Table of Contents

 

 

 

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, 2008

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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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.

 

35,563,940 Common Shares as of August 31, 2008

 

 

 



Table of Contents

 

BLYTH, INC.

 

INDEX

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

Condensed Consolidated Statements of Earnings

4-5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-20

 

 

Item 2.

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

21-27

 

 

 

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



Table of Contents

 

Part I.   FINANCIAL  INFORMATION

Item I.  FINANCIAL STATEMENTS

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

July 31,

 

January 31,

 

(In thousands, except share and per share data)

 

2008

 

2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

106,166

 

$

163,021

 

Short-term investments

 

11,034

 

30,375

 

Accounts receivable, less allowance for doubtful receivables of $2,449 and $2,006 respectively

 

54,036

 

35,054

 

Inventories

 

170,040

 

132,585

 

Prepaid and other

 

31,611

 

31,968

 

Deferred income taxes

 

35,374

 

36,841

 

Total current assets

 

408,261

 

429,844

 

Property, plant and equipment, at cost:

 

 

 

 

 

Less accumulated depreciation of $222,218 and $214,874, respectively

 

137,576

 

140,021

 

Other assets:

 

 

 

 

 

Investments

 

21,720

 

22,315

 

Goodwill

 

31,854

 

31,854

 

Other intangible assets, net of accumulated amortization of $10,000 and $9,250, respectively

 

30,750

 

31,500

 

Deposits and other assets

 

14,717

 

11,888

 

Total other assets

 

99,041

 

97,557

 

Total assets

 

$

644,878

 

$

667,422

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank lines of credit

 

$

20,000

 

$

 

Current maturities of long-term debt

 

846

 

928

 

Accounts payable

 

47,807

 

55,167

 

Accrued expenses

 

64,985

 

78,045

 

Income taxes payable

 

5,508

 

10,926

 

Total current liabilities

 

139,146

 

145,066

 

Deferred income taxes

 

32,572

 

29,563

 

Long-term debt, less current maturities

 

151,806

 

157,887

 

Other liabilities

 

33,390

 

35,838

 

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 50,932,836 shares and 50,922,460 shares, respectively

 

1,019

 

1,018

 

Additional contributed capital

 

139,978

 

138,163

 

Retained earnings

 

516,699

 

522,328

 

Accumulated other comprehensive income

 

29,246

 

25,444

 

Treasury stock, at cost, 15,368,896 shares and 14,557,351 shares, respectively

 

(398,978

)

(387,885

)

Total stockholders’ equity

 

287,964

 

299,068

 

Total liabilities and stockholders’ equity

 

$

644,878

 

$

667,422

 

 

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

 

3



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

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

 

2008

 

2007

 

Net sales

 

$

486,634

 

$

505,238

 

Cost of goods sold

 

219,196

 

242,164

 

Gross profit

 

267,438

 

263,074

 

Selling

 

186,365

 

172,645

 

Administrative and other

 

63,048

 

66,103

 

Total operating expense

 

249,413

 

238,748

 

Operating profit

 

18,025

 

24,326

 

Other expense (income):

 

 

 

 

 

Interest expense

 

4,872

 

7,346

 

Interest income

 

(2,355

)

(4,050

)

Foreign exchange and other

 

4,237

 

(151

)

Total other expense

 

6,754

 

3,145

 

Earnings before income taxes and minority interest

 

11,271

 

21,181

 

Income tax expense

 

7,048

 

6,223

 

Earnings before minority interest

 

4,223

 

14,958

 

Minority interest

 

58

 

54

 

Net earnings

 

$

4,165

 

$

14,904

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.11

 

$

0.38

 

Weighted average number of shares outstanding

 

36,290

 

39,400

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.11

 

$

0.37

 

Weighted average number of shares outstanding

 

36,660

 

39,751

 

 

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

 

4



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

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

 

2008

 

2007

 

Net sales

 

$

236,786

 

$

234,871

 

Cost of goods sold

 

108,779

 

113,501

 

Gross profit

 

128,007

 

121,370

 

Selling

 

87,691

 

78,996

 

Administrative and other

 

32,252

 

34,704

 

Total operating expense

 

119,943

 

113,700

 

Operating profit

 

8,064

 

7,670

 

Other expense (income):

 

 

 

 

 

Interest expense

 

2,449

 

3,625

 

Interest income

 

(1,043

)

(2,061

)

Foreign exchange and other

 

556

 

397

 

Total other expense

 

1,962

 

1,961

 

Earnings before income taxes and minority interest

 

6,102

 

5,709

 

Income tax expense

 

3,068

 

2,510

 

Earnings before minority interest

 

3,034

 

3,199

 

Minority interest

 

29

 

27

 

Net earnings

 

$

3,005

 

$

3,172

 

Basic:

 

 

 

 

 

Net earnings per common share

 

$

0.08

 

$

0.08

 

Weighted average number of shares outstanding

 

36,304

 

39,488

 

Diluted:

 

 

 

 

 

Net earnings per common share

 

$

0.08

 

$

0.08

 

Weighted average number of shares outstanding

 

36,712

 

39,835

 

 

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

 

5



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Common

 

Contributed

 

Retained

 

Treasury

 

Comprehensive

 

 

 

(In thousands)

 

Stock

 

Capital

 

Earnings

 

Stock

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net 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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended July 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2008

 

$

1,018

 

$

138,163

 

$

522,328

 

$

(387,885

)

$

25,444

 

$

299,068

 

Net earnings for the period

 

 

 

 

 

4,165

 

 

 

 

 

4,165

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

5,669

 

5,669

 

Net unrealized loss on certain investments (net of tax benefit of $269)

 

 

 

 

 

 

 

 

 

(437

)

(437

)

Net loss on cash flow hedging instruments (net of tax benefit of $876)

 

 

 

 

 

 

 

 

 

(1,430

)

(1,430

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

7,967

 

Common stock issued in connection with long-term incentive plan

 

1

 

 

 

 

 

 

 

 

 

1

 

Amortization of unearned compensation

 

 

 

1,815

 

 

 

 

 

 

 

1,815

 

Dividends

 

 

 

 

 

(9,794

)

 

 

 

 

(9,794

)

Treasury stock purchases

 

 

 

 

 

 

 

(11,093

)

 

 

(11,093

)

Balance, July 31, 2008

 

$

1,019

 

$

139,978

 

$

516,699

 

$

(398,978

)

$

29,246

 

$

287,964

 

 

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

 

6



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six months ended July 31 (In thousands)

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

4,165

 

$

14,904

 

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

 

 

 

 

 

Depreciation and amortization

 

10,279

 

14,435

 

Write down of investments

 

6,034

 

 

Loss on disposition of fixed assets

 

10

 

39

 

Gain on sale of assets

 

 

(594

)

Unrealized gain on trading investments

 

(42

)

 

Stock-based compensation expense

 

1,362

 

983

 

Deferred income taxes

 

2,301

 

8,247

 

Equity in earnings of investee

 

(52

)

(34

)

Minority interest

 

13

 

15

 

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

 

 

 

 

 

Accounts receivable

 

(18,488

)

(29,007

)

Inventories

 

(35,310

)

