form10k_fy09.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

           (Mark One)

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

For the fiscal year ended January 31, 2009

or

 
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)
(I.R.S. Employer
Identification No.)
One East Weaver Street
Greenwich, Connecticut
 
06831
(Address of Principal Executive Offices)
(Zip Code)

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

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

 
Title of each class
Name of each exchange
on which registered
Common Stock, par value $0.02 per share
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act:  None

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

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

 
 
 
 

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

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

Large accelerated filer
 
Non-accelerated filer
Accelerated filer x  
 
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes       No  x  
 

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $351.9 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on July 31, 2008 and based on the assumption, for purposes of this computation only, that all of the registrant’s directors and executive officers are affiliates.

As of March 31, 2009, there were 8,892,665 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2009 Proxy Statement for the Annual Meeting of Shareholders to be held on June 10, 2009 (Incorporated into Part III).

 


TABLE OF CONTENTS
PART I
 
Item 1.
 
 
 
 
4
Item 1A.
   
9
Item 1B.
   
14
Item 2.
   
14
Item 3.
   
15
Item 4.
   
15
 
PART II
 
Item 5.
 
 
 
 
16
Item 6.
   
20
Item 7.
   
22
Item 7A.
   
42
Item 8.
   
44
Item 9.
   
83
Item 9A.
   
83
Item 9B.
   
86
 
PART III
 
Item 10.
 
 
 
 
87
Item 11.
   
87
Item 12.
   
87
Item 13.
   
87
Item 14.
   
87
 
PART IV
 
Item 15.
 
 
 
 
88



3


PART I
Item 1.  Business
(a) General Development of Business

Blyth, Inc. (together with its subsidiaries, the “Company,” which may be referred to as “we,” “us” or “our”) is a multi-channel company competing primarily in the home fragrance and decorative accessories industry.  We design, market and distribute an extensive array of decorative and functional household products including candles, accessories, seasonal decorations, household convenience items and personalized gifts. We also market chafing fuel and other products for the foodservice trade, nutritional supplements and weight management products. Our distribution channels include direct sales, catalog & Internet and wholesale.  Sales and operations take place primarily in the United States, Canada and Europe, with additional activity in Mexico, Australia and the Far East.

Business Acquisition

On August 4, 2008, we signed a definitive agreement to purchase ViSalus Holdings, LLC (“ViSalus”), a direct seller of vitamins and other related nutritional supplements, through a series of investments.  On October 21, 2008, we completed the initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash.  In addition, we may be required to make additional purchases of ViSalus’s equity interest to increase our equity ownership over time to 57.5%, 72.7% and 100.0%.  These additional purchases are conditioned upon ViSalus meeting certain operating targets in calendar year 2009, 2010 and 2011, subject to a one-time, one-year extension.  The purchase prices of the additional investments are based on ViSalus’s future operating results. We have the option to acquire the remaining interest in ViSalus even if they do not meet the predefined operating targets.

Additional Information
 
Additional information is available on our website, www.blyth.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto filed or furnished pursuant to the Securities Exchange Act of 1934 are available on our website free of charge as soon as reasonably practicable following submission to the SEC.  Also available on our website are our corporate governance guidelines, code of conduct, and the charters for the audit committee, compensation committee, and nominating and corporate governance committee, each of which is available in print to any shareholder who makes a request to Blyth, Inc., One East Weaver Street, Greenwich, CT 06831, Attention: Secretary. The information posted to www.blyth.com, however, is not incorporated herein by reference and is not a part of this report.

(b) Financial Information about Segments

We report our financial results in three business segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment.  These segments accounted for approximately 63%, 18% and 19% of consolidated net sales, respectively, for fiscal 2009. Financial information relating to these business segments for fiscal 2007, 2008 and 2009 appears in Note 17 to the Consolidated Financial Statements and is incorporated herein by reference.



 
4


(c)           Narrative Description of Business

Direct Selling Segment

In fiscal 2009, the Direct Selling segment represented approximately 63% of total sales.  Our principal Direct Selling business is PartyLite, which sells premium candles and home fragrance products and related decorative accessories.  PartyLiteâ brand products are marketed in North America, Europe and Australia through a network of independent sales consultants using the party plan method of direct selling.  These products include fragranced and non-fragranced candles, bath products and a broad range of related accessories.

In fiscal 2006, we acquired a party plan company called Two Sisters Gourmet, which is focused on selling gourmet food. Effective March 31, 2009, we combined the Two Sisters Gourmet brand into our PartyLite business and will continue to offer these products as part of the PartyLite party concept.  In October 2008, we acquired our interest in ViSalus, a distributor-based business that sells nutritional supplements, energy drinks and weight management products. Both businesses represented approximately 1% of total sales of the Direct Selling segment in fiscal 2009.

United States Market

Within the United States market, PartyLiteâ  brand products are sold directly to consumers through a network of independent sales consultants.  These consultants are compensated on the basis of PartyLite product sales at parties organized by them and parties organized by consultants recruited by them.  Over 21,000 independent sales consultants located in the United States were selling PartyLite products at January 31, 2009.  PartyLite products are designed, packaged and priced in accordance with their premium quality, exclusivity and the distribution channel through which they are sold. Independent distributors sell ViSalus brand products using a one-to-one direct sales model.

International Market

In fiscal 2009, PartyLite products were sold internationally by more than 42,000 independent sales consultants located outside the United States.  These consultants were the exclusive distributors of PartyLite brand products internationally. PartyLite’s international markets during fiscal 2009 were Australia, Austria, Canada, Denmark, Finland, France, Germany, Ireland, Mexico, Norway, Switzerland and the United Kingdom.

We support our independent sales consultants with inventory management and control, and satisfy delivery requirements through an Internet-based order entry system, which is available to all independent sales consultants in the United States, Canada and Europe.

Catalog & Internet Segment

In fiscal 2009, this segment represented approximately 18% of total sales.  We design, market and distribute a wide range of household convenience items, personalized gifts and photo storage products, as well as coffee and tea, within this segment.  These products are sold through the Catalog and Internet distribution channel under brand names that include As We Changeâ, Boca Javaâ, Easy Comfortsâ, Exposuresâ, Home Marketplaceâ, Miles Kimballâ and Walter Drakeâ.


5


Wholesale Segment

In fiscal 2009, this segment represented approximately 19% of total sales. Products within this segment include candles and related accessories, seasonal decorations and home décor products such as lamps, picture frames and decorative metal accessories. In addition, chafing fuel and tabletop lighting products and accessories for the “away from home” or foodservice trade are sold in this segment.  Our wholesale products are designed, packaged and priced to satisfy the varying demands of retailers and consumers within each distribution channel.
 
In April 2007, we sold certain assets and liabilities of our Blyth HomeScents International North American mass channel candle business (“BHI NA”), which was part of the Wholesale segment.

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

Product Brand Names

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

PartyLiteâ
Well Being by PartyLiteâ
 
Two Sisters Gourmetâ
ViSalus Sciencesâ
 

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

As We Changeâ
Boca Javaâ
Easy Comfortsâ
Exposuresâ
Home Marketplaceâ
Miles Kimballâ
Walter Drakeâ

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

Ambriaâ
CBKâ
Colonial Candleâ
Colonial Candle of Cape Codâ
Colonial at HOMEâ
HandyFuelâ
Seasons of Cannon Fallsâ
Sternoâ

New Product Development

Concepts for new products and product line extensions are directed to the marketing departments of our business units from within all areas of the Company, as well as from our independent sales representatives and worldwide product manufacturing partners.  The new product development process may include technical research, consumer market research, fragrance studies, comparative analyses, the formulation of engineering specifications, feasibility studies, safety assessments, testing and evaluation.

6


Manufacturing, Sourcing and Distribution

In all of our business segments, management continuously works to increase value and lower costs through increased efficiency in worldwide production, sourcing and distribution practices, the application of new technologies and process control systems, and consolidation and rationalization of equipment and facilities.  Net capital expenditures over the past five years have totaled $73.6 million and are targeted to technological advancements and normal maintenance and replacement projects at our manufacturing and distribution facilities.  We have also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions.

We manufacture most of our candles using highly automated processes and technologies, as well as certain hand crafting and finishing, and source nearly all of our other products, primarily from independent manufacturers in the Pacific Rim, Europe and Mexico.  Many of our products are manufactured by others based on our design specifications, making our global supply chain approach critically important to new product development, quality control and cost management.  We have also built a network of stand-alone highly automated distribution facilities in our core markets.

Customers

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

Competition

All of our business segments are highly competitive, both in terms of pricing and new product introductions.  The worldwide market for home expressions products is highly fragmented with numerous suppliers serving one or more of the distribution channels served by us.  In addition, we compete for direct selling consultants with other direct selling companies.  Because there are relatively low barriers to entry in all of our business segments, we may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to us. Competition includes companies selling candles manufactured at lower costs outside of the United States.  Moreover, certain competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

Employees

As of January 31, 2009, we had approximately 2,600 full-time employees, of whom approximately 18% were based outside of the United States.  Approximately 60% of our employees are non-salaried.  We do not have any unionized employees. We believe that relations with our employees are good.  Since our formation in 1977, we have never experienced a work stoppage.

Raw Materials

All of the raw materials used for our candles, home fragrance products and chafing fuel, principally petroleum-based wax, fragrance, glass containers and corrugate, have historically been available in adequate supply from multiple sources.  In fiscal 2009, costs continued to

7


increase for certain raw materials, such as paraffin and other wax products, dyethelene glycol (DEG) and ethanol, as well as steel and paper, which negatively impacted profitability of certain products in all three segments.

Seasonality

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

Trademarks and Patents

We own and have pending numerous trademark and patent registrations and applications in the United States Patent and Trademark Office related to our products.  We also register certain trademarks and patents in other countries.  While we regard these trademarks and patents as valuable assets to our business, we are not dependent on any single trademark or patent or group thereof.

Environmental Law Compliance

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

(d)           Financial Information about Geographic Areas

For information on net sales from external customers attributed to the United States and international geographies and on long-lived assets located in the United States and outside the United States, see Note 17 to the Consolidated Financial Statements.




 
8


Item 1A.  Risk Factors

We may be unable to increase sales or identify suitable acquisition candidates.

Our ability to increase sales depends on numerous factors, including market acceptance of existing products, the successful introduction of new products, growth of consumer discretionary spending, our ability to recruit new independent sales consultants, sourcing of raw materials and demand-driven increases in production and distribution capacity.  Business in all of our segments is driven by consumer preferences.  Accordingly, there can be no assurances that our current or future products will maintain or achieve market acceptance.  Our sales and earnings results can be negatively impacted by the worldwide economic environment, particularly the United States, Canadian and European economies.  There can be no assurances that our financial results will not be materially adversely affected by these factors in the future.

Our historical growth has been due in part to acquisitions, and we continue to consider additional strategic acquisitions.  There can be no assurances that we will continue to identify suitable acquisition candidates, consummate acquisitions on terms favorable to us, finance acquisitions successfully integrate acquired operations or that companies we acquire will perform as anticipated.

We may be unable to respond to changes in consumer preferences.

