Park, Australia

 

Distribution

 

Direct Selling

 

 

18,535

Batavia, Illinois

 

Manufacturing and

 

Direct Selling and

 

486,000

 

 

 

Research &

 

Wholesale

 

 

 

 

 

 

Development

 

 

 

 

 

 

Caldas da Rainha, Portugal

 

Manufacturing and

 

Wholesale

 

230,000

 

 

 

related distribution

 

 

 

 

 

 

Cannon Falls, Minnesota

 

Distribution

 

Wholesale

 

 

192,000

Carol Stream, Illinois

 

Distribution

 

Direct Selling

 

 

651,000

Cumbria, England(4)

 

Manufacturing and

 

Direct Selling and

 

223,000

 

70,000

 

 

related distribution

 

Wholesale

 

 

 

 

Elkin, North Carolina

 

Manufacturing and

 

Wholesale

 

699,000

 

 

 

related distribution

 

 

 

 

 

 

Glinde, Germany

 

Manufacturing and related distribution

 

Wholesale

 

172,000

 

Heidelberg, Germany

 

Distribution

 

Direct Selling

 

 

6,000

Jacksonville, Florida

 

Roasting, packaging

 

Catalog & Internet

 

 

16,826

 

 

and distribution

 

 

 

 

 

 

Memphis, Tennessee

 

Distribution

 

Wholesale

 

 

414,960

Monterrey, Mexico

 

Distribution

 

Direct Selling

 

 

45,000

Montfoort, Netherlands

 

Distribution

 

Wholesale

 

 

204,521

Ontario, Canada

 

Distribution

 

Direct Selling

 

 

25,000

Orlando, Florida

 

Warehouse and

 

Direct Selling

 

 

14,048

 

 

distribution

 

 

 

 

 

 

Oshkosh, Wisconsin

 

Distribution

 

Catalog & Internet

 

 

386,000

Oskarshamm, Sweden

 

Manufacturing and

 

Wholesale

 

 

122,000

 

 

related distribution

 

 

 

 

 

 

Plymouth, Massachusetts

 

Distribution

 

Direct Selling

 

59,000

 

Reeuwijk, Netherlands

 

Distribution

 

Wholesale

 

59,203

 

204,521

Tampa, Florida

 

Warehouse and

 

Direct Selling

 

 

12,000

 

 

distribution

 

 

 

 

 

 

Texarkana, Texas

 

Manufacturing and

 

Wholesale

 

154,000

 

65,000

 

 

related distribution

 

 

 

 

 

 

Tilburg, Netherlands

 

Distribution

 

Direct Selling

 

327,000

 

Tijuana, Mexico

 

Manufacturing

 

Wholesale

 

 

201,000

Union City, Tennessee

 

Distribution

 

Wholesale

 

360,000

 

90,350


(3)             Measured in square meters.

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

The Company’s executive offices, administrative offices and outlet stores are generally located in leased space (except for certain offices located in owned space).

11




Item 3.                        Legal Proceedings

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

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

None

PART II

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

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

 

 

High

 

Low

 

Fiscal 2005

 

 

 

 

 

First Quarter

 

$

34.51

 

$

31.28

 

Second Quarter

 

36.00

 

30.46

 

Third Quarter

 

35.51

 

28.43

 

Fourth Quarter

 

32.72

 

27.80

 

Fiscal 2006

 

 

 

 

 

First Quarter

 

$

33.84

 

$

26.80

 

Second Quarter

 

29.60

 

27.24

 

Third Quarter

 

28.48

 

17.70

 

Fourth Quarter

 

23.68

 

17.95

 

 

As of March 31, 2006, there were 1,921 registered holders of record of the Company’s Common Stock.

On April 4, 2006, the Company’s Board of Directors declared a regular semi-annual cash dividend in the amount of $0.23 per share of Common Stock payable in the second quarter of fiscal 2007. During fiscal 2006 and 2005, the Company’s Board of Directors declared dividends as follows: $0.21 per share of Common Stock payable in the second quarter of fiscal 2006; $0.23 per share of Common Stock payable in the fourth quarter of fiscal 2006; $0.17 per share of Common Stock payable in the second quarter of the fiscal 2005; $0.19 per share of Common Stock payable in the fourth quarter of fiscal 2005. Currently, the Company expects to pay comparable cash dividends in the future.

12




The following table sets forth, for the equity compensation plan categories listed below, information as of January 31, 2006:

EQUITY COMPENSATION PLAN INFORMATION

Plan Category

 

 

 

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

 

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

 

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

 

Equity compensation plans approved by security holders

 

 

1,236,400

 

 

 

$

26.12

 

 

 

2,137,126

 

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

 

Total.

 

 

1,236,400

 

 

 

$

26.12

 

 

 

2,137,126

 

 


(1)    The information in this column excludes 13,000 shares of restricted stock and 61,475 restricted stock units outstanding as of January 31, 2006.

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

 

Month #1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 1, 2005–
November 30, 2005

 

 

0

 

 

 

 

 

 

0

 

 

 

1,373,200 shares

 

 

Month #2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 1, 2005–
December 31, 2005

 

 

0

 

 

 

 

 

 

0

 

 

 

1,373,200 shares

 

 

Month #3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2006–
January 31, 2006

 

 

0

 

 

 

 

 

 

0

 

 

 

1,373,200 shares

 

 

Total

 

 

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 January 31, 2006, 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 from time to time.

13




Item 6.   Selected Consolidated Financial Data

Set forth below are selected summary consolidated financial and operating data of the Company for fiscal years 2002 through 2006, which have been derived from our audited financial statements for those years. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report on Form 10-K.