(11,145

)

Prepaid and other

 

874

 

(12,394

)

Other long-term assets

 

(419

)

2,406

 

Accounts payable

 

(8,786

)

(7,344

)

Accrued expenses

 

(14,305

)

(9,647

)

Other liabilities

 

(1,817

)

1,607

 

Income taxes

 

(5,755

)

(1,337

)

Net cash used in operating activities

 

(59,936

)

(28,866

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment, net of disposals

 

(4,524

)

(4,034

)

Purchases of short-term investments

 

(40,294

)

(1,167,030

)

Proceeds from sales of short-term investments

 

53,643

 

1,170,770

 

Note receivable issued under revolving credit facility

 

(2,516

)

 

Proceeds from the sales of businesses, net of cash disposed

 

 

514

 

Proceeds from sale of assets

 

 

25,423

 

Proceeds from sale of long-term investments

 

100

 

 

Net cash provided by investing activities

 

6,409

 

25,643

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

 

7,079

 

Tax benefit from stock options

 

 

303

 

Purchases of treasury stock

 

(11,093

)

(2,700

)

Borrowings from bank line of credit

 

123,000

 

 

 

Repayments on bank line of credit

 

(103,000

)

 

 

Repayments of long-term debt

 

(5,955

)

(3,995

)

Payments on capital lease obligations

 

(249

)

(217

)

Dividends paid

 

(9,794

)

(10,631

)

Net cash used in financing activities

 

(7,091

)

(10,161

)

Effect of exchange rate changes on cash

 

3,763

 

409

 

Net decrease in cash and cash equivalents

 

(56,855

)

(12,975

)

Cash and cash equivalents at beginning of period

 

163,021

 

103,808

 

Cash and cash equivalents at end of period

 

$

106,166

 

$

90,833

 

 

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

 

7



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.             Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Blyth, Inc. (“the Company”) and its subsidiaries.  All intercompany accounts and transactions have been eliminated.  The 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 at July 31, 2008, the consolidated results of its operations for the three and six month periods ended July 31, 2008 and 2007 and cash flows for the six month periods ended July 31, 2008 and 2007.  These interim statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended January 31, 2008, as set forth in the Company’s Annual Report on Form 10-K.  Operating results for the three and six months ended July 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2009.

 

2.             Divestitures

 

During the first quarter of last year, 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 $25.3 million (including overstock inventory proceeds of $1.3 million) of which $21.8 million was received at closing during the first quarter of fiscal 2008, with the remaining amount received subsequently during fiscal 2008.

 

The sale included 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. The net assets sold related to the BHI business 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.

 

The Company is entitled to receive a portion of the proceeds from any additional sales of the overstock inventory by the buyer per the terms of the agreement, which will continue to be recorded as a reduction to Administrative and other expense upon receipt.

 

Revenue and costs related to operating the retained facilities and certain agreed-upon transitional support services are included in the Condensed Consolidated Statements of Earnings.

 

3.             Restructuring

 

During fiscal 2007 the Company initiated restructuring plans within the North American mass channel home fragrance business within the Wholesale segment and the North American operations of the Company’s Direct Selling segment. The execution of these plans continued throughout fiscal 2007, 2008 and into fiscal 2009.

 

At January 31, 2008, the Company had an accrual for approximately $1.4 million for restructuring charges relating to severance and a lease obligation, net of estimated sublease income.  As a result of a change in estimate relating to future sublease income and payments made during the six month period ended July 31, 2008, the restructuring accrual approximated $1.7 million as of July 31, 2008. The remaining lease obligation will be paid through fiscal 2013.

 

8



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.             Restructuring (continued)

 

The following is a tabular rollforward of the restructuring accruals described above that are included in Accrued expenses:

 

 

 

Wholesale
Segment

 

Direct Selling
Segment

 

 

 

(In thousands)

 

Severance Costs

 

Lease
Obligation

 

Severance Costs

 

Total

 

Balance at January 31, 2008

 

$

138

 

$

1,151

 

$

100

 

$

1,389

 

Change in estimate during fiscal 2009

 

$

 

$

1,034

 

$

 

$

1,034

 

Payments made in fiscal 2009

 

(138

)

(458

)

(100

)

(696

)

Balance at July 31, 2008

 

$

 

$

1,727

 

$

 

$

1,727

 

 

4.             Investments

 

The Company invests in a number of financial securities including debt instruments, preferred and common stocks, a joint venture, and a limited partnership that primarily invests in other limited partnerships that invest in real estate investment trusts and marketable securities.  The Company accounts for its investments in debt instruments and preferred and common stocks in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

 

Certain preferred stocks are bought and sold on a short-term basis with the sole purpose of generating a profit on price differences.  Accordingly, these preferred stocks are classified as trading securities and as such all realized and unrealized gains and losses are recorded in the Condensed Consolidated Statements of Earnings in the Foreign exchange and other expense (income) line.  These securities are valued based on quoted prices in inactive markets.

 

The Company also holds other debt and equity auction rate securities (“ARS”) which are classified as available-for-sale.  These securities are valued based on many factors including the credit quality of the issuer and its insurer, the Company’s discounted cash flow analysis and input from broker-dealers in these types of securities. Realized gains and losses on these securities are determined using the specific identification method and are recorded in Foreign exchange and other expense (income).  Unrealized gains and temporary unrealized losses on these securities are recorded in Accumulated other comprehensive income (“AOCI”) within Stockholders’ equity.  Unrealized losses that are considered other than temporary are recorded in the Condensed Consolidated Statements of Earnings in Foreign exchange and other expense (income).

 

The Company has an investment in a limited partnership that is accounted for under the cost method. The Company does not influence any operating and financial policies of the investee and the Company’s ownership interest is less than three percent.  To the extent that there is a decline in the fair value of these investments below their carrying value that is considered to be other-than-temporary, the investments would be written down to their estimated fair value.  The factors considered in making impairment assessments include, but are not limited to, the severity and duration of the impairment, market prices, market conditions, other third party information and management’s ability and intent to hold the security for a reasonable period of time for the security to recover its value.

 

The Company has an investment in a joint venture company which sells and manufactures charcoal and candle related products in Australia that is accounted for under the equity method.  To the extent that there is a decline in the fair value of this investment below its carrying value that is considered to be other-than-temporary, the investment would be written down to its estimated fair value.

 

9



Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.             Investments (continued)

 

Investments, by category and classification:

 

(In thousands)

 

July 31, 2008

 

January 31, 2008

 

Debt securities

 

$

9,653

 

$

15,000

 

Equity securities

 

9,700

 

15,186

 

Total available-for-sale securities

 

19,353

 

30,186

 

Preferred stock

 

10,386

 

10,184

 

Other

 

25

 

5

 

Total trading securities

 

10,411

 

10,189

 

Limited partnership

 

623

 

10,000

 

Joint venture

 

2,367

 

2,315

 

Total investments

 

$

32,754

 

$

52,690

 

 

As of July 31, 2008 and January 31, 2008, the Company held $19.4 million and $25.0 million, respectively, of ARS classified as available-for-sale securities. ARS are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at predetermined intervals in days. This mechanism generally allows investors to rollover their holdings and continue to own their respective securities or liquidate their holdings by selling their securities at par value. The Company generally invests in these securities for short periods of time as part of its cash management program. The Company’s auction rate securities are all AAA/Aaa rated investments and consist of a student loan portfolio with the vast majority of the student loans guaranteed by the U.S. Government under the Federal Family Education Loan Program, municipal bonds guaranteed by a monoline insurance company and a closed-end fund consisting of preferred stock of various utilities that maintains assets equal to or greater than 200% of the liquidation preference of its preferred stock. These securities’ valuations considered the financial conditions of the issuer and the bond insurers as well as the value of the collateral.  If the credit ratings of the issuer, the bond insurers or the collateral deteriorate, the Company may adjust the carrying value of these investments.

