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 July 31, 2007

 

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 o

 

Accelerated filer x

 

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.

39,480,662 Common Shares as of August 31, 2007

 




BLYTH, INC.

INDEX

 

Page

 

 

 

Part I.   Financial Information

 

 

 

Item 1.   Financial Statements (Unaudited):

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Earnings (Loss)

4-5

 

 

Condensed Consolidated Statements of Stockholders’ Equity

6

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

Notes to Condensed Consolidated Financial Statements

8-18

 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

19-27

 

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

28-29

 

 

Item 4.   Controls and Procedures

30

 

 

Part II.   Other Information

 

 

 

Item 1.   Legal Proceedings

31

 

 

Item 1A.   Risk Factors

31

 

 

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

32

 

 

Item 3.   Defaults upon Senior Securities

32

 

 

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

33

 

 

Item 5.   Other Information

33

 

 

Item 6.   Exhibits

34

 

 

Signatures

35

 

2




Part I.   FINANCIAL  INFORMATION

Item I.   FINANCIAL STATEMENTS

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

July 31,

 

January 31,

 

(In thousands, except share and per share data)

 

2007

 

2007

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

90,833

 

$

103,808

 

Short-term investments

 

125,985

 

129,725

 

Accounts receivable, less allowance for doubtful receivables of $1,782 and $1,533, respectively

 

56,822

 

35,040

 

Inventories

 

143,652

 

148,321

 

Prepaid and other

 

45,166

 

33,317

 

Deferred income taxes

 

21,800

 

29,707

 

Total current assets

 

484,258

 

479,918

 

Property, plant and equipment, at cost:

 

 

 

 

 

Less accumulated depreciation of $219,769 and $209,160, respectively

 

149,368

 

159,484

 

Other assets:

 

 

 

 

 

Investment

 

3,644

 

3,610

 

Goodwill

 

78,682

 

78,682

 

Other intangible assets, net of accumulated amortization of $8,500 and $7,750, respectively

 

34,600

 

35,350

 

Deposits and other assets

 

18,092

 

17,594

 

Total non-current assets

 

135,018

 

135,236

 

Total assets

 

$

768,644

 

$

774,638

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

1,022

 

987

 

Accounts payable

 

48,562

 

56,450

 

Accrued expenses

 

67,829

 

77,738

 

Income taxes payable

 

3,698

 

4,925

 

Total current liabilities

 

121,111

 

140,100

 

Deferred income taxes

 

33,085

 

35,002

 

Long-term debt, less current maturities

 

210,575

 

214,792

 

Other liabilities

 

32,260

 

21,051

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock - authorized 100,000,000 shares of $0.02 par value; issued 50,916,460 shares and 50,637,060 shares, respectively

 

1,018

 

1,013

 

Additional contributed capital

 

137,295

 

129,367

 

Retained earnings

 

536,401

 

534,897

 

Accumulated other comprehensive income

 

23,313

 

22,130

 

Treasury stock, at cost, 11,435,798 shares and 11,335,798 shares, respectively

 

(326,414

)

(323,714

)

Total stockholders’ equity

 

371,613

 

363,693

 

Total liabilities and stockholders’ equity

 

$

768,644

 

$

774,638

 

 

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

3




 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Unaudited)

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

 

2007

 

2006

 

Net sales

 

$

505,238

 

$

542,864

 

Cost of goods sold

 

242,164

 

273,484

 

Gross profit

 

263,074

 

269,380

 

Selling

 

172,645

 

183,856

 

Administrative and other

 

66,103

 

62,417

 

Goodwill impairment

 

 

36,769

 

Total operating expense

 

238,748

 

283,042

 

Operating profit (loss)

 

24,326

 

(13,662

)

Other expense (income):

 

 

 

 

 

Interest expense

 

7,346

 

9,989

 

Interest income

 

(4,050

)

(3,533

)

Foreign exchange and other

 

(151

)

(592

)

Total other expense

 

3,145

 

5,864

 

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

 

21,181

 

(19,526

)

Income tax expense (benefit)

 

6,223

 

(6,975

)

Earnings (loss) from continuing operations before minority interest

 

14,958

 

(12,551

)

Minority interest

 

54

 

74

 

Earnings (loss) from continuing operations

 

14,904

 

(12,625

)

Loss from discontinued operations, net of income tax benefit of $1,041 in 2006

 

 

(107,351

)

Net earnings (loss)

 

$

14,904

 

$

(119,976

)

Basic:

 

 

 

 

 

Earnings (loss) from continuing operations per common share

 

$

0.38

 

$

(0.31

)

Loss from discontinued operations per common share

 

 

(2.66

)

Net earnings (loss) per common share

 

$

0.38

 

$

(2.98

)

Weighted average number of shares outstanding

 

39,400

 

40,312

 

Diluted:

 

 

 

 

 

Earnings (loss) from continuing operations per common share

 

$

0.37

 

$

(0.31

)

Loss from discontinued operations per common share

 

 

(2.66

)

Net earnings (loss) per common share

 

$

0.37

 

$

(2.98

)

Weighted average number of shares outstanding

 

39,751

 

40,312

 

 

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 July 31 (In thousands, except per share data)

 

2007

 

2006

 

Net sales

 

$

234,871

 

$

262,617

 

Cost of goods sold

 

113,501

 

134,571

 

Gross profit

 

121,370

 

128,046

 

Selling

 

78,996

 

86,744

 

Administrative and other

 

34,704

 

32,258

 

Goodwill impairment

 

 

36,769

 

Total operating expense

 

113,700

 

155,771

 

Operating profit (loss)

 

7,670

 

(27,725

)

Other expense (income):

 

 

 

 

 

Interest expense

 

3,625

 

5,288

 

Interest income

 

(2,061

)

(1,747

)

Foreign exchange and other

 

397

 

(103

)

Total other expense

 

1,961

 

3,438

 

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

 

5,709

 

(31,163

)

Income tax expense (benefit)

 

2,510

 

(10,434

)

Earnings (loss) from continuing operations before minority interest

 

3,199

 

(20,729

)

Minority interest

 

27

 

40

 

Earnings (loss) from continuing operations

 

3,172

 

(20,769

)

Loss from discontinued operations, net of income tax benefit of $892 in 2006

 

 

(68,598

)

Net earnings (loss)

 

$

3,172

 

$

(89,367

)

Basic:

 

 

 

 

 

Earnings (loss) from continuing operations per common share

 

$

0.08

 

$

(0.52

)

Loss from discontinued operations per common share

 

 

(1.72

)

Net earnings (loss) per common share

 

$

0.08

 

$

(2.24

)

Weighted average number of shares outstanding

 

39,488

 

39,821

 

Diluted:

 

 

 

 

 

Earnings (loss) from continuing operations per common share

 

$

0.08

 

$

(0.52

)

Loss from discontinued operations per common share

 

 

(1.72

)

Net earnings (loss) per common share

 

$

0.08

 

$

(2.24

)

Weighted average number of shares outstanding

 

39,835

 

39,821

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common

 

Contributed

 

Retained

 

Treasury

 

Unearned

 

Comprehensive

 

 

 

 

 

Stock

 

Capital

 

Earnings

 

Stock

 

Compensation

 

Income (Loss)

 

Total

 

For the six months ended July 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

 

 

 

 

 

(119,976

)

 

 

 

 

 

 

(119,976

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

14,288

 

14,288

 

Unrealized gain on certain investments (net of tax $4)

 

 

 

 

 

 

 

 

 

 

 

6

 

6

 

Net loss on cash flow hedging instruments (net of tax of $33)

 

 

 

 

 

 

 

 

 