 

 

Year ended January 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

 

 

(In thousands, except per share and percent data)

 

Statement of Earnings Data:(1)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,178,771

 

$

1,288,583

 

$

1,505,573

 

$

1,586,297

 

$

1,573,076

 

Gross profit

 

577,005

 

640,302

 

723,675

 

771,680

 

713,266

 

Operating profit

 

120,490

 

155,517

 

153,077

 

169,330

 

56,172

 

Interest expense

 

17,237

 

14,664

 

17,443

 

22,138

 

23,701

 

Earnings before income taxes, minority interest and cumulative effect of accounting change(2)(4)

 

108,289

 

142,557

 

136,893

 

149,076

 

32,027

 

Earnings before minority interest and cumulative effect of accounting change

 

68,006

 

89,525

 

86,516

 

96,154

 

24,252

 

Net earnings(3)

 

68,006

 

57,772

 

86,351

 

96,514

 

24,857

 

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

 

$

1.45

 

$

1.94

 

$

1.89

 

$

2.24

 

$

0.61

 

Cumulative effect of accounting
change(3)

 

 

(0.69

)

 

 

 

 

 

$

1.45

 

$

1.25

 

$

1.89

 

$

2.24

 

$

0.61

 

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

 

$

1.44

 

$

1.92

 

$

1.88

 

$

2.22

 

$

0.60

 

Cumulative effect of accounting
change(3)

 

 

(0.68

)

 

 

 

 

 

$

1.44

 

$

1.24

 

$

1.88

 

$

2.22

 

$

0.60

 

Cash dividends paid, per share

 

$

0.20

 

$

0.22

 

$

0.28

 

$

0.36

 

$

0.44

 

Basic weighted average number of common shares outstanding

 

47,056

 

46,256

 

45,771

 

43,136

 

40,956

 

Diluted weighted average number of common shares outstanding

 

47,205

 

46,515

 

46,027

 

43,556

 

41,176

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Gross profit margin

 

48.9

%

49.7

%

48.1

%

48.6

%

45.3

%

Operating profit margin

 

10.2

%

12.1

%

10.2

%

10.7

%

3.6

%

Capital expenditures

 

$

11,901

 

$

14,322

 

$

21,963

 

$

20,976

 

$

17,272

 

Depreciation and amortization

 

36,246

 

30,212

 

35,954

 

35,600

 

35,875

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

285,771

 

$

324,060

 

$

400,540

 

$

312,172

 

$

439,141

 

Total assets

 

804,781

 

860,084

 

1,127,963

 

1,075,820

 

1,116,520

 

Total debt

 

191,701

 

176,493

 

293,886

 

287,875

 

371,742

 

Total stockholders’ equity

 

468,063

 

507,852

 

588,970

 

521,349

 

493,824

 


(1)             Statement of Earnings Data includes the results of operations for periods subsequent to the respective purchase acquisitions of Midwest of Cannon Falls, Inc. acquired in April 2001, CBK, Ltd., LLC (now CBK Styles, Inc.) acquired in May 2002, Miles Kimball Company acquired in April 2003, Kaemingk B.V. acquired in June 2003, Walter Drake acquired in December 2003 and Edelman B.V. and Euro-Decor B.V. acquired in September 2004, none of which individually had a material effect on the Company’s results of operations in the period during which they occurred, or thereafter.

(2)             Fiscal 2002 pre-tax earnings include restructuring and impairment charges of approximately $14.1 million related to closure of the Company’s 62nd Street Chicago facility, other rationalization of the North American consumer wholesale business and certain changes in the European sector. Fiscal 2002 pre-tax earnings also include approximately $6.3 million and $5.0 million in charges to cost of sales for inventory revaluations related to the U.S. mass market and other marketplace conditions impacting realizable value of obsolete inventory. Fiscal 2003 pre-tax earnings include an impairment charge of $2.6 million as a result of putting Wax Lyrical into receivership. Fiscal 2004 pre-tax earnings include restructuring and impairment charges of $23.8 million related to manufacturing equipment impairment, closure of the Company’s Hyannis manufacturing facility, the discontinuance of the Canterbury® brand, and the closure of five of the Company’s candle outlet stores.

(3)             The Company recorded a one-time cumulative effect of accounting change in February 2002 to reflect the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”.

(4)             Fiscal 2006 pre-tax earnings include a goodwill impairment charge of $53.3 million in the Wholesale segment. (See Note 9 to the Consolidated Financial Statements).

14




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

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

Overview

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

Today, on an annualized net sales basis considering the full year impact of recent acquisitions, Blyth is comprised of an approximately $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 in the Direct Selling segment, we have developed Purple Tree, a new party plan company, which markets crafts. In addition we completed the acquisition of a small gourmet food company, Two Sisters Gourmet, which 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 in 2003, giving us a presence in all of our desired channels. Our most recent 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 requested and received from the Internal Revenue Service a ruling on the tax-free status for the transaction. Management intends to evaluate additional strategic opportunities that have been identified since the announcement of the spin off, has engaged outside consultants to advise it on strategic alternatives within the Wholesale segment and will likely focus on one or more of its European Wholesale businesses, believing that substantial upside opportunities exist in the North American Wholesale business despite challenging market conditions impacting the Home Expressions industry.

Segments

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories, fragranced bath gels and body lotions and other fragranced products under the PartyLite® brand. The Company also

15




operates two small Direct Selling businesses, Purple Tree and 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 in North America.

The following table sets forth, for the periods indicated, the percentage relationship to net sales and the percentage increase or decrease of certain items included in the Company’s Consolidated Statements of Earnings:

 

 

 

 

 

 

 

 

Percentage Increase
(Decrease)
from Prior Period

 

 

 

Percentage of Net Sales
Years Ended January 31

 

Fiscal 2005
Compared
to Fiscal

 

Fiscal 2006
Compared
to Fiscal

 

 

 

2004

 

2005

 

2006

 

2004

 

2005

 

Net sales

 

100.0

 

100.0

 

100.0

 

 

5.4

 

 

 

(0.8

)

 

Cost of goods sold

 

51.9

 

51.4

 

54.7

 

 

4.2

 

 

 

5.5

 

 

Gross profit

 

48.1

 

48.6

 

45.3

 

 

6.6

 

 

 

(7.6

)

 

Selling

 

27.7

 

28.9

 

29.0

 

 

9.8

 

 

 

(0.7

)

 

Administrative

 

8.6

 

9.1

 

9.4

 

 

11.3

 

 

 

3.2

 

 

Operating profit

 

10.2

 

10.7

 

3.6

 

 

10.6

 

 

 

(66.8

)

 

Net earnings

 

5.7

 

6.1

 

1.6

 

 

11.8

 

 

 

(74.2

)

 

 

Fiscal 2006 Compared to Fiscal 2005

Net sales decreased $13.2 million, or approximately 1%, from $1,586.3 million in fiscal 2005 to $1,573.1 million in fiscal 2006. Management believes that a significant increase in party plan competition within the Direct Selling channel in the United States and a weak North American and European consumer environment were exacerbated by high energy prices, which negatively impacted our ability to generate sales growth throughout fiscal 2006.