 

The recent uncertainties in the credit markets have prevented the Company and other investors from liquidating their holdings by selling their securities at par value. Historically, the par value of these securities approximated fair value as a result of the resetting of the interest rate. In the first quarter of fiscal year 2009 market auctions, including auctions for substantially all our auction rate securities, began to fail due to insufficient buyers. As a result of these failed auctions and the uncertainty of when these investments could successfully be liquidated at par, the Company has recorded unrealized losses of $0.5 million during fiscal 2009 to reflect liquidity risk related to the securities. As a result of the uncertainty as to when the liquidity issues relating to these investments will improve, the Company has classified these securities as non-current investments as of July 31, 2008.

 

Debt securities by contractual maturity, at par, are as follows:

 

(In thousands)

 

July 31, 2008

 

January 31, 2008

 

Due within one year

 

$

 

$

 

Due between one and five years

 

 

 

Due after ten years

 

9,900

 

15,000

 

Total

 

$

9,900

 

$

15,000

 

 

All income generated from these debt securities was recorded as Interest income. Actual maturities may differ from contractual maturities should the borrower have the right to call certain obligations.

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.             Investments (continued)

 

As of January 31, 2008, the Company had a $5.2 million investment in the equity securities of RedEnvelope, Inc. (“RedEnvelope”), that was classified as available-for-sale.  In the first quarter of fiscal 2009, this investment was deemed to be other-than-temporarily impaired as a result of RedEnvelope’s filing for bankruptcy protection. Accordingly, a charge of $5.2 million was recorded to write off the full balance of this investment.

 

The investment in the limited partnership was purchased in fiscal 2008, at a cost of $10.0 million. During the six-month period ended July 31, 2008, the Company redeemed $8.5 million of its investment in the partnership, and recorded a permanent impairment of $0.9 million. The remaining balance of this investment as of July 31, 2008 was $0.6 million.

 

The total unrealized gain related to trading investments for the six-month period ended July 31, 2008 was not significant.

 

5.             Inventories

 

The components of inventory are as follows:

 

(In thousands)

 

July 31, 2008

 

January 31, 2008

 

Raw materials

 

$

6,191

 

$

6,490

 

Work in process

 

762

 

 

Finished goods

 

163,087

 

126,095

 

Total

 

$

170,040

 

$

132,585

 

 

6.             Goodwill and Other Intangibles

 

Goodwill and other indefinite lived intangibles are subject to an assessment for impairment 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. If the fair value of the reporting unit exceeds the carrying value, no further analysis is necessary. 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 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.

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.             Goodwill and Other Intangibles (continued)

 

The following table shows the carrying amount of goodwill, by operating segment as of July 31, 2008 and January 31, 2008:

 

 

 

 

 

Catalog &

 

 

 

(In thousands)

 

Direct Selling

 

Internet

 

Total

 

Goodwill

 

$

2,298

 

$

29,556

 

$

31,854

 

 

Other intangible assets consisted of indefinite-lived trade names and trademarks and customer lists related to the Company’s acquisition of Miles Kimball and Walter Drake in fiscal 2004 and are reported in the Catalog and Internet segment. The Company does not amortize the indefinite-lived trade names and trademarks, but rather test for impairment annually as of January 31, or upon the occurrence of a triggering event.

 

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

 

 

 

July 31, 2008

 

January 31, 2008

 

(In thousands)

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Indefinite-lived trade names and trademarks

 

$

25,750

 

$

 

$

25,750

 

$

25,750

 

$

 

$

25,750

 

Customer lists

 

15,000

 

10,000

 

5,000

 

15,000

 

9,250

 

5,750

 

Total

 

$

40,750

 

$

10,000

 

$

30,750

 

$

40,750

 

$

9,250

 

$

31,500

 

 

Amortization expense for customer lists was $0.8 million for the six months periods ended July 31, 2008 and 2007.  The estimated annual amortization expense for fiscal year 2009 is $1.5 million.  The estimated amortization expense for the next five fiscal years beginning with fiscal 2010 is as follows:  $1.1 million, $1.0 million, $0.8 million, $0.6 million and $0.5 million.

 

7.             Fair Value Measurements

 

On February 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for our financial assets and liabilities. This statement provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, which for the second quarter of fiscal 2009 is July 31, 2008.

 

The fair-value hierarchy established in FAS 157 prioritizes the inputs used in valuation techniques into three levels as follows:

 

Level-1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;

 

Level-2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data;

 

Level-3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.             Fair Value Measurements (continued)

 

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of the measurement date, July 31, 2008, and the basis for that measurement, by level within the fair value hierarchy:

 

(In thousands)

 

Balance as of
July 31, 2008

 

Quoted prices in
active markets for
identical assets
(Level-1)

 

Significant other
observable inputs
(Level-2)

 

Significant
unobservable
inputs (Level-3)

 

Financial assets

 

 

 

 

 

 

 

 

 

Equity securities

 

$

20,086

 

$

 

$

10,386

 

$

9,700

 

Debt securities

 

9,653

 

 

 

9,653

 

Deferred compensation plan assets (1)

 

3,560

 

3,560

 

 

 

Other

 

25

 

 

25

 

 

Total

 

$

33,324

 

$

3,560

 

$

10,411

 

$

19,353

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

(3,296

)

$

 

$

(3,296

)

$

 

 


(1) There is an offsetting liability for the obligation to its employees on the Company’s books.

 

The table below summarizes the change in the fair value of Level-3 financial assets and liabilities for the three and six month periods ended July 31, 2008:

 

(In thousands)

 

Significant unobservable
inputs (Level-3)

 

 

 

 

 

Fair value February 1, 2008

 

$

25,000

 

Settlements

 

(5,100

)

Unrealized loss (1)

 

(547

)

Fair value July 31, 2008

 

$

19,353

(1)

 


(1)   All unrealized losses on our available for sale investments are recorded as a component of accumulated other comprehensive income.

 

The Company values its deferred compensation plan assets using Level-1 inputs.  These assets consist of shares of mutual funds, for which there are quoted prices in an active market. The Company also enters into both cash flow and fair value hedges, by purchasing forward contracts. These contracts are valued using Level-2 inputs, primarily observable forward foreign exchange rates. The Company values certain preferred stock investments using information classified as Level-2. This data consists of quoted prices of identical instruments in an inactive market and third party bid offers. The debt and equity securities classified as Level-3 consist of auction rate securities, the value of which takes into consideration many factors including the credit quality of both the issuer and its insurer, value of the collateral, the Company’s discounted cash flow analysis and input from broker-dealers in these types of securities. Since there is not an active, observable, market currently for these securities, they have been classified as a Level-3 input.

