UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 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 incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

One East Weaver Street, Greenwich, Connecticut 06831

(Address of principal executive offices)           (Zip Code)

 

(203) 661-1926

(Registrant’s telephone number, including area code)

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

Yes  x          No  o

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  x

 

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 Exchange Act).

Yes  o          No  x

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

39,293,262 Common Shares as of November 30, 2006

 




BLYTH, INC.

INDEX

Part I.

Financial Information

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings (Loss)

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

Part II.

Other Information

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

 

2




Part I.   FINANCIAL INFORMATION

Item I.   FINANCIAL STATEMENTS

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

October 31,

 

January 31,

 

(In thousands, except share and per share data)

 

2006

 

2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

80,615

 

$

242,068

 

Short-term investments

 

95,000

 

 

Accounts receivable, less allowance for doubtful receivables of $2,606 and $3,892, respectively

 

88,864

 

109,857

 

Inventories

 

180,847

 

237,753

 

Prepaid and other

 

34,099

 

35,643

 

Assets held for sale

 

 

3,027

 

Deferred income taxes

 

16,781

 

20,645

 

Assets of discontinued operations

 

2,997

 

 

Total current assets

 

499,203

 

648,993

 

Property, plant and equipment, at cost:

 

 

 

 

 

Less accumulated depreciation of $199,936 and $264,941, respectively

 

163,793

 

225,826

 

Other assets:

 

 

 

 

 

Investment

 

3,472

 

3,397

 

Goodwill

 

90,726

 

185,127

 

Other intangible assets, net of accumulated amortization of $7,300 and $5,917, respectively

 

35,800

 

37,183

 

Other long-term assets

 

17,737

 

15,994

 

 

 

147,735

 

241,701

 

Total assets

 

$

810,731

 

$

1,116,520

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

8,636

 

$

25,772

 

Current maturities of long-term debt

 

923

 

1,049

 

Accounts payable

 

49,217

 

75,735

 

Dividends payable

 

10,578

 

 

Accrued expenses

 

85,786

 

93,000

 

Income taxes payable

 

3,680

 

14,296

 

Liabilities of discontinued operations

 

6,619

 

 

Total current liabilities

 

165,439

 

209,852

 

Deferred income taxes

 

21,201

 

39,383

 

Long-term debt, less current maturities

 

259,765

 

344,921

 

Other long-term liabilities

 

23,482

 

28,540

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock - authorized 100,000,000 shares of $0.02 par value; issued 50,622,860 shares and 50,528,060 shares, respectively

 

1,013

 

1,010

 

Additional contributed capital

 

128,404

 

127,580

 

Retained earnings

 

517,905

 

657,983

 

Accumulated other comprehensive income

 

17,217

 

(1,935

)

Unearned compensation on restricted stock

 

 

(3,070

)

Treasury stock, at cost, 11,335,798 shares and 9,533,416 shares, respectively

 

(323,695

)

(287,744

)

Total stockholders’ equity

 

340,844

 

493,824

 

Total liabilities and stockholders’ equity

 

$

810,731

 

$

1,116,520

 

 

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

3




BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

 

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

 

2006

 

2005

 

Net sales

 

$

840,775

 

$

873,556

 

Cost of goods sold

 

434,047

 

436,306

 

Gross profit

 

406,728

 

437,250

 

Selling

 

283,435

 

284,762

 

Administrative

 

95,501

 

94,673

 

Goodwill impairment

 

36,769

 

 

 

 

415,705

 

379,435

 

Operating profit (loss)

 

(8,977

)

57,815

 

Other expense (income):

 

 

 

 

 

Interest expense

 

14,576

 

14,287

 

Interest income

 

(5,352

)

(1,446

)

Foreign exchange and other

 

(614

)

959

 

 

 

8,610

 

13,800

 

Earnings (loss) from continuing operations before income taxes and minority interest

 

(17,587

)

44,015

 

Income tax expense (benefit)

 

(7,008

)

9,493

 

Earnings (loss) from continuing operations before minority interest

 

(10,579

)

34,522

 

Minority interest

 

114

 

(506

)

Earnings (loss) from continuing operations

 

(10,693

)

35,028

 

Earnings (loss) from discontinued operations, net of income tax expense (benefit) of ($1,278) in 2006 and $295 in 2005 (note 3)

 

(109,504

)

2,128

 

Net earnings (loss)

 

$

(120,197

)

$

37,156

 

Basic:

 

 

 

 

 

Earnings (loss) from continuing operations per common share

 

$

(0.27

)

$

0.86

 

Earnings (loss) from discontinued operations per common share

 

(2.74

)

0.05

 

Net earnings (loss) per common share

 

$

(3.01

)

$

0.91

 

Weighted average number of shares outstanding

 

39,945

 

40,948

 

Diluted:

 

 

 

 

 

Earnings (loss) from continuing operations per common share

 

$

(0.27

)

$

0.85

 

Earnings (loss) from discontinued operations per common share

 

(2.74

)

0.05

 

Net earnings (loss) per common share

 

$

(3.01

)

$

0.90

 

Weighted average number of shares outstanding

 

39,945

 

41,190

 

 

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

4




 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

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

 

2006

 

2005

 

Net sales

 

$

297,911

 

$

328,458

 

Cost of goods sold

 

160,563

 

174,838

 

Gross profit

 

137,348

 

153,620

 

Selling

 

99,579

 

102,455

 

Administrative

 

33,084

 

31,879

 

 

 

132,663

 

134,334

 

Operating profit

 

4,685

 

19,286

 

Other expense (income):

 

 

 

 

 

Interest expense

 

4,587

 

5,030

 

Interest income

 

(1,819

)

(706

)

Foreign exchange and other

 

(22

)

85

 

 

 

2,746

 

4,409

 

Earnings from continuing operations before income taxes and minority interest

 

1,939

 

14,877

 

Income tax expense (benefit)

 

(33

)

1,066

 

Earnings from continuing operations before minority interest

 

1,972

 

13,811

 

Minority interest

 

40

 

54

 

Earnings from continuing operations

 

1,932

 

13,757

 

Earnings (loss) from discontinued operations, net of income tax expense (benefit) of ($237) in 2006 and $4,222 in 2005 (note 3)

 

(2,153

)

9,284

 

Net earnings (loss)

 

$

(221

)

$

23,041

 

Basic:

 

 

 

 

 

Earnings from continuing operations per common share

 

$

0.05

 

$

0.33

 

Earnings (loss) from discontinued operations per common share

 

(0.05

)

0.23

 

Net earnings (loss) per common share

 

$

 

$

0.56

 

Weighted average number of shares outstanding

 

39,211

 

40,978

 

Diluted:

 

 

 

 

 

Earnings from continuing operations per common share

 

$

0.05

 

$

0.33

 

Earnings (loss) from discontinued operations per common share

 

(0.05

)

0.23

 

Net earnings (loss) per common share

 

 

$

0.56

 

Weighted average number of shares outstanding

 

39,531

 

41,141

 

 

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

5




BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

(In thousands, except share data)

 

Common
Stock

 

Additional
Contributed
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Unearned
Compensation

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total

 

For the nine months ended October 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2005

 

$

1,007

 

$

118,148

 

$

651,156

 

$

(285,064

)

$

 

$

36,102

 

$

521,349

 

Net earnings for the period

 

 

 

 

 

37,156

 

 

 

 

 

 

 

37,156

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

(31,702

)

(31,702

)

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

 

 

 

 

 

 

 

 

 

 

 

123

 

123

 

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

 

 

 

 

 

 

 

 

 

 

 

3,655

 

3,655

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

9,232

 

Common stock issued in connection with long-term incentive plan

 

3

 

3,511

 

 

 

 

 

 

 

 

 

3,514

 

Tax benefit from stock options

 

 

 

316

 

 

 

 

 

 

 

 

 

316

 

Issuance of restricted stock, net of cancellations

 

 

 

5,550

 

 

 

(604

)

(4,946

)

 

 

 

Amortization of unearned compensation

 

 

 

 

 

 

 

 

 

1,541

 

 

 

1,541

 

Dividends

 

 

 

 

 

(18,027

)

 

 

 

 

 

 

(18,027

)

Treasury stock purchases

 

 

 

 

 

 

 

(2,071

)

 

 

 

 

(2,071

)

Balance, October 31, 2005

 

$

1,010

 

$

127,525

 

$

670,285

 

$

(287,739

)

$

(3,405

)

$

8,178

 

$

515,854

 

For the nine months ended October 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2006

 

$

1,010

 