Our ability to manage our inventories properly is an important factor in our operations. The nature of our products and the rapid changes in customer preferences leave us vulnerable to an increased risk of inventory obsolescence. Excess inventories can result in lower gross margins due to the excessive discounts and markdowns that might be necessary to reduce inventory levels. Our ability to meet future product demand in all of our business segments will depend upon our success in sourcing adequate supplies of our products; bringing new production and distribution capacity on line in a timely manner; improving our ability to forecast product demand and fulfill customer orders promptly; improving customer service-oriented management information systems; and training, motivating and managing new employees.  The failure of any of the above could result in a material adverse effect on our financial results.
 
A downturn in the economy may affect consumer purchases of discretionary items such as our products which could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations may be materially affected by conditions in the global capital markets and the economy generally, both in the United States and elsewhere around the world. The stress experienced by global capital markets that began in the second half of fiscal 2008 continued and substantially increased during fiscal 2009. Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the United States have contributed to increased volatility and diminished expectations for the economy. A continued or protracted downturn in the economy could adversely impact consumer purchases of discretionary items including demand for our products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, energy costs, interest rates and tax rates, the availability of consumer credit and consumer confidence. A reduction in consumer spending could significantly reduce our sales and leave us with unsold inventory. The occurrence of these events could have a material adverse effect on our business, financial condition and results of operations.
 

9


The recent turmoil in the financial markets could increase our cost of borrowing and impede access to or increase the cost of financing our operations and investments and could result in additional impairments to our businesses.
 
United States and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms. In addition, equity markets are continuing to experience rapid and wide fluctuations in value. If these conditions continue or worsen, our cost of borrowing, if needed, may increase and it may be more difficult to obtain financing for our businesses. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies. A decrease in these ratings would likely increase our cost of borrowing and/or make it more difficult for us to obtain financing. In the event current market conditions continue we will more than likely be subject to higher interest costs than we are currently incurring and may require our providing security to guarantee such borrowings.  Alternatively, we may not be able to obtain unfunded borrowings in that amount, which may require us to seek other forms of financing, such as term debt, at higher interest rates and with additional expenses.
 
In addition, we may be subject to future impairments of our assets, including accounts receivable, investments, inventories, property, plant and equipment, goodwill and other intangibles, if the valuation of these assets or businesses continues to decline.
 
We face diverse risks in our international business, which could adversely affect our operating results.
 
We are dependent on international sales for a substantial amount of our total revenue. For fiscal 2007, 2008 and 2009, revenue from outside the United States was 27%, 33% and 41% of our total revenue, respectively. We expect that international sales will continue to represent a substantial portion of our revenue for the foreseeable future.

Due to our reliance on sales to customers outside the United States, we are subject to the risks of conducting business internationally, including:
  
 
 
United States and foreign government trade restrictions, including those which may
 impose restrictions on imports to or from the United States;
 
 
 
foreign government taxes and regulations, including foreign taxes that we may not be able
 to offset against taxes imposed upon us in the United States, and foreign tax and other
 laws limiting our ability to repatriate funds to the United States;

 
 
the laws and policies of the United States, Canada and certain European countries affecting the importation of goods (including duties, quotas and taxes);
 
 
 
foreign labor laws, regulations and restrictions;

 
 
difficulty in staffing and managing foreign operations and difficulty in maintaining quality control;
 
 
 
adverse fluctuations in foreign currency exchange rates and interest rates, including
risks related to any interest rate swap or other hedging activities we undertake;
 
 
 
political instability, natural disasters, health crises, war or events of terrorism;
 
10

 
 
 transportation costs and delays; and
 
 
 
the strength of international economies.
 
 We are dependent upon sales by independent consultants.

A significant portion of our products are marketed and sold through the direct selling method of distribution, where products are primarily marketed and sold by independent consultants to consumers without the use of retail establishments. This distribution system depends upon the successful recruitment, retention and motivation of a large number of independent consultants to offset frequent turnover. The recruitment and retention of independent consultants depends on the competitive environment among direct selling companies and on the general labor market, unemployment levels, economic conditions, and demographic and cultural changes in the workforce. The motivation of our consultants depends, in large part, upon the effectiveness of our compensation and promotional programs, its competitiveness compared with other direct selling companies, the successful introduction of new products, and the ability to advance through the consultant ranks.

Our sales are directly tied to the levels of activity of our consultants, which is a part-time working activity for many of them. Activity levels may be affected by the degree to which a market is penetrated by the presence of our consultants, the amount of average sales per party, the amount of sales per consultant, the mix of high-margin and low-margin products in our product line and the activities and actions of our competitors.
 
Earnings of PartyLite’s independent sales consultants are subject to taxation, and in some instances, legislation or governmental agencies impose obligations on us to collect or pay taxes, such as value added taxes, and to maintain appropriate records.  In addition, we may be subject to the risk in some jurisdictions of new liabilities being imposed for social security and similar taxes with respect to PartyLite’s independent sales consultants.  In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat PartyLite’s independent sales consultants as employees, or that PartyLite’s independent sales consultants are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors or agents under existing laws and interpretations, we may be held responsible for social charges and related taxes in those jurisdictions, plus related assessments and penalties, which could harm our financial condition and operating results.
 
Our profitability may be affected by shortages of raw materials.

Certain raw materials could be in short supply due to price changes, capacity, availability, a change in production requirements, weather or other factors, including supply disruptions due to production or transportation delays.  While the price of crude oil is only one of several factors impacting the price of petroleum wax, it is possible that recent fluctuations in oil prices may have a material adverse affect on the cost of petroleum-based products used in the manufacture or transportation of our products, particularly in the Direct Selling and Wholesale segments.  In recent years, substantial cost increases for certain raw materials, such as paraffin, dyethelene glycol (DEG) and ethanol, as well as aluminum and paper, negatively impacted profitability of certain products in all three segments.

 
We are dependent upon our key corporate management personnel.

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

Our businesses are subject to the risks from increased competition.

Our business is highly competitive both in terms of pricing and new product introductions.  The worldwide market for decorative and functional products for the home is highly fragmented with numerous suppliers serving one or more of the distribution channels served by us.  In addition, we compete for independent sales consultants with other direct selling companies.  Because there are relatively low barriers to entry in all of our business segments, we may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to us.  Competition includes companies selling candles manufactured at lower costs outside of the United States.  Moreover, certain competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

We may be adversely affected by proposed FTC regulations.
 
In April 2006, the U.S. Federal Trade Commission ("FTC") issued a notice of proposed rulemaking that if implemented, as originally proposed, will regulate all sellers of “business opportunities” in the United States. The proposed rule, as originally proposed, would, among other things, require all sellers of business opportunities, which would likely include PartyLite, to implement a seven-day waiting period before entering into an agreement with a prospective business opportunity purchaser and provide all prospective business opportunity purchasers with substantial disclosures in writing regarding the business opportunity and the company.  In March 2008, the FTC revised the proposed rulemaking to remove from the coverage of the rule certain  types of direct selling companies, including PartyLite. Based on information currently available, we anticipate that the final rule may require several years to become final and effective, and may differ substantially from the rule as currently proposed.
 
We depend upon our information technology systems.

Our information technology systems depend on global communications providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have experienced significant system failures and outages in the past.  Our systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events.  Despite the implementation of network security measures, our systems are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our systems.  The occurrence of these or other events could disrupt or damage our information technology systems and inhibit internal operations, the ability to provide customer service or the ability of customers or sales personnel to access our information systems.
 
 
Changes in our effective tax rate may have an adverse effect on our reported earnings.
 
Our effective tax rate and the amount of our provision for income taxes may be adversely affected by a number of factors, including:
 
 
 
the jurisdictions in which profits are determined to be earned and taxed;
 
 
 
adjustments to estimated taxes upon finalization of various tax returns;
 
 
 
changes in available tax credits;
 
 
 
changes in the valuation of our deferred tax assets and liabilities;
 
 
 
changes in accounting standards or tax laws and regulations, or interpretations thereof;
 
 
 
the resolution of issues arising from uncertain positions and tax audits with various tax authorities; and
 
 
 
penalties and/or interest expense that we may be required to recognize on liabilities associated with uncertain tax positions.
 
ViSalus’s business is affected by extensive laws, governmental regulations and similar constraints, and their failure to comply with those constraints may have a material adverse effect on ViSalus’s financial condition and operating results.

ViSalus is affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints exist at the federal, state or local levels in the United States, including regulations pertaining to: (1) the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of ViSalus’s products; (2) product claims and advertising, including direct claims and advertising by ViSalus, as well as claims and advertising by distributors, for which ViSalus may be held responsible; (3) ViSalus’s network marketing program; and (4) taxation of ViSalus’s independent distributors (which in some instances may impose an obligation on ViSalus to collect the taxes and maintain appropriate records).  There can be no assurance that ViSalus or its distributors are in compliance with all of these regulations, and the failure by ViSalus or its distributors’ failure to comply with these regulations or new regulations could lead to the imposition of significant penalties or claims and could negatively impact ViSalus’s business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may negatively impact the marketing of ViSalus’s products, resulting in significant loss of sales revenues.

In addition, ViSalus’s network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agencies in the United States. ViSalus is subject to the risk that, in one or more markets, its network marketing program could be found not to be in compliance with applicable law or regulations.  Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales-related criteria. The regulatory requirements concerning network marketing programs do not

 



13

 
include “bright line” rules and are inherently fact-based, and thus, even in jurisdictions where ViSalus believes that its network marketing program is in full compliance with applicable laws or regulations governing network marketing systems, it is subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. The failure of ViSalus’s network marketing program to comply with current or newly adopted regulations could negatively impact its business in a particular market or in general.
 
Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 might have an impact on market confidence in our reported financial information.

We must continue to document, test, monitor and enhance our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In connection with the preparation of this report, we identified and reported a material weakness in our internal controls over financial reporting relating to accounting for income taxes. As a result of this material weakness, we were unable to conclude that our internal control over financial reporting was effective as of January 31, 2009.
 
Item 1B.  Unresolved Staff Comments
 
None.

Item 2.  Properties

The following table sets forth the location and approximate square footage of our major manufacturing and distribution facilities:
 
Location
 
Use
Business Segment
 
Approximate Square Feet
 
       
Owned
   
Leased
 
Arndell Park, Australia
  Distribution
Direct Selling
          38,000  
Batavia, Illinois
  Manufacturing and
  Research &
  Development
Direct Selling and Wholesale
    486,000        
Cannon Falls, Minnesota
  Distribution
Wholesale
          192,000  
Carol Stream, Illinois
  Distribution
Direct Selling
          651,000  
Cumbria, England
  Manufacturing and
  related distribution
Direct Selling
    90,000        
Deerfield Beach, Florida
  Roasting, packaging
  and distribution
Catalog & Internet
 
          22,000  
Elkin, North Carolina
  Manufacturing and
  related distribution
Wholesale
    280,000        
Heidelberg, Germany
  Distribution
Direct Selling
          6,000  
Monterrey, Mexico
  Distribution
Direct Selling
          45,000  
Oshkosh, Wisconsin
  Distribution
Catalog & Internet
          386,000  
Texarkana, Texas
  Manufacturing and
  related distribution
Wholesale
    154,000       65,000  
Tilburg, Netherlands
  Distribution
Direct Selling
    442,500        
Union City, Tennessee
  Warehouse and
  distribution
Wholesale
    360,000       12,500  

 

 






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Our executive and administrative offices are generally located in leased space (except for certain offices located in owned space).  Most of our properties are currently being utilized for their intended purpose.