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.             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)

 

2008

 

2007

 

2008

 

2007

 

Net earnings

 

$

3,005

 

$

3,172

 

$

4,165

 

$

14,904

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

36,304

 

39,488

 

36,290

 

39,400

 

Dilutive effect of restricted shares

 

408

 

347

 

370

 

351

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Diluted

 

36,712

 

39,835

 

36,660

 

39,751

 

 

For both the three and six-month periods ended July 31, 2008, options to purchase 386,100 shares of common stock 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, 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.

 

9.             Treasury and Common Stock

 

Treasury Stock

 

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

 

Shares

 

Amount

 

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

)

 

 

 

 

 

 

Balance at February 1, 2008

 

14,557,351

 

$

(387,885

)

Treasury stock purchases

 

811,545

 

(11,093

)

Balance at July 31, 2008

 

15,368,896

 

$

(398,978

)

 

Common Stock

 

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

 

Shares

 

Amount

 

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

 

 

 

 

 

 

 

Balance at February 1, 2008

 

50,922,460

 

$

1,018

 

Common stock issued in connection with long-term incentive plan

 

10,376

 

1

 

Balance at July 31, 2008

 

50,932,836

 

$

1,019

 

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

10.          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, 2008, 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 $51.5 million as of July 31, 2008, reflecting $20.0 million of outstanding loans and $3.5 million in outstanding letters of credit.

 

11.          Income Taxes

 

The Company’s effective tax rate for the six months ended July 31, 2008 and 2007 was 62.5% and 29.4%, respectively, which resulted in a provision for income taxes of $7.0 million and $6.2 million, respectively. The higher effective tax rate in the six months ended July 31, 2008 was primarily related to a $1.8 million valuation allowance for the capital loss recorded during the first quarter related to the write down of the RedEnvelope investment discussed in Note 4, as well as the impact of additional taxes recorded during the current quarter resulting from the filing of amended tax returns for the tax years ended 2005 through 2007.  In addition, for the six months ended July 31, 2007, the Company’s effective rate reflected a benefit of 11% for the reversal of a valuation allowance previously recorded.

 

The effective tax rate for the three months ended July 31, 2008 was 50.3% compared to 43.9% in the prior year. The increase in the effective tax rate for the current quarter is due primarily to the impact of additional taxes recorded during the current quarter resulting from the filing of amended tax returns for the tax years 2005 through 2007.

 

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on February 1, 2007.  In accordance with FIN 48, the Company recorded $0.6 million of accrued interest related to uncertain tax positions in the six months ended July 31, 2008 as compared to $0.3 million for the same period in 2007. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

 

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of July 31, 2008 that may be resolved within the next 12 months is approximately $6.9 million, as a result of the filing of amended tax returns, closing of statutes, and audit settlements.  Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in fiscal 2009, but the amount cannot be reasonably estimated.

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.          Stock Based Compensation

 

As of July 31, 2008, the Company had one active stock-based compensation plan, the Amended and Restated 2003 Omnibus Incentive Plan (“2003 Plan”), available to grant future awards. In addition, the Company maintains 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, 2008, 6,500,100 shares were authorized and approximately 3,600,000 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. During the second quarter of fiscal 2009 a total of 10,500 RSUs were granted to the non-employee directors, with vesting in two equal annual installments beginning on the first anniversary of the grant date. This grant brought the total for fiscal 2009 to 116,885 RSUs.

 

The total compensation expense related to all stock-based compensation plans for the three and six-month periods ended July 31, 2008 was approximately $0.7 million and $1.4 million, respectively. 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 tax benefit recognized for the three and six-month periods ended July 31, 2008 was approximately $0.2 million and $0.5 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.

 

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest. Stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings for the three and six months ended July 31, 2008 and 2007 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.

 

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Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.          Stock Based Compensation (continued)

 

Transactions involving restricted stock and RSUs are summarized as follows:

 

 

 

 

 

Weighted Average

 

Aggregate

 

 

 

Shares

 

Grant date Fair Value

 

Intrinsic Value

 

 

 

 

 

 

 

(In thousands)

 

Nonvested restricted stock and RSUs at January 31, 2008

 

279,370

 

$

24.30

 

 

 

Granted

 

116,885

 

20.22

 

 

 

Vested

 

(25,985

)

28.40

 

 

 

Forfeited

 

(24,131

)

23.70

 

 

 

Nonvested restricted stock and RSUs at July 31, 2008

 

346,139

 

$

22.66

 

$

5,036

 

Total restricted stock and RSUs at July 31, 2008

 

384,839

 

$

23.21

 

$

5,599

 

 

Compensation expense related to restricted stock and RSUs for the three and six-month periods ended July 31, 2008 was approximately $0.7 million and $1.4 million, respectively. 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. There were 10,500 RSUs granted to the Board of Directors in the second quarter of fiscal 2009.

 

As of July 31, 2008, there was $3.0 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 1.2 years. As of July 31, 2008, approximately 350,000 restricted stock awards with a weighted average grant date fair value of $22.66 are expected to vest.  The total unrecognized stock-based compensation cost to be recognized in future periods as of July 31, 2008 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, 2008

 

447,400

 

27.01

 

3.97

 

 

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

 

Options forfeited

 

(5,000

)

19.24

 

 

 

 

 

Options expired

 

(56,300

)

28.57

 

 

 

 

 

Outstanding and exercisable at July 31, 2008

 

386,100

 

$

26.88

 

3.92

 

$

 

 

At July 31, 2008 and January 31, 2008, options to purchase 386,100 and 442,400 shares, respectively, were exercisable.  There were no options granted in the first six months of fiscal 2009.

 

All outstanding stock options are vested as of July 31, 2008, and therefore no expense was recorded during the first six months of fiscal 2009 and an insignificant amount was recorded in fiscal 2008.

 

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.

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13.          Related Party Transactions

 

On August 4, 2008, the Company signed a definitive agreement (the “Agreement”) to purchase ViSalus Holdings, LLC (“ViSalus”), a direct seller of vitamins and other related nutritional supplements, through a series of investments through 2012.  The completion of this transaction is contingent upon ViSalus meeting certain operating targets and implementing certain operating plans. As part of the transaction, the Company and ViSalus entered into a $5.0 million revolving credit facility that permits Visalus to borrow from the Company at interest rates comparable to those that the Company receives when borrowing from a third-party lender, except as described below.  On July 30, 2008, the Company advanced ViSalus approximately $2.5 million under this credit facility, which is due no earlier than 2014. Upon the implementation of certain operating plans referred to previously, the $2.5 million will be converted to a 7.69% equity interest in ViSalus and the Company will execute rights under the Agreement to acquire an additional 32.31% equity interest for $10.5 million, bringing its total ownership interest in ViSalus to 40%.   This transaction is expected to occur before December 31, 2008. In addition, as permitted under the terms of the Agreement, the Company intends to make an additional series of purchases of ViSalus’s equity interests to increase its equity ownership over time to 55.0%, 70.0% and 100.0%.  These additional purchases are dependent on ViSalus meeting certain operating targets in calendar year 2009, 2010 and 2011, respectively, subject to a one-time, one-year extension in any year as defined in the Agreement.  The purchase prices of the additional investments are based on ViSalus’s future operating results as defined in the Agreement.