$

127,580

 

$

657,983

 

$

(287,744

)

$

(3,070

)

$

(1,935

)

$

493,824

 

Net loss for the period

 

 

 

 

 

(120,197

)

 

 

 

 

 

 

(120,197

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

18,922

 

18,922

 

Unrealized holding gains on certain investments (net of tax of $115)

 

 

 

 

 

 

 

 

 

 

 

187

 

187

 

Net gain on hedging instruments (net of tax of $23)

 

 

 

 

 

 

 

 

 

 

 

43

 

43

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(101,045

)

Reclassification of unearned compensation

 

 

 

(3,070

)

 

 

 

 

3,070

 

 

 

 

Common stock issued in connection with long-term incentive plan

 

3

 

2,145

 

 

 

 

 

 

 

 

 

2,148

 

Tax benefit from stock options

 

 

 

109

 

 

 

 

 

 

 

 

 

109

 

Restricted stock cancellations

 

 

 

963

 

 

 

(963

)

 

 

 

 

 

Amortization of unearned compensation

 

 

 

677

 

 

 

 

 

 

 

 

 

677

 

Dividends

 

 

 

 

 

(19,881

)

 

 

 

 

 

 

(19,881

)

Treasury stock purchases

 

 

 

 

 

 

 

(34,988

)

 

 

 

 

(34,988

)

Balance, October 31, 2006

 

$

1,013

 

$

128,404

 

$

517,905

 

$

(323,695

)

$

 

$

17,217

 

$

340,844

 

 

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

6




BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine months ended October 31 (In thousands)

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings (loss)

 

$

(120,197

)

$

37,156

 

Adjustments to reconcile net earnings (loss) to net cash used in operating activities:

 

 

 

 

 

Loss on sale of discontinued operations, net of tax

 

89,109

 

 

Depreciation and amortization

 

25,034

 

27,170

 

Loss (gain) on disposition of fixed assets

 

1,093

 

(18

)

Tax benefit from stock options

 

109

 

316

 

Amortization of unearned compensation on restricted stock

 

677

 

 

Deferred income taxes

 

(9,984

)

840

 

Equity in (gain) loss of investee

 

(75

)

164

 

Minority interest

 

(222

)

(730

)

Goodwill impairment

 

36,769

 

 

Loss on sale of assets held for sale

 

79

 

1,159

 

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

 

 

 

 

 

Accounts receivable

 

(10,814

)

(80,049

)

Inventories

 

(6,697

)

(56,004

)

Prepaid and other

 

(15,097

)

(9,503

)

Deposits and other assets

 

958

 

1,161

 

Accounts payable

 

(14,879

)

(11,411

)

Accrued expenses

 

6,432

 

4,418

 

Other liabilities

 

(1,870

)

2,213

 

Income taxes

 

(11,815

)

(5,259

)

Net cash used in operating activities

 

(31,390

)

(88,377

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(12,409

)

(10,820

)

Purchases of short-term investments

 

(1,074,586

)

 

Proceeds from sales of short-term investments

 

979,586

 

 

Proceeds from sale of property, plant and equipment

 

5,515

 

 

Proceeds from sale of businesses, net of cash disposed

 

86,841

 

 

Purchases of businesses, net of cash acquired

 

(6,654

)

(7,121

)

Net cash used in investing activities

 

(21,707

)

(17,941

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

2,148

 

3,514

 

Purchases of treasury stock

 

(34,988

)

(2,071

)

Borrowings from bank lines of credit

 

33,889

 

115,008

 

Repayments on bank lines of credit

 

(32,318

)

(43,450

)

Repayments of long-term debt

 

(75,117

)

(4,613

)

Payments on capital lease obligations

 

(190

)

 

Dividends paid

 

(9,303

)

(8,602

)

Net cash provided by (used in) financing activities

 

(115,879

)

59,786

 

Effect of exchange rate changes on cash

 

8,050

 

(343

)

Net decrease in cash and cash equivalents

 

(160,926

)

(46,875

)

Less: cash and cash equivalents of discontinued operations at end of period

 

527

 

 

Cash and cash equivalents at beginning of period

 

242,068

 

91,695

 

Cash and cash equivalents at end of period

 

$

80,615

 

$

44,820

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Capital lease for equipment

 

$

1,246

 

$

 

 

 

 

 

 

 

 

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

7




BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.             Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  Investments in companies that are not majority owned or controlled are reported using the equity method and are recorded in investments.  Certain of the Company’s subsidiaries operate on a 52- or 53-week fiscal year ending on the Saturday closest to January 31.  European operations maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary for fair presentation of the Company’s consolidated financial position at October 31, 2006 and the consolidated results of its operations for the three and nine month periods ended October 31, 2006 and 2005 and cash flows for the nine month periods ended October 31, 2006 and 2005.  These interim statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended January 31, 2006, as set forth in the Company’s Annual Report on Form 10-K.  Operating results for the nine months ended October 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2007.

Stock Based Compensation

Summary of Plans

At October 31, 2006, the Company had one stock-based compensation plan, the 2003 Long-Term Incentive Plan (“2003 Plan”), available to grant future awards, as described below, and two terminated or expired stock-based compensation plans (the Amended and Restated 1994 Employee Stock Option Plan and the Amended and Restated 1994 Stock Option Plan for Non-Employee Directors), under which vested and unexercised options remain outstanding.  There were 6,500,100 shares authorized for grant under these plans and at October 31, 2006, there were approximately 3,400,000 shares available for grant under these plans.

The Board of Directors and the stockholders of the Company have approved the adoption and subsequent amendments of the 2003 Plan.  The 2003 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock unit awards to officers, employees and non-employee directors.  The 2003 Plan also provides for grants of nonqualified stock options to directors of the Company who are not, and who have not been during the immediately preceding 12-month period, officers or employees of the Company or any of its subsidiaries.

Restricted stock and restricted stock units (“RSUs”) are granted to certain employees to incent performance and retention.  RSUs issued under the plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed.  The release of RSUs on each of the vesting dates is contingent upon continued active employment by the employee until the vesting dates.

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.

The total compensation expense related to all stock-based compensation plans for the three and nine months ended October 31, 2006 was approximately $0.2 million and $0.9 million, respectively.  The total compensation expense related to all stock-based compensation plans for the three and nine months ended October 31, 2005 was approximately $0.3 million and $0.8 million, respectively.  The tax benefit recognized for the three and nine months ended October 31, 2006 was approximately $0.1 million and $0.3 million, respectively.

8




The tax benefit recognized for the three and nine months ended October 31, 2005 was approximately $0.2 million and $0.3 million, respectively.  Total stock-based compensation benefit included in discontinued operations for the nine months ended October 31, 2006 was approximately $0.2 million.  Total stock-based compensation expense included in discontinued operations for the three and nine months ended October 31, 2005 was approximately $40 thousand and $0.1 million, respectively. No compensation cost was capitalized as part of inventory.

Transactions involving stock options are summarized as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Weighted Average

 

Remaining

 

Aggregate

 

 

 

Shares

 

Exercise Price

 

Contractual Life

 

Intrinsic Value

 

 

 

 

 

 

 

 

 

(In thousands)

 

Outstanding at January 31, 2006

 

1,236,400

 

$

26.12

 

5.16

 

 

 

Options granted

 

17,500

 

20.63

 

4.54

 

 

 

Options exercised

 

(94,800

)

22.51

 

 

 

 

Options forfeited

 

(103,600

)

26.37

 

 

 

 

Options expired

 

(16,500

)

24.83

 

 

 

 

Outstanding at October 31, 2006

 

1,039,000

 

$

26.35

 

4.70

 

$

235

 

Exercisable at October 31, 2006

 

1,021,500

 

$

26.45

 

4.70

 

$

177

 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the nine months ended October 31, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on October 31, 2006.  This amount will change in future periods based on the fair market value of the Company’s stock and the number of shares outstanding.  Total intrinsic value of options exercised for the three and nine months ended October 31, 2006 was $0.3 million.  Compensation expense in both the three and nine month periods ended October 31, 2006 related to stock options was approximately $10 thousand.  As of October 31, 2006, $0.1 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of 3 years.   All outstanding stock options at October 31, 2006 are expected to vest.