Item 3.  Legal Proceedings

We are involved in litigation arising in the ordinary course of business.  In our opinion, existing litigation will not have a material adverse effect on our financial position, results of operations or cash flows.

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

We held a Special Meeting of Stockholders on January 29, 2009 at which the stockholders approved an amendment to our Restated Certificate of Incorporation that: (1) effects a reverse stock split of our common stock at one of two split ratios to be selected by our Board of Directors, either 1-for-3 or 1-for-4 (“Proposal No. 1”), and (2) decreases the total number of authorized shares from 110,000,000 shares to 60,000,000 shares, 50,000,000 shares of which will be common stock, par value $0.02 per share, and 10,000,000 shares of which will be preferred stock, par value $0.01 per share (“Proposal No. 2”).   Immediately following stockholder approval, the Board of Directors approved the implementation of the reverse stock split at the ratio of 1-for-4.

The number of votes cast for and against, as well as the number of abstentions, as to Proposal Nos. 1 and 2 were:

   
For
   
Against
   
Abstentions
 
Proposal No. 1
    25,494,738       3,442,260       8,062  
Proposal No. 2
    25,555,772       3,376,943       12,345  

There were no votes withheld or broker non-votes as to Proposal No. 1 or 2.

The reverse stock split was effective at 6:01 p.m., Eastern Time, on January 30, 2009.  





















 
15


PART II

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

Our Common Stock is traded on the New York Stock Exchange under the symbol BTH.  Effective as of 6:01 p.m., Eastern Time, on January 30, 2009 we implemented a 1-for-4 reverse stock split of our Common Stock.  The following table provides the closing price range for the Common Stock on the New York Stock Exchange, all of which amounts have been retroactively adjusted to give effect to the reverse stock split (such adjustment has been calculated by multiplying the historic stock price by four, the reverse stock split multiple; none of the information in the following table represents actual closing prices of the Common Stock):

   
High
   
Low
 
Fiscal 2008
 
First Quarter
  $ 109.24     $ 79.48  
Second Quarter
    120.88       89.28  
Third Quarter
    94.00       64.00  
Fourth Quarter
    96.12       70.52  
   
Fiscal 2009
 
       First Quarter
  $ 89.44     $ 67.36  
Second Quarter
    78.88       47.72  
Third Quarter
    64.56       25.60  
Fourth Quarter
    35.40       13.64  

As of March 31, 2009, there were approximately 1,500 registered holders of record of the Common Stock.

On April 7, 2009, the Board of Directors declared a regular semi-annual cash dividend in the amount of $0.10 per share payable in the second quarter of fiscal 2010. During fiscal 2009 and 2008, the Board of Directors declared dividends as follows (such amounts have been adjusted to give effect to the reverse stock split by multiplying the actual amount of the dividend by four, the reverse stock split multiple): $1.08 per share payable in the second and fourth quarters of fiscal 2009 and $1.08 per share payable in the second and fourth quarters of fiscal 2008. Our ability to pay cash dividends in the future is dependent upon, among other things, our ability to operate profitably and to generate significant cash flows from operations in excess of investment and financing requirements that may increase in the future to, for example, fund new acquisitions or retire debt.









16


The following table sets forth, for the equity compensation plan categories listed below, information as of January 31, 2009 (which information has been adjusted to give effect to the reverse stock split):

Equity Compensation Plan Information

 
 
 
 
 
 
 
Plan Category
 
(a)
 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights1
   
(b)
 
Weighted-average
exercise price of outstanding options, warrants and rights1
   
(c)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders
    79,425     $ 107.10       909,656  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    79,425     $ 107.10       909,656  
1 The information in this column excludes 90,947 restricted stock units outstanding as of January 31, 2009.

The following table sets forth certain information concerning the repurchases of Common Stock made by us during the fourth quarter of fiscal 2009 (the amounts set forth under “Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs” have been adjusted to give effect to the reverse stock split):

Issuer Purchases of Equity Securities1

Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
November 1, 2008 -November 30, 2008
    -     $ -       -       1,884,430  
December 1, 2008 -December 31, 2008
    -       -       -       1,884,430  
January 1, 2009 -January 31, 2009
    -       -       -       1,884,430  
Total
    -     $ -       -       1,884,430  
_____________________________

1 On September 10, 1998, our Board of Directors approved a share repurchase program pursuant to which we were originally authorized to repurchase up to 250,000 shares of Common Stock in open market transactions. From June 1999 to June 2006, the Board of Directors increased the

17


authorization under this repurchase program, five times (on June 8, 1999 to increase the authorization by 250,000 shares to 500,000 shares; on March 30, 2000 to increase the authorization by 250,000 shares to 750,000 shares; on December 14, 2000 to increase the authorization by 250,000 shares to 1.0 million shares; on April 4, 2002 to increase the authorization by 500,000 shares to 1.5 million shares; and on June 7, 2006 to increase the authorization by 1.5 million shares to 3.0 million shares). On December 13, 2007, the Board of Directors authorized a new repurchase program, for 1.5 million shares, which will become effective after we exhaust the authorized amount under the old repurchase program.  As of January 31, 2009, we have purchased a total of 2,615,570 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. The amounts set forth in this paragraph have been adjusted to give effect to the reverse stock split.


















 




 
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Performance Graph

The performance graph set forth below reflects the yearly change in the cumulative total stockholder return (price appreciation and reinvestment of dividends) on our Common Stock compared to the S&P 500 Index and the S&P 400 Midcap Index for the five fiscal years ended January 31, 2009. The graph assumes the investment of $100 in Common Stock and the reinvestment of all dividends paid on such Common Stock into additional shares of Common Stock and such indexes over the five-year period.  We believe that we are unique and do not have comparable industry peers. Since our competitors are typically not public companies or are themselves subsidiaries or divisions of public companies engaged in multiple lines of business, we believe that it is not possible to compare our performance against that of our competition. In the absence of a satisfactory peer group, we believe that it is appropriate to compare us to companies comprising the S&P 400 Midcap Indexes.

Blyth, Inc. Performance Graph
 
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Item 6.   Selected Financial Data

Set forth below are selected summary consolidated financial and operating data for fiscal years 2005 through 2009, which have been derived from our audited financial statements for those years.  The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, appearing elsewhere in this Report. The per share amounts and number of shares outstanding have been adjusted to give effect to the 1-for-4 reverse stock split of our common stock that we implemented at the end of January 2009.


   
Year ended January 31,
 
(In thousands, except per share and percent data)
 
2005
   
2006
   
2007
   
2008
   
2009
 
Statement of Earnings Data: (1)
                             
  Net sales
  $ 1,301,365     $ 1,254,261     $ 1,220,611     $ 1,164,950     $ 1,050,793  
  Gross profit
    694,588       635,785       596,669       615,471       577,216  
  Operating profit (2) (3)
    144,783       45,167       15,644       30,887       4,028  
  Interest expense
    18,936       20,602       19,074       15,540       10,001  
  Earnings (loss) from continuing operations
                                       
    before income taxes and minority interest
    128,268       26,444       5,369       21,725       (11,525 )
  Earnings (loss) from continuing operations
                                       
    before minority interest
    82,106       20,065       2,705       11,178       (15,365 )
  Earnings (loss) from continuing operations
    82,364       20,531       2,555       11,072       (15,480 )
  Earnings (loss) from discontinued operations (4)
    14,150       4,326       (105,728 )     -       -  
  Net earnings (loss)
    96,514       24,857       (103,173 )     11,072       (15,480 )
  Basic net earnings (loss) from continuing operations
                                       
    per common share
  $ 7.64     $ 2.01     $ 0.26     $ 1.15     $ (1.73 )
  Basic net earnings (loss) from discontinued operations
                                 
    per common share
  $ 1.31     $ 0.42     $ (10.63 )   $ -     $ -  
  Net earnings (loss) per basic common share
  $ 8.95     $ 2.43     $ (10.37 )   $ 1.15     $ (1.73 )
  Diluted net earnings (loss) from continuing operations
                                 
    per common share
  $ 7.56     $ 1.99     $ 0.26     $ 1.14     $ (1.73 )
  Diluted net earnings (loss) from discontinued operations
                                 
    per common share
  $ 1.30     $ 0.42     $ (10.56 )   $ -     $ -  
  Net earnings (loss) per diluted common share
  $ 8.86     $ 2.41     $ (10.30 )   $ 1.14     $ (1.73 )
  Cash dividends paid, per share
  $ 1.44     $ 1.76     $ 2.00     $ 2.16     $ 2.16  
  Basic weighted average number
                                       
    of common shares outstanding
    10,784       10,239       9,945       9,648       8,971  
  Diluted weighted average number
                                       
    of common shares outstanding
    10,889       10,294       10,014       9,732       8,971  
Operating Data:
                                       
  Gross profit margin
    53.4 %     50.7 %     48.9 %     52.8 %     54.9 %
  Operating profit margin
    11.1 %     3.6 %     1.3 %     2.7 %     0.4 %
  Net capital expenditures
  $ 20,976     $ 17,272     $ 17,714     $ 9,421     $ 8,173  
  Depreciation and amortization
    35,600       35,875       34,630       31,974       18,628  
Balance Sheet Data:
                                       
  Total assets
  $ 1,075,820     $ 1,116,520     $ 774,638     $ 667,422     $ 574,103  
  Total debt
    287,875       371,742       215,779       158,815       145,731  
  Total stockholders' equity
    521,349       493,824       363,693       299,068       248,498  

(1)  
Statement of Earnings Data includes the results of operations for periods subsequent to the respective purchase acquisitions of As We Change, acquired in August 2008, and ViSalus, acquired in October 2008, none of which individually or in the aggregate had a material effect on the Company’s results of operations.

(2)  
Fiscal 2007 and 2008 earnings include restructuring charges recorded in the Wholesale and Direct Selling segments of $24.0 million and $2.3 million, respectively. Fiscal 2009 earnings include restructuring charges recorded in the Direct Selling segment of $1.7 million (See Note 5 to the Consolidated Financial Statements).

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(3)  
 Fiscal 2006 and 2007 pre-tax earnings include goodwill and other intangibles impairment charges of $53.3 million and $48.8 million in the Wholesale segment, respectively.  Fiscal 2008, and 2009 pre-tax earnings include goodwill and other intangibles impairment charges of $49.2 million and $48.8 million in the Catalog & Internet segment, respectively (See Note 9 to the Consolidated Financial Statements).
 
(4)  
In fiscal 2007, the Kaemingk Edelman., Euro-Decor, Gies and Colony businesses were sold (See Note 4 to the Consolidated Financial Statements).  The results of operations for these business units have been reclassified to discontinued operations for all periods presented.

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

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

Overview

Blyth is a designer and marketer of home fragrance products and accessories, home décor, seasonal decorations, household convenience items and personalized gifts.  We also market chafing fuel and other products for the foodservice trade, nutritional supplements, and weight management products.  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.