 

 

(62

)

(62

)

Reclassification of unearned compensation

 

 

 

(3,070

)

 

 

 

 

3,070

 

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(105,744

)

Cancellation of restricted stock

 

 

 

438

 

 

 

(438

)

 

 

 

 

 

Amortization of unearned compensation

 

 

 

450

 

 

 

 

 

 

 

 

 

450

 

Dividends

 

 

 

 

 

(9,302

)

 

 

 

 

 

 

(9,302

)

Treasury stock purchases

 

 

 

 

 

 

 

(34,987

)

 

 

 

 

(34,987

)

Balance, July 31, 2006

 

$

1,010

 

$

125,398

 

$

528,705

 

$

(323,169

)

$

 

$

12,297

 

$

344,241

 

For the six months ended July 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2007

 

$

1,013

 

$

129,367

 

$

534,897

 

$

(323,714

)

$

 

$

22,130

 

$

363,693

 

FIN 48 adoption adjustment

 

 

 

 

 

(2,769

)

 

 

 

 

 

 

(2,769

)

Adjusted Balance,
February 1, 2007:

 

$

1,013

 

$

129,367

 

$

532,128

 

$

(323,714

)

$

 

$

22,130

 

$

360,924

 

Net earnings for the period

 

 

 

 

 

14,904

 

 

 

 

 

 

 

14,904

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

1,746

 

1,746

 

Unrealized gain on certain investments (net of tax $51)

 

 

 

 

 

 

 

 

 

 

 

84

 

84

 

Net loss on cash flow hedging instruments (net of tax of $348)

 

 

 

 

 

 

 

 

 

 

 

(647

)

(647

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

16,087

 

Common stock issued in connection with long-term incentive plan

 

6

 

7,073

 

 

 

 

 

 

 

 

 

7,079

 

Common stock cancelled in connection with long-term incentive plan

 

(1

)

 

 

 

 

 

 

 

 

 

 

(1

)

Tax benefit from stock options

 

 

 

303

 

 

 

 

 

 

 

 

 

303

 

Amortization of unearned stock compensation

 

 

 

552

 

 

 

 

 

 

 

 

 

552

 

Dividends

 

 

 

 

 

(10,631

)

 

 

 

 

 

 

(10,631

)

Treasury stock purchases

 

 

 

 

 

 

 

(2,700

)

 

 

 

 

(2,700

)

Balance, July 31, 2007

 

$

1,018

 

$

137,295

 

$

536,401

 

$

(326,414

)

$

 

$

23,313

 

$

371,613

 

 

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

 

6




 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six months ended July 31 (In thousands)

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings (loss)

 

$

14,904

 

$

(119,976

)

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

 

 

 

 

 

Loss on sale of discontinued operations, net of tax

 

 

92,897

 

Depreciation and amortization

 

14,435

 

17,234

 

Loss on disposition of fixed assets

 

39

 

1,144

 

Gain on sale of assets

 

(594

)

 

Stock-based compensation expense

 

983

 

450

 

Deferred income taxes

 

8,247

 

(10,094

)

Equity (income) loss of investee

 

(34

)

60

 

Minority interest

 

15

 

(45

)

Goodwill impairment

 

 

36,769

 

Loss on sale of assets held for sale

 

 

79

 

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

 

 

 

 

 

Accounts receivable

 

(29,007

)

16,253

 

Inventories

 

(11,145

)

(24,030

)

Prepaid and other

 

(12,394

)

(12,724

)

Other long-term assets

 

2,406

 

1,067

 

Accounts payable

 

(7,344

)

(6,449

)

Accrued expenses

 

(9,647

)

(14,392

)

Other liabilities

 

1,607

 

(1,945

)

Income taxes

 

(1,337

)

(10,990

)

Net cash used in operating activities

 

(28,866

)

(34,692

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(4,034

)

(8,743

)

Purchases of short-term investments

 

(1,167,030

)

(744,341

)

Proceeds from sales of short-term investments

 

1,170,770

 

671,206

 

Proceeds from sale of assets

 

25,423

 

5,458

 

Proceeds from the sales of businesses, net of cash disposed

 

514

 

69,208

 

Purchase of businesses, net of cash acquired

 

 

(6,654

)

Net cash provided by (used in) investing activities

 

25,643

 

(13,866

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

7,079

 

 

Tax benefit from stock options

 

303

 

 

Purchases of treasury stock

 

(2,700

)

(34,987

)

Borrowings from bank lines of credit

 

 

32,903

 

Repayments on bank lines of credit

 

 

(26,664

)

Repayments of long-term debt

 

(3,995

)

(72,607

)

Payments on capital lease obligations

 

(217

)

 

Dividends paid

 

(10,631

)

(9,302

)

Net cash used in financing activities

 

(10,161

)

(110,657

)

Effect of exchange rate changes on cash

 

409

 

3,661

 

Net decrease in cash and cash equivalents

 

(12,975

)

(155,554

)

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

 

 

 

2,928

 

Cash and cash equivalents at beginning of period

 

103,808

 

242,068

 

Cash and cash equivalents at end of period

 

$

90,833

 

$

83,586

 

 

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 subsidiaries.  All intercompany accounts and transactions have been eliminated.  Our investment in a company that is not majority owned or controlled is reported using the equity method and is recorded as an investment.  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 as of July 31, 2007 and the consolidated results of its operations and cash flows for the six-month periods ended July 31, 2007 and 2006.  These interim statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended January 31, 2007, as set forth in the Company’s Annual Report on Form 10-K.  Operating results for the three and six months ended July 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2008.

2.                                     Discontinued Operations and Divestitures

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.  On December 20, 2006, the Company sold its European premium candle business, Colony, which was part of 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).

Included in the earnings (loss) from discontinued operations in the Condensed Consolidated Statements of Earnings (Loss) for the three and six months ended July 31, 2007 and 2006 are the following:

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands)

 

2007

 

2006

 

2007

 

2006

 

Net Sales

 

$

 

$

27,379

 

$

 

$

86,625

 

Loss from discontinued operations, net of tax

 

 

(10,791

)

 

(14,454

)

Loss on sale of discontinued operations, net of tax

 

 

(57,807

)

 

(92,897

)

 

Included in the net loss from discontinued operations were operating losses related to Kaemingk of $0.0 million and $0.3 million, respectively, for the three and six months ended July 31, 2006. In the first quarter of fiscal 2007 the Company recorded a non-tax deductible loss from discontinued operations of $18.4 million related to the sale of Kaemingk.

Included in the net loss from discontinued operations were net operating losses related to Edelman and Euro-Decor of $1.9 million and $2.2 million for the three and six months ended July 31, 2006, respectively. In the first quarter of fiscal 2007, the Company recorded a non-tax deductible goodwill impairment charge of $16.7 million related to these businesses, which has been included in the net loss from discontinued operations. In the quarter ended July 31, 2006, the net loss from discontinued operations includes a non-taxable gain on the sale of Edelman and Euro-Decor of $1.9 million.

8




 

Included in the net loss from discontinued operations were net operating losses related to Gies and Colony for the three and six months ended July 31, 2006, of $8.9 million and $11.9 million, respectively.  Also included in the net loss from discontinued operations for the three and six months ended July 31, 2006 were non-tax deductible charges for the impairment of the Gies and Colony businesses of $31.1 million and $28.6 million, respectively.

These charges reflected the amount by which the carrying value of the net assets sold exceeded the estimated fair value of the businesses.