Transactions involving restricted stock and RSUs are summarized as follows:

 

 

 

Weighted Average

 

Aggregate

 

 

 

Shares

 

Grant-date Fair Value

 

Intrinsic Value

 

 

 

 

 

 

 

(In thousands)

 

Nonvested restricted stock and RSUs at January 31, 2006

 

146,970

 

$

31.85

 

 

 

Granted

 

257,605

 

21.82

 

 

 

Vested

 

(12,500

)

31.19

 

 

 

Forfeited

 

(47,750

)

29.02

 

 

 

Nonvested restricted stock and RSUs at October 31, 2006

 

344,325

 

$

24.63

 

 

 

Total restricted stock and RSUs at October 31, 2006

 

362,825

 

$

25.02

 

$

8,679

 

 

The total intrinsic value of restricted stock and RSUs vested during the nine months ended October 31, 2006 was $0.2 million.  Compensation expense related to restricted stock and RSUs for the three and nine months ended October 31, 2006 was approximately $0.2 million and $0.9 million, respectively.  Compensation expense related to RSUs for the three and nine months ended October 31, 2005 was approximately $0.3 million and

9




 

$0.8 million, respectively. Restricted stock and RSUs benefit included in discontinued operations for the nine months ended October 31, 2006 was approximately $0.2 million.  Restricted stock and RSUs expense included in discontinued operations for the three and nine months ended October 31, 2005 was approximately $40 thousand and $0.1 million, respectively.

Also, as a result of the adoption of the Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), $3.1 million of unearned compensation recorded in stockholders’ equity as of February 1, 2006 was reclassified to and reduced the balance of additional contributed capital.  As of October 31, 2006, there was $6.6 million of unearned compensation expense related to non-vested restricted stock and RSU awards.  The total unrecognized stock-based compensation cost to be recognized in future periods as of October 31, 2006 does not consider the effect of stock-based awards that may be issued in subsequent periods.  This cost is expected to be recognized over a weighted average period of 2.8 years.  All outstanding shares of restricted stock and RSUs at October 31, 2006 are expected to vest.

Impact of Adoption of 123(R)

On February 1, 2006, the Company adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock and RSUs based on estimated fair values.  SFAS 123(R) supersedes the Company’s previous disclosure only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”), and Accounting Principles Board (APB) opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for stock options granted to its employees and directors under the intrinsic value method employed by the Company for periods prior to fiscal 2007.  In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R).  The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model, where applicable.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s Condensed Consolidated Statement of Earnings (Loss).  Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).  Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Condensed Consolidated Statements of Earnings (Loss), because the exercise price of the Company’s stock options granted to employees and directors equaled the fair value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period.  Stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings (Loss) for the three and nine months ended October 31, 2006 includes compensation expense for restricted stock, RSUs and stock-based awards granted subsequent to January 31, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognizes these compensation costs net of a forfeiture rate for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is the vesting term of 3 years for stock options; cliff vesting of 50% over 4 years and 50% over 5 years or 3 year vesting for employee restricted stock and RSUs; and cliff vesting of 50% over 1 year and 50% over 2 years for

10




non-employee restricted stock and RSUs.  SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

In the Company’s pro forma information required under SFAS 123 for periods prior to fiscal 2007, the Company accounted for forfeitures of stock options as they occurred.  There was no stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings (Loss) for the first nine months of fiscal 2007 for stock options granted prior to February 1, 2006 because no portion of those stock-based payment awards was unvested.  In accordance with the modified prospective transition method, the Company’s Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

Upon adoption of SFAS 123(R), the Company elected to continue to use the Black-Scholes option-pricing model (“Black-Scholes model”) to determine fair value for stock option grants.  The Company’s determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables.  These variables include, but are not limited to: the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

Assumptions used to estimate fair value

The fair value of stock options is estimated on the date of grant using the Black-Scholes model.  The Company granted 17,500 stock options during the nine months ended October 31, 2006.  The Company granted no stock options during the nine months ended October 31, 2005.  The fair value of these stock options was determined using the following weighted average assumptions.

 

Nine months ended October 31,

 

 

 

2006

 

2005

 

Expected volatility

 

2.9

%

N/A

 

Risk free interest rates

 

4.94

%

N/A

 

Expected lives

 

3.5

 

N/A

 

Expected dividend yield

 

2.23

%

N/A

 

 

The weighted average fair value of options granted for the nine months ended October 31, 2006 was $4.78.

11




Pro forma Impact of 123(R)

If compensation expense for the Company’s stock options had been determined in accordance with the fair value method in SFAS 123 and SFAS 148, the Company’s reported net income and earnings per share at October 31, 2005 would have been adjusted to the pro forma amounts indicated below:

 

Three months ended

 

Nine months ended

 

(In thousands, except per share data)

 

October 31, 2005

 

October 31, 2005

 

Net earnings:

 

 

 

 

 

As reported

 

$

23,041

 

$

37,156

 

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

 

293

 

899

 

Pro forma

 

$

22,748

 

$

36,257

 

Net earnings per common share:

 

 

 

 

 

As reported:

 

 

 

 

 

Basic

 

$

0.56

 

$

0.91

 

Diluted

 

0.56

 

0.90

 

Pro forma:

 

 

 

 

 

Basic

 

$

0.56

 

$

0.89

 

Diluted

 

0.55

 

0.88

 

 

Other Information

Authorized unissued shares may be used under the stock-based compensation plans.  The Company intends to issue shares of its common stock to meet the stock requirements of its awards in the future.

2.             Business Acquisitions

On August 15, 2005, the Company acquired a 100% interest in Boca Java, a small gourmet coffee and tea company.  The results of operations of Boca Java, which were not material, are included in the Condensed Consolidated Statements of Earnings (Loss) of the Company since August 16, 2005.  For segment reporting purposes, Boca Java is included in the Catalog & Internet segment.

3.             Discontinued Operations and Divestitures

Discontinued Operations

In March 2006, the Company announced its intention to evaluate additional strategic opportunities identified since the September 2005 announcement of the proposed spin off of the entire Wholesale segment, and stated that the focus would likely be on one or more of the European wholesale businesses.

On April 12, 2006, the Company sold its European seasonal decorations business, Kaemingk B.V. (“Kaemingk”), in the Wholesale segment, to an entity controlled by the management of Kaemingk.  On June 16, 2006, the Company sold its European everyday home, garden and seasonal business, Edelman B.V. (“Edelman”), and its European gift and florist products business, Euro-Decor B.V. (“Euro-Decor”), both in the Wholesale segment, to an entity with which members of the management of Edelman and Euro-Decor are affiliated.  On August 17, 2006, the Company sold its European mass candle business, Gies, which was part of the Wholesale segment.  Also, during the second quarter of fiscal 2007, the Company made the decision to hold another European business for

12




sale, Colony, which is a premium candle business in the Wholesale segment.  Accordingly, these businesses have all been reported as discontinued operations for all periods presented in the Condensed Consolidated Statements of Earnings (Loss).

The aggregate carrying value of the remaining discontinued business and the remaining unpaid disposal costs of the businesses was a net liability of $3.6 million at October 31, 2006.  The assets and liabilities related to these businesses have been classified separately in the Condensed Consolidated Balance Sheets at October 31, 2006 as discontinued operations.  Prior periods’ balance sheets have not been adjusted to reflect the effect of the discontinued businesses.  The major classes of assets and liabilities of discontinued operations included in the Condensed Consolidated Balance Sheets at October 31, 2006 are summarized as follows:

(In thousands)

 

October 31, 2006

 

Assets of Discontinued Operations:

 

 

 

Cash and cash equivalents

 

$

527

 

Accounts receivable

 

2,470

 

 

 

$

2,997

 

 

 

 

 

Liabilities of Discontinued Operations:

 

 

 

Accounts payable

 

$

2,591

 

Accrued expenses and other liabilities

 

4,028

 

 

 

$

6,619

 

 

Included in the net income (loss) from discontinued operations in the Condensed Consolidated Statements of Earnings (Loss) for the three and nine months ended October 31, 2006 and 2005 are the following:

 

Three months ended October 31,

 

Nine months ended October 31,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

11,699

 

$

116,069

 

$

98,294

 

$

218,893

 

Income (loss) from discontinued operations, net of tax

 

$

(5,941

)

$

9,284

 

$

(20,395

)

$

2,128

 

Gain (loss) on sale of discontinued operations, net of tax

 

$

3,788

 

$

 

$

(89,109

)

$

 

 

Included in the net income (loss) from discontinued operations were a net operating loss related to Kaemingk of $0.3 million for the nine months ended October 31, 2006, and net operating income of $7.0 million and $6.7 million, respectively, for the three and nine months ended October 31, 2005.  In the first quarter of fiscal 2007, the Company recorded a non-tax deductible loss on sale of discontinued operations of $18.4 million on the sale of Kaemingk.