Fiscal 2009 net sales are comprised of an approximately $660 million Direct Selling business, an approximately $190 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 leverage more fully our infrastructure.  New product development continues to be critical to all three segments of our business.  In the Direct Selling segment, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants.  In the Catalog & Internet channel, product, merchandising and circulation strategy are designed to drive strong sales growth in newer brands and expand the sales and customer base of our flagship brands.  In the Wholesale segment, sales initiatives are targeted to independent retailers and national accounts.

Reverse Stock Split

At the end of January 2009, we implemented a 1-for-4 reverse stock split of our outstanding common stock that reduced the number of outstanding shares of common stock from 35.6 million to 8.9 million. The per share amounts within this section have been adjusted to give effect to the reverse stock split.

Business Acquisition

On August 4, 2008, we signed an agreement to purchase ViSalus, a direct seller of vitamins and other related nutritional supplements, through a series of investments.  On October 21, 2008, we completed the initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash.  In addition, we may be required to make additional purchases of ViSalus’s equity interest to increase our equity ownership over time to 57.5%, 72.7% and 100.0%.  These additional purchases are conditioned upon ViSalus meeting certain operating targets in calendar year 2009, 2010 and 2011, subject to a one-time, one-year extension in any year.  The purchase prices of the additional investments are based on ViSalus’s future operating results.  We have the
 
option to acquire the remaining interest in ViSalus even if they do not meet the predefined operating targets.

Sale of Mass Channel Candle Business
 
On April 27, 2007, we sold certain assets and liabilities of our BHI NA mass channel candle business, which was part of the Wholesale segment. The net assets were sold for $25.3 million, including proceeds from the sale of overstock inventory of $1.3 million. Of this amount, $21.8 million was received at closing and a total of $3.5 million was received subsequently in fiscal 2008. The sale resulted in a pre-tax loss of $0.6 million, which was recorded in Administrative expenses in the Consolidated Statements of Earnings (Loss).
 
Segments

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories and other fragranced products under the PartyLite® brand.  The Company also has an interest in another direct selling business, ViSalus Sciences®, which sells nutritional supplements and weight management products. All products in this segment are sold in North America through networks of independent sales consultants. PartyLite brand products are also sold in Europe and Australia.

Within the Catalog & Internet segment, we design, source and market 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 As We Change ®, Boca Java®, Easy Comforts®, Exposures®, Home Marketplace®, Miles Kimball® and Walter Drake® brands.  These products are sold in North America.

Within the Wholesale segment, we design, manufacture or source, market and distribute 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 markets under the CBK®, Colonial Candle of Cape Cod®, Colonial at HOME® 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.

The following table sets forth, for the periods indicated, the percentage relationship to net sales and the percentage increase or decrease of certain items included in our Consolidated Statements of Earnings (Loss):
 
                     
Percentage Increase (Decrease)
from Prior Period
 
   
Percentage of Net Sales
   
Fiscal 2008 Compared to Fiscal 2007
   
Fiscal 2009 Compared to Fiscal 2008
 
   
Years Ended January 31
 
   
2007
   
2008
   
2009
 
Net sales
    100.0       100.0       100.0       (4.6 )     (9.8 )
Cost of goods sold
    51.1       47.2       45.1       (11.9 )     (13.8 )
Gross profit
    48.9       52.8       54.9       3.2       (6.2 )
Selling
    33.6       34.8       38.1       (1.1 )     (1.1 )
Administrative
    10.0       11.2       11.8       6.2       (4.9 )
Operating profit
    1.3       2.7       0.4       N/M       N/M  
Earnings from continuing operations
    0.2       1.0       (1.5  )     N/M       N/M  

N/M - Percent change from the prior year is not meaningful in concluding on our performance.

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Fiscal 2009 Compared to Fiscal 2008

Consolidated Net Sales

Net sales decreased $114.2 million, or approximately 10%, from $1,165.0 million in fiscal 2008 to $1,050.8 million in fiscal 2009.  The decrease is a result of a decline in sales in PartyLite’s North American businesses and overall declines in sales in our Wholesale and Catalog & Internet segments. This decrease was partially offset by an increase in sales within PartyLite’s International markets.

Net Sales – Direct Selling Segment

Net sales in the Direct Selling segment decreased $22.3 million, or 3%, from $686.8 million in fiscal 2008 to $664.5 million in fiscal 2009.  PartyLite’s U.S. sales decreased approximately 23% compared to the prior year, this decrease was driven by a decline in the number of sales consultants, which declined from over 27,000 as of January 31, 2008 to over 21,000 as of January 31, 2009, as well as fewer shows. The reduction in sales consultants is partially the result of an increase in competition to attract and retain consultants due to more companies entering the direct selling channel. Additionally, the recent economic downturn in the U.S. economy has led to lower consumer discretionary spending, which resulted in fewer shows and opportunities to promote our products and recruit new consultants.  We have been initiating new and expanded means to maintain our consultant count such as increased training and promotional initiatives.

PartyLite Canada reported an approximately 10% decrease compared to the prior year in U.S. dollars, or 6% on a local currency basis. The sales decrease in Canada is primarily due to the decrease in its consultant base.

In PartyLite’s European markets, sales increased approximately 14% in U.S. dollars, driven by strong sales in the newer markets, an increase of about 5,000 consultants and favorable foreign currency translation.  On a local currency basis, PartyLite Europe sales increased approximately 10%. PartyLite Europe represented approximately 42% of PartyLite’s worldwide net sales in fiscal 2008 compared to 50% in fiscal 2009, reflecting the continued sales growth.

Net sales in the Direct Selling segment represented approximately 59% of total Blyth net sales in fiscal 2008 compared to 63% in fiscal 2009.

Net Sales – Catalog & Internet Segment

Net sales in the Catalog & Internet segment decreased $16.7 million, or 8%, from $206.8 million in fiscal 2008 to $190.1 million in fiscal 2009.  This decrease is due to lower consumer discretionary spending, as well as order processing difficulties associated with the implementation of a new Enterprise Resource Planning (“ERP “) system.

Net sales in the Catalog & Internet segment accounted for approximately 18% of total Blyth net sales in fiscal 2008 and 2009.

Net Sales – Wholesale Segment

Net sales in the Wholesale segment decreased $75.2 million, or 28%, from $271.4 million in fiscal 2008 to $196.2 million in fiscal 2009.  The decrease is a result of reduced sales within our home décor and seasonal decor product lines, which were adversely impacted by the weak housing market. In addition, sales were negatively impacted by $31.8 million, as a result of the

24


sale of our mass channel candle business, which occurred at the end of the first quarter of fiscal 2008.

Net sales in the Wholesale segment represented approximately 23% of total Blyth net sales in fiscal 2008 compared to 19% in fiscal 2009.

Consolidated Gross Profit and Operating Expenses

Blyth’s consolidated gross profit decreased $38.3 million, or 6%, from $615.5 million in fiscal 2008 to $577.2 million in fiscal 2009. The decrease in gross profit is primarily attributable to the 10% decrease in sales, partially offset by efforts to control costs including reductions in workforce within the manufacturing and distribution operations and renegotiations of certain vendor and supplier contracts. The gross profit margin increased from 52.8% in fiscal 2008 to 54.9% in fiscal 2009.  This increase from prior year is due in part to nonrecurring charges of $8.9 million, or 0.8%, relating to severance, inventory write-downs and asset impairments in connection with the sale of BHI NA during fiscal 2008. The balance of this increase was primarily due to the absence of BHI NA sales in fiscal 2009 since BHI NA operated at lower margins than Blyth’s other businesses in the prior year.

Blyth’s consolidated selling expense decreased $4.6 million, or approximately 1%, from $405.3 million in fiscal 2008 to $400.7 million in fiscal 2009.  The decrease in selling expense relates to the reduced sales in PartyLite U.S. (from $303.8 million is fiscal 2008 to $234.9 million in fiscal 2009) and the Wholesale and Catalog & Internet segments. Offsetting the impact in reduced sales are strategic initiatives undertaken by PartyLite to increase sales. These initiatives include various independent consultant promotional programs aimed at increasing sales and recruiting new consultants. Selling expense as a percentage of net sales increased from 34.8% in fiscal 2008 to 38.1% in fiscal 2009.  Overall, the increase in selling expense as a percent of sales is primarily a result of sales decreasing at a greater rate than selling expenses.

Blyth consolidated administrative expenses decreased $6.3 million, or 5%, from $130.1 million in fiscal 2008 to $123.8 million in fiscal 2009.  This decline was principally due to severance related charges ($3.2 million) and the termination of an office lease ($2.4 million) taken during fiscal 2008 associated with the sale of BHI NA, as well as improved expense management on a year over year basis.  Administrative expenses as a percentage of sales were approximately 11.2% for fiscal 2008 and 11.8% for fiscal 2009.

Impairment charges of $49.2 million for goodwill and other intangibles were recognized in the Catalog & Internet segment in fiscal 2008, compared to $48.8 million in fiscal 2009. In both years we reviewed the performance of the Miles Kimball business and its projected outlook. The Miles Kimball business experienced lower revenue growth and reduced operating margins than anticipated during both fiscal 2008 and 2009. This shortfall in revenues and profit was primarily attributable to decreased consumer spending due to changes in the business environment, an overall weak economic climate and higher postage, paper and printing costs. As a result, the goodwill and intangibles in the Catalog & Internet segment were determined to be impaired in fiscal 2008 and further impaired in fiscal 2009.

Blyth’s consolidated operating profit decreased $26.9 million from $30.9 million in fiscal 2008 to $4.0 million in fiscal 2009.  The decrease is primarily due to the decrease in sales partially offset by a corresponding decrease in selling, general and administrative expenses as a result of initiatives to maintain sales, as well as severance incurred due to reductions in personnel.



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Operating Profit - Direct Selling Segment

Operating profit in the Direct Selling segment decreased $24.3 million, or 25%, from $98.7 million in fiscal 2008 to $74.4 million in fiscal 2009. The decrease was primarily due to a 20% reduction in sales for PartyLite’s North American operations and increased promotional costs of $5.0 million. Partially offsetting this decline was an improvement in sales within PartyLite Europe, including the positive effects of stronger foreign currencies.

Operating Loss – Catalog & Internet Segment

Operating loss in the Catalog & Internet segment increased by $10.2 million, from $48.9 million in fiscal 2008, to $59.1 million in fiscal 2009.  This increased loss was primarily due to the issues associated with the implementation of the new ERP at the Miles Kimball Company and continued lower consumer spending resulting from the weakening economy. Operating losses for fiscal 2008 and 2009 included goodwill and other intangibles impairments charges of $49.2 million and $48.8 million, respectively. Partially offsetting these charges were a reduction in losses at the Boca Java Company of $2.7 million, excluding the $1.9 million goodwill impairment.

Operating Loss – Wholesale Segment

Operating loss in the Wholesale segment decreased from $19.0 million in fiscal 2008 to $11.2 million in fiscal 2009. This reduction is primarily the result of the sale of the BHI NA business in fiscal 2008, which had contributed $18.0 million in operating losses in the prior year, improving operating income this year by $16.3 million. This was partially offset by lower sales  and profit across the segment due to a soft housing market and weakening economy.