On April 27, 2007, the Company sold certain assets and liabilities of its Blyth HomeScents International North American mass channel candle business (“BHI NA”), which was part of the Wholesale segment.  The net assets were sold for $25.1 million, inclusive of proceeds from the sale of overstock inventory of $1.1 million. Of this amount, $21.8 million was received at closing and $3.3 million was received in the second quarter of fiscal 2008.  The sale, including the proceeds received in the second quarter, resulted in a pre-tax gain of $0.6 million, and is recorded as Administrative and other expenses in the Condensed Consolidated Statements of Earnings (Loss).

Included in the sale were working capital net assets, as well as fixed assets and leases related to the Memphis, Tennessee distribution facility and Bentonville, Arkansas operations.  The Company retained all other offices and its Elkin, North Carolina manufacturing and distribution facilities, which produce the Company’s premium wholesale Colonial Candle brand product, and continue to manufacture and distribute candles under a transition services agreement for the buyer. The net assets sold were comprised primarily of customer relationships, accounts receivable of $7.4 million, inventory of $16.6 million and distribution equipment of $1.1 million, less liabilities assumed of $1.7 million.

In addition, the Company entered into an overstock inventory agreement with the buyer that provides for revenue sharing in future sales of excess and obsolete inventory, transferred to the buyer as part of the sale of certain assets and liabilities of BHI NA.  The Company is entitled to receive a portion of the proceeds from the sale of the overstock inventory by the buyer. For the three and six months ended July 31, 2007, the Company received $1.1 million of proceeds from this agreement, which were included as part of the pre-tax gain on sale of $0.6 million, described above.

Revenue and costs related to operating the retained facilities and certain agreed upon transitional support services will continue to be reported in continuing operations in the Condensed Consolidated Statements of Earnings (Loss).

3.                                     Restructuring

During the third and fourth quarters of fiscal 2007 the Company recorded restructuring charges related to the restructuring plan for our North American mass channel home fragrance business, the major components of which were the closing of our Tijuana, Mexico manufacturing facility, the elimination of less profitable customers, the streamlining of the stock keeping unit (“SKU”) base of the mass business, the outsourcing of certain products currently being manufactured and head count reductions.  These charges included $1.4 million of severance costs associated with the termination of 149 employees.

Also, during the fourth quarter of fiscal 2007, the Company recorded charges related to the restructuring of the North American operations of our Direct Selling segment in recognition of the recent decline in sales in this channel.  These costs were comprised of $1.5 million of severance costs associated with the termination of 91 employees and $0.5 million of lease termination costs.

9




 

As of January 31, 2007, the Company had an accrual for approximately $2.5 million for restructuring charges in the Condensed Consolidated Balance Sheet, which related to the aforementioned severance liabilities and lease obligations. For the six month period ending July 31, 2007, an additional $0.5 million of lease termination charges were recorded in cost of goods sold and $0.8 million in severance charges were recorded in administrative and other expense.  As a result of payments made during the six month period ending July 31, 2007 approximately $0.9 million of severance liabilities and $0.6 million of lease obligations were remaining on the balance sheet at July 31, 2007.  The remaining severance liability and lease obligations will be paid within the next twelve months.

The following table represents the restructuring activity incurred for the above described programs recorded during the six month period ended July 31, 2007:

 

Wholesale
Segment

 

Direct Selling
Segment

 

 

 

(In thousands)

 

Severance Costs

 

Lease Obligation

 

Severance Costs

 

Total

 

Balance at January 31, 2007

 

$

469

 

$

450

 

$

1,541

 

$

2,460

 

Charges incurred in fiscal 2008

 

769

 

541

 

 

$

1,310

 

Payments made in fiscal 2008

 

(509

)

(391

)

(1,374

)

(2,274

)

Balance at July 31, 2007

 

$

729

 

$

600

 

$

167

 

$

1,496

 

 

4.                                     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 49 days.  Despite the long-term nature of their stated contractual maturities, the Company generally has the ability to liquidate these securities in 49 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.

As of July 31, 2007 and January 31, 2007, the Company held $126.0 million and $129.7 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)

 

July 31, 2007

 

January 31, 2007

 

Due within one year

 

$

4,000

 

$

7,000

 

Due between one and ten years

 

3,750

 

 

Due after ten years

 

118,235

 

122,725

 

Total

 

$

125,985

 

$

129,725

 

 

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.

10




 

5.                                      Inventories

The components of inventory are as follows:

(In thousands)

 

July 31, 2007

 

January 31, 2007

 

Raw materials

 

$

13,109

 

$

22,462

 

Work in process

 

548

 

90

 

Finished goods

 

129,995

 

125,769

 

Total

 

$

143,652

 

$

148,321

 

 

6.                                      Goodwill and Other Intangibles

Goodwill and other indefinite lived intangibles are subject to an assessment for impairment using a two-step fair value-based test and other intangibles are also subject to impairment reviews, which must be performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired.

The Company performs its annual assessment of impairment as of January 31, which is our fiscal year-end date.  For goodwill, the first step is to identify whether a potential impairment exists. This is done by comparing the fair value of a reporting unit to its carrying amount, including goodwill.  Fair value for each of our reporting units is estimated utilizing a combination of valuation techniques, namely the discounted cash flow methodology and the market multiple methodology.  The discounted cash flow methodology assumes the fair value of an asset can be estimated by the economic benefit or net cash flows the asset will generate over the life of the asset, discounted to its present value. The discounting process uses a rate of return that accounts for both the time value of money and investment risk factors.  The market multiple methodology estimates fair value based on what other participants in the market have recently paid for reasonably similar assets. Adjustments are made to compensate for differences between the reasonably similar assets and the assets being valued. The fair value of the reporting units is derived by calculating the average of the outcomes of the two valuation techniques described above. If the fair value of the reporting unit exceeds the carrying value, no further analysis is necessary.  If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the estimated fair value of the goodwill. If fair value is less than the carrying amount, an impairment loss is reported as a reduction to the goodwill and a charge to operating expense.

The following table shows the carrying amount of goodwill, by operating segment, as of July 31, 2007 and January 31, 2007:

 

 

 

Catalog &

 

 

 

(In thousands)

 

Direct Selling

 

Internet

 

Total

 

Goodwill

 

$

2,298

 

$

76,384

 

$

78,682

 

 

11




 

Other intangible assets, all reported in the Catalog & Internet segment, consisted of the following:

 

July 31, 2007

 

January 31, 2007

 

(In thousands)

 

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

 

8,500

 

6,500

 

15,000

 

7,750

 

7,250

 

Total

 

$

43,100

 

$

8,500

 

$

34,600

 

$

43,100

 

$

7,750

 

$

35,350

 

 

Amortization expense for other intangible assets for the six month periods ended July 31, 2006 and 2007 was $0.9 million and $0.8 million, respectively. The estimated annual amortization expense for fiscal 2008 is $1.5 million.  The estimated amortization expense for the next five fiscal years beginning with fiscal 2009 is as follows:  $1.5 million, $1.1 million, $1.0 million, $0.8 million and $0.6 million.

7.                                      Earnings per Share

The components of basic and diluted earnings per share are as follows:

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands)

 

2007

 

2006

 

2007

 

2006

 

Net earnings (loss)

 

$

3,172

 

$

(89,367

)

$

14,904

 

$

(119,976

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

39,488

 

39,821

 

39,400

 

40,312

 

Dilutive effect of stock options and restricted shares

 

347

 

 

351

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Diluted

 

39,835

 

39,821

 

39,751

 

40,312

 

 

For the three and six-month periods ended July 31, 2007, options to purchase 231,200 and 463,400 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be anti-dilutive.  Also, for the three and six-month periods ended July 31, 2006, options to purchase 1,148,400 shares of common stock are not included in the computation of earnings per share because the effect would be anti-dilutive.