 

The acquisition of ViSalus by Blyth involves related parties. ViSalus is currently owned in part by Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC (collectively, “RAM”), which together own a significant minority interest in ViSalus.  Robert B. Goergen, Chairman of the Board and Chief Executive Officer of Blyth, Robert B. Goergen, Jr., Vice President of Blyth and President of the Multi-Channel Group, and Todd A. Goergen, son of Robert B. Goergen and Pamela Goergen (who is also a director of Blyth), and brother of Robert B. Goergen, Jr., own, directly or indirectly, substantially all of the interests in RAM.  Todd A. Goergen is a member of the Board of Managers of ViSalus.

 

As of July 31, 2008, the Company classified the $2.5 million outstanding under the revolving credit facility within Deposits and other assets. The $2.5 million amount outstanding as of July 31, 2008 is non-interest bearing due to its anticipated conversion to equity, as discussed above. Through July 31, 2008, the Company has incurred $1.0 million in costs related to the transaction that have been deferred and are classified in Deposits and other assets. If the equity acquisition (as described above) does not take place, the Company will recognize the $1.0 million in deferred costs as a current period expense.

 

14.          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.

 

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

 

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Table of Contents

 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14.          Segment Information (continued)

 

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.

 

 

 

Three months ended July 31,

 

Six months ended July 31,

 

(In thousands)

 

2008

 

2007

 

2008

 

2007

 

Net Sales

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

141,418

 

$

130,219

 

$

310,081

 

$

290,463

 

Multi-channel Group:

 

 

 

 

 

 

 

 

 

Catalog & Internet

 

39,324

 

40,176

 

75,988

 

80,072

 

Wholesale

 

56,044

 

64,476

 

100,565

 

134,703

 

Subtotal Multi-channel Group

 

95,368

 

104,652

 

176,553

 

214,775

 

Total

 

$

236,786

 

$

234,871

 

$

486,634

 

$

505,238

 

Operating profit (loss)

 

 

 

 

 

 

 

 

 

Direct Selling

 

$

12,486

 

$

15,377

 

$

32,262

 

$

42,308

 

Multi-channel Group:

 

 

 

 

 

 

 

 

 

Catalog & Internet

 

(4,266

)

(2,903

)

(8,229

)

(5,056

)

Wholesale

 

(156

)

(4,804

)

(6,008

)

(12,926

)

Subtotal Multi-channel Group

 

(4,422

)

(7,707

)

(14,237

)

(17,982

)

 

 

8,064

 

7,670

 

18,025

 

24,326

 

Other expense

 

(1,962

)

(1,961

)

(6,754

)

(3,145

)

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

 

$

6,102

 

$

5,709

 

$

11,271

 

$

21,181

 

 

 

 

July 31, 2008

 

January 31, 2008

 

Identifiable Assets

 

 

 

 

 

Direct Selling

 

$

310,694

 

$

306,484

 

Multi-channel Group:

 

 

 

 

 

Catalog & Internet

 

118,948

 

103,677

 

Wholesale

 

145,081

 

146,612

 

Subtotal Multi-channel Group

 

264,029

 

250,289

 

Unallocated Corporate

 

70,155

 

110,649

 

Total

 

$

644,878

 

$

667,422

 

 

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BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15.                               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.

 

In August 2008, a state department of revenue proposed to assess additional corporate income taxes on the Company for fiscal 2002, 2003 and 2004 in the net amount of $34.9 million, which includes interest.  In August 2008, the Company filed a protest of the assessment, which it intends to vigorously contest.  During fiscal 2008, the Company established a reserve for this matter that it believes is adequate based on existing facts and circumstances.  Although final resolution of this matter is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.

 

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

 

RESULTS OF OPERATIONS:

 

Overview

 

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

 

Today, annualized net sales are comprised of an approximately $700 million Direct Selling business, an approximately $200 million Catalog & Internet business and an approximately $200 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.

 

Our current focus is driving sales growth of our brands so we may more fully leverage our infrastructure.  New product development continues to be critical to all three segments of our business.  In the Direct Selling segment, 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, distributors and national accounts.

 

Sale of Mass Channel Candle Business

 

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 $25.3 million, including $1.3 million of sales of surplus inventory, of which $21.8 million was received at closing during the first quarter of fiscal 2008, with the remaining amount received subsequently during fiscal 2008.

 

Net Sales

 

Net sales for the six months ended July 31, 2008 decreased $18.6 million, or approximately 4%, to $486.6 million from $505.2 million in the first six months of the comparable prior year period.  The decrease is primarily a result of lower sales in our domestic markets across all segments, which included the sale of BHI NA, partially offset by increased sales in PartyLite’s international markets.

 

Net sales for the three months ended July 31, 2008 increased $1.9 million, or 1%, to $236.8 million, from $234.9 million in the comparable prior year period. Strong sales within PartyLite’s international markets, which included the positive impact of foreign exchange translation, were partially offset by lower sales in the domestic operations within all of our segments.

 

Net Sales - Direct Selling Segment

 

Net sales in the Direct Selling segment for the six months ended July 31, 2008 increased $19.6 million, or 7%, to $310.1 million from $290.5 million in the comparable prior year period. In PartyLite’s European markets, sales increased approximately 26% in U.S. Dollars, a 10% increase in local currency. PartyLite Canada reported an approximate 13% increase in sales as measured in U.S. Dollars, a 2% increase in sales in local currency, versus the prior year. Sales increases in the aforementioned markets were driven primarily by an increase in the number of active independent sales consultants in Europe and Canada of 16% and 5%, respectively. These increases were partially offset by a decline in PartyLite’s U.S. sales, which decreased

 

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approximately 17% compared to the prior year primarily due to a decline in the number of active independent sales consultants.

 

Net sales in the Direct Selling segment for the three months ended July 31, 2008 increased $11.2 million, or 9%, to $141.4 million from $130.2 million in the comparable prior year period. In PartyLite’s European markets, sales increased approximately 35% as measured in U.S. Dollars, an increase of 16% in sales in local currency, versus the prior year. PartyLite Canada’s sales increased 20% as measured in U.S. Dollars, a 13% increase in local currency, versus the prior year. Sales increases in the aforementioned markets were driven primarily by an increase in the number of active independent sales consultants. These sales increases were partially offset by a decline in PartyLite’s U.S. sales, which decreased approximately 16% compared to the prior year mainly due to a decline in active independent sales consultants.

 

Net Sales - Catalog & Internet Segment

 

Net sales in the Catalog & Internet segment for the six months ended July 31, 2008 decreased $4.1 million, or 5%, to $76.0 million from $80.1 million in the comparable prior year period.  Sales declines across the segment, due in part to lower consumer discretionary spending, were partially offset by modest increases in the Miles Kimball brand catalogs and relatively significant increases in the Easy Comforts brand catalogs.