Consolidated Other Expense (Income)

Interest expense decreased $5.5 million, or 35%, from $15.5 million in fiscal 2008 to $10.0 million in fiscal 2009, primarily due to a decrease in outstanding debt.

Interest income decreased $3.3 million, from $7.6 million in fiscal 2008 to $4.3 million in fiscal 2009, mainly due to lower amounts of cash and short-term investments and lower interest rates during fiscal 2009.

Foreign exchange and other losses were $1.3 million in fiscal 2008 compared to $9.8 million in fiscal 2009.  The loss in fiscal 2008 includes a $1.2 million impairment charge related to an available-for-sale equity investment in RedEnvelope, Inc. and a $0.9 million impairment charge on an Australian joint venture investment accounted for under the equity method. The loss recorded in fiscal 2009 includes $5.2 million for the permanent impairment of our investment in RedEnvelope and an unrealized loss of $2.1 million related to our preferred stock portfolio that are classified as trading investments.

Income tax expense decreased $6.7 million from $10.5 million in fiscal 2008 to $3.8 million in fiscal 2009.  The decrease in income tax expense was primarily due to a pretax loss in the United States. This decrease was offset by continued strong foreign sourced earnings as well as the tax impact of the non-deductible portion of goodwill and other intangible impairments and impairments of investments for which no tax benefit was recorded. The effective tax rate was 48.6% in fiscal 2008 compared to a negative 33.3% for the current year as result of our net loss. The current year rate reflects the strong foreign sourced earnings offset in part by the pretax loss in the United States and the partial benefit taken on the Goodwill and intangible impairments in the Catalog and Internet segment.

 
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As a result of the foregoing, earnings from continuing operations decreased $26.6 million, from $11.1 million in fiscal 2008 to a loss of $15.5 million in fiscal 2009.  Basic earnings per share from continuing operations were $1.15 for fiscal 2008 compared to a loss of $1.73 for fiscal 2009.  Diluted earnings per share from continuing operations were $1.14 for fiscal 2008 compared to a loss of $1.73 for fiscal 2009.

Fiscal 2008 Compared to Fiscal 2007

Consolidated Net Sales

Net sales decreased $55.6 million, or approximately 5%, from $1,220.6 million in fiscal 2007 to $1,165.0 million in fiscal 2008.  The decrease is a result of lower Wholesale sales of $53.9 million due to the sale of BHI NA mass channel candle business in our Wholesale segment and a decrease in PartyLite’s U.S. sales of $51.9 million.  This decrease was partially offset by an increase in sales within both PartyLite’s European and Canadian operations and the Catalog & Internet segment.

Net Sales – Direct Selling Segment

Net sales in the Direct Selling segment decreased $7.2 million, or 1%, from $694.0 million in fiscal 2007 to $686.8 million in fiscal 2008.  PartyLite’s U.S. sales decreased approximately 15% compared to prior year.   Management believes this sales decrease was driven by a decline in the number of sales consultants as a result of increased channel competition, as well as fewer shows per consultant.

PartyLite Canada reported an approximately 13% increase compared to the prior year in U.S. dollars, or 4% on a local currency basis. Sales in Canada increased due to a higher number of guests per show and shows per consultant.

In PartyLite’s European markets, sales increased approximately 16% in U.S. dollars, driven by strong sales in the newer markets and favorable foreign currency translation.  On a local currency basis, PartyLite Europe sales increased approximately 5%. PartyLite Europe represented approximately 37% of PartyLite’s worldwide net sales in fiscal 2007 compared to 42% in fiscal 2008.

Net sales in the Direct Selling segment represented approximately 57% of net sales in fiscal 2007 compared to 59% in fiscal 2008.

Net Sales – Catalog & Internet Segment

Net sales in the Catalog & Internet segment increased $7.5 million, or 4%, from $199.3 million in fiscal 2007 to $206.8 million in fiscal 2008.  This increase was due to increased sales in our Miles Kimball and Easy Comforts catalogs and sales growth in Boca Java.

Net sales in the Catalog & Internet segment accounted for approximately 16% of net sales in fiscal 2007 compared to 18% in fiscal 2008.

Net Sales – Wholesale Segment

Net sales in the Wholesale segment decreased $55.8 million, or 17%, from $327.2 million in fiscal 2007 to $271.4 million in fiscal 2008.  The decrease was a result of lower mass candle sales due to the sale of the BHI NA business, as well as reduced sales in our home décor channel, which was adversely impacted by the weak housing market. Partially offsetting these declines

 

was an increase in sales for the Sterno business of approximately 4% and in the seasonal décor business of 2%.
 
Net sales in the Wholesale segment represented approximately 27% of total Blyth net sales in fiscal 2007 compared to 23% in fiscal 2008.

Consolidated Gross Profit and Operating Expenses

Blyth’s consolidated gross profit increased $18.8 million, from $596.7 million in fiscal 2007 to $615.5 million in fiscal 2008. As a percent of sales, gross margin was 48.9% in fiscal 2007 and 52.8% in fiscal 2008, an increase of 3.9%.  This increase was principally related to the following factors:  (1)  a reduction of severance, inventory write-downs and asset impairments related to BHI NA, or 0.9%; (2) improvements at PartyLite largely due to selected price increases, reduced shipping and handling costs and favorable product mix, or 1.2%; and (3) improvements in the Wholesale businesses, mostly due to the sale of BHI NA in the first quarter of fiscal 2008 (whose gross margins are significantly lower than our other businesses), as well as improvements in our other Wholesale businesses resulting from selected price increases, better cost control and favorable product mix, or 0.6%. Partially offsetting these increases were higher commodities costs, primarily in wax and other chemicals, which decreased gross profit margin by 0.2%.

Blyth’s consolidated selling expense decreased $4.4 million, or approximately 1%, from $409.7 million in fiscal 2007 to $405.3 million in fiscal 2008. The decrease in selling expense relates to reduced sales resulting from the sale of BHI NA late in the first quarter of fiscal 2008 ($93.2 million in sales in fiscal 2007 compared to $39.3 million in fiscal 2008). Selling expense decreased by $4.9 million as a result of the sale of BHI NA. Selling expense as a percentage of net sales increased from 33.6% in fiscal 2007 to 34.8% in fiscal 2008 since BHI NA had a very low ratio of selling expense to net sales. PartyLite’s selling expense was flat since PartyLite Europe’s increased sales were offset by PartyLite U.S.’s reduced selling expense, which was consistent with the overall sales trends in these businesses.

Blyth consolidated administrative expenses increased $7.6 million, or 6%, from $122.5 million in fiscal 2007 to $130.1 million in fiscal 2008.  The increase in administrative expenses was primarily due to severance charges and an impairment of a lease and other fixed asset impairments related to the sale of BHI NA, partially offset in fiscal 2007 and 2008 by $5.2 million and $1.4 million, respectively, of collections of notes receivable which had previously been reserved for as part of the Gies sale.  Administrative expenses as a percentage of sales were approximately 10.0% for fiscal 2007 and 11.2% for fiscal 2008.

Impairment charges for goodwill of $48.8 million were recognized in the Wholesale segment in fiscal 2007. Impairment charges of $49.2 million for goodwill and other intangibles were recognized in the Catalog & Internet segment in fiscal 2008.  The amount recorded in fiscal 2007 was the result of our decision to discontinue the sales of a new Sterno product, rising commodity costs and a continued decline in operating performance in the Sterno reporting unit and a business restructuring which resulted in a significantly changed near-term outlook of the business in the Wholesale premium reporting unit. In fiscal 2008, as part of our annual impairment review, we assessed the recent performance of the Miles Kimball business and its fiscal outlook. The Miles Kimball business experienced lower revenue growth than anticipated and reduced operating margins due to higher postage, paper and printing costs. This shortfall was primarily attributable to decreased consumer spending due to changes in the Catalog & Internet business environment and an overall weak economic climate. As a result, the goodwill and intangibles in the Catalog & Internet segment was determined to be impaired.


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Blyth’s consolidated operating profit increased $15.3 million from $15.6 million in fiscal 2007 to $30.9 million in fiscal 2008.  The increase is primarily due to higher profits within the Direct Selling segment, in particular for PartyLite Europe and Canada, and reduced operating losses within the Wholesale segment.
 
Operating Profit - Direct Selling Segment

Operating profit in the Direct Selling segment increased $11.8 million, or 14%, from $86.9 million in fiscal 2007 to $98.7 million in fiscal 2008.  The increase was primarily due to the impact of increased sales within PartyLite Europe and Canada, including the effects of stronger foreign currencies, partially offset by reduced sales for PartyLite U.S. and continued cost increases for wax and other commodities.

Operating Profit/Loss – Catalog & Internet Segment

Operating loss in the Catalog & Internet segment increased by $52.6 million, from a profit of $3.7 million in fiscal 2007 to a loss of $48.9 million in fiscal 2008.  This profit decline was primarily due to the impairment charge for goodwill and other intangible assets of $49.2 million related to the Miles Kimball business unit, higher postage, paper and printing costs within the Miles Kimball business and an increase in Selling expense of $3.1 million at Boca Java, primarily related to sales promotions.

Operating Loss – Wholesale Segment

Operating loss in the Wholesale segment decreased from $74.9 million in fiscal 2007 to $19.0 million in fiscal 2008. Included in the loss for fiscal 2007 was the previously mentioned goodwill impairment charge of $48.8 million. Also contributing to the improvement for fiscal 2008 was increased operating profit at Sterno and Midwest of Cannon Falls businesses, totaling $8.2 million.

Consolidated Other Expense (Income)

Interest expense decreased $3.6 million, or 19%, from $19.1 million in fiscal 2007 to $15.5 million in fiscal 2008, primarily due to a decrease in outstanding debt.

Interest income increased $0.2 million, from $7.4 million in fiscal 2007 to $7.6 million in fiscal 2008, mainly due to higher amounts of cash and short-term investments held during fiscal 2008.

Foreign exchange and other reported income of $1.4 million in fiscal 2007 compared to a loss of $1.3 million in fiscal 2008.  The loss of $1.3 million in fiscal 2008 includes a $1.2 million impairment charge related to an available-for-sale equity investment in RedEnvelope, Inc., whose decline in value was deemed other than temporary and a $0.9 million impairment charge on an Australian joint venture investment accounted for under the equity method.  Partially offsetting these charges in fiscal 2008 were foreign exchange gains and other income of $0.8 million.

Income tax expense increased $7.8 million from $2.7 million in fiscal 2007 to $10.5 million in fiscal 2008.  The increase in income tax expense was primarily due to the increase in profit before tax and the increase in our tax reserves for ongoing tax audits. This increase was offset by continued strong foreign sourced earnings, which are taxed at a lower rate than U.S earnings. The offsets led to a slight decrease in the effective tax rate from 49.6% in fiscal 2007 to 48.6% in fiscal 2008.