12




 

8.                                      Treasury and Common Stock

Treasury Stock

 

 

 

 

 

Changes in Treasury Stock were (In thousands, except shares):

 

Shares

 

Amount

 

Balance at February 1, 2006

 

9,533,416

 

$

(287,744

)

Restricted stock cancellations

 

 

(438

)

Treasury stock purchases

 

1,802,382

 

(34,987

)

Balance at July 31, 2006

 

11,335,798

 

$

(323,169

)

 

 

 

 

 

 

Balance at February 1, 2007

 

11,335,798

 

$

(323,714

)

Treasury stock purchases

 

100,000

 

(2,700

)

Balance at July 31, 2007

 

11,435,798

 

$

(326,414

)

 

Common Stock

 

 

 

 

 

Changes in Common Stock were (In thousands, except shares):

 

Shares

 

Amount

 

Balance at February 1, 2006

 

50,528,060

 

$

1,010

 

Balance at July 31, 2006

 

50,528,060

 

$

1,010

 

 

 

 

 

 

 

Balance at February 1, 2007

 

50,637,060

 

$

1,013

 

Common stock issued in connection with long-term incentive plan

 

283,400

 

6

 

Common stock cancelled in connection with long-term incentive plan

 

(4,000

)

(1

)

Balance at July 31, 2007

 

50,916,460

 

$

1,018

 

 

9.                                      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) reduced the amount available for borrowing under the Credit Agreement from $150.0 million to $75.0 million, (ii) changed the initial termination date from June 2, 2010 to June 1, 2009, (iii) increased the rate of interest applicable to loans under the Credit Agreement and (iv) modified some of the covenants.  The Company has the ability to increase the amount available for borrowing, under certain circumstances, by an additional $50.0 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 July 31, 2007, the Company was in compliance with such provisions.  Amounts outstanding under the amended Credit Facility bear interest, at the Company’s option, at either the JPMorgan Chase Bank’s prime rate or the 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.  The amount available for borrowing under this facility was approximately $68.5 million as of July 31, 2007, reflecting $6.5 million in outstanding letters of credit.

13




 

10.                               Income Taxes

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on February 1, 2007.  As a result of the adoption of FIN 48, the Company recognized an increase of $6.1 million in the liability for unrecognized tax benefits and an asset of $3.3 million.  These amounts were accounted for as a net $2.8 million reduction to the Company’s February 1, 2007 retained earnings balance.

As of February 1, 2007, the date of adoption, and July 31, 2007, the Company’s unrecognized tax benefits totaled $17.1 million and $17.0 million, respectively.  Of the amount of unrecognized benefits at February 1, 2007, $13.1 million, if recognized, would affect our effective tax rate.  Any prospective adjustments to our reserves for income taxes will be recorded as an increase or decrease to our provision for income taxes and would impact our effective tax rate.

The Company will now recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. In the past interest and penalties were reflected as part of pre-tax income.  The Company has made a change in accounting principle related to interest and penalties as part of the adoption of FIN 48.  During the three and six months ended July 31, 2007, the Company recognized $0.1 million and $0.3 million, respectively of interest expense related to the unrecognized tax benefits.  As of the adoption date, the Company had accrued interest of $2.6 million and penalties of $3.3 million in relation to the above unrecognized tax benefits.  At July 31, the accrual for interest and penalties was $6.2 million.

Blyth, Inc. files income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions.   The number of years with open tax audits varies depending on the tax jurisdiction.  Our major taxing jurisdictions include the U.S., including state jurisdictions of Illinois and Massachusetts, Canada, Germany, and Switzerland.  In the U.S, we are not currently under audit by the Internal Revenue Service but we are open to examination for the fiscal years 2005 through 2007.  We are currently under audit in the state of Illinois for the fiscal years 2002, 2003, and 2004 and are open to examination for the fiscal years 2005 through 2007.  We are also currently under audit in the state of Massachusetts for the fiscal years 2001, 2002, 2003, and 2004 and are open to examination for the fiscal years 2005 through 2007.  In Canada, we are currently under audit for fiscal years 2005 and 2006 and are open to examination for 2007.  In Germany, we are currently under examination for the fiscal year 2004 and open to examination for fiscal years 2005 through 2007.  In Switzerland, we are open to examination for fiscal year 2007.  We do not anticipate that the resolution of the Illinois, Massachusetts, Canadian and German audits will materially impact our financial statements.

Of the $2.8 million net FIN 48 retained earnings adjustment, $3.6 million liability relates to a potential tax adjustment for which correlative relief would be available.  A corresponding tax asset of $3.3 million has separately been established on the balance sheet to record the benefit that the Company would realize upon resolution of this issue through the competent authority process.  The adjustment to reflect this asset has been recorded as an increase in retained earnings concurrent with the FIN 48 retained earnings adjustment.

In the first quarter of fiscal 2008 the Company recorded a $6.1 million reversal of a previously established valuation allowance against capital loss carryforwards.  This resulted from a capital gain generated on the sale of certain assets and liabilities of the BHI NA business.

14




 

11.                               Stock Based Compensation

Summary of Plans

As of July 31, 2007, the Company had one active stock-based compensation plan, the 2003 Long-Term Incentive Plan (“2003 Plan”), available to grant future awards and two inactive 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. As of July 31, 2007, 6,500,100 shares were authorized and approximately 3,700,000 shares were available for grant under these plans.  The Company’s policy is to issue new shares of common stock for all stock options exercised and restricted stock grants.

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 and employees. 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. At the 2007 Annual Meeting, each non-employee director was granted 1,500 RSUs vesting in two equal installments beginning on the first anniversary of the date of grant.

The total compensation expense related to all stock-based compensation plans for the three and six-month periods ended July 31, 2007 was approximately $0.1 million and $0.5 million, respectively.  The total compensation expense related to all stock-based compensation plans for the three and six-month periods ended July 31, 2006 was approximately $0.4 million and $0.7 million, respectively.  The tax benefit recognized for the three and six-month periods ended July 31, 2007 was approximately $0.0 million and $0.2 million, respectively.  The tax benefit recognized for the three and six-month periods ended July 31, 2006 was approximately $0.1 million and $0.2 million, respectively.

Impact of Adoption of 123(R)

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 six months ended July 31, 2007 and 2006 includes compensation expense for restricted stock, RSUs and other 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 over periods of 3 years for stock options; 2 to 5 years for employee restricted stock and RSUs; and 1 to 2 years for 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 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). As a result of the adoption of 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.

15




 

Transactions involving restricted stock and RSUs are summarized as follows:

 

 

 

 

 

Aggregate

 

 

 

 

 

Weighted Average

 

Intrinsic Value

 

 

 

Shares

 

Grant date Fair Value

 

(In thousands)

 

Nonvested restricted stock and RSUs at January 31, 2007

 

343,430

 

$

24.63

 

 

 

Granted

 

12,000

 

27.79

 

 

 

Vested

 

(19,000

)

25.68

 

 

 

Forfeited

 

(50,205

)

26.14

 

 

 

Nonvested restricted stock and RSUs at July 31, 2007

 

286,225

 

$

24.43

 

$

6,389

 

Total restricted stock and RSUs at July 31, 2007

 

317,225

 

$

24.86

 

$

7,080

 

 

Compensation expense related to restricted stock and RSUs for the three and six-month periods ended July 31, 2007 was approximately $0.1 million and $0.5 million, respectively. Compensation expense related to restricted stock and restricted stock units for the three and six-month periods ended July 31, 2006 was approximately $0.4 million and $0.6 million, respectively. There were 12,000 RSUs granted to the Board of Directors in the second quarter of fiscal 2008.