Net Sales—Direct Selling Segment

Net sales in the Direct Selling segment decreased $31.8 million, or 4%, from $735.9 million in fiscal 2005 to $704.1 million in fiscal 2006. PartyLite’s U.S. sales decreased approximately 11% compared to the prior year, which includes the $5.5 million benefit of the reversal of a contingent reserve related to a settlement of a state unclaimed property matter. 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


(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.

16




Selling channel. In addition, we believe PartyLite’s U.S. operations were negatively impacted by reduced consumer discretionary income, resulting from higher energy prices.

PartyLite Canada reported an approximately 13% increase versus the prior year in U.S. dollars. Sales in Canada increased due to a higher number of guests per show and shows per consultant.

In PartyLite’s European markets, sales increased approximately 4% in U.S. dollars, driven by strong sales in the newer markets. PartyLite Europe now represents approximately 32% of PartyLite’s worldwide net sales.

Net sales in the Direct Selling segment represented approximately 45% of total Blyth sales in fiscal 2006 compared to 46% in fiscal 2005.

Net Sales—Wholesale Segment

Net sales in the Wholesale segment increased  $24.7 million, or 4%, from $656.9 million in fiscal 2005 to $681.6 million in fiscal 2006. The primary reason for this increase was the acquisitions of Edelman and Euro-Decor in September 2004, which contributed an increase in net sales of $59.2 million to the segment. This increase was partially offset by sales declines in most of the other Wholesale businesses, which the Company believes was caused by a reluctance of retailers to make significant purchases in response to the lower level of consumer spending.

In North America, the Wholesale segment experienced a sales decline of approximately 4% versus the prior year. This sales decrease was a result of lower sales in home décor and premium fragrance candle products, which was partially offset by increased sales of mass channel home fragrance products.

In Europe, the Wholesale segment experienced a sales increase of approximately 12% in fiscal 2006 versus fiscal 2005, due to the acquisitions of Edelman and Euro-Decor.

Net sales in the Wholesale segment represented approximately 43% of total Blyth sales in fiscal 2006 compared to 42% in fiscal 2005.

Net Sales—Catalog & Internet Segment

Net sales in the Catalog & Internet segment decreased $6.2 million, or 3%, from $193.5 million in fiscal 2005 to $187.3 million in fiscal 2006. This decline from last year was attributable to sales shortfalls in our primary catalogs, which the Company believes was due to decreased consumer discretionary spending.

Net sales in the Catalog & Internet segment accounted for approximately 12% of Blyth’s total net sales in fiscal 2006 and in fiscal 2005.

Blyth’s consolidated gross profit decreased $58.4 million, or 8%, from $771.7 million in fiscal 2005 to $713.3 million in fiscal 2006. The gross profit margin decreased from 48.6% in fiscal 2005 to 45.3% in fiscal 2006. This decrease was primarily due to sales shortfalls within PartyLite U.S., the margins of which are higher than Blyth’s overall average, as well as higher fuel, freight and commodity costs, which have adversely impacted a number of Blyth’s businesses.

Blyth’s consolidated selling expense decreased $3.2 million, or approximately 1%, from $458.7 million in fiscal 2005 to $455.5 million in fiscal 2006. Most of the decrease in selling expense relates to the reduced sales in the U.S. Direct Selling channel, which was offset by the full year impact of the September 2004 acquisitions of Edelman and Euro-Decor. Selling expense as a percentage of net sales increased from 28.9% in fiscal 2005 to 29.0% in fiscal 2006.

Blyth’s consolidated administrative expenses increased $4.6 million, or 3%, from $143.7 million in fiscal 2005 to $148.3 million in fiscal 2006. The increase in administrative expenses versus the prior year was primarily due to the acquisitions of Edelman and Euro-Decor and the $1.2 million write-down in the book value of the Colorado Springs facility, which is currently held for sale. Administrative expenses as a percentage of net sales increased from 9.1% in fiscal 2005 to 9.4% in fiscal 2006.

17




A goodwill impairment charge of $53.3 million was recognized in the Wholesale segment in January 2006. In fiscal 2006 this segment experienced a substantial decline in operating performance when compared to prior years results and budgeted fiscal 2006 expectations.

Blyth’s consolidated operating profit decreased $113.1 million from $169.3 million in fiscal 2005 to $56.2 million in fiscal 2006 principally due to the impact of lower sales within the PartyLite U.S., Wholesale and Catalog & Internet segments, the previously mentioned goodwill impairment, investments in organic strategic initiatives, such as Purple Tree and Two Sisters Gourmet in the Direct Selling segment and flameless technology in the foodservice channel of the Wholesale segment and higher commodity costs across our businesses.

Operating Profit/Loss—Direct Selling Segment

Operating profit in the Direct Selling segment decreased $24.2 million, or 18%, from $131.9 million in fiscal 2005 to $107.7 million in fiscal 2006. The decrease was primarily driven by the previously mentioned sales shortfall of PartyLite U.S. and lower gross profit due to increased commodity costs, as well as the ongoing investment being made in the organic strategic initiatives, Purple Tree and Two Sisters Gourmet.

Operating Profit/Loss—Wholesale Segment

Operating profit in the Wholesale segment decreased from $30.7 million in fiscal 2005 to a loss of $51.1 million in fiscal 2006. The previously mentioned goodwill impairment charge, 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/Loss—Catalog & Internet Segment

Operating profit in the Catalog & Internet segment decreased from $6.7 million in fiscal 2005 to a loss of $0.4 million in fiscal 2006. The decrease in profitability compared to the prior year was primarily due to the impact of the previously mentioned reduced sales, increased sales promotions and circulation costs and the write-down of the Colorado Springs facility.

Interest expense increased $1.6 million, or 7%, from $22.1 million in fiscal 2005 to $23.7 million in fiscal 2006, due to increases in borrowings, interest rates and interest expense on state tax settlements.

Other income decreased $2.3 million from $1.9 million in fiscal 2005 to a loss of $0.4 million in fiscal 2006. This decrease was primarily due to a loss on the sale of Impact Plastics and foreign currency exchange losses.