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As a result of the foregoing, earnings from continuing operations increased $8.5 million, from $2.6 million in fiscal 2007 to $11.1 million in fiscal 2008.  Basic earnings per share from continuing operations were $0.26 for fiscal 2007 compared to $1.15 for fiscal 2008.  Diluted earnings per share from continuing operations were $0.26 for fiscal 2007 compared to $1.14 for fiscal 2008.
 
The loss from discontinued operations, net of tax, for fiscal 2007 was $105.7 million, or $10.56 per diluted share.  The loss includes (a) a non-tax deductible loss of $18.4 million on the sale of the Kaemingk business, (b) a non-tax deductible loss on the sale of the Edelman and Euro-Decor businesses of $14.5 million, which includes a goodwill impairment charge of $16.7 million, (c) a net of tax loss on the sale of the Gies business of $28.0 million, which includes an impairment charge of $31.1 million and (d) net of tax loss on sale of the Colony business of $19.9 million, which includes an impairment charge of $28.6 million. The loss from discontinued operations includes an operating loss, net of tax, of $24.9 million, or $2.48 per diluted share, for fiscal 2007. There were no discontinued operations during fiscal 2008.

Seasonality

Historically, our operating cash flow for the first nine months of the fiscal year shows a utilization of cash, due to requirements for meeting working capital needs for inventory purchases and the extension of credit through the holiday season. Our fourth quarter, however, historically generated a surplus of cash resulting from a large concentration of our business occurring during the fourth quarter holiday season.
 
Liquidity and Capital Resources

We recognize that the cash provided by operations of $37.8 million in fiscal 2009 is significantly lower than the $91.8 million in the prior year. However, we are addressing this matter in the following ways. First, we have begun to execute an aggressive working capital management program designed to conserve cash.  Second, we will continue to focus on cost cutting measures throughout the Company with the goal to save cash. Third, we will consider the timing and level of future dividends and treasury share buybacks. Fourth, we have long-term investments on our balance sheet that we could convert into cash should the need arise. These initiatives will support our expectation that we will be able to fund our working capital requirements in the foreseeable future from operational cash flows.
 
Cash and cash equivalents decreased $16.6 million from $163.0 million at January 31, 2008 to $146.4 million at January 31, 2009.  We have limited our decrease in cash by liquidating some of our investments and reducing our share repurchases during fiscal 2009.
 
We typically generate positive cash flow from operations due to favorable gross margins and the variable nature of selling expenses, which constitute a significant percentage of operating expenses.  We generated $91.8 million in cash from operations in fiscal 2008 compared to $37.8 million in fiscal 2009.  This decline was largely due to the reduction in net earnings. Operating profit decreased $26.9 million to $4.0 million primarily due to lower sales, increased commodity and shipping costs and selling expense as a percentage of sales. Included in earnings from continuing operations were non-cash charges for depreciation and amortization, goodwill and other intangible impairments and amortization of unearned stock-based compensation of $18.6 million, $48.8 million and $1.8 million, respectively.
 
Net changes in operating assets and liabilities resulted in a use of cash of $12.6 million. Due to the seasonal nature of our businesses we generally do not have positive cash flow from operations

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until our fourth quarter. Our working capital needs are the highest in late summer prior to the start of the holiday season. If demand for our products falls short of expectations this could require us to maintain higher inventory balances than forecasted and could negatively impact our liquidity. Additionally, the existing credit crisis may also negatively impact the ability of our customers to obtain credit and consequently could negatively impact our sales and the collection of our receivables.
 
Net cash provided by investing activities was $94.9 million in fiscal 2008, compared to a use of cash of $4.8 million in fiscal 2009. Our investments decreased from $52.7 million as of January 31, 2008 to $25.0 million at January 31, 2009. Net capital expenditures for property, plant and equipment were $8.2 million in fiscal 2009, down from $9.4 million in fiscal 2008.  During fiscal 2008 we received proceeds from the sale of certain assets and liabilities of the BHI NA business of $25.3 million and proceeds from the sale of one of our European Wholesale discontinued operations of $0.5 million compared to a use of cash of $15.8 million in the current year to obtain our interest in ViSalus and certain assets of As We Change.

Net cash used in financing activities in fiscal 2009 was $43.7 million which included the reduction of our long-term debt and capital lease obligations by $13.2 million, compared to long-term debt and capital lease payments of $57.1 million in the prior year. We also purchased treasury stock of $11.1 million and paid dividends of $19.4 million. Our 7.90% Senior Notes, with a remaining principal amount of $37.3 million as of January 31, 2009, are due on October 1, 2009. We anticipate the ability to repay these notes using existing cash balances as well as expected cash flows from operations. We will continue to carefully monitor our cash position, and will only make additional repurchases of outstanding debt or shares and will only pay dividends when we have sufficient cash surpluses available for us to do so.

The primary factor impacting our operating cash flow in fiscal 2009 is the decrease in PartyLite sales in the U.S. market of $68.9 million, which was driven by fewer active independent sales consultants, as well as lower activity by existing consultants and reduced sales per show resulting from difficult economic conditions that made booking and holding shows more challenging. Management’s key areas of focus include stabilizing the consultant base through training and promotional incentives, which has resulted in an increase in our selling expense during fiscal 2009. PartyLite’s active independent sales consultants have declined in recent years, primarily in the United States.  In the United States, the number of active independent sales consultants has declined from over 27,000 at the end of fiscal 2008 to over 21,000 at the end of fiscal 2009. While we are making efforts to stabilize and increase the number of active independent sales consultants, it may be difficult to do so in the current economic climate due to reduced consumer discretionary spending. If our U.S. consultant count continues to decline it will have a negative impact on our liquidity and financial results.

In addition, our operating cash flow is impacted by decreased sales within the Wholesale and Catalog & Internet segments.  Sales within our Wholesale segment have declined from $271.4 million in fiscal 2008 to $196.2 million in fiscal 2009 and sales in our Catalog & Internet segment have declined from $206.8 million in fiscal 2008 to $190.1 million in fiscal 2009. Furthermore, we expect that the current recession, with a decline in consumer spending and its negative impact on sales, to continue. If the current recession is prolonged and/or the actions already initiated by management are not successful in improving the operating performances of our businesses, it may become necessary to undertake additional measures to preserve our liquidity. These initiatives could include additional dispositions, overhead cost reductions, lower levels of in-stock inventory and reduced promotional activities.

We anticipate total capital spending of approximately $6 million for fiscal 2010, or about $2 million less than our net expenditures in fiscal year 2009, due to our plans to invest in only


necessary updates and repairs and only investing capital where significant returns are provided with minimal risk. Our focus is on improving our information technology systems. We have grown in part through acquisitions and, as part of our growth strategy, we expect to continue from time to time in the ordinary course of 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.  Information on debt maturities is presented in Note 12 to the Consolidated Financial Statements.

On October 21, 2008, we acquired a 43.6% interest in ViSalus for $13.0 million and incurred acquisition costs of $1.0 million for a total cash acquisition cost of $14.0 million.  We intend to and may be required to purchase additional interests in ViSalus that will require additional capital resources, increasing our ownership to 100%. The requirement for additional purchases is conditioned upon ViSalus meeting certain operating targets in fiscal 2010, 2011 and 2012, subject to a one-time, one-year extension. We have the option to acquire the remaining interest in ViSalus even if they do not meet these operating targets.  If ViSalus meets its current projected operating targets, the total expected redemption value of the noncontrolling interest will be approximately $19.4 million over fiscal 2011, 2012 and 2013. The purchase prices of the additional investments are equal to a multiple of ViSalus’s earnings before interest, taxes, depreciation and amortization, exclusive of certain extraordinary items. The payment, if any, will be out of existing cash balances and expected future cash flows from operations.

In October 2006, we executed Amendment No. 1 to our unsecured revolving credit facility (“Credit Facility”) dated as of June 2, 2005.  The amendment provided for borrowing under the Credit Facility of $75.0 million, contingent upon the adherence to predefined covenants. As a result of noncompliance with two of the covenants we terminated the Credit Facility on December 5, 2008, after providing cash collateral to the issuing bank such that all standby letters of credit are fully satisfied and are no longer considered outstanding under the Credit Facility.

United States and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms.  In addition, equity markets are continuing to experience rapid and wide fluctuations in value.  If these conditions continue or worsen, our cost of borrowing may increase and it may be more difficult to obtain financing for our businesses. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies.  A decrease in these ratings would likely increase our cost of borrowing and/or make it more difficult for us to obtain financing.  Obtaining a new credit facility will more than likely require higher interest costs and may require our providing security to guarantee such borrowings.  Alternatively, we may not be able to obtain unfunded borrowings, which may require us to seek other forms of financing, such as term debt, at higher interest rates and additional expense.

In addition, if the economic conditions continue to worsen, we may be subject to future impairments of our assets, including accounts receivable, inventories, property, plant and equipment, investments, goodwill and other intangibles, if the valuation of these assets or businesses continues to decline.

As of January 31, 2009, 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, 2010.  As of January 31, 2009, no letters of credit were outstanding under this facility.

In May 1999, we filed a shelf registration statement for the 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. In fiscal 2008 and 2009, we


repurchased $48.4 million and $12.3 million, respectively, of these notes.  Such notes contain, among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  As of January 31, 2009, 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 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 January 31, 2009, 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 January 31, 2008 and 2009, Miles Kimball had approximately $8.6 million and $8.2 million, respectively, of long-term debt (including current portion) outstanding under a real estate mortgage note payable, which matures on 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 January 31, 2008 and 2009, 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.  The loan is collateralized by certain of CBK’s assets.  The amount outstanding under the IRB bears interest at short-term floating rates, which on a weighted average was 2.0% as of January 31, 2009. Interest payments are required monthly and the principal is due upon maturity.

The estimated fair value of our $158.8 million and $145.7 million total long-term debt (including current portion) at January 31, 2008 and 2009 was approximately $141.9 million and $120.6 million, respectively.  The fair value is determined by quoted market prices, where available, and from analyses performed by investment bankers using current interest rates considering our credit rating and the remaining terms to maturity.

The following table summarizes the maturity dates of our contractual obligations as of January 31, 2009:

   
         
Less than
               
More than
 
Contractual Obligations (In thousands)
 
Total
   
1 year
   
1 - 3 Years
   
3 - 5 Years
   
5 Years
 
  Long-Term Debt(1)
  $ 145,476     $ 37,753     $ 1,037     $ 101,111     $ 5,575  
  Capital Leases(2)
    255       183       72       -       -  
  Interest(3)
    32,370       8,093       12,155       10,580       1,542  
  Purchase Obligations(4)
    39,033       37,799       894       340       -  
  Operating Leases
   
42,535
      14,305       18,390       7,125       2,715  
  Unrecognized Tax Benefits(5)
    24,526       1,880       -       -       -  
     Total Contractual Obligations
  $ 284,195     $ 100,013     $ 32,548     $ 119,156     $ 9,832  
(1) Long-term debt includes 7.90% Senior Notes due October 1, 2009, 5.5% Senior Notes due November 1, 2013, a mortgage note payable-maturity June 1, 2020, and an Industrial Revenue Bond ("IRB") with a maturity date of January 1, 2025 (See Note 12 to the Consolidated Financial Statements).
 