As of July 31, 2007, there was $4.4 million of unearned compensation expense related to non-vested restricted stock and RSU awards. This cost is expected to be recognized over a weighted average period of 2.16 years. As of July 31, 2007, approximately 0.3 million restricted stock awards with a weighted average grant date fair value of $24.43 are expected to vest.  The total unrecognized stock-based compensation cost to be recognized in future periods as of July 31, 2007 does not consider the effect of stock-based awards that may be issued in subsequent periods.

Transactions involving stock options are summarized as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Option

 

Weighted Average

 

Remaining

 

Aggregate

 

 

 

Shares

 

Exercise Price

 

Contractual Life

 

Intrinsic Value

 

Outstanding at January 31, 2007

 

877,500

 

$

26.32

 

4.56

 

 

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

(283,400

)

24.98

 

 

 

 

 

Options forfeited and expired

 

(64,500

)

24.77

 

 

 

 

 

Outstanding at July 31, 2007

 

529,600

 

$

27.23

 

4.25

 

$

31,000

 

Exercisable at July 31, 2007

 

524,600

 

$

27.31

 

4.25

 

$

15,000

 

 

At July 31, 2007 and January 31, 2007, options to purchase 524,600 and 860,000 shares, respectively, were exercisable.  There were no options granted during the current fiscal year.

The compensation expense for the three and six months ended July 31, 2007 related to stock options was not significant. As of July 31, 2007, $20 thousand of total unrecognized compensation cost related to stock options is expected to be recognized over a period of 1.83 years.  All outstanding stock options at July 31, 2007 are expected to vest.

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.

16




 

12.                               Segment Information

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

During fiscal 2007 there was a change in our senior management structure with the departure of our Wholesale segment President.  Our Catalog & Internet segment President assumed responsibility for the Wholesale segment in addition to his current responsibilities.  We refer to this new reporting structure as the Multi-channel Group, which includes our Catalog & Internet and Wholesale segments.  For segment reporting purposes, Blyth continues to report individual segment operating results for the Direct Selling, Catalog & Internet and Wholesale segments.

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories, fragranced bath gels and body lotions and other fragranced products under the PartyLite® brand.  The Company also operates a small Direct Selling business, Two Sisters GourmetTM, which is focused on selling gourmet foods.  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 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 trim 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 and specialty channels under the CBK®, Colonial Candle of Cape Cod®, Colonial at HOMEâ 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®, HandyFuel™ and Sterno® brands.

Operating profit in all segments represents net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments.  Other expense includes interest expense, interest income and equity in earnings of investee, 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.

17




 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands)

 

2007

 

2006

 

2007

 

2006

 

Net Sales

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

130,219

 

$

143,999

 

$

290,463

 

$

308,988

 

Multi-channel Group:

 

 

 

 

 

 

 

 

 

Catalog & Internet

 

40,176

 

38,423

 

80,072

 

74,912

 

Wholesale

 

64,476

 

80,195

 

134,703

 

158,964

 

Subtotal Multi-channel Group

 

104,652

 

118,618

 

214,775

 

233,876

 

Total

 

$

234,871

 

$

262,617

 

$

505,238

 

$

542,864

 

Operating profit (loss)

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

15,377

 

$

14,359

 

$

42,308

 

$

34,914

 

Multi-channel Group:

 

 

 

 

 

 

 

 

 

Catalog & Internet

 

(2,903

)

(2,303

)

(5,056

)

(6,063

)

Wholesale

 

(4,804

)

(39,781

)

(12,926

)

(42,513

)

Subtotal Multi-channel Group

 

(7,707

)

(42,084

)

(17,982

)

(48,576

)

 

 

7,670

 

(27,725

)

24,326

 

(13,662

)

Other expense

 

(1,961

)

(3,438

)

(3,145

)

(5,864

)

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

 

$

5,709

 

$

(31,163

)

$

21,181

 

$

(19,526

)

 

 

 

July 31, 2007

 

 

 

January 31, 2007

 

 

 

Identifiable Assets

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

251,236

 

 

 

$

238,194

 

 

 

Multi-channel Group:

 

 

 

 

 

 

 

 

 

Catalog & Internet

 

162,279

 

 

 

152,068

 

 

 

Wholesale

 

173,400

 

 

 

181,384

 

 

 

Subtotal Multi-channel Group

 

335,679

 

 

 

333,452

 

 

 

Unallocated Corporate

 

181,729

 

 

 

202,992

 

 

 

Total

 

$

768,644

 

 

 

$

774,638

 

 

 

 

13.                              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 affect on its consolidated financial position, results of operations or cash flows.

18




 

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, annualized net sales are comprised of an approximately $700 million Direct Selling business, an approximately $200 million Catalog & Internet business and an approximately $250 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 in the Form 10-K, for the  fiscal year ended January 31, 2007.

Our current focus is driving sales growth of our brands so we may leverage more fully our infrastructure.  New product development continues to be critical to all three segments of our business.  In the Direct Selling segment, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants.  In the Catalog & Internet segment, product, merchandising and circulation strategy are designed to drive strong sales growth in newer brands and expand further the sales and customer base of our flagship brands.  In the Wholesale segment, sales initiatives are targeted to independent retailers and national accounts.

Recent Developments

In September 2005, we announced our proposed intention to spin off the Wholesale segment.  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 alternatives that had 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 businesses despite challenging market conditions impacting the Home Expressions industry.

In accordance with this intention to explore strategic alternatives with respect to our European Wholesale businesses, (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, (c) on August 17, 2006, we sold the Gies Group and (d) on December 20, 2006, we sold Colony Gifts Corporation Ltd. (“Colony”). Accordingly, the results of operations for Kaemingk, Edelman, Euro-Decor, Gies and Colony have been classified as discontinued operations for all periods presented.

On April 27, 2007, the Company sold certain assets and liabilities of its BHI NA mass channel candle business, which was part of the Wholesale segment.  The net assets were sold for $25.1 million, inclusive of proceeds from the sale of overstock inventory of $1.1 million. Of this amount, $21.8 million was received at closing and $3.3 million was received in the second quarter of fiscal 2008.  The sale, including the proceeds received in the second quarter, resulted in a pre-tax gain of $0.6 million, and is recorded as Administrative and other expenses in the Condensed Consolidated Statements of Earnings (Loss).

19




 

Net Sales

Net sales in the six months ended July 31, 2007 decreased $37.7 million, or approximately 7%, to $505.2 million from $542.9 million in the first six months of the comparable prior year period.  The decrease is primarily a result of a shortfall of sales within PartyLite’s domestic market and Wholesale segment, offset by increased sales in the Catalog and Internet segment.

Net sales decreased $27.7 million, or 11%, to $234.9 million in the quarter ended July 31, 2007 from $262.6 million in the comparable prior year period, as a result of the impact of the sale of BHI NA, which resulted in a  sales decrease of $10.6 million, or 4%, and the sales decline in PartyLite’s domestic market, partially offset by higher sales within the Catalog & Internet segment.

Net Sales - Direct Selling Segment

Net sales in the Direct Selling segment for the six months ended July 31, 2007 decreased $18.5 million, or 6%, to $290.5 million from $309.0 million in the comparable prior year period.  PartyLite’s U.S. sales decreased approximately 18% compared to the prior year primarily due to a decline in the number of active independent sales consultants.  PartyLite Canada reported an approximate 3% increase in sales as measured in U.S. Dollars, a 2% increase in sales in local currency, versus the prior year.  In PartyLite’s European markets, sales increased approximately 10% in U.S. Dollars, a 1% increase in local currency.