Included in the net income (loss) from discontinued operations were a net operating loss related to Edelman and Euro-Decor of $2.2 million for the nine months ended October 31, 2006, and net operating income of $4.0 million and $2.2 million, respectively, for the three and nine months ended October 31, 2005.  In the first quarter of fiscal 2007, the Company recorded a non-tax deductible goodwill impairment charge of $16.7 million related to these

13




businesses, which has been included in the loss on sale of discontinued operations.  In the second quarter and third quarter of fiscal 2007, the Company recorded a non-taxable gain on the sale of Edelman and Euro-Decor of $1.9 million and $0.2 million, respectively.

Included in the net income (loss) from discontinued operations were net operating losses related to Gies of $2.5 million and $9.9 million, respectively, for the three and nine months ended October 31, 2006, and net operating losses of $0.8 million and $3.4 million, respectively, for the three and nine months ended October 31, 2005.  Also included in the loss on sale of discontinued operations for the nine months ended October 31, 2006 was a non-tax deductible charge of $31.1 million for the impairment of the Gies business.  This charge, which was recorded in the second quarter, reflected the amount by which the carrying value of the net assets exceeded the estimated fair value of the business.  In the third quarter of fiscal 2007, due to changes in the net assets of the business and foreign currency, the Company recorded a non-taxable gain on the sale of Gies of $2.2 million.

Included in the net income (loss) from discontinued operations were net operating losses related to Colony of $3.4 million and $8.0 million, respectively, for the three and nine months ended October 31, 2006, and net operating losses of $0.8 million and $3.4 million, respectively, for the three and nine months ended October 31, 2005.  Also included in the loss on sale of discontinued operations for the nine months ended October 31, 2006 was a non-tax deductible charge of $27.2 million for the impairment of the Colony business.  A charge of $28.6 million, was recorded in the second quarter, which reflected the amount by which the carrying value of the net assets exceeded the estimated fair value of the business.  In the third quarter of fiscal 2007, the Company recorded a non-taxable gain of $1.4 million for a reduction of the previously recorded impairment due to changes in the net assets and foreign currency.

Divestitures

During the fourth quarter of fiscal 2006, the Company divested its North American mass channel seasonal decorations business, Impact Plastics, in the Wholesale segment through a sale.  The operating results of Impact Plastics were immaterial to the consolidated operating results of the Company.  On January 20, 2006, the Company sold the business for approximately $7.6 million in cash and a promissory note of $2.0 million.  The sale resulted in a pre-tax loss of approximately $1.6 million.  In addition, $7.8 million of goodwill attributable to Impact Plastics, which was tax deductible, was disposed of as part of this divestiture.

4.             Restructuring Charges

During the third quarter of fiscal 2007, we began the restructuring of our North American mass channel home fragrance business with the announcement that we will be closing our Tijuana, Mexico manufacturing facility.  In addition, we plan to eliminate unprofitable customers and streamline the stock keeping unit (“SKU”) base of the mass business.

The initial steps of this restructuring project resulted in fiscal 2007 third quarter charges totaling $5.2 million.  Inventory write-downs and equipment impairments of $4.5 million and severance costs of approximately $0.3 million were charged to cost of goods sold, while the remaining $0.4 million related to severance was charged to general and administrative expenses.  These restructuring efforts are expected to continue into fiscal 2008, with additional charges related to severance and equipment impairment estimated to be approximately $13 million.  In addition, we will continue to evaluate our SKU base and customer relationships.  As a result of these evaluations there may be additional inventory write-downs related to the elimination of customers that are not as profitable as we desire and/or the further reduction of the SKU base of the mass business.

14




5.             Short-Term Investments

The Company accounts for its short-term investments in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  The Company’s short-term investments consist of auction rate securities and variable rate demand obligations classified as available-for-sale securities.  Our short-term investments in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days.

Despite the long-term nature of their stated contractual maturities, the Company generally has the ability to liquidate these securities in 35 days or less.  Management’s intent is to hold these securities as liquid assets convertible to cash for applicable operational needs as they may arise.

At October 31, 2006 and January 31, 2006, the Company held $95.0 million and $0.0 million, respectively, of short-term investments, which consist of auction rate securities and variable rate demand obligations classified as available-for-sale securities.

Short-term investments by contractual maturity are as follows (in thousands):

 

October 31, 2006

 

January 31, 2006

 

Due within one year

 

$

34,500

 

$

 

Due between one and five years

 

 

 

Due after ten years

 

60,500

 

 

Total

 

$

95,000

 

$

 

 

There were no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from our short-term investments. All income generated from these short-term investments was recorded as interest income. Actual maturities may differ from contractual maturities should the borrower have the right to call certain obligations.

6.             Inventories

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

 

October 31, 2006

 

January 31, 2006

 

Raw materials

 

$

23,532

 

$

31,954

 

Work in process

 

498

 

361

 

Finished goods

 

156,817

 

205,438

 

Total

 

$

180,847

 

$

237,753

 

 

7.             Goodwill and Other Intangibles

Goodwill and other indefinite lived intangibles are subject to an annual assessment for impairment, which the Company performs in the fourth fiscal quarter, or more frequently if events or circumstances indicate the goodwill or other indefinite lived intangibles might be impaired.

During the second quarter of fiscal 2007, the Company identified triggering events in two reporting units within the Wholesale segment.  In the first reporting unit, the Company’s decision to discontinue sales of a new product line coupled with sharply rising commodity costs led the Company to perform an impairment analysis of goodwill in the reporting unit.  In the second reporting unit, new management with a significantly changed near-term outlook for the businesses that gives effect to the changing business environment led the Company to perform an impairment analysis of the goodwill in this reporting unit.   As a result of these analyses, the goodwill in both

15




reporting units was determined to be impaired, as the fair value of the reporting units was less than the carrying values of the reporting units including goodwill.  The decrease in the fair value of the reporting units was due to a significant decrease in the projected results for the full fiscal year and future years as a result of the factors previously discussed.  The estimated fair value of the reporting units was determined utilizing a combination of valuation techniques, namely the discounted cash flow methodology and the market multiple methodology.  As a result, the Company recorded a non-cash pre-tax goodwill impairment charge of $36.8 million in the Wholesale segment.

As discussed in note 3, the Company sold its European seasonal and everyday decorations businesses, Kaemingk, Edelman and Euro-Decor, in the first half of fiscal 2007, which resulted in a reduction in goodwill attributable to these businesses totaling $66.5 million.

The following table shows changes in the carrying amount of goodwill for the nine months ended October 31, 2006, by operating segment (in thousands):

 

 

 

Catalog &

 

 

 

 

 

 

 

Direct Selling

 

Internet

 

Wholesale

 

Total

 

Goodwill at January 31, 2006

 

$

2,298

 

$

76,308

 

$

106,521

 

$

185,127

 

Euro-Decor pension adjustment

 

 

 

 

 

212

 

212

 

Kaemingk earn out payment

 

 

 

 

 

6,659

 

6,659

 

Boca Java adjustment

 

 

 

76

 

 

 

76

 

Goodwill disposed of related to the sale of:

 

 

 

 

 

 

 

 

 

Kaemingk

 

 

 

 

 

(31,775

)

(31,775

)

Edelman and Euro-Decor

 

 

 

 

 

(34,736

)

(34,736

)

Impairment charges

 

 

 

 

 

(36,769

)

(36,769

)

Foreign currency translation adjustment

 

 

 

 

 

1,932

 

1,932

 

Total adjustments

 

 

76

 

(94,477

)

(94,401

)

Goodwill at October 31, 2006

 

$

2,298

 

$

76,384

 

$

12,044

 

$

90,726

 

 

Other intangible assets, all of which are included in the Catalog & Internet segment, consisted of the following (in thousands):

 

October 31, 2006

 

January 31, 2006

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Indefinite-lived trade names and trademarks

 

$

28,100

 

$

 

$

28,100

 

$

28,100

 

$

 

$

28,100

 

Customer lists

 

15,000

 

7,300

 

7,700

 

15,000

 

5,917

 

9,083

 

Total

 

$

43,100

 

$

7,300

 

$

35,800

 

$

43,100

 

$

5,917

 

$

37,183

 

 

Amortization expense for other intangible assets was $1.4 million and $1.6 million for the nine months ended October 31, 2006 and 2005, respectively.  Estimated amortization expense for the next five fiscal years, beginning with fiscal 2008, is as follows:  $1.5 million, $1.5 million, $1.2 million, $1.0 million and $0.7 million.