Income tax expense decreased $45.1 million, or 85%, from $52.9 million in fiscal 2005 to $7.8 million in fiscal 2006. The effective income tax rate was 24.3% for fiscal 2006 compared to 35.5% in fiscal 2005. This decrease in income tax expense and tax rate was 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, the favorable impact of global audit settlements and a reduction in tax expense resulting from adjustments to prior years’ income tax items. These decreases were offset by the one-time tax charge on the American Job Creations Act of 2004 (“AJCA”) dividend as well as the non-tax deductible portion of the goodwill impairment charge.

As a result of the foregoing, net earnings decreased $71.6 million, or 74%, from $96.5 million in fiscal 2005 to $24.9 million in fiscal 2006.

Basic earnings per share were $0.61 for fiscal 2006 compared to $2.24 for fiscal 2005. Diluted earnings per share were $0.60 for fiscal 2006 compared to $2.22 for fiscal 2005. The total of the following previously discussed items: goodwill impairment charge, loss on the sale of Impact Plastics, tax charge on the AJCA dividend, the favorable impact of global audit settlements and a reduction in tax expense resulting from adjustments to prior years’ income tax items reduced diluted earnings per share by approximately $0.96 in fiscal 2006.

18




Fiscal 2005 Compared to Fiscal 2004

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

Net Sales—Direct Selling Segment

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

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

Net Sales—Wholesale Segment

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

19




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

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

Net sales in the Wholesale segment represented approximately 42% of total Blyth sales in fiscal 2005 and in fiscal 2004.

Net Sales—Catalog & Internet Segment

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

Net sales in the Catalog & Internet segment accounted for approximately 12% of Blyth’s total net sales in fiscal 2005 compared to 7% in fiscal 2004.

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

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

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

In fiscal 2004, the Company recorded pre-tax restructuring and impairment charges of approximately $23.8 million. Of the $23.8 million charge, $6.7 million related to the Direct Selling segment and the closure of the Company’s Hyannis, Massachusetts candle manufacturing facility and $17.1 million related to the Wholesale segment. The Wholesale segment charges principally related to the write down of certain candle manufacturing assets, severance and personnel charges related to the restructuring in North America, and the discontinuation of one brand. The total charge of $23.8 million was reported as a component of operating expenses.

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

Operating Profit/Loss - Direct Selling Segment

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

Operating Profit/Loss—Wholesale Segment

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

Operating Profit/Loss—Catalog & Internet Segment

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

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

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

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

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

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

Seasonality

Approximately 41% of the Company’s net sales occurred in the first and second fiscal quarters of 2006. This is approximately equal to the Company’s net sales that occurred in the first and second fiscal quarters of 2005. The Company’s net sales are strongest in the third and fourth fiscal quarters due to increased shipments to meet year-end holiday season demand for the Company’s products.

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Liquidity and Capital Resources

Cash and cash equivalents increased $150.4 million, or 164%, from $91.7 million at January 31, 2005 to $242.1 million at January 31, 2006. The increase in cash during fiscal 2006 was primarily due to cash generated from operations and increased borrowing in Europe to fully fund the dividend paid under the AJCA.

The Company typically generates positive cash flow from operations due to favorable gross margins and the variable nature of selling expenses, which constitute a significant percentage of operating expenses. The Company generated $106.8 million in cash from operations in fiscal 2006 compared to $138.5 million in fiscal 2005. This decrease was primarily due to the reduction in net earnings and an increase in inventory in the North American candles and home fragrance business to meet mass-market customer needs.

Capital expenditures for property, plant and equipment were approximately $17.3 million in fiscal 2006 down from $21.0 million in fiscal 2005. The decrease from historical levels is due to the Company continuing to reduce spending on manufacturing facilities, while moving to more of an outsourced product supply model. The Company anticipates total capital spending of approximately $25.0 million for fiscal 2007, primarily for the expansion of the Direct Selling European distribution center in support of ongoing growth, information technology and research and development-related equipment and upgrades to machinery and equipment in existing manufacturing and distribution facilities.

The Company has grown in part through acquisitions and, as part of its growth strategy, the Company expects to continue from time to time in the ordinary course of its business to evaluate and pursue acquisition opportunities as appropriate. Our recent growth has been primarily acquisition related and in the future, acquisitions may continue to contribute more to the Company’s overall sales growth rate than historically. 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. The Company acquired Edelman B.V. and Euro-Decor B.V. during fiscal 2005, which added the home décor product to the European Wholesale business. The Company entered the Catalog and Internet channel of direct-to-consumer distribution in 2003, giving us a presence in all of our desired channels. Our latest acquisition, Boca Java, a small gourmet coffee and tea company, was in this segment.

As of January 31, 2006, 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 January 31, 2006.

As of January 31, 2006, 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. Since the line of credit is uncommitted, there is no maturity date. At January 31, 2006, approximately $0.5 million of letters of credit were outstanding under this credit line.

As of December 31, 2005, The Gies Group (“Gies”) had available lines of credit of approximately $40.4 million of which approximately $18.8 million was outstanding. The amounts outstanding under the lines of credit bear interest at a weighted average rate of 3.2% at December 31, 2005. The lines of credit have maturity dates thru December 2006 and are renewed annually.

As of December 31, 2005, Kaemingk had an available line of credit of approximately $32.6 million with ING Bank N.V, which expires December 31, 2006. No amounts were outstanding at December 31, 2005. The line of credit is collateralized by certain real estate and equipment owned by Kaemingk.

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As of December 31, 2005, Colony Gift Corporation Limited (“Colony”) had an $8.6 million short-term revolving credit facility with Barclays Bank, which matures in August 2006. Colony had borrowings under the credit facility of approximately $7.0 million, at a weighted average interest rate of 5.6%, as of December 31, 2005.

As of December 31, 2005, Edelman B.V. and Euro-Decor B.V. had available lines of credit of approximately $29.6 million with ABN Amro Bank N.V, which mature September 2007. The lines of credit are collateralized by inventory and receivables owned by Edelman B.V. and Euro-Decor B.V. At December 31, 2004, $6.9 million was outstanding at a weighted average interest rate of 3.0%. At December 31, 2005, approximately $6.4 million was outstanding at a weighted average interest rate of 3.5%.