Net sales in the Direct Selling segment for the quarter ended July 31, 2007 decreased $13.8 million, or 10%, to $130.2 million from $144.0 million in the comparable prior year period. PartyLite’s U.S. sales decreased approximately 24% compared to the prior year mainly due to a decline in active independent sales consultants. PartyLite Canada reported a 3% decrease in sales as measured in U.S. Dollars, a 6% decrease in sales in local currency, versus the prior year.  In PartyLite’s European markets, sales increased approximately 2% as measured in U.S. Dollars, a decrease of 5% in sales in local currency, versus the prior year.

Net Sales - Catalog & Internet Segment

Net sales in the Catalog & Internet segment increased $5.2 million, or 7%, to $80.1 million in the six months ended July 31, 2007, from $74.9 million in the comparable prior year period.  This increase was primarily due to increased sales in our Boca Java business as a result of investment in new club member acquisitions and increased sales in our core catalogs of the Miles Kimball company.

Net sales in the Catalog & Internet segment increased $1.8 million, or 5%, to $40.2 million in the quarter ended July 31, 2007, compared with $38.4 million in the comparable prior year period.  This increase was primarily due to sales growth attributable to new club member acquisitions in Boca Java.

Net Sales - Wholesale Segment

Net sales in the Wholesale segment in the six months ended July 31, 2007 decreased $24.3 million, or approximately 15%, to $134.7 million from $159.0 million in the comparable prior year period. The decrease in sales is primarily due to a planned sales reduction in the mass candle business, the sale of the BHI NA business, as well as the decline in the overall home décor business, reflecting a softer housing market.

Net sales in the Wholesale segment in the quarter ended July 31, 2007 decreased $15.7 million, or approximately 20% to $64.5 million from $80.2 million in the comparable prior year period. The decrease in sales is primarily due to a planned sales reduction in the mass candle business, the sale of the BHI NA business, as well as the decline in the overall home décor business, reflecting a softer housing market.

20




 

Gross Profit

Gross profit decreased $6.3 million, or 2%, to $263.1 million in the six months ended July 31, 2007 from $269.4 million in the comparable prior year period.  The decrease in gross profit is principally attributable to the impairment and accelerated depreciation of certain fixed assets of $2.6 million, resulting from the sale of the BHI NA business, in addition to the impact of reduced sales within the Direct Selling and Wholesale Segments. Gross profit margin increased to 52.1% for the six months ended July 31, 2007 from 49.6% in the comparable prior year period.  The gross profit margin improvement is the result of price increases, favorable product mix and effective cost control efforts, partially offset by a continued increase in commodity costs.

Gross profit decreased $6.6 million, or 5%, to $121.4 million in the quarter ended July 31, 2007 from $128.0 million in the comparable prior year period. This decline in gross profit is primarily due to the impairment and accelerated depreciation of certain fixed assets of $2.1 million, as a result of the sale of the BHI NA business, as well as the impact of reduced sales within the Direct Selling and Wholesale Segments. Gross profit margin increased to 51.7% for the quarter ended July 31, 2007 from 48.8% in the comparable prior year period.  The gross profit margin improvement is the result of price increases, favorable product mix, and effective cost control efforts, partially offset by a continued increase in commodity costs.

Selling Expense

Selling expense decreased $11.3 million, or 6%, to $172.6 million in the six months ended July 31, 2007, from $183.9 million in the comparable prior year period. The decrease in selling expense is primarily due to reduced sales. As a percentage of net sales, selling expense increased to 34.2% of net sales for the six months ended July 31, 2007, compared to 33.9% of net sales during the comparable prior year period.

Selling expense decreased $7.7 million, or 9%, to $79.0 million in the quarter ended July 31, 2007, from $86.7 million in the comparable prior year period. The decrease in selling expense is primarily due to the decreased sales in the Direct Selling and Wholesale segments. As a percentage of net sales, selling expense increased to 33.6% of net sales for the quarter ended July 31, 2007, compared to 33.0% for the comparable prior year period.

Administrative and Other Expense

Administrative and other expense increased $3.7 million, or 6%, to $66.1 million in the six months ended July 31, 2007 from $62.4 million in the comparable prior year period.  As a percent of sales, administrative expense was 13.1% in the six months ended July 31, 2007 versus 11.5% in the comparable prior year period.  The increase in administrative expense includes severance and related benefits expense associated with termination of certain employees as a result of the sale of the BHI NA business of $2.9 million and an amendment to an executive employment agreement, partially offset by the gain on the sale of the BHI NA business.

Administrative and other expense increased $2.4 million, or 11%, to $34.7 million in the quarter ended July 31, 2007 from $32.3 million in the comparable prior year period.  As a percent of sales, administrative expense was 14.8% for the quarter ended July 31, 2007 and 12.3% for the comparable prior year period.   The increase in administrative expense includes severance and related benefits expense associated with the termination of certain employees as a result of the sale of the BHI NA business of $ 2.2 million and an amendment to an executive employment agreement, partially offset by the gain on the sale of the BHI NA business.

21




 

Operating Profit (Loss)

Operating profit increased $38.0 million to $24.3 million in the six months ended July 31, 2007 from a loss of $13.7 million in the comparable prior year period. This increase was primarily due to the non-repeating goodwill impairment charge of $36.8 million recorded in the Wholesale segment in the second quarter of the prior year. Excluding the prior year goodwill impairment charge, the Company’s operating profit improvement was offset by an increase in operating losses in the Wholesale segment as a result of the sale of the BHI NA business.

Operating profit increased $35.4 million to $7.7 million in the quarter ended July 31, 2007 from a loss of $27.7 million in the comparable prior year period.  This increase was due to the aforementioned goodwill impairment charge of $36.8 million. Excluding the prior year goodwill impairment charge, the Company’s operating profit improvement was offset by an increase in operating losses in the Wholesale segment as a result of the sale of the BHI NA business.

Operating Profit - Direct Selling Segment

Operating profit in the Direct Selling segment for the six months ended July 31, 2007 increased $7.3 million, or 21%, to $42.3 million from $35.0 million in comparable prior year periodThe increase is primarily due to gross margin improvement from a combination of product mix, price increases and cost saving initiatives throughout the PartyLite businesses, as well as improved sales in PartyLite Europe and Canada.

Operating profit in the quarter ended July 31, 2007 in the Direct Selling segment increased $1.0 million, or 7%, to $15.4 million from $14.4 million in the comparable prior year period.  This increase was primarily driven by the higher gross margin due to a combination of product mix, price increases and cost saving initiatives throughout the PartyLite businesses and increased sales in PartyLite Europe.

Operating Loss - Catalog & Internet Segment

Operating loss in the six months ended July 31, 2007 in the Catalog & Internet segment improved by $1.0 million, or 17% to $5.1 million compared to a $6.1 million loss in the comparable prior year period.  The improvement is related to the increase in sales and margin improvements within the Miles Kimball business.

Operating loss in the quarter ended July 31, 2007 in the Catalog & Internet segment increased $0.6 million to $2.9 million versus $2.3 million in the comparable prior year period.  The increase in operating loss over the prior year is primarily due to the continued investment in Boca Java during the second quarter.

Operating Loss - Wholesale Segment

Operating loss in the six months ended July 31, 2007 in the Wholesale segment was $12.9 million versus a loss of $42.5 million in the comparable prior year period.  Included in the prior year was a goodwill impairment charge of $36.8 million. In fiscal 2008, additional costs were incurred due to the sale of the BHI NA business, which included severance of $3.2 million, the impairment of certain fixed assets and accelerated depreciation of $2.6 million.