 

Net sales in the Catalog & Internet segment for the three months ended July 31, 2008 decreased $0.9 million, or 2%, to $39.3 million from $40.2 million in the comparable prior year period.  Sales declines across the segment, due in part to lower consumer discretionary spending, were partially offset by modest increases in the Miles Kimball brand catalogs and relatively significant increases in the Easy Comforts brand catalogs.

 

Net Sales - Wholesale Segment

 

Net sales in the Wholesale segment in the six months ended July 31, 2008 decreased $34.1 million, or approximately 25%, to $100.6 million from $134.7 million in the comparable prior year period. The decrease in sales is primarily due to the sale of the BHI NA business in the first quarter of last year, as well as declines in the home décor businesses, reflecting a softer housing market.

 

Net sales in the Wholesale segment in the three months ended July 31, 2008 decreased $8.5 million, or approximately 13% to $56.0 million from $64.5 million in the comparable prior year period. The decrease in sales is primarily due to the sale of the BHI NA business, as well as declines in the home décor businesses, reflecting a softer housing market.

 

Gross Profit

 

Gross profit for the six months ended July 31, 2008, increased $4.3 million, or 2%, to $267.4 million from $263.1 million in the comparable prior year period.  The increase in gross profit is principally attributable to the prior year’s nonrecurring impairment and accelerated depreciation charges of $2.6 million, resulting from the sale of the BHI NA business during fiscal 2008, as well as strong sales in PartyLite Europe, partially offset by a decline in PartyLite’s U.S. sales. Gross profit margin for the six months ended July 31, 2008 increased to 55.0% of sales from 52.1% in the comparable prior year period. The increase in gross profit margin is primarily attributable to the prior year sale of BHI NA, the mass market gross profit margins of which were lower that of Blyth’s other businesses, price increases and effective cost control efforts, partially offset by higher commodity costs in the current year.

 

Gross profit for the three months ended July 31, 2008, increased $6.6 million, or 5%, to $128.0 million from $121.4 million in the comparable prior year period. This increase in gross profit is primarily due to the prior year’s impairment and accelerated depreciation charges of $2.1 million, resulting from the sale of the BHI NA business during fiscal 2008, as well as strong sales in PartyLite Europe, in part due to foreign currency translation and organic sales growth. Gross profit margin for the three months ended July 31, 2008 increased to 54.1% of sales from 51.7% in the comparable prior year period.  The gross profit margin improvement is the result of price increases and effective cost control efforts, partially offset by a continued increase in commodity costs, and the aforementioned BHI NA sale related charges.

 

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Table of Contents

 

Selling Expense

 

Selling expense increased $13.8 million, or 8%, to $186.4 million in the six months ended July 31, 2008, from $172.6 million in the comparable prior year period. The increase in selling expense is primarily due to strategic initiatives undertaken by the PartyLite markets and the Wholesale segment to increase sales. These initiatives include various independent consultant promotional programs as well as customer rebates. These increases are partially offset by the decrease in selling expense related to BHI NA of $1.2 million, as a result of the sale of this business in fiscal 2008. As a percentage of net sales, selling expense increased to 38.3% of net sales for the six months ended July 31, 2008, compared to 34.2% of net sales during the comparable prior year period.

 

Selling expense for the three months ended July 31, 2008, increased $8.7 million, or 11%, to $87.7 million from $79.0 million in the comparable prior year period. As noted above, the increase in selling expense is primarily due to initiatives undertaken by the North American PartyLite markets and the Wholesale segment to increase sales. As a percentage of net sales, selling expense increased to 37.0% of net sales for the quarter ended July 31, 2008, compared to 33.6% for the comparable prior year period.

 

Administrative and Other Expense

 

Administrative and other expense for the six months ended July 31, 2008, decreased $3.1 million, or 5%, to $63.0 million from $66.1 million in the comparable prior year periodThis decline was principally due to severance related charges of $2.9 million taken in the prior year associated with the sale of BHI NA in April 2007. As a percent of sales, administrative expense was 13.0% in the six months ended July 31, 2008 versus 13.1% in the comparable prior year period.

 

Administrative and other expense for the three months ended July 31, 2008, decreased $2.4 million, or 7%, to $32.3 million from $34.7 million in the comparable prior year period.  As a percent of sales, administrative expense was 13.6% for the quarter ended July 31, 2008 and 14.8% for the comparable prior year period. This decline was principally due to severance related charges of $2.2 million taken in the prior year associated with the sale of BHI NA in April 2007.

 

Operating Profit (Loss)

 

Operating profit for the six months ended July 31, 2008 decreased $6.3 million, or 26% to $18.0 million from $24.3 million in the comparable prior year period. The decrease in operating profit is primarily a result of decreased sales and additional promotional expenses at PartyLite U.S. and a higher operating loss at the Miles Kimball Company, partially offset by improved performance in the Wholesale segment and PartyLite Europe.  The increase in the loss at the Miles Kimball Company is attributable to lower sales and higher selling expenses resulting from higher shipping and paper costs. The Wholesale segment’s improved operating performance over the prior year is the result of prior year BHI NA impairment and severance expenses related to the sale of BHI NA and improved operating performance at Sterno due to strategic pricing and better cost management.

 

Operating profit for the three months ended July 31, 2008 increased $0.4 million, or 5% to $8.1 million from $7.7 million in the comparable prior year period.  In the prior year, the Company’s operating profit was negatively affected by the increase in operating losses in the Wholesale segment as a result of impairment and severance expenses related to the sale of BHI NA. In the Direct Selling Segment current year operating profits decreased as a result of lower sales at PartyLite U.S. and lower operating profits in the Catalog & Internet Segment.

 

Operating Profit - Direct Selling Segment

 

Operating profit in the Direct Selling segment for the six months ended July 31, 2008 decreased $10.0 million, or 24%, to $32.3 million from $42.3 million in comparable prior year period.  The decrease is primarily due to lower sales in PartyLite U.S. as well as additional promotional initiatives to increase the number of independent sales consultants. This decrease was partially offset by higher operating profits in PartyLite Europe due to higher sales as a result of an increase in active independent sales consultants.

 

Operating profit for the three months ended July 31, 2008 in the Direct Selling segment decreased $2.9 million, or

 

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19%, to $12.5 million from $15.4 million in the comparable prior year period. The decrease is primarily due to lower sales in PartyLite U.S. as well as continued promotional initiatives to increase the number of independent sales consultants in all markets offset in part by higher operating profits in PartyLite Europe due to higher sales as a result of an increase in its active independent sales consultants.

 

Operating Loss - Catalog & Internet Segment

 

Operating loss for the six months ended July 31, 2008 in the Catalog & Internet segment increased by $3.1 million to $8.2 million, or 61%, from a $5.1 million loss in the comparable prior year period.  This increased loss is related to lower sales as the result of soft economic conditions and the impact of ERP implementation delays. Also contributing to the increase in operating loss are higher printing and shipping and handling costs. The operating loss at Boca Java was reduced from last year primarily due to lower marketing and promotion expense.