16




8.             Earnings per Share

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

 

Three months

 

Nine months

 

 

 

ended October 31,

 

ended October 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net earnings (loss)

 

$

(221

)

$

23,041

 

$

(120,197

)

$

37,156

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

39,211

 

40,978

 

39,945

 

40,948

 

Dilutive effect of stock options and restricted shares

 

320

 

163

 

 

242

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Diluted

 

39,531

 

41,141

 

39,945

 

41,190

 

 

For the three and nine months ended October 31, 2006, restricted stock, RSUs, and options to purchase 1,016,500 and 1,401,825 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be anti-dilutive.  Also, for the three and nine months ended October 31, 2005, options to purchase 993,200 and 440,633 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be anti-dilutive.

9.             Treasury and Common Stock

Treasury Stock (In thousands, except shares):

 

Shares

 

Amount

 

For the nine months ended October 31, 2005:

 

 

 

 

 

Balance at February 1, 2005

 

9,468,416

 

$

(285,064

)

Restricted stock cancellations

 

 

(604

)

Treasury stock purchases

 

65,000

 

(2,071

)

Balance at October 31, 2005

 

9,533,416

 

$

(287,739

)

 

 

 

 

 

 

For the nine months ended October 31, 2006:

 

 

 

 

 

Balance at February 1, 2006

 

9,533,416

 

$

(287,744

)

Restricted stock cancellations

 

 

(963

)

Treasury stock purchases

 

1,802,382

 

(34,988

)

Balance at October 31, 2006

 

11,335,798

 

$

(323,695

)

 

17




Common Stock (In thousands, except shares):

 

Shares

 

Amount

 

For the nine months ended October 31, 2005:

 

 

 

 

 

Balance at February 1, 2005

 

50,367,827

 

$

1,007

 

Common stock issued in connection with long-term incentive plan

 

155,733

 

3

 

Issuance of restricted stock, net of canellations

 

1,500

 

 

Balance at October 31, 2005

 

50,525,060

 

$

1,010

 

 

 

 

 

 

 

For the nine months ended October 31, 2006:

 

 

 

 

 

Balance at February 1, 2006

 

50,528,060

 

$

1,010

 

Common stock issued in connection with long-term incentive plan

 

94,800

 

3

 

Balance at October 31, 2006

 

50,622,860

 

$

1,013

 

 

10.                               Segment Information

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

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories, fragranced bath gels and body lotions and other fragranced products under the PartyLite® brand.  The Company also operates a small Direct Selling business, 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.  Two Sisters Gourmet™ brand products are sold in North America.

Within the Catalog & Internet segment, the Company designs, sources and markets a broad range of household convenience items, premium photo albums, frames, holiday cards, personalized gifts, kitchen accessories and gourmet coffee and tea.  These products are sold directly to the consumer under the Boca Java™, Easy Comforts™, Exposuresâ, Home Marketplace®, Miles Kimballâ and Walter Drakeâ brands.  These products are sold primarily in North America.

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, and home décor products such as picture frames, lamps and textiles. Products in this segment are sold primarily in North America to retailers in the premium, specialty and mass channels under the CBK®, Carolina®, Colonial Candle of Cape Cod®, Colonial at HOMEâ, Florasense® and Seasons of Cannon Falls® 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.

Operating profit in all segments represent net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments.  Other expense includes interest expense,

18




interest income and foreign exchange and other, which are not allocated to the business segments.  Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations.  Unallocated Corporate within the identifiable assets include corporate cash and cash equivalents, short-term investments, prepaid income tax, corporate fixed assets, deferred bond costs and other long-term investments, which are not allocated to the business segments.

 

Three months

 

Nine months

 

 

 

ended October 31,

 

ended October 31,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

Net Sales

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

144,898

 

$

154,711

 

$

453,886

 

$

469,147

 

Catalog & Internet

 

52,708

 

51,661

 

127,620

 

122,489

 

Wholesale

 

100,305

 

122,086

 

259,269

 

281,920

 

Total

 

$

297,911

 

$

328,458

 

$

840,775

 

$

873,556

 

Operating profit (loss)

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

4,177

 

$

12,173

 

$

39,092

 

$

61,077

 

Catalog & Internet

 

2,469

 

35

 

(3,595

)

(4,263

)

Wholesale

 

(1,961

)

7,078

 

(44,474

)

1,001

 

 

 

4,685

 

19,286

 

(8,977

)

57,815

 

Other expense

 

(2,746

)

(4,409

)

(8,610

)

(13,800

)

Earnings (loss) from continuing operations before income taxes and minority interest

 

$

1,939

 

$

14,877

 

$

(17,587

)

$

44,015

 

 

 

October 31, 2006

 

January 31, 2006

 

Identifiable Assets

 

 

 

 

 

Direct Selling

 

$

238,133

 

$

230,097

 

Catalog & Internet

 

170,733

 

165,672

 

Wholesale

 

246,472

 

522,386

 

Unallocated Corporate

 

152,396

 

198,365

 

Assets of discontinued operations

 

2,997

 

 

Total

 

$

810,731

 

$

1,116,520

 

 

11.                               Assets Held for Sale

During the third quarter of fiscal 2005, the Colorado Springs facility, purchased as part of the Walter Drake acquisition, became available for sale.  During the third quarter of fiscal 2006, the Company recorded an impairment of $1.2 million on the facility due to the deterioration of local real estate market conditions.  The facility was sold on April 7, 2006 for $2.9 million, net of related transaction costs, and resulted in an additional loss of approximately $0.1 million.  The building was classified as assets held for sale in the Condensed Consolidated Balance Sheets as of January 31, 2006.

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12.                               Bank Lines of Credit

On October 2, 2006, the Company executed Amendment No. 1 (the “Amendment”) to its unsecured revolving credit facility (“Credit Facility”) dated as of June 2, 2005.  The Amendment (i) reduces the amount available for borrowing under the Credit Agreement from $150 million to $75 million, (ii) changes the initial termination date from June 2, 2010 to June 1, 2009, (iii) increases the rates of interest applicable to loans under the Credit Agreement and (iv) modifies some of the covenants.  The Company has the ability to increase the amount available for borrowing, 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.  As of October 31, 2006, the Company was in compliance with such provisions.  Amounts outstanding under the amended Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate or Eurocurrency rate plus a spread ranging from 0.80% to 1.70% calculated on the basis of the Company’s senior unsecured long-term debt rating.  As of October 31, 2006, approximately $25.3 million (including letters of credit) was outstanding under the Credit Facility.

13.                               Debt

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. In June 2006, the Company repurchased $25.1 million of these notes at a 1% premium. Subsequent to October 31, 2006, the Company repurchased an additional $27.0 million of these notes.

14.                               Contingencies

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

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

RESULTS OF OPERATIONS:

Overview

Blyth is a designer and marketer of home fragrance products and accessories, home décor, seasonal decorations, household convenience items, personalized gifts and products for the foodservice trade.  We compete in the global Home Expressions industry, and our products can be found throughout North America, Europe and Australia.  Our financial results are reported in three segments - the Direct Selling segment, the Catalog & Internet segment and the Wholesale 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 and divestitures, Blyth is comprised of an approximately $700 million direct selling business, an approximately $200 million catalog and internet business and an approximately $330 million wholesale business.  Sales and earnings growth differ in each segment depending on geographic location, market penetration, our relative market share and product and marketing execution, among other business factors.  Over the long term, all three segments should experience single-digit growth, most likely within the low to mid-single digit range, again depending on the business factors previously noted.

Our current focus is driving sales growth of our brands so we may leverage more fully our infrastructure.  New product development continues to be critical to all three segments of our business.  In the Direct Selling segment, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants. In fiscal 2006 we completed the acquisition of a small gourmet food company, Two Sisters Gourmet, which markets its products through the Direct Selling channel.  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 the Catalog & Internet segment.   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.

Recent Developments

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.  In March 2006, we announced our intention to evaluate additional strategic opportunities that have been identified since the announcement of the spin off, which would likely focus on one or more of our European Wholesale businesses, believing that substantial upside opportunities exist in the North American Wholesale business despite challenging market conditions impacting the Home Expressions industry.