Operating loss in the quarter ended July 31, 2007 in the Wholesale segment decreased $35.0 million to $4.8 million versus a loss of $39.8 million in the comparable prior year period.  As mentioned above, during the second quarter of fiscal 2007 a goodwill impairment charge of $36.8 million was recorded.  In the current quarter, additional costs were incurred due to the sale of the BHI NA business, which included severance of $2.5 million, and the impairment of certain fixed asset and accelerated depreciation of $2.1 million.

22




 

Interest Expense and Interest Income

Interest expense decreased approximately $2.7 million, or 27%, to $7.3 million in the six months ended July 31, 2007 from $10.0 million in the comparable prior year period, due to a decrease in borrowings.

Interest expense decreased approximately $1.7 million, or 31% to $3.6 million in the quarter ended July 31, 2007 from $5.3 million in the comparable prior year period, due to a decrease in borrowings.

Interest income increased approximately $0.5 million to $4.0 million in the six months ended July 31, 2007 from $3.5 million in the comparable prior year period, due to higher cash and short-term investment balances and an increase in interest rates.

Interest income increased approximately $0.4 million to $2.1 million in the second quarter ended July 31, 2007, from $1.7 million in the comparable prior year period, due to higher cash and short-term investment balances and an increase in interest rates.

Income Taxes

Income tax expense (benefit) increased $13.2 million, to $6.2 million in the six months ended July 31, 2007 from a benefit of $7.0 million in the same period in the prior fiscal year.  The effective tax rate for the six months ended July 31, 2007 was approximately 29.4% compared to a benefit of 35.7% in the prior year.  The effective tax rate for the first six months of fiscal 2008 was favorably impacted by the reversal of a previously established valuation allowance against capital loss carryforwards which was partially offset by taxes on unremitted foreign earnings. The valuation allowance was reversed as a result of a capital gain generated on the sale of certain assets and liabilities of the BHI NA business.  The tax benefit in the prior year was a result of $10.6 million of tax benefit related to $28.0 million of the goodwill impairment charge.

Income tax expense (benefit) increased $12.9 million to an expense of $2.5 million in the three months ended July 31, 2007 from a benefit of $10.4 million in the three months ended July 31, 2006. The tax benefit was a result of the $10.6 million benefit discussed above.  The effective tax rate for the three months ended July 31, 2007 was an expense of 43.9% compared to a benefit of 33.5% in the prior year. The increase in the effective tax rate for the current quarter, versus the comparable prior year’s period, is due in part to the increase in taxes on unremitted foreign earnings.

Earnings (Loss) from Continuing Operations

Earnings from continuing operations increased $27.5 million to $14.9 million, or $0.37 per diluted share, in the six months ended July 31, 2007 from a loss of $12.6 million, or $0.31 per diluted share, for the comparable prior year period.  The improvement is primarily the result of the goodwill impairment charges recorded in the prior year, offset by costs incurred with the sale of the BHI NA business, as mentioned previously.

Earnings from continuing operations for three months ended July 31, 2007 were $3.2 million, or $0.08 per diluted share, an increase of $24.0 million, compared to loss of $20.8 million, or $0.52 per diluted share, for the comparable prior year period. The improvement is primarily the result of previously mentioned impairment charges taken in the prior year, offset by costs incurred with the sale of the BHI NA business, as mentioned previously.

23




 

Loss from Discontinued Operations

The loss from discontinued operations, net of tax, for the six months ended July 31, 2006 was $107.4 million, or $2.66 per diluted share.  The loss includes a non-tax deductible loss of $18.4 million on the sale of Kaemingk and a loss on sale of $14.7 million for the Edelman and Euro-Decor businesses, which includes a goodwill impairment charge of $16.7 million.  The loss from discontinued operations also includes non-tax deductible impairment charges of $31.1 million for the Gies business and $28.6 million for the Colony business. Also, the loss includes operating losses for the businesses of $14.5 million for the six months ended July 31, 2006. There was no income or loss from discontinued operations for the six months ended July 31, 2007.

Loss from discontinued operations, net of tax, for the three months ended July 31, 2006 was $68.6 million, or $1.72 per diluted share.  The loss includes non-tax deductible impairment charges of $31.1 million for the Gies business and $28.6 million for the Colony business and a gain on the sale of Edelman and Euro-Decor of $1.9 million.  Also, the loss includes operating losses for the businesses of $10.8 million for the quarter ended July 31, 2006. There was no income or loss from discontinued operations for the three months ended July 31, 2007.

Liquidity and Capital Resources

Cash and cash equivalents decreased $13.0 million to $90.8 million at July 31, 2007 from $103.8 million at January 31, 2007.

Net cash used by operations was $28.9 million for the six months ended July 31, 2007 compared to $34.7 million in the comparable prior year period. The Company had earnings from operations of $14.9 million during the six months ended July 31, 2007. Cash used in operating assets and liabilities, net of the deferred income tax asset of $8.2 million, was $58.6 million.  Also included in earnings from continuing operations were non-cash charges for depreciation and amortization of $14.4 million and amortization of unearned compensation of $1.0 million.

Net cash provided by investing activities was $25.6 million. Capital expenditures for property, plant and equipment were $4.0 million for the six months ended July 31, 2007 compared to $8.7 million in the prior year period.  In the comparable prior year period, the capital expenditures included the expansion of PartyLite’s European distribution center.  The Company received proceeds from the sale of certain assets and liabilities of the BHI NA business of $25.1 million and proceeds from the sale of one of our European Wholesale discontinued operations of $0.5 million in the six months ended July 31, 2007.

Net cash used in financing activities was $10.2 million.  This was primarily due to the Company’s dividend payment of $10.6 million, the reduction of long-term debt and capital lease obligations of $4.2 million, and a purchase of Treasury Stock of $2.7 million.  This was partially offset by the proceeds from the issuance of the Company’s common stock upon exercise of stock options of $7.1 million.

The Company anticipates total capital spending of approximately $13.0 million for fiscal 2008 or approximately $5.0 million less than fiscal year 2007 due to the reduced spending requirements on the Company’s manufacturing facilities. The Company has grown in part through acquisitions and, as part of its growth strategy, the Company expects to continue from time to time in the ordinary course of its business to evaluate and pursue acquisition opportunities as appropriate.  The Company believes our financing needs in the short and long term can be met from cash generated internally and through our borrowing capacity from our existing credit agreements.

24




 

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) reduced the amount available for borrowing under the Credit Agreement from $150.0 million to $75.0 million, (ii) changed the initial termination date from June 2, 2010 to June 1, 2009, (iii) increased the rate of interest applicable to loans under the Credit Agreement and (iv) modified some of the covenants.  The Company has the ability to increase the amount available for borrowing, under certain circumstances, by an additional $50.0 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 July 31, 2007, the Company was in compliance with such provisions.  Amounts outstanding under the amended Credit Facility bear interest, at the Company’s option, at either the JPMorgan Chase Bank’s prime rate or the 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.  Amounts available for borrowing under this facility were approximately $68.5 million as of July 31, 2007, reflecting $6.5 million in outstanding letters of credit.

As of July 31, 2007, the Company had a total of $2.0 million available under an uncommitted facility with LaSalle Bank National Association, to be used for letters of credit through November 30, 2007.  As of July 31, 2007, approximately $0.5 million of letters of credit were outstanding under this facility.

As of July 31, 2007, the Company had a total of $2.0 million available under an uncommitted facility with Bank of America, to be used for letters of credit through January 31, 2008.  As of July 31, 2007, no letters of credit were outstanding under this facility.