 

Operating loss for the three months ended July 31, 2008 in the Catalog & Internet segment increased $1.4 million to $4.3 million versus $2.9 million in the comparable prior year period.  The increase in operating loss over the prior year is primarily due to lower sales as the result of soft economic conditions, the aforementioned ERP implementation issues and higher shipping and handling costs. The operating loss at Boca Java primarily was reduced from last year primarily due to lower marketing and promotion expense.

 

Operating Loss - Wholesale Segment

 

Operating loss for the six months ended July 31, 2008 in the Wholesale segment declined to $6.0 million versus $12.9 million in the comparable prior year period. In fiscal 2008, additional costs were incurred due to the sale of the BHI NA business, which included severance of $3.2 million, and the impairment of certain fixed assets and accelerated depreciation of $2.6 million. Operating performance improved at Sterno due to improved strategic pricing and better cost management. This was offset in part by lower operating profits in the seasonal home décor businesses as a result of lower sales and the continued soft housing market.

 

Operating loss for the three months ended July 31, 2008 in the Wholesale segment decreased $4.6 million to $0.2 million versus a loss of $4.8 million in the comparable prior year period.  In the second quarter of fiscal 2008, 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. Operating performance improved at Sterno due to improved strategic pricing and better cost management. This was offset in part by lower operating profits in the seasonal home décor businesses as a result of lower sales attributable to the continued soft housing market.

 

Interest Expense, Interest Income, and Foreign Exchange and Other

 

Interest expense for the six months ended July 31, 2008, decreased approximately $2.4 million, or 33%, to $4.9 million from $7.3 million in the comparable prior year period. Interest expense for the three months ended July 31, 2008 decreased approximately $1.2 million, or 33% to $2.4 million from $3.6 million in the comparable prior year period. The decrease in interest expense for both of these periods is primarily the result of a decrease in long-term borrowings.

 

Interest income for the six months ended July 31, 2008 decreased approximately $1.6 million to $2.4 million from $4.0 million in the comparable prior year period. Interest income for the three months ended July 31, 2008 decreased approximately $1.1 million to $1.0 million from $2.1 million in the comparable prior year period. The decrease in interest income is primarily due to lower cash and short-term investment balances, as well as our shift to lower yielding, less volatile treasury bills.

 

Foreign exchange and other losses for the six months ended July 31, 2008 were $4.2 million compared to a gain of $0.2 million in the comparable prior year period. The current year’s loss includes a $5.2 million write-off of our RedEnvelope investment in April 2008, partially offset by beneficial foreign exchange rate fluctuations. Foreign exchange and other losses for the three months ended July 31, 2008 were $0.6 million, compared to a loss of $0.4 million in the comparable prior year period.

 

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Table of Contents

 

Income Taxes

 

Our effective tax rate for the six months ended July 31, 2008 and 2007 was 62.5% and 29.4%, respectively, which resulted in a provision for income taxes of $7.0 million and $6.2 million, respectively. The higher effective tax rate in the six months ended July 31, 2008 was primarily related to a $1.8 million valuation allowance for the capital loss recorded during the first quarter related to the write down of the RedEnvelope investment discussed in Note 4, as well as the impact of additional taxes recorded during the current quarter resulting from the filing of amended tax returns for the tax years ended 2005 through 2007.  In addition for the six months ended July 31, 2007, our effective rate reflected a benefit of 11% for the reversal of a valuation allowance previously recorded.

 

The effective tax rate for the three months ended July 31, 2008 was an expense of 50.3% compared to an expense of 43.9% in the prior year. The increase in the effective tax rate for the current quarter is due primarily to the impact of additional taxes recorded during the current quarter resulting from the filing of amended tax returns for the tax years 2005 through 2007.

 

Net Earnings

 

Net earnings for the six months ended July 31, 2008 decreased $10.7 million, or 72%, to $4.2 million in from $14.9 million for the same period in fiscal 2008.  The decrease is primarily a result of decreased sales at PartyLite U.S., lower operating profit at Miles Kimball resulting from lower sales and higher selling expenses driven by higher shipping and paper costs, and higher income tax expense.  These decreases were partially offset by the impact of prior year charges related to the BHI NA sale, as well as improved operating performance at Sterno due to strategic price increases and better cost management.

 

Diluted earnings per share for the six month period ended July 31, 2008, was $0.11, a decrease of $0.26 compared to $0.37 for the comparable prior year period.

 

Net earnings for the three months ended July 31, 2008 decreased $0.2 million, or 6%, to $3.0 million from $3.2 million for the same period in fiscal 2008.  This decrease is attributed to increased selling and promotional expenses within the Direct Selling segment, partially offset by the increased sales at our international PartyLite markets.

 

Basic and diluted earnings per share for the three month periods ended July 31, 2007 and 2008, were $0.08.

 

Liquidity and Capital Resources

 

Cash and cash equivalents decreased $56.8 million to $106.2 million at July 31, 2008 from $163.0 million at January 31, 2008. The decrease in cash during the first six months of fiscal 2009 was primarily related to cash used to meet working capital needs, share repurchases, the payment of dividends, and the retirement of long-term debt.

 

Net cash used by operations was $59.9 million for the first six months of fiscal 2009 compared to $28.9 million provided in the prior year period. The increase in cash used by operations is due to lower net earnings as well as changes in working capital. Net changes in operating assets and liabilities decreased cash by $84.0 million, driven primarily by an increase in inventory, due to planned inventory purchases for new product promotions, and accounts receivable. Included in earnings were non-cash charges for depreciation and amortization of $10.3 million.

 

Net cash provided by investing activities was $6.4 million. Net capital expenditures for property, plant and equipment were $4.5 million for the first six months of fiscal 2009 compared to $4.0 million in the prior year period.  We reduced our investment in the limited partnership by $8.5 million and redeemed our investment in auction rate securities for $5.1 million. Included in investing activities is the $2.5 million outstanding under the revolving credit facility issued to ViSalus.

 

Net cash used in financing activities was $7.1 million.  Use of cash for the six months period ended July 31, 2008 included our dividend payment during the second quarter of $9.8 million, reduction of long-term debt and capital lease obligations of $6.2 million, and share repurchases of $11.1 million. Net cash provided by our revolving credit facility was $20.0 million.

 

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We anticipate total capital spending of approximately $10.0 million for fiscal 2009. We have grown in part through acquisitions and, as part of this growth strategy, we expect to continue from time to time in the ordinary course of its business to evaluate and pursue acquisition opportunities as appropriate.  We believe 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.

 

On August 4, 2008, the Company signed a definitive agreement to purchase ViSalus through a series of cash investments through 2012 as described in Note 13 of the Condensed Consolidated Financial Statements. The acquisition is dependent on ViSalus meeting certain operating targets and resolving other operating issues. The cost to complete this acquisition, which in part is determined by future operating results, will require additional capital resources. We estimate that we will pay an additional $10.5 million, for a total of $13.0 million including amounts outstanding under the revolving credit facility, before December 31, 2008, in order to obtain a 40% interest in ViSalus common stock.

 

On October 2, 2006, we 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.  We have 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, 2008, the Company was in compliance with such provisions.  Amounts outstanding under the amended Credit Facility bear interest, at our option, at 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 our senior unsecured long-term debt rating.  Amounts available for borrowing under this facility were approximately $51.5 million as of July 31, 2008, reflecting $20.0 million of outstanding borrowings and $3.5 million in outstanding letters of credit.