In accordance with this intention to explore strategic alternatives with respect to our European Wholesale business, (a) on April 12, 2006, we sold Kaemingk B.V. (“Kaemingk”) to an entity controlled by the management of this business, (b) on June 16, 2006, we sold Edelman B.V. (“Edelman”) and Euro-Decor B. V. (“Euro-Decor”) to an entity with which members of the management of Edelman and Euro-Decor are affiliated, and (c) on August 17, 2006, we sold the Gies Group. Accordingly, the results of operations for Kaemingk, Edelman, Euro-Decor and Gies have been reclassified as discontinued operations for all periods presented.  The remaining European Wholesale business, Colony, is classified as held for sale as of October 31, 2006. Similarly, the results of operations for Colony have been reclassified as discontinued operations for all periods presented.  The assets and liabilities of the business to be sold have been classified as assets of discontinued operations and liabilities of discontinued operations, respectively, in the Company’s Condensed Consolidated Balance Sheets.

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During the third quarter of fiscal 2007, we began the restructuring of our North American mass channel home fragrance business with the announcement that we will be closing our Tijuana, Mexico manufacturing facility.  In addition, we plan to eliminate unprofitable customers and streamline the SKU base of the mass business.

The initial steps of this restructuring project resulted in fiscal 2007 third quarter charges totaling $5.2 million.  Inventory write-downs and equipment impairments of $4.5 million and severance costs of approximately $0.3 million were charged to cost of goods sold, while the remaining $0.4 million related to severance was charged to general and administrative expenses.  These restructuring efforts are expected to continue into fiscal 2008, with additional charges related to severance and equipment impairment estimated to be approximately $13 million.  In addition, we will continue to evaluate our SKU base and customer relationships.  As a result of these evaluations there may be additional inventory write-downs related to the elimination of customers that are not as profitable as we desire and/or the further reduction of the SKU base of the mass business.

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Net Sales

Net sales in the nine months ended October 31, 2006 decreased $32.8 million, or 3.8%, to $840.8 million from $873.6 million in the same period a year earlier.   Net sales decreased $30.6 million, or 9.3%, to $297.9 million in the third quarter of fiscal 2007 from $328.5 million in the third quarter of fiscal 2006.  The decrease is a result of the sale of Impact Plastics, the shortfall in PartyLite’s U.S. sales and lower mass candle sales in our Wholesale business, partially offset by an increase in the Catalog & Internet segment sales as well as improvement in our seasonal, home décor and Sterno businesses.

Net Sales - Direct Selling Segment

Net sales in the Direct Selling segment for the first nine months of fiscal 2007 decreased $15.2 million, or 3.2%, to $453.9 million from $469.1 million a year earlier.  PartyLite’s U.S. sales decreased approximately 12.0%. Management believes this sales decrease was driven by a decline in the number of sales consultants as a result of increased channel competition as well as fewer shows per consultant.  Additionally, last year’s sales benefited from the reversal of a contingent reserve in the amount of $5.5 million for a U.S. state settlement of an unclaimed property matter associated with gift cards sold since the inception of the gift card program in the Direct Selling business.  Excluding the previously mentioned reversal PartyLite’s U.S. sales decreased approximately 10.0% during the first nine months of fiscal 2007 as compared to prior yearPartyLite Canada’s sales increased approximately 8.0% as a result of the increase in active and productive independent consultants, and PartyLite Europe’s sales increased approximately 9.0% also as a result of an increase in the number of sales consultants in most of its geographic markets.

Net sales in the Direct Selling segment for the quarter ended October 31, 2006 decreased $9.8 million, or 6.3%, to $144.9 million, from $154.7 million in the quarter ended October 31, 2005. PartyLite’s U.S. sales decreased approximately 12.0% compared to the prior year due to a decrease in the number of sales consultants, hostesses and party guests.  PartyLite Canada sales decreased approximately approximately 4.0% compared to the same quarter in the prior year due to a lower number of consultants.  In PartyLite’s European markets, sales increased approximately 14.0% due to an increase in active independent consultants in most markets.

Net Sales - Catalog & Internet Segment

Net sales in the Catalog & Internet segment for the first nine months of fiscal 2007 increased $5.1 million, or 4.2%, to $127.6 million from $122.5 million in the same period earlier.  Net sales in the Catalog & Internet segment increased $1.0 million, or 1.9%, to $52.7 million in the quarter ended October 31, 2006, compared with $51.7 million in the same period in fiscal 2006.  This increase is due to higher sales in most of our major catalogs and accretive sales from Boca Java which was acquired in August 2005.

Net Sales - Wholesale Segment

Net sales in the Wholesale segment decreased $22.6 million, or 8.0%, to $259.3 million in the nine months ended October 31, 2006 from $281.9 million in the nine months ended October 31, 2005. Net sales in the Wholesale segment in the quarter ended October 31, 2006 decreased $21.8 million, or 17.9%, to $100.3 million from $122.1 million in the same period a year earlier.  The decline from last year is primarily attributable to the divestiture of Impact Plastics in January 2006 and the continued softness in the mass candle sales, partially offset by increased sales in our premium home décor and Sterno businesses.

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Gross Profit

Gross profit in the first nine months of fiscal 2007 decreased $30.6 million, or 7.0%, to $406.7 million, from $437.3 million in the first nine months of fiscal 2006. Gross profit margin decreased from 50.1% for the first nine months of fiscal 2006 to 48.4% for the first nine months of fiscal 2007.  Gross profit decreased $16.3 million, or 10.6% from $153.6 million in the quarter ended October 31, 2005 to $137.3 million in the quarter ended October 31, 2006.  Gross profit margin decreased from 46.8% for the third quarter of fiscal 2006 to 46.1% in the third quarter of fiscal 2007.  The decrease from prior year is principally due to lower PartyLite U.S. sales, restructuring charges in our North American mass candle business and higher commodity costs.

Selling Expense

Selling expense decreased $1.4 million, or 0.5%, from $284.8 million in the first nine months of fiscal 2006, when selling expense was 32.6% of net sales, to $283.4 million in the same period in fiscal 2007, or 33.7% of net sales.  Selling expense decreased $2.9 million, or 2.8%, from $102.5 million in the third quarter of fiscal 2006, when selling expense was 31.2% of net sales, to $99.6 million in the same period in fiscal 2007, or 33.4% of net sales.  The decrease in selling expense is a result of lower sales and related selling expenses within PartyLite U.S. as well as tight cost controls at several business units.

Administrative Expense

Administrative expense increased $0.8 million, or 0.8%, from $94.7 million in the first nine months of fiscal 2006 to $95.5 million in the same period of fiscal 2007.  As a percent of sales, administrative expense was 11.4% for fiscal 2007 and 10.8% for fiscal 2006.  Administrative expense increased $1.2 million, or 3.8%, from $31.9 million in the third quarter of fiscal 2006 to $33.1 million in the same period of fiscal 2007.  As a percent of sales, administrative expense was 11.1% for fiscal 2007 and 9.7% for fiscal 2006.  The increase relates to severance costs of $0.4 million in our North American Wholesale business associated with headcount reductions and other executive severance costs of $1.1 million in the current fiscal quarter.

Goodwill Impairment

Goodwill and other indefinite lived intangibles are subject to an annual assessment for impairment, which the Company performs in the fourth fiscal quarter, or more frequently if events or circumstances indicate the goodwill or other indefinite lived intangibles might be impaired.

During the second quarter of fiscal 2007, the Company identified triggering events in two reporting units within the Wholesale segment.  In the first reporting unit, the Company’s decision to discontinue sales of a new product line coupled with sharply rising commodity costs led the Company to perform an impairment analysis of goodwill in the reporting unit.  In the second reporting unit, new management with a significantly changed near-term outlook for the businesses that gives effect to the changing business environment led the Company to perform an impairment analysis of the goodwill in this reporting unit.   As a result of these analyses, the goodwill in both reporting units was determined to be impaired, as the fair value of the reporting units was less than the carrying values of the reporting units including goodwill.  The decrease in the fair value of the reporting units is due to a significant decrease in the projected results for the full fiscal year and future years as a result of the factors previously discussed.  The estimated fair value of the reporting units was determined utilizing a combination of valuation techniques, namely the discounted cash flow methodology and the market multiple methodology.  As a result, the Company recorded a non-cash pre-tax goodwill impairment charge of $36.8 million in the Wholesale segment.

24




Operating Profit (Loss)

Operating profit decreased $66.8 million from $57.8 million of profit in the first nine months of fiscal 2006 to a loss of $9.0 million in the same period of fiscal 2007.  In addition to the goodwill impairment charge discussed above, operating profit was affected by reduced sales in our PartyLite U.S. business, restructuring charges in our North American mass candle business, and higher commodity costs.

Operating profit decreased $14.6 million from $19.3 million of profit in the quarter ended October 31, 2005 to $4.7 million in the same period of fiscal 2007.  This decline was primarily due to the impact of lower PartyLite U.S. sales, the loss on sales of excess and obsolete inventory in the mass candle business, and higher commodity costs.