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” matures June 2010. 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. At January 31, 2005, $3.3 million letters of credit were outstanding under the prior Credit Facility. As of January 31, 2006, approximately $73.0 million (including letters of credit) was outstanding under the Credit Facility.

As of January 31, 2005 and January 31, 2006, Miles Kimball had approximately $9.9 million and $9.4 million, respectively of long-term debt outstanding under a real estate mortgage note payable to John Hancock Life Insurance Company, which matures June 1, 2020. Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

As of December 31, 2004, Kaemingk had approximately $8.8 million of long-term debt outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 5.1%. As of December 31, 2005, approximately $7.0 million of long-term debt was outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 4.9%. 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 June 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 January 31, 2006, 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 January 31, 2006, 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.

As of January 31, 2005 and January 31, 2006, CBK had $4.5 million and $4.4 million, respectively of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1,

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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 4.6% at January 31, 2006. Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

The estimated fair value of the Company’s $276.1 million and $346.0 million total long-term debt (including current portion) at January 31, 2005 and 2006 was approximately $303.0 million and $330.7 million, respectively. The fair value is determined by quoted market prices, where available, and from analyses performed by investment bankers using current interest rates considering credit ratings and the remaining terms to maturity.

The following table summarizes the maturity dates of the contractual obligations of the Company as of January 31, 2006:

 

 

Payments Due by Period

 

Contractual Obligations (In thousands)

 

 

 

Total

 

Less than
1 year

 

1–3 Years

 

3–5 Years

 

More than
5 Years

 

Interest(3)

 

$

93,642

 

$

18,187

 

 

$

36,272

 

 

 

$

20,316

 

 

$

18,867

 

Capital Leases

 

52

 

20

 

 

31

 

 

 

1

 

 

 

Purchase Obligations(1)

 

31,279

 

31,219

 

 

60

 

 

 

 

 

 

Long-Term Debt(3)

 

345,970

 

1,049

 

 

9,872

 

 

 

223,480

 

 

111,569

 

Operating Leases

 

65,724

 

19,209

 

 

24,332

 

 

 

14,071

 

 

8,112

 

Lines of Credit

 

25,772

 

25,772

 

 

 

 

 

 

 

 

Other(2)

 

6,134

 

5,357

 

 

681

 

 

 

96

 

 

 

Total Contractual Obligations

 

$

568,573

 

$

100,813

 

 

$

71,248

 

 

 

$

257,964

 

 

$

138,548

 


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

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

(3)             Long-term debt includes: 7.90% Senior Notes due October 1, 2009, 5.50% Senior Notes due November 1, 2013, a mortgage note payable-maturity June 1, 2020, an Industrial Revenue Bond (“IRB”)-maturity January 1, 2025 and six bank loans maturing from 2008 to 2020. The Company also has credit facilities with maturity dates beyond one year with variable interest rates that are not included in the table due to the inability to calculate future interest payments. (See Note 12 to the Consolidated Financial Statements).

The Company does not utilize derivatives for trading purposes.

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 January 31, 2006 for a total cost of approximately $115.1 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 the Company’s prior $200 million credit facility.

On April 4, 2006, the Company announced that it has declared a cash dividend of $0.23 per share of the Company’s common stock for the six months ended January 31, 2006. The dividend, authorized at the Company’s April 4, 2006 Board of Directors meeting, will be payable to shareholders of record as of May 1, 2006, and will be paid on May 15, 2006.

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

On December 9, 2005, the Board of Directors of the Company approved the acceleration of the vesting of all unvested stock options. Stock option awards granted from December 10, 2000 through the date of acceleration with respect to approximately 350,000 shares of the Company’s common stock, which represented 100% of the unvested options, were subject to this acceleration, which was effective as of December 9, 2005. Virtually all of these options had exercise prices in excess of the current market values and were not fully achieving their original objectives of incentive compensation and employee retention. Additional expense of $1.7 million associated with the acceleration is included in the year ended January 31, 2006 pro forma disclosure presented in Note 1 to the Consolidated Financial Statements. The acceleration also eliminates future compensation expense the Company would otherwise recognize in its Consolidated Statement of Earnings upon adoption of SFAS 123R. The Company believes the implementation of this standard will not have a material impact on the financial statements.

On January 24, 2006, the Board of Directors approved a domestic reinvestment plan for the approximately $130 million in foreign earnings, which were previously considered permanently reinvested in non-U.S. legal entities, which the Company repatriated under the AJCA. The funds were brought back to the United States late in the fourth quarter and received the favorable tax treatment provided by the Act. The Company recorded a one-time tax expense of $9.1 million, which is reflected in the Company’s current year effective tax rate.  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

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

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

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

Generally, sales orders are received via signed customer purchase orders with stated fixed prices based on published price lists. The Company records estimated reductions to revenue for customer programs,

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which may include special pricing agreements for specific customers, volume incentives and other promotions. Should market conditions decline, the Company may increase customer incentives with respect to future sales. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damage in transit or for other reasons that can only become known subsequent to recognizing the revenue. If the amount of actual customer returns and chargebacks were to increase significantly from the estimated amount, revisions to the estimated allowance would be required.

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

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

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

Inventory valuation—Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. If market acceptance of our existing products or the successful introduction of new products should significantly decrease, additional inventory write-downs could be required. Potential additional inventory write-downs could result from unanticipated additional quantities of obsolete finished goods and raw materials, and/or from lower disposition values offered by the parties who normally purchase surplus inventories. At January 31, 2006 the Company had obsolete inventory reserves totaling approximately $21.6 million.

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Restructuring and impairment charges on long-lived assets—In response to changing market conditions and competition, the Company’s management regularly updates its business model and market strategies, including the evaluation of facilities, personnel and products. Future adverse changes in economic and market conditions could result in additional organizational changes and possibly additional restructuring and impairment charges. The Company recorded an approximately $1.0 million impairment charge related to equipment in its North American Wholesale manufacturing facility, which is included in cost of goods sold in the fiscal 2006 financial statements. The Company did not record any restructuring and impairment charges in fiscal 2005. In fiscal 2004 the Company recorded charges related to long-lived asset impairments, product line discontinuances, severance payments to employees, lease write-offs, bad debt write-offs and inventory write-downs. (See Note 5 to the Consolidated Financial Statements). The Company recorded restructuring and impairment charges in fiscal 2004 totaling $23.8 million. Historically, the Company has reviewed long-lived assets, including property, plant and equipment and other intangibles with definite lives for impairment periodically and whenever events or changes in circumstances indicated that the carrying amount of such an asset might not be recoverable. Management determines whether there has been a permanent impairment on long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or asset group, to the carrying value of the asset. The amount of any resulting impairment is calculated by comparing the carrying value to the fair value, which may be estimated using the present value of the same cash flows. Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value.