(2) Amounts represent future lease payments, excluding interest, due on five capital leases, which end between fiscal 2010 and fiscal 2012 (See Note 12 to the Consolidated Financial Statements).
 
(3) Interest expense on long-term debt is comprised of $28.1 million relating to Senior Notes, $4.3 million in mortgage interest, $32 thousand of interest due on the CBK Industrial Revenue Bond and approximately $21 thousand of interest relating to future capital lease obligations.
 
(4) Purchase obligations consist primarily of open purchase orders for inventory.
                         
(5) Unrecognized tax benefits consist of $1.9 million which is expected to be realized within the next 12 months, and $22.6 million for which we are not able to reasonably estimate the timing of the potential future payments
         
(See Note 15 to the Consolidated Financial Statements).
 


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Since January 31, 2008, we have purchased 202,887 shares on the open market, for a cost of $11.1 million, bringing the cumulative total purchased shares to 2,615,570 as of January 31, 2009, for a total cost of approximately $224.8 million.  Additionally in fiscal 2005, 1,226,654 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.
 
On April 7, 2009, we declared a cash dividend of $0.10 per share of common stock. The dividend will be payable to shareholders of record as of May 1, 2009 and will be paid on May 15, 2009.

Our ability to pay cash dividends in the future is dependent upon, among other things, our ability to operate profitably and to generate significant cash flows from operations in excess of investment and financing requirements that may increase in the future to, for example, fund new acquisitions or retire debt. As we normally do, we will review our dividend policy prior to our next dividend payment (historically we have paid dividends in May and November), and may adjust the rate of our semi-annual dividend if necessary. During fiscal 2009 we paid a total of $19.4 million in dividends.

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to a have a material current or future effect upon our financial statements. We do not utilize derivatives for trading purposes.

Critical Accounting Policies

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

Note 1 to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following are our critical accounting policies and methods.

Revenue Recognition

Revenues consist of sales to customers, net of returns and allowances.  We recognize revenue upon delivery, when both title and risk of loss are transferred to the customer. We present revenues net of any taxes collected from customers and remitted to government authorities.

Generally, our sales are based on fixed prices from published price lists.  We record estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions.  Should market conditions decline, we may increase customer incentives with respect to future sales.  We also record reductions to revenue, based primarily on historical experience, for estimated customer returns and chargebacks that may arise as a result of shipping errors, product damage in transit or for other reasons that can only become known subsequent to recognizing the revenue.  If the amount of

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actual customer returns and chargebacks were to increase significantly from the estimated amount, revisions to the estimated allowance would be required.  In some instances, we receive payment in advance of product delivery.  Such advance payments occur primarily in our direct selling and direct marketing channels and are recorded as deferred revenue in Accrued expenses in the Consolidated Balance Sheets.  Upon delivery of product for which advance payment has been made, the related deferred revenue is reversed and recorded as revenue.

We establish an allowance for doubtful accounts for trade and note receivables.  The allowance is determined based on our evaluation of specific customers’ ability to pay, aging of receivables, historical experience and the current economic environment. While we believe we have appropriately considered known or expected outcomes, our customers’ ability to pay their obligations, including those to us, could be adversely affected by declining retail sales resulting from such factors as contraction in the economy or a general decline in consumer spending.

Some of our wholesale business units offer seasonal dating programs pursuant to which customers that qualify for such programs are offered extended payment terms for seasonal product shipments, which is a common practice in some of our channels. The sales price for our products sold pursuant to such seasonal dating programs is fixed prior to the time of shipment to the customer.  Customers do not have the right to return product, except for rights to return that we believe are typical of our industry for such reasons as damaged goods, shipping errors or similar occurrences. We are not required to repurchase products from our customers, nor do we have any regular practice of doing so. We believe that we are reasonably assured of payment for products sold pursuant to such seasonal dating programs based on our historical experience with the established list of customers eligible for such programs. If, however, product sales by our customers during the seasonal selling period should fall significantly below expectations, such customers’ financial condition could be adversely affected, increasing the risk of not collecting these seasonal dating receivables and, possibly, resulting in additional bad debt charges.  We do not make any sales under consignment or similar arrangements.

Inventory valuation

Inventories are valued at the lower of cost or market.  Cost is determined by the first-in, first-out method.  We write down our inventory for estimated obsolete, excess and unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts.  If market acceptance of our existing products or the successful introduction of new products should significantly decrease, additional inventory write-downs could be required.  Potential additional inventory write-downs could result from unanticipated additional quantities of obsolete finished goods and raw materials, and/or from lower disposition values offered by the parties who normally purchase surplus inventories.

Restructuring and impairment charges on long-lived assets

In response to changing market conditions and competition, our management regularly updates our business model and market strategies, including the evaluation of facilities, personnel and products.  Future adverse changes in economic and market conditions could result in additional organizational changes and possibly additional restructuring and impairment charges. Historically, we have reviewed long-lived assets, including property, plant and equipment and other intangibles with definite lives for impairment annually and whenever events or changes in circumstances indicated that the carrying amount of such an asset might not be recoverable.  Management determines whether there has been a permanent impairment on long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or asset group to the carrying value of the asset.  The amount




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of any resulting impairment is calculated by comparing the carrying value to the fair value, which may be estimated using the present value of the same cash flows.  Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value.

Goodwill and other indefinite lived intangibles

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

We perform our annual assessment of impairment as of January 31, which is our fiscal year-end date, or as deemed necessary. For goodwill, the first step is to identify whether a potential impairment exists. This first step compares 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 fair value of the reporting units is derived by calculating the average of the outcome of the two valuation techniques.  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 the 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. 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 goodwill and a charge to operating expense.

Our assumptions in the discounted cash flow methodology used to support recoverability include the reporting unit’s five year business outlook. The business outlook is a five year projection of the business unit’s financial performance.  The business outlook includes the cash expected to be generated from the reporting unit based on certain assumptions for revenue growth, capital spending and profit margins. This serves as the basis for the discounted cash flow model in determining fair value. Additionally, the discount rate utilized in the cash flow model values the reporting unit to its net present value taking into consideration the time value of money, other investment risk factors and the terminal value of the business. For the terminal value, we used a multiple of earnings before income taxes, depreciation and amortization (“EBITDA”) multiplied by a certain factor for which an independent third party would pay for a similar business in an arms length transaction.  In determining this factor we used information that was available for similar transactions executed in the marketplace. The multiple of EBITDA used contemplates, among other things, the expected revenue growth of the business, which in turn would require the use of a higher EBITDA multiple if revenue were expected to grow at a higher rate than normal.  The following circumstances could impact our cash flow and cause further impairments to reported goodwill:
· unexpected increase in competition resulting in lower prices or lower volumes,
· entry of new products into the marketplace from competitors,
· lack of acceptance of our new products into the marketplace,
· loss of a key employee or customer,
· significantly higher raw material costs, and
· macroeconomic factors.






 
36


Miles Kimball
 
As a result of our January 31, 2008 annual impairment assessment, we determined that the goodwill related to the Miles Kimball reporting unit, in the Catalog & Internet segment, was impaired. In fiscal 2008, the Miles Kimball business experienced lower revenue growth than anticipated when compared to the fiscal 2008 budget. We believe this shortfall in performance was primarily attributable to decreased consumer spending due to changes in the business environment and adverse economic conditions that were prevailing during the later part of fiscal 2008. As a result of this analysis, the goodwill in this reporting unit was determined to be impaired, as the fair value of the reporting unit was less than the carrying value of the reporting unit including goodwill. Accordingly, we recorded a non-cash pre-tax goodwill impairment charge of $46.8 million in the fourth quarter of fiscal 2008.

In the third quarter of fiscal 2009, the Miles Kimball Company continued to experience substantial declines in operating performance when compared to prior years’ results and its strategic outlook. We believe this shortfall in performance was primarily attributable to decreased consumer spending due to changes in the business environment and adverse economic conditions. As a result of the impairment analysis performed, the goodwill was determined to be fully impaired, as the fair value of the reporting unit was less than its carrying value, including goodwill. Accordingly, we recorded a non-cash pre-tax goodwill impairment charge of $29.0 million, which included the $1.3 million related to As We Change, during the third quarter of fiscal 2009.

The table below is a summary of estimated fair values as of January 31, 2008 and October 31, 2008 and the assumptions used in comparison to the carrying values in assessing recoverability of goodwill for the Miles Kimball reporting unit of the Catalog & Internet segment.
 
($'s in millions)
 
 January 31, 2008
   
 October 31, 2008
 
             
Estimated fair value
  $ 108.4     $ 64.9  
Recorded carrying value of assets
    146.6       105.1  
Excess (impaired) value to recorded value
  $ (38.2 )   $ (40.2 )
                 
Assumptions and other information:
               
Discount rate
    13.0 %     15.0 %
Average revenue growth rate
    4.1 %     1.4 %
Tax rate
    39.8 %     39.8 %
Terminal multiple of EBITDA
    6.0       4.5  
Capital expenditures
  $ 7.6     $ 7.8  
Goodwill at risk
  $ 27.7     $ 29.0  
Other long lived assets at risk
  $ 20.3     $ 20.0  

 
As a result of the reduced near term outlook and the changing business environment, the terminal multiple of EBITDA was reduced from 6.0 to 4.5. The change in this assumption reflects the continued changes in the business environment and adverse business conditions we are currently experiencing due to decreased consumer spending. Management believes the adverse conditions currently being experienced are not temporary, but rather reflect the additional risk in the marketplace as a result of additional economic and pricing pressures.



37



Other

In August 2005, we acquired a 100% interest in Boca Java, a small gourmet coffee and tea company. Boca Java sells its products primarily through the internet and is included in the Catalog & Internet segment. Boca Java represents a separate reporting unit and is reviewed for impairment on an annual basis. We completed an impairment assessment as of October 31, 2008 which indicated that the goodwill of $1.9 million was fully impaired and recorded a charge to write off the goodwill.

Our Direct Selling segment had approximately $2.3 million of goodwill as of January 31, 2008. With the addition of ViSalus in the third quarter of fiscal 2009 goodwill increased by approximately $11.7 million, to $14.0 million, as of January 31, 2009. The January 31, 2009 impairment assessment of this segment indicates that the goodwill is fully recoverable.

Significant assumptions

If actual revenue growth, profit margins, costs and capital spending should differ significantly from the assumptions included in our business outlook used in the cash flow models, the reporting unit’s fair value could fall significantly below expectations and additional impairment charges could be required to write down goodwill to its fair value and, if necessary, other long lived assets could be subject to a similar fair value test and possible impairment.  Long lived assets represent primarily fixed assets and other long term assets excluding goodwill and other intangibles.

There are two main assumptions that are used for the discounted cash flow analysis: first, the discount rate and second the terminal multiple. This discount rate is used to value the gross cash flows expected to be derived from the business to its net present value. The discount rate uses a rate of return to account for the time value of money and an investment risk factor. For the terminal multiple, we used EBITDA multiplied by a factor for which an independent third party would pay for a similar business in an arms length transaction.  In determining this factor we used information that was available for similar transactions executed in the marketplace. The multiple of EBITDA used contemplates, among other things, the expected revenue growth of the business which in turn would require the use of a higher EBITDA multiple if revenue were expected to grow at a higher rate than normal. A change in the discount rate is often used by management to alter or temper the discounted cash flow model if there is a higher degree of risk that the business outlook objectives might not be achieved. These risks are often based upon the business units past performance, competition, confidence in the business unit management, position in the marketplace, acceptance of new products in the marketplace and other macro and microeconomic factors surrounding the business.