Operating Profit - Direct Selling Segment

Operating profit in the Direct Selling segment for the first nine months of fiscal 2007 decreased $22.0 million, or 36.0%, to $39.1 million from $61.1 million in the same period a year earlier. This decrease was due to a decline in gross profit caused by reduced sales in the U.S. and higher wax and other commodity costs, as well as the previously mentioned reversal of the contingent reserve of $5.5 million for the settlement of an unclaimed property matter in fiscal 2006.

Operating profit in the quarter ended October 31, 2006 in the Direct Selling segment decreased $8.0 million, or 65.6%, to $4.2 million from $12.2 million in the same period a year earlier.  This decrease was primarily driven by the sales decrease in PartyLite U.S., as well as increased commodity costs.

Operating Profit (Loss) - Catalog & Internet Segment

Operating loss in the Catalog & Internet segment was $3.6 million in the nine months ended October 31, 2006 compared favorably to a loss of $4.3 million in the nine months ended October 31, 2005.  Operating profit in the quarter ended October 31, 2006 in the Catalog & Internet segment increased $2.4 million to $2.5 million from $0.1 million in the same period a year earlier.  The improvement over the prior year is primarily due to increased sales from our major catalogs and reduced promotional spending, which more than offset the continued investment in Boca Java for the quarter.

Operating Profit (Loss) - Wholesale Segment

Operating profit in the Wholesale segment was $1.0 million for the nine months ended October 31, 2005 compared to a loss of $44.5 million in the nine months ended October 31, 2006.  As previously mentioned, a goodwill impairment charge of $36.8 million was recorded in the second quarter of fiscal 2007, as well as restructuring charges of $5.2 million recorded in the third quarter.

Operating profit in the Wholesale segment was $7.1 million for the quarter ended October 31, 2005 compared to a loss of $2.0 million for the quarter ended October 31, 2006 primarily driven by the North American mass candle business, which experienced lower sales volume and higher commodity costs, in addition to the restructuring costs recorded in the mass candle business.

Interest Expense and Interest Income

Interest expense increased approximately $0.3 million, or 2.1% from $14.3 million in the first nine months of fiscal 2006 to $14.6 million in the same period of fiscal 2007, due to fluctuations in borrowings and interest rates.

25




Interest expense decreased approximately $0.4 million, or 8.0% from $5.0 million in the quarter ended October 31, 2005 to $4.6 million in the quarter ended October 31, 2006, due to decreased line of credit borrowings partially offset by an increase in interest rates.

Interest income increased approximately $4.0 million from $1.4 million in the first nine months of fiscal 2006 to $5.4 million in the same period of fiscal 2007.  Interest income increased approximately $1.1 million from $0.7 million in the third quarter of fiscal 2006 to $1.8 million in the same period of fiscal 2007.  The increase is due to higher cash balances and an increase in interest rates.

Income Taxes

Income tax expense (benefit) decreased $16.5 million from an expense of $9.5 million in the first nine months of fiscal 2006 to a benefit of $7.0 million in the same period in the current fiscal year.  The tax benefit was a result of $10.6 million of tax benefit related to $28.0 million of the goodwill impairment that was tax deductible.  Taxes were favorably impacted by the decrease in U.S. earnings versus higher foreign sourced earnings, which are taxed at a lower rate than U.S. earnings. The effective tax rate for the nine months ended October 31, 2006 was a benefit of 39.8% compared to an expense of 21.6% in the prior year.

Income tax expense (benefit) decreased $1.1 million from an expense of $1.1 million in the three months ended October 31, 2005 to a benefit of approximately $30 thousand in the three months ended October 31, 2006.  Taxes were favorably impacted by the decrease in U.S. earnings versus higher foreign sourced earnings, which are taxed at a lower rate than U.S. earnings. The effective tax rate for the three months ended October 31, 2006 was a benefit of 1.7% compared to an expense of 7.2% in the prior year.

Earnings (Loss) from Continuing Operations

Loss from continuing operations for nine months ended October 31, 2006 was $10.7 million, or $0.27 per diluted share, compared to earnings of $35.0 million, or $0.85 per diluted share, for the nine months ended October 31, 2005.  Included in the current year loss from continuing operations is an after-tax restructuring charge of $3.2 million or $0.08 per diluted share.

Earnings from continuing operations for three months ended October 31, 2006 was $1.9 million, or $0.05 per diluted share, compared to earnings of $13.8 million, or $0.33 per diluted share, for the three months ended October 31, 2005.  Included in the current year loss from continuing operations is an after-tax restructuring charge of $3.2 million or $0.08 per diluted share.

Discontinued Operations

The loss from discontinued operations, net of tax, for the nine months ended October 31, 2006 was $109.5 million.  The loss includes a non-tax deductible loss of $18.4 million on the sale of the Kaemingk business in the first quarter of fiscal 2007, a non-tax deductible net loss on the sale of the Edelman and Euro-Decor businesses of $14.5 million, which includes a goodwill impairment charge of $16.7 million recorded in the first quarter, and a non-tax deductible loss on the sale of the Gies business of $28.9 million, which includes an impairment charge of $31.1 million recorded in the second quarter of fiscal 2007.  The loss from discontinued operations also includes a non-tax deductible impairment charge of $27.2 million for the Colony business which is classified as held for sale.  Also, the loss includes operating losses for the businesses of $20.4 million for the nine months ended October 31, 2006.  Income from discontinued operations, net of tax, for the nine months ended October 31, 2005 was $2.1 million.

26




Loss from discontinued operations, net of tax, for the three months ended October 31, 2006 was $2.2 million.  Included in income (loss) from discontinued operations were non-taxable gains of $2.3 million for the sales of the Gies, Edelman and Euro-Decor businesses and a non-taxable gain of $1.4 million to adjust the carrying value of the Colony net assets to the estimated fair value of the business offset by operating losses of $5.9 million in the quarter ended October 31, 2006.  Income from discontinued operations, net of tax, for the three months ended October 31, 2005 was $9.3 million.

Liquidity and Capital Resources

Net cash used in operations decreased to approximately $31.4 million in the first nine months of fiscal 2007 from $88.4 million in the same period of fiscal 2006.  This improvement in cash from operations in fiscal 2007 is primarily due to the impact of divestitures which had a seasonal working capital requirement.

Capital expenditures for property, plant and equipment were $12.4 million in the nine months ended October 31, 2006 compared to $10.8 million in the prior year period.  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 and divestitures.  The Company anticipates total capital spending of approximately $20.0 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.

On October 2, 2006, the Company executed Amendment No. 1 (the “Amendment”) to its unsecured revolving credit facility (“Credit Facility”) dated as of June 2, 2005.  The Amendment (i) reduces the amount available for borrowing under the Credit Agreement from $150 million to $75 million, (ii) changes the initial termination date from June 2, 2010 to June 1, 2009, (iii) increases the rates of interest applicable to loans under the Credit Agreement and (iv) modifies some of the covenants.  The Company has the ability to increase the amount available for borrowing, 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.  As of October 31, 2006, the Company was in compliance with such provisions.  Amounts outstanding under the amended Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate or Eurocurrency rate plus a spread ranging from 0.80% to 1.70% calculated on the basis of the Company’s senior unsecured long-term debt rating.  As of October 31, 2006, approximately $25.3 million (including letters of credit) was outstanding under the Credit Facility.

At October 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.  Effective November 10, 2006, the amount available under the uncommitted line of credit was reduced to $2.0 million.  At October 31, 2006, approximately $0.1 million of letters of credit were outstanding under this credit line.

As of September 30, 2006, Colony Gift Corporation Limited (“Colony”) had a $9.4 million short-term revolving credit facility with Barclays Bank, which matured in July 2006.  This revolving credit facility is pending renewal and, borrowings will continue on a month to month basis.  Colony had borrowings under the credit facility of approximately $8.6 million, at a weighted average interest rate of 5.6%, as of September 30, 2006.

At October 31, 2006, Miles Kimball had approximately $9.1 million of long-term debt outstanding under a real estate mortgage note payable to John Hancock Life Insurance Company, which matures June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

27




In July 1995, the Company privately placed $25.0 million aggregate principal amount of 7.54% Senior Notes due 2005.  The final payment on the notes was made on June 30, 2005.