Goodwill and other indefinite lived intangibles—Goodwill and other indefinite lived intangibles are subject to an assessment for impairment using a two-step fair value-based test and such other intangibles are also subject to impairment reviews, which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired. The Company performs its annual assessment of impairment in the fourth fiscal quarter. For goodwill, the first step compares the fair value of a reporting unit to its carrying amount, including goodwill. For each of the reporting units, the estimated fair value is determined utilizing a combination of valuation techniques, namely the discounted cash flow methodology and the market multiple methodology. If the fair value of the reporting unit exceeds the carrying value, no further analysis is necessary. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the fair value of the goodwill. If fair value is less than the carrying amount, an impairment loss is reported as a reduction to the asset and a charge to operating expense, except at the transition date, when the loss was reflected as a cumulative effect of a change in accounting principle. As a result of our 2006 goodwill impairment analysis, we recognized a goodwill impairment charge of $53.3 million in the Wholesale segment. (See 9 to the Consolidated Financial Statements).

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

27




time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.

Impact of Adoption of Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004” (“AJCA”). The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the repatriation provision.  On January 24, 2006, the Board of Directors approved a domestic reinvestment plan for the approximately $130 million in foreign earnings, which were previously considered permanently reinvested in non-U.S. legal entities, which the Company repatriated under the AJCA. The funds were brought back to the United States late in the fourth quarter and received the favorable tax treatment provided by the Act. The Company recorded a one-time tax expense of approximately $9.1 million, which is reflected in the Company’s current year effective tax rate. 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.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43”. This standard requires abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to be recognized as current period charges. Additionally, it requires that allocation of fixed production overhead costs be allocated to inventory based on the normal capacity of the production facility. The provisions of this standard apply prospectively and are effective for the Company for inventory costs incurred after February 1, 2006. The Company believes this standard will not have a material effect on its financial statements.

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. On December 9, 2005, the Board of Directors of the Company approved the acceleration of the vesting of all unvested stock options. Stock option awards granted from December 10, 2000 through the date of acceleration with respect to approximately 350,000 shares of the Company’s common stock, which represented 100% of the unvested options, were subject to this acceleration, which was effective as of December 9, 2005. Virtually all of these options had exercise prices in excess of the current market values and were not fully achieving their original objectives of incentive compensation and employee retention. Additional expense of $1.7 million associated with the acceleration is included in the year ended January 31, 2006 pro forma disclosure presented in Note 1 to the Consolidated Financial Statements. The acceleration also eliminates future compensation expense the Company would otherwise recognize in its Consolidated Statement of Earnings upon adoption of SFAS 123R. The Company believes the implementation of this standard will not have a material impact on the financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a Replacement of APB No. 20 and FASB No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is

28




impracticable. APB Opinion No. 20 “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This standard did not impact the Company for the year ended January 31, 2006.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”) to clarify the guidance included in SFAS No. 143, “Accounting for Asset Retirement Obligations”. FIN 47 requires companies to recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. If amounts cannot be reasonably estimated, certain disclosures are required about the unrecognized asset retirement obligations. This standard did not impact the Company for the year-ended January 31, 2006.

Forward-looking and Cautionary Statements

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

29




Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk

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

Interest Rate Risk

As of January 31, 2006, the Company is subject to interest rate risk on approximately $108.6 million of variable rate debt. Each 1-percentage point increase in the interest rate would impact pre-tax earnings by approximately $1.1 million if applied to the total.

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

Foreign Currency Risk

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

The Company hedged the net assets of certain of its foreign operations through foreign currency forward contracts during fiscal 2006. 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 accumulated other comprehensive income (loss) (“OCI”) totaled $1.8 million at January 31, 2006.

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 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 of the 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. Amounts included in accumulated OCI at January 31, 2006 are immaterial 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 and intercompany payables 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.

30




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

The following table provides information about the Company’s foreign exchange forward and options contracts at January 31, 2006:

 

 

US Dollar

 

Average

 

Estimated

 

 

 

Notional Amount

 

Contract Rate

 

Fair Value

 

 

 

(In thousands, except average contract rate)

 

Canadian Dollar

 

 

$

7,050

 

 

 

0.86

 

 

 

$

(181

)

 

Euro

 

 

13,625

 

 

 

1.20

 

 

 

139

 

 

Pound Sterling

 

 

725

 

 

 

1.74

 

 

 

8

 

 

 

 

 

$

21,400

 

 

 

 

 

 

 

$

(34

)

 

 

The foreign exchange contracts outstanding have maturity dates through September 2006.

31




Item 8.                        Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Blyth, Inc. and subsidiaries (the “Company”) as of January 31, 2006 and 2005, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the fiscal years then ended. Our audits also included the financial statement schedule for the fiscal years ended January 31, 2006 and 2005 listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2006 and 2005, and the results of its operations and its cash flows for the fiscal years ended January 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 12, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

 

DELOITTE & TOUCHE LLP

Chicago, Illinois

 

April 12, 2006

 

 

32




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

 

Stamford, Connecticut
April 26, 2004, except for Note 19, as to which the date is April 8, 2005

33




BLYTH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

 

January 31, 

 

 

 

2005

 

2006

 

 

 

(In thousands, except share
and per share data)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

91,695

 

$

242,068

 

Accounts receivable, less allowance for doubtful receivables
$4,028 in 2005 and $3,892 in 2006

 

124,603

 

109,857

 

Inventories

 

234,984

 

237,753

 

Prepaid and other

 

43,832

 

35,643

 

Assets held for sale

 

3,949

 

3,027

 

Deferred income taxes

 

15,068

 

20,645

 

Total current assets

 

514,131

 

648,993

 

Property, plant and equipment, at cost:

 

 

 

 

 

Land and buildings

 

190,198

 

173,526

 

Leasehold improvements

 

19,797

 

18,303

 

Machinery and equipment

 

210,674

 

204,138

 

Office furniture, data processing equipment and software

 

97,750

 