 

As of July 31, 2008, we 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, 2009.  As of July 31, 2008, no letters of credit were outstanding under this facility.

 

In May 1999, we 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, we 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. Through July 31, 2008, we have repurchased a total of $106.2 million of these notes.  Such notes contain, among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  As of July 31, 2008, we were in compliance with such provisions.  Interest is payable semi-annually in arrears on April 1 and October 1.  On October 20, 2003, we 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.  As of July 31, 2008, we were 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, 2008, Miles Kimball had approximately $8.4 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, 2008, CBK had $0.1 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 2.6% at July 31, 2008.  Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

 

On December 13, 2007, our Board of Directors authorized a new stock repurchase program for 6,000,000 shares that will become effective after we exhaust the 12,000,000 shares authorized for repurchase under the old

 

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repurchase program.  Since January 31, 2008, we have purchased 811,545 shares on the open market, for a cost of $11.1 million, bringing the cumulative total purchased shares to 10,462,280 as of July 31, 2008, for a total cost of approximately $224.8 million.  Additionally in fiscal 2005, 4,906,616 shares were repurchased 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.

 

Critical Accounting Policies

 

There were no changes to our critical accounting policies in the second quarter of fiscal 2009.  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, 2008.

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS No. 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and, as such, we will adopt this standard in fiscal 2010. We will be required to account for any acquisition entered into subsequent to January 31, 2009 in accordance with the provisions of this statement. . We do not expect a significant impact of SFAS No. 141R on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and, as such, we will adopt this standard in fiscal 2010. We do not expect a significant impact of SFAS No. 160 on our consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. We do not expect the expanded disclosures of SFAS No. 161 to have a significant impact on our consolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchanges Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”  We do not expect a significant impact of SFAS No. 162 on our consolidated financial statements.

 

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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

We have operations outside of the United States and sell our products worldwide.  Our activities expose us 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.

 

Interest Rate Risk

 

We are subject to interest rate risk on both variable rate debt and our investments in auction rate securities.  As of July 31, 2008, the company is subject to interest rate risk on approximately $0.1 million of variable rate debt.  A 1-percentage point increase in the interest rate would not have a material impact on our financial statements.  As of July 31, 2008, we held $19.9 million of non-current investments, which consist of auction rate securities.  A 1-percentage point decrease in the rate of return would impact annual pre-tax earnings by approximately $0.2 million if applied to the total.

 

On July 10, 2003, we terminated the interest rate swap agreement in relation to $50.0 million of our outstanding 7.90% Senior Notes, which mature on October 1, 2009.  This termination resulted in a deferred gain of approximately $5.0 million, which is being amortized over the remaining term of the notes.  At July 31, 2008, there was $0.8 million remaining to be amortized.

 

Foreign Currency Risk

 

We use 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. We do not hold or issue derivative financial instruments for trading purposes.  We have and continue to hedge the net assets of certain of our foreign operations through foreign currency forward contracts. The net after-tax loss related to the derivative net investment hedges recorded in Accumulated other comprehensive income (loss) (“AOCI”) during the six months ended July 31, 2008 was $1.9 million. The net loss position in AOCI related to net investment hedges as of July 31, 2008 was $0.1 million.

 

We have designated our 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 AOCI 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 AOCI 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 AOCI 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.  During the first six months of fiscal 2009 the amount transferred to earnings was insignificant. Losses included in accumulated AOCI at July 31, 2008 are $0.2 million and are expected to be transferred into earnings within the next twelve months upon payment of the underlying commitment.

 

We have designated our 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.

 

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The following table provides information about our foreign exchange forward contracts at July 31, 2008:

 

 

 

U.S. Dollar

 

Average

 

Unrealized

 

(In thousands, except average contract rate)

 

Notional Amount

 

Contract Rate

 

Gain (Loss)

 

Canadian Dollar

 

$

3,400

 

1.00

 

$

76

 

Euro

 

56,470

 

1.47

 

(3,319

)

 

 

$

59,870

 

 

 

$

(3,243

 

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

 

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Item 4.  CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of July 31, 2008.

 

(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 2009 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, 2008.

 

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

 

The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the second quarter of the fiscal year ending January 31, 2009.

 

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 of Shares 
that May Yet Be 
Purchased Under the 
Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

May 1, 2008 – May 31, 2008

 

 

 

 

8,217,132

 

 

 

 

 

 

 

 

 

 

 

June 1, 2008 – June 30, 2008

 

127,700

 

$

13.24

 

127,700

 

8,089,432

 

 

 

 

 

 

 

 

 

 

 

July 1, 2008 – July 31, 2008

 

551,712

 

$

12.49

 

557,712

 

7,537,720

 

 

 

 

 

 

 

 

 

 

 

Total

 

679,412

 

$

12.63

 

679,412

 

7,537,720

 

 


(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.  From June 1999 to June 2006, the Board of Directors increased the authorization under this repurchase program five times (on June 8, 1999 to increase the authorization by 1.0 million shares to 2.0 million shares; on March 30, 2000 to increase the authorization by 1.0 million shares to 3.0 million;  on December 14, 2000 to increase the authorization by 1.0 million shares to 4.0 million shares; on April 4, 2002 to increase the authorization by 2.0 million shares to 6.0 million shares;  and on June 7, 2006 to increase the authorization by 6.0 million shares to 12.0 million shares). On December 13, 2007, the Board of Directors authorized a new repurchase program, for 6.0 million shares, which will become effective after we exhaust the authorized amount under the old repurchase program.  As of July 31, 2008, we have purchased a total of 10,462,280 shares of Common Stock under the old repurchase program.  The repurchase programs do not have expiration dates.  We intend to make further purchases under the repurchase programs 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 4, 2008, 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

 

Anne M. Busquet

 

32,945,737

 

0

 

347,141

 

0

 

Wilma H. Jordan

 

32,310,290

 

0

 

982,588

 

0

 

James M. McTaggart

 

32,814,027

 

0

 

478,851

 

0

 

 

In addition to the directors elected at the meeting, the directors of the Company whose terms of office continued after the meeting are: Pamela M. Goergen and Carol J. Hochman (terms expiring in 2009), and Robert B. Goergen, Neil I. Goldman and Howard E. Rose (terms expiring in 2010).

 

2)  A proposal to approve the Amended and Restated 2003 Omnibus Incentive Plan received 30,709,340 votes for, 837,370 votes against, and 30,212 abstentions.

 

3) A proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors received 33,291,100 votes for, 1,645 votes against, and 131 abstentions.

 

Item 5.   Other Information

 

None

 

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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.

 

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SIGNATURES

 

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

 

 

 

 

 

 

BLYTH, INC.

 

 

 

 

 

 

 

 

 

 

 

 

Date:

    September 4, 2008

 

By:

/s/Robert B. Goergen

 

 

 

 

Robert B. Goergen

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

Date:

    September 4, 2008

 

By:

/s/Robert H. Barghaus

 

 

 

 

Robert H. Barghaus

 

 

 

 

Vice President and Chief Financial Officer

 

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