In May 1999, the Company filed a shelf registration statement for issuance of up to $250.0 million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.4 million, which is being amortized over the life of the notes.  In June 2006, the Company repurchased $25.1 million of these notes at a 1% premium.  Subsequent to October 31, 2006, the Company repurchased an additional $27.0 million of these same notes.  Such notes contain, among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  At October 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 October 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 specific redemption price.  The proceeds of the debt issuance were used for general corporate purposes.

At October 31, 2006, CBK had $4.4 million of debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letter of credit issued by LaSalle 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 5.5% at October 31, 2006.  Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

The Company’s short-term investments consist of auction rate securities and variable rate demand obligations classified as available-for-sale securities.  The short-term investments in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long-term nature of their stated contractual maturities, the Company generally has the ability to liquidate these securities in 35 days or less.  Management’s intent is to hold these securities as liquid assets convertible to cash for applicable operational needs as they may arise.  At October 31, 2006, the Company held $95.0 million of short-term investments, which consist of auction rate securities and variable rate demand obligations classified as available-for-sale securities.  The contractual maturities on these short-term investments range from within one year and beyond ten years.

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 American Job Creations Act of 2004.  The funds were brought back to the United States late in the fourth quarter of fiscal 2006 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 prior 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.

On June 7, 2006, the Company’s Board of Directors amended the Repurchase Program and increased the number of shares of common stock authorized to be repurchased by 6,000,000 shares, from 6,000,000 shares to 12,000,000 shares. Since January 31, 2006, the Company has purchased 1,802,382 shares on the open market for a cost of approximately $35.0 million, bringing the cumulative total purchased shares to 6,429,182 as of October 31, 2006

28




for a total cost of approximately $149.6 million.  Additionally, the Company repurchased 4,906,616 shares for an aggregate purchase price of $172.6 million in July 2004 through a Dutch auction cash tender offer.  The acquired shares are held as common stock in treasury at cost.

On September 7, 2006, the Company announced that it had declared a cash dividend of $0.27 per share of common stock for the six months ended July 31, 2006.  The dividend, authorized at the Company’s September 7, 2006 Board of Directors meeting, was payable to shareholders of record as of November 1, 2006, and was paid on November 15, 2006.  The total payment was $10.6 million.

Critical Accounting Policies

There were no changes to our critical accounting policies in the third quarter of fiscal 2007.  For a discussion of the Company’s critical accounting policies see our Annual Report on Form 10-K for the fiscal year ended January 31, 2006.

Recent Accounting Pronouncements

During the first quarter of fiscal 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (SFAS No. 155) and SFAS No. 156, “Accounting for Servicing of Financial Instruments — an amendment of FASB Statement No. 140” (SFAS No. 156). SFAS No. 155 requires that interests in securitized financial assets be evaluated to determine whether they contain embedded derivatives, and permits the accounting for any such hybrid financial instruments as single financial instruments at fair value with changes in fair value recognized directly in earnings. SFAS No. 156 specifies that servicing assets or liabilities recognized upon the sale of financial assets must be initially measured at fair value, and subsequently either measured at fair value or amortized in proportion to and over the period of estimated net servicing income or loss. The Company plans to adopt both standards on February 1, 2007.  The Company does not expect the adoption of the standards to have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”  This Interpretation requires that a recorded tax benefit must be more likely than not of being sustained upon examination by tax authorities based upon its technical merits.  The amount of benefit recorded is the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.  Upon adoption, any adjustment will be recorded directly to beginning retained earnings. The Interpretation is effective for the Company beginning no later than February 1, 2007.  The Company has not yet adopted the Interpretation and has not analyzed its potential effect on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures regarding fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements.  Accordingly, SFAS No. 157 does not require any new fair value measurements.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  SFAS No. 158 requires the Company to recognize the funded status of its defined benefit plan as an asset or liability on the financial statements and the changes in the funded status, net of tax, within accumulated other comprehensive income, to the extent these changes are not recognized in earnings as components of periodic net benefit cost.  Additionally, SFAS No. 158 requires the plan’s funded status to be measured as of the end of our current fiscal year.  The SFAS No. 158 recognition provisions will be effective as of the end of fiscal year 2007 and the SFAS No. 158 measurement date provisions will be effective as of the end of fiscal year 2009.  The Company does not

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expect the adoption of the standards to have a material impact on the Company’s consolidated financial position, annual results of operations or cash flows.  As it relates to SFAS No. 158, this determination was based on the January 31, 2006 funded status of its pension plan.  The actual effects will depend on the funded status of the pension plan at January 31, 2007, which will depend on several factors, principally fiscal 2007 returns on plan assets and January 31, 2007, discount rates.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  This issuance eliminates the diversity in practice in quantifying financial statement misstatements.  SAB No. 108 establishes the approach that requires the Company to quantify the misstatement on each of the financial statements and related disclosures.  SAB No. 108 is effective for the fiscal year ending January 31, 2007 and the Company has evaluated the impact of SAB No. 108 and does not expect it to have a material impact on the financial statements.

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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

Interest Rate Risk

As of October 31, 2006, the Company is subject to interest rate risk on approximately $34.4 million of variable rate debt.  Each 1-percentage point change in the interest rate would impact pre-tax earnings by approximately $0.3 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.  The Company does not intend to continue to hedge the net assets of its foreign operations during fiscal 2007.  Any increase or decrease in the fair value of the forwards related to changes in the spot foreign exchange rates was 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 as of October 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 cost of the acquired asset.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in accumulated OCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  Approximately $0.1 million of hedge gains related to cash flow hedges are included in accumulated OCI at October 31, 2006, 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 cash flow with the items being hedged.

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

 

U.S. Dollar

 

Average

 

Estimated

 

(In thousands, except average contract rate)

 

Notional Amount

 

Contract Rate

 

Fair Value

 

Canadian Dollar

 

$

5,800

 

0.89

 

$

6

 

Pound Sterling

 

250

 

1.91

 

5

 

Euro

 

4,400

 

1.29

 

56

 

 

 

$

10,450

 

 

 

$

67

 

 

The foreign exchange contracts outstanding have maturity dates through April 2007.

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Item 4.   CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of October 31, 2006.

(b) Changes in internal control over financial reporting.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the third quarter of fiscal 2007 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II.   OTHER INFORMATION

Item 1.   Legal Proceedings

None.

Item 1A. Risk Factors

Risks Associated with Proposed FTC Regulations

In April 2006, the U.S. Federal Trade Commission issued a notice of proposed rulemaking that if implemented, will regulate all sellers of “business opportunities” in the United States. The proposed rule would, among other things, require all sellers of business opportunities, which would likely include PartyLite and Two Sisters Gourmet, to implement a seven day waiting period before entering into an agreement with a prospective business opportunity purchaser and provide all prospective business opportunity purchasers with substantial disclosures in writing regarding the business opportunity and the company.  Based on information currently available, we anticipate that the final rule may require several years to become final and effective, and may differ substantially from the rule as originally proposed. Nevertheless the proposed rule, if implemented in its original form, would negatively impact our Direct Selling businesses.

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

The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the third quarter of the fiscal year ending January 31, 2007.

ISSUER PURCHASES OF EQUITY SECURITIES(1)

Period

 

(a) Total
Number of
Shares
Purchased

 

(b)
Average
Price Paid
per Share

 

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

 

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

 

August 1, 2006 – August 31, 2006

 

0

 

 

0

 

5,570,818

 

September 1, 2006 – September 30, 2006

 

0

 

 

0

 

5,570,818

 

October 1, 2006 – October 31, 2006

 

0

 

 

0

 

5,570,818

 

Total

 

0

 

 

0

 

5,570,818

 

 


(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.  On June 7, 2006, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of common stock authorized to be repurchased by 6,000,000 shares, from 6,000,000 shares to 12,000,000 shares.  As of October 31, 2006, the Company has purchased a total of 6,429,182 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.

Item 3.   Defaults upon Senior Securities

None

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

None

Item 5.   Other Information

None

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Item 6.   Exhibits

Exhibits

10.18                  Share Sale and Purchase Agreement between Prebola NR 293 AB (under name change to ALG Holding AB) and Blyth Wholesale Holdings, Inc. dated August 14, 2006.

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

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

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

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

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SIGNATURES

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

 

 

 

 

 

 

 

 

BLYTH, INC.

 

 

 

 

 

 

 

 

 

 

 

Date:

December 11, 2006

 

 

By:

/s/Robert B. Goergen

 

 

 

 

 

Robert B. Goergen

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

Date:

December 11, 2006

 

 

By:

/s/Robert H. Barghaus

 

 

 

 

 

Robert H. Barghaus

 

 

 

 

Vice President and Chief Financial Officer

 

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