92,834

 

Construction in progress

 

3,162

 

1,966

 

 

 

521,581

 

490,767

 

Less accumulated depreciation

 

262,685

 

264,941

 

 

 

258,896

 

225,826

 

Other assets:

 

 

 

 

 

Investments

 

3,446

 

3,397

 

Excess of cost over fair value of assets acquired

 

246,182

 

185,127

 

Other intangible assets, net of accumulated amortization of $3,867 in 2005 and $5,917 in 2006

 

39,233

 

37,183

 

Deposits and other assets

 

13,932

 

15,994

 

 

 

302,793

 

241,701

 

Total assets

 

$

1,075,820

 

$

1,116,520

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

11,813

 

$

25,772

 

Current maturities of long-term debt

 

4,489

 

1,049

 

Accounts payable

 

81,333

 

75,735

 

Accrued expenses

 

94,847

 

93,000

 

Income taxes

 

9,477

 

14,296

 

Total current liabilities

 

201,959

 

209,852

 

Deferred income taxes

 

47,740

 

39,383

 

Long-term debt, less current maturities

 

271,573

 

344,921

 

Other liabilities

 

33,199

 

28,540

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock—authorized 100,000,000 shares of $0.02 par value; issued
50,367,827 shares in 2005 and 50,528,060 shares in 2006

 

1,007

 

1,010

 

Additional contributed capital

 

118,148

 

127,580

 

Retained earnings

 

651,156

 

657,983

 

Accumulated other comprehensive income (loss)

 

36,102

 

(1,935

)

Treasury stock, at cost, 9,468,416 shares in 2005 and 9,533,416 shares in 2006

 

(285,064

)

(287,744

)

Unearned compensation on restricted stock

 

 

(3,070

)

Total stockholders’ equity

 

521,349

 

493,824

 

Total liabilities and stockholders’ equity

 

$

1,075,820

 

$

1,116,520

 

 

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

34




BLYTH, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

 

 

Year ended January 31,

 

 

 

2004

 

2005

 

2006

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

1,505,573

 

$

1,586,297

 

$

1,573,076

 

Cost of goods sold

 

781,898

 

814,617

 

859,810

 

Gross profit

 

723,675

 

771,680

 

713,266

 

Selling

 

417,768

 

458,690

 

455,507

 

Administrative

 

129,021

 

143,660

 

148,326

 

Restructuring and impairment charges

 

23,809

 

 

53,261

 

 

 

570,598

 

602,350

 

657,094

 

Operating profit

 

153,077

 

169,330

 

56,172

 

Other expense (income):

 

 

 

 

 

 

 

Interest expense

 

17,443

 

22,138

 

23,701

 

Other (income) loss, net

 

(1,259

)

(1,884

)

444

 

 

 

16,184

 

20,254

 

24,145

 

Earnings before income taxes and minority interest

 

136,893

 

149,076

 

32,027

 

Income tax expense

 

50,377

 

52,922

 

7,775

 

Earnings before minority interest

 

86,516

 

96,154

 

24,252

 

Minority Interest

 

165

 

(360

)

(605

)

Net earnings

 

$

86,351

 

$

96,514

 

$

24,857

 

Basic:

 

 

 

 

 

 

 

Net earnings per common share

 

$

1.89

 

$

2.24

 

$

0.61

 

Weighted average number of shares outstanding

 

45,771

 

43,136

 

40,956

 

Diluted:

 

 

 

 

 

 

 

Net earnings per common share

 

$

1.88

 

$

2.22

 

$

0.60

 

Weighted average number of shares outstanding

 

46,027

 

43,556

 

41,176

 

 

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

35




BLYTH, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

other

 

 

 

 

 

Common

 

contributed

 

Retained

 

Treasury

 

Unearned

 

comprehensive

 

 

 

 

 

stock

 

capital

 

earnings

 

stock

 

compensation

 

income (loss)

 

Total

 

 

 

(In thousands)

 

Balance at February 1, 2003

 

$

994

 

$

101,567

 

$

496,627

 

$

(86,585

)

 

$

 

 

 

$

(4,751

)

 

$

507,852

 

Net earnings for the year

 

 

 

 

 

86,351

 

 

 

 

 

 

 

 

 

 

 

86,351

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,120

 

 

21,120

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(325

)

 

(325

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(820

)

 

(820

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

106,326

 

Common stock issued in connection with long-term incentive plan

 

5

 

5,840

 

 

 

 

 

 

 

 

 

 

 

 

 

5,845

 

Tax benefit from stock options

 

 

 

558

 

 

 

 

 

 

 

 

 

 

 

 

 

558

 

Dividends paid ($0.28 per share)

 

 

 

 

 

(12,807

)

 

 

 

 

 

 

 

 

 

 

(12,807

)

Treasury stock purchases

 

 

 

 

 

 

 

(18,804

)

 

 

 

 

 

 

 

 

(18,804

)

Balance at January 31, 2004

 

999

 

107,965

 

570,171

 

(105,389

)

 

 

 

 

15,224

 

 

588,970

 

Net earnings for the year

 

 

 

 

 

96,514

 

 

 

 

 

 

 

 

 

 

 

96,514

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,311

 

 

21,311

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

135

 

 

135

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(568

)

 

(568

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117,392

 

Common stock issued in connection with long-term incentive plan

 

8

 

9,463

 

 

 

 

 

 

 

 

 

 

 

 

 

9,471

 

Tax benefit from stock options

 

 

 

720

 

 

 

 

 

 

 

 

 

 

 

 

 

720

 

Dividends paid ($0.36 per share)

 

 

 

 

 

(15,529

)

 

 

 

 

 

 

 

 

 

 

(15,529

)

Treasury stock purchases

 

 

 

 

 

 

 

(179,675

)

 

 

 

 

 

 

 

 

(179,675

)

Balance at January 31, 2005

 

1,007

 

118,148

 

651,156

 

(285,064

)

 

 

 

 

36,102

 

 

521,349

 

Net earnings for the year

 

 

 

 

 

24,857

 

 

 

 

 

 

 

 

 

 

 

24,857

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,946

)

 

(40,946

)

Minimum pension liability adjustment (net of tax $578)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,347

)

 

(1,347

)

Unrealized gain on certain investments (net of tax of $167)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

948

 

 

948

 