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 fiscal 2007, the Company repurchased $52.1 million of these notes.  Such notes contain, among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  At July 31, 2007, 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 of 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes.  Such notes contain provisions and restrictions similar to those in the 7.90% Senior Notes.  At July 31, 2007, the Company was in compliance with such provisions.  Interest is payable semi-annually in arrears on May 1 and November 1.  The notes may be redeemed in whole or in part at any time at a specified redemption price.  The proceeds of the debt issuances were used for general corporate purposes.

As of July 31, 2007, Miles Kimball had approximately $8.8 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%.

As of July 31, 2007, CBK had $4.2 million of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letter of credit issued by 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 5.4% at July 31, 2007.  Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

25




 

On June 7, 2006, the Company’s Board of Directors amended the stock repurchase program and increased the number of shares of common stock authorized to be repurchased by 6,000,000 shares to 12,000,000 shares.  The Company repurchased 100,000 shares during the six months ended July 31, 2007. As of July 31, 2007, the Company has purchased a cumulative total of 6,529,182 shares for approximately $152.3 million.  Additionally, 4,906,616 shares were repurchased in fiscal 2005, through a Dutch auction cash tender offer for an aggregate purchase price of $172.6 million, including fees and expenses.  The acquired shares are held as common stock in treasury at cost.

On September 6, 2007 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, 2007.  The dividend, authorized at the Company’s September 6, 2007 Board of Directors meeting, will be payable to shareholders of record as of November 1, 2007, and will be paid on November 15, 2007.

Critical Accounting Policies

There were no changes to our critical accounting policies in the second quarter of fiscal 2008.  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, 2007.

Recent Accounting Pronouncements

During the first quarter of fiscal 2007, the FASB issued Statements of Financial Accounting Standards 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 adopted both standards on February 1, 2007 and there was no 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 to be 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 Company adopted the Interpretation as of February 1, 2007 and the effect on the financial statements is disclosed in Note 10 to the Condensed Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  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.   The Company has not yet adopted the standard and the effect, if any, on the Company’s consolidated financial position, annual results of operations or cash flows has not been determined.

26




 

In February 2007, the FASB issued FASB No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”).  A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period.  This accounting standard is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The effect, if any, of adopting SFAS No. 159 on the Company’s consolidated financial position, annual results of operations or cash flows has not yet been determined.

27




 

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

The Company is subject to interest rate risk on both variable rate debt and its investments in auction rate securities.  As of July 31, 2007, the company is subject to interest rate risk on approximately $4.2 million of variable rate debt.  A 1-percentage point increase in the interest rate would impact pre-tax earnings by approximately $42 thousand if applied to the total.  As of July 31, 2007, the Company held $126.0 million of short-term investments, which consist of auction rate securities and variable rate demand obligations.  A 1-percentage point decrease in the rate of return would impact pre-tax earnings by approximately $1.3 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.  As of July 31, 2007, there was $1.7 million remaining to be amortized.

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 foreign denominated loans. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company has designated its forward exchange and options contracts on forecasted intercompany purchases and future purchase commitments as cash flow hedges and, as such, as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in Accumulated Other Comprehensive Income (“OCI”) until earnings are affected by the variability of the cash flows being hedged.  With regard to commitments for inventory purchases, upon payment of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from accumulated OCI and is included in the measurement of the cost of the acquired asset.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in accumulated OCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  Amounts included in accumulated OCI at July 31, 2007 is an unrealized loss of $0.6 million (net of taxes) 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 certain foreign denominated 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 Condensed Consolidated Statement of Cash Flows with the items being hedged.

28




 

The following table provides information about the Company’s foreign exchange forward and options contracts at July 31, 2007:

 

U.S. Dollar

 

Average

 

Estimated

 

(In thousands, except average contract rate)

 

Notional Amount

 

Contract Rate

 

Fair Value

 

Canadian Dollar

 

$

13,200

 

0.89

 

$

(780

)

Euro

 

10,750

 

1.35

 

(112

)

 

 

$

23,950

 

 

 

$

(892

)

 

The foreign exchange contracts outstanding have maturity dates through May 2008.

29




 

Item 4.    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of July 31, 2007.

(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 second quarter of fiscal 2008 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

There have been no changes to the risks described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007 except as follows:

Dependence on Key Corporate Management Personnel

Our success depends in part on the contributions of key corporate management, including our Chairman and Chief Executive Officer, Robert B. Goergen, as well as members of the Office of the Chairman:  Robert H. Barghaus, Vice President and Chief Financial Officer; Robert B. Goergen Jr., Vice President of the Company and President, Multi-Channel Group; and Anne M. Butler, Vice President of the Company and President PartyLite Worldwide.  We do not have employment contracts with any of our key corporate management personnel, except the Chairman and Chief Executive Officer, nor do we maintain any key person life insurance policies.  The loss of any of the key corporate management personnel could have a material adverse effect on us.

31




 

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

The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the second quarter of the fiscal year ending January 31, 2008.

ISSUER PURCHASES OF EQUITY SECURITIES(1)

Period

 

(a) Total
Number of
Shares Purchased

 

(b)
Average
Price Paid
per Share

 

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

 

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

 

May 1, 2007 –
May 31, 2007

 

0

 

 

0

 

5,570,818 shares

 

June 1, 2007 –
June 30, 2007

 

0

 

 

0

 

5,570,818 shares

 

July 1, 2007 –
July 31, 2007

 

100,000

 

$

27.00

 

100,000

 

5,470,818 shares

 

Total

 

100,000

 

$

27.00

 

100,000

 

5,470,818 shares

 


(1) On September 10, 1998, the Company’s Board of Directors approved the Company’s share repurchase program (the “Repurchase Program”) pursuant to which the Company was authorized to repurchase up to 1,000,000 shares of its issued and outstanding Common Stock in open market transactions.  On June 8, 1999, the Company’s Board of Directors amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 1,000,000 to 2,000,000 shares.  On March 30, 2000, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 2,000,000 to 3,000,000 shares.  On December 14, 2000, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 3,000,000 to 4,000,000 shares.  On April 4, 2002, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.  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 July 31, 2007, the Company has purchased a total of 6,529,182 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

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

The following matters were voted upon at the Annual Meeting of Stockholders held on June 6, 2007, and received the votes set forth below:

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

 

For

 

Against

 

Withheld

 

Abstentions

 

Robert B. Goergen

 

36,678,008

 

0

 

289,123

 

0

 

Neal I. Goldman

 

36,710,239

 

0

 

256,892

 

0

 

Howard E. Rose

 

36,778,043

 

0

 

189,088

 

0

 

 

In addition to the directors elected at the meeting, the directors of the Company whose terms of office continued after the meeting are: John W. Burkhart, Wilma H. Jordan and James M. McTaggart (terms expiring in 2008) and Roger A. Anderson, Pamela M. Goergen and Carol J. Hochman (terms expiring in 2009).

2) A proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors received 36,949,354 votes for, 11,654 votes against, 0 votes withheld and 6,123 abstentions.

Item 5.           Other Information

None

33




 

Item 6.           Exhibits

Exhibits

 

 

 

 

 

 

 

31.1

 

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

 

 

 

 

 

31.2

 

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

 

 

 

 

 

32.1

 

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

 

 

 

 

 

32.2

 

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

 

34




SIGNATURES

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

BLYTH, INC.

 

 

 

 

 

 

 

 

 

 

Date:

   September 7, 2007

 

By:

/s/ Robert B. Goergen

 

 

Robert B. Goergen

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

Date:

   September 7, 2007

 

By:

/s/ Robert H. Barghaus

 

 

Robert H. Barghaus

 

 

Vice President and Chief Financial Officer

 

35