Net gain on cash flow hedging instruments (net of tax of $842)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,530

 

 

1,530

 

Net gain on net investment hedging instruments (net of tax $1,090)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,778

 

 

1,778

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,180

)

Common stock issued in connection with long-term incentive plan

 

3

 

3,570

 

 

 

 

 

 

 

 

 

 

 

 

 

3,573

 

Tax benefit from stock options

 

 

 

315

 

 

 

 

 

 

 

 

 

 

 

 

 

315

 

Issuance of restricted stock, net of cancellations

 

 

 

5,547

 

 

 

(609

)

 

(4,938

)

 

 

 

 

 

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

 

1,868

 

 

 

 

 

 

1,868

 

Dividends paid ($0.44 per share)

 

 

 

 

 

(18,030

)

 

 

 

 

 

 

 

 

 

 

(18,030

)

Treasury stock purchases

 

 

 

 

 

 

 

(2,071

)

 

 

 

 

 

 

 

 

(2,071

)

Balance at January 31, 2006

 

$

1,010

 

$

127,580

 

$

657,983

 

$

(287,744

)

 

$

(3,070

)

 

 

$

(1,935

)

 

$

493,824

 

 

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

36




BLYTH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

 

Year ended January 31,

 

 

 

2004

 

2005

 

2006

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net earnings

 

$

86,351

 

$

96,514

 

$

24,857

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

35,954

 

35,600

 

35,875

 

Loss on disposition of fixed assets

 

2,739

 

1,070

 

3,212

 

(Gain)/loss on sale of business

 

 

(364

)

1,620

 

Tax benefit from stock options

 

558

 

720

 

315

 

Amortization of unearned compensation on restricted stock

 

 

 

1,868

 

Deferred income taxes

 

(584

)

12,407

 

(12,923

)

Equity in (earnings)/losses of investees

 

71

 

(319

)

50

 

Minority interest

 

165

 

(528

)

(767

)

Restructuring and impairment charges, including goodwill

 

20,229

 

 

53,261

 

(Gain)/loss on sale of long-term investments

 

(497

)

 

 

(Gain)/loss on assets held for sale

 

 

(128

)

1,159

 

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

 

 

 

 

 

 

 

Accounts receivable

 

(12,935

)

10,106

 

2,490

 

Inventories

 

24,718

 

(3,391

)

(13,841

)

Prepaid and other

 

(2,422

)

(14,050

)

6,676

 

Deposits and other assets

 

5,611

 

(1,235

)

(248

)

Accounts payable

 

3,236

 

(3,199

)

(1,406

)

Accrued expenses

 

6,937

 

(12,496

)

3,042

 

Other liabilities

 

2,093

 

6,565

 

(4,029

)

Income taxes

 

833

 

11,250

 

5,612

 

Net cash provided by operating activities

 

173,057

 

138,522

 

106,823

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(21,963

)

(20,976

)

(17,272

)

Purchases of long-term investments

 

(1,377

)

(21,000

)

 

Proceeds from sale of long-term investments

 

1,874

 

21,000

 

 

Proceeds from sale of assets held for sale

 

 

3,718

 

 

Proceeds from sale of business

 

 

9,752

 

7,645

 

Cash impact of Wax Lyrical receivership

 

1,902

 

 

 

Purchase of businesses, net of cash acquired

 

(148,584

)

(54,221

)

(7,121

)

Net cash used in investing activities

 

(168,148

)

(61,727

)

(16,748

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

5,845

 

9,471

 

3,706

 

Purchases of treasury stock

 

(18,804

)

(179,675

)

(2,071

)

Borrowings from bank line of credit

 

67,833

 

158,761

 

140,794

 

Repayments on bank line of credit

 

(70,931

)

(187,649

)

(117,950

)

Borrowings on long-term debt

 

130,506

 

 

69,406

 

Repayments on long-term debt

 

(40,663

)

(5,044

)

(4,944

)

Dividends paid

 

(12,807

)

(15,529

)

(18,030

)

Net cash provided by (used in) financing activities

 

60,979

 

(219,665

)

70,911

 

Effect of exchange rate changes on cash

 

(4,758

)

4,839

 

(10,613

)

Net increase/(decrease) in cash and cash equivalents

 

61,130

 

(138,031

)

150,373

 

Cash and cash equivalents at beginning of year

 

168,596

 

229,726

 

91,695

 

Cash and cash equivalents at end of year

 

$

229,726

 

$

91,695

 

$

242,068

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

10,800

 

$

22,380

 

$

23,976

 

Income taxes, net of refunds

 

47,460

 

37,270

 

23,565

 

Non-cash transactions:

 

 

 

 

 

 

 

Note received for sale of assets

 

$

 

$

 

$

2,000

 

 

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

37




BLYTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 1.   Summary of Significant Accounting Policies

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

Principles of Consolidation

The consolidated financial statements include the accounts of Blyth, Inc. and its direct and indirect subsidiaries,  (the “Company”). The Company consolidates entities in which it owns or controls more than 50% of the voting shares and investments where the Company has been determined to be the primary beneficiary. The unowned portion is reflected as minority interest. Investments in companies that are not consolidated are reported using the equity method and are recorded in other assets in the Consolidated Balance Sheet. All significant inter-company balances and transactions have been eliminated in consolidation.

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

Estimates

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

Credit Concentration

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

Foreign Currency Translation

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

Investments

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

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BLYTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)

Note 1.   Summary of Significant Accounting Policies (Continued)

Derivatives and Other Financial Instruments

The Company applies the provisions of Statement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accounting for Derivative and Hedging Activities” and its corresponding amendment under SFAS No. 138. These statements establish the accounting and reporting standards for derivative instruments and hedging activities and require that all derivative instruments be recorded on the balance sheet at fair value. The Company uses foreign exchange forward and options contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, intercompany payables and certain intercompany loans. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company hedged the net assets of certain of its foreign operations through foreign currency forward contracts during fiscal 2006. 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 accumulated other comprehensive income (loss) (“OCI”) totaled $1.8 million at January 31, 2006.

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 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 of the 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. Amounts included in accumulated OCI at January 31, 2006 are immaterial 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 and intercompany payables as fair value hedges. The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.

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

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

39




BLYTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)

Note 1.   Summary of Significant Accounting Policies (Continued)

Fair Value of Fin