If management believes there is additional risk associated with the business outlook it will adjust the discount rate and terminal value accordingly. The terminal value is generally a multiple of EBITDA and is discounted to its net present value using the discount rate. Capital expenditures are included and are consistent with the historical business trend plus any known significant expenditures.

Trade Names and Trademarks

Our trade name and trademark intangible assets related to our acquisitions of Miles Kimball and Walter Drake (reported in the Catalog & Internet segment) and our acquisition of a controlling interest in ViSalus in October 2008 (reported in the Direct Selling segment). We had approximately $25.8 million and $12.1 million in trade names and trademarks as of January 31, 2008 and 2009, respectively.

38

 
We perform our annual assessment of impairment for indefinite-lived intangible assets as of January 31, which is our fiscal year-end, or upon the occurrence of a triggering event.  We use the relief from royalty method to estimate the fair value for indefinite-lived intangible assets. The underlying concept of the relief from royalty method is that the inherent economic value of intangibles is directly related to the timing of future cash flows associated with the intangible asset. Similar to the income approach or discounted cash flow methodology used to determine the fair value of goodwill, the fair value of indefinite-lived intangible assets is equal to the present value of after-tax cash flows associated with the intangible asset based on an applicable royalty rate. The royalty rate is determined by using existing market comparables for royalty agreements using an intellectual property data base. The arms-length agreements generally support a rate that is a percentage of direct sales. This approach is based on the premise that the free cash flow is a more valid criterion for measuring value than “book” or accounting profits.
 
As a result of our fiscal 2008 and 2009 impairment assessments, we determined that the recorded values of trade names and trademarks in the Miles Kimball reporting unit, in the Catalog & Internet segment, were impaired. In fiscal 2008, the Miles Kimball business experienced lower revenue growth than anticipated when compared to the fiscal budget and forecasts. In the third and fourth quarters of fiscal 2009 we performed additional impairment assessments due to changes in the business environment and adverse economic conditions currently experienced due to the continued decrease in consumer spending. As a result of these impairment analyses performed, the trade names and trademarks in this reporting unit were determined to be impaired, as their fair value was less than their carrying value. Accordingly, we recorded a non-cash pre-tax impairment charge of $2.4 million in fiscal 2008, and $15.0 million and $2.9 million in the third and fourth quarters, respectively of fiscal 2009.

The trade names associated with ViSalus were not found to be impaired as of January 31, 2009.
 
The two primary assumptions used in the relief from royalty method are the discount rate and the royalty rate. This discount rate is used to value the expected net cash flows to be derived from the royalty to its net present value. The discount rate uses a rate of return to account for the time value of money and an investment risk factor. The royalty rate is based upon past royalty performance as well as the expected royalty growth rate using both macro and microeconomic factors surrounding the business. A change in the discount rate is often used by management to alter or temper the discounted cash flow analysis if there is a higher degree of risk that the estimated cash flows from the indefinite-lived intangible asset may not be fully achieved. These risks are often based upon the business units’ past performance, competition, position in the marketplace, acceptance of new products in the marketplace and other macro and microeconomic factors surrounding the business. If, however, actual cash flows should fall significantly below expectations, this could result in an impairment of our indefinite-lived intangible assets.  If, as of January 31, 2009, the discount rate would have increased by 1% and the royalty rate would have decreased by half of one percent, the fair value of the Catalog & Internet trade names and trademarks would have decreased by $6.7 million to $4.1 million. This decrease would have required us to take an additional impairment charge of $3.8 million to write-down our indefinite lived intangibles to its estimated fair value. Conversely, if the discount rate would have decreased by 1% and the royalty rate would have increased by half of one percent, the fair value of the Catalog & Internet trade names and trademarks would have increased by $1.2 million, resulting in no impairment charge.



39


Accounting for income taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our actual current tax exposure (state, federal and foreign), together with assessing permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property and equipment, and valuation of inventories. Temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we must include an expense within the tax provision in the accompanying Consolidated Statements of Earnings (Loss). Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Amounts accrued for the tax uncertainties, primarily recorded in long-term liabilities, total $25.1 million and $24.5 million at January 31, 2008 and 2009, respectively. Accruals relate to tax issues for U.S. federal, domestic state and taxation of foreign earnings.
 
During fiscal 2008 and 2009, we determined that a portion of our fiscal 2008 and 2009 undistributed foreign earnings are not reinvested indefinitely by our non-U.S. subsidiaries, and accordingly, recorded a deferred income tax expense on these undistributed earnings. We periodically determine whether the non-U.S. subsidiaries will invest their undistributed earnings indefinitely and reassesses this determination as appropriate.
 
As of January 31, 2009, we determined that $93.3 million of undistributed foreign earnings were not reinvested indefinitely by our non-U.S. subsidiaries. During fiscal 2009, deferred income taxes of $4.1 million were recorded as a reduction to our Net Earnings on these unremitted earnings. We periodically determine whether the non-U.S. subsidiaries will invest their undistributed earnings indefinitely and reassess this determination as appropriate.

Impact of Adoption of Recently Issued Accounting Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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, acquisition costs, in-process research and development 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 have not been able to estimate the impact of the adoption of SFAS No. 141R.

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. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and, as such, we will adopt this standard in fiscal 2010. SFAS No. 160 will change the way in which we classify our noncontrolling interests on our

 

Consolidated Balance Sheets, and manor in which we present our net income (loss) in the Consolidated Statement of Earnings (Loss). None of these changes are expected to have a significant impact 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.

Forward-looking and Cautionary Statements

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







41


Item 7A.    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 interest rates, foreign currency exchange rates and commodity prices. These financial exposures are actively monitored and, where considered appropriate, managed by us. We enter into contracts, with the intention of limiting these risks, with only those counterparties that we deem to be creditworthy, in order to also mitigate our non-performance risk.

Interest Rate Risk

We are subject to interest rate risk on both variable rate debt and our investments in auction rate securities.  As of January 31, 2009, we are 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 pre-tax earnings.  As of January 31, 2009, we held $15.0 million of auction rate securities, at par value.  A 1-percentage point decrease in the rate of return would impact pre-tax earnings by approximately $0.2 million if applied to the total.

Investment Risk

We are subject to investment risks on our marketable securities due to market volatility.  As of January 31, 2009 we held $20.7 million in equity and debt instruments which have been adjusted to fair value based on current market data.

Foreign Currency Risk

We use foreign exchange forward 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 hedge the net assets of certain of our foreign operations through foreign currency forward contracts. The net after-tax gain related to the derivative net investment hedges recorded in Accumulated other comprehensive income (loss) (“AOCI”) during fiscal 2009 was $3.7 million. The after-tax gain in AOCI related to net investment hedges as of January 31, 2009 was $5.4 million.

We have designated our forward exchange 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 resulting gain or loss on the terminated hedge is recognized into earnings immediately.  During fiscal 2009 the amount transferred to earnings was insignificant. Gains included in AOCI at January 31, 2009 are insignificant, and are expected to be transferred into earnings within the next twelve months upon payment of the underlying commitment.


42


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 forward contracts are classified in the categories of the Consolidated Statements of Cash Flows with the items being hedged.

Forward contracts held with each bank are presented in a net asset or liability position based netting agreements with each bank.

The following table provides information about our foreign exchange forward contracts at January 31, 2009:
 
   
US Dollar
   
Average
   
Unrealized
 
(In thousands, except average contract rate)
 
Notional Amount
   
Contract Rate
   
Gain (Loss)
 
Canadian Dollar
  $ 1,400       0.87     $ 93  
Euro
    55,085       1.46       5,862  
    $ 56,485             $ 5,955  

The foreign exchange contracts outstanding have maturity dates through August 2009.


43


 
Item 8.  Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Blyth, Inc.
Greenwich, Connecticut
 
We have audited the accompanying consolidated balance sheets of Blyth, Inc. and subsidiaries (the "Company") as of January 31, 2009 and 2008, and the related consolidated statements of earnings (loss), stockholders' equity, and cash flows for each of the three years in the period ended January 31, 2009.  Our audits also included the financial statement schedule listed in the Index at Item 15.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Blyth, Inc. and subsidiaries as of January 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2009, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Note 15 to the consolidated financial statements, on February 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 13, 2009 expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.
 
 
/s/ DELOITTE & TOUCHE LLP

 
Stamford, Connecticut
April 13, 2009
 
 
44

 
As of January 31, (In thousands, except share and per share data)
 
2008
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 163,021     $ 146,424  
Short-term investments
    30,375       -  
Accounts receivable, less allowance for doubtful receivables $2,006 in 2008 and $3,438 in 2009
    35,054       29,525  
Inventories
    132,585       137,087  
Prepaid and other
    31,968       30,669  
Deferred income taxes
    36,841       40,574  
       Total current assets
    429,844       384,279  
Property, plant and equipment, at cost:
               
Land and buildings
    126,305       108,803  
Leasehold improvements
    11,516       10,010  
Machinery and equipment
    148,430       133,032  
Office furniture, data processing equipment and software
    63,396       66,888  
Construction in progress
    5,248       1,145  
      354,895       319,878  
    Less accumulated depreciation
    214,874       199,524  
      140,021       120,354  
Other assets:
               
Investments
    22,315       24,975  
Goodwill
    31,854       13,988  
Other intangible assets, net of accumulated amortization of $9,250 in 2008 and $10,897 in 2009
    31,500       16,840  
Deposits and other assets
    11,888       13,667  
      97,557       69,470  
       Total assets
  $ 667,422     $ 574,103  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 928     $ 37,936  
Accounts payable
    55,167       47,014  
Accrued expenses
    78,045       64,893  
Income taxes payable
    10,926       17,291  
       Total current liabilities
    145,066       167,134  
Deferred income taxes
    29,563       21,778  
Long-term debt, less current maturities
    157,887       107,795  
Other liabilities
    35,838       28,898  
Commitments and contingencies
    -       -  
Stockholders' equity:
               
Preferred stock - authorized 10,000,000 shares of $0.01 par value; no shares issued
    -       -  
Common stock - authorized 50,000,000 shares of $0.02 par value; issued 12,730,615 shares in 2008 and 12,733,209 shares in 2009
    1,018       1,019  
Additional contributed capital
    138,163       140,543  
Retained earnings
    522,328       486,548  
Accumulated other comprehensive income
    25,444       19,366  
Treasury stock, at cost, 3,639,338 shares in 2008 and 3,842,224 shares in 2009
    (387,885 )     (398,978 )
       Total stockholders' equity
    299,068       248,498  
       Total liabilities and stockholders' equity
  $ 667,422     $ 574,103  
The accompanying notes are an integral part of these consolidated financial statements.
 
 
45

 
 
 
For the year ended January 31, (In thousands, except per share data)
 
2007
   
2008
   
2009
 
Net sales
  $ 1,220,611     $ 1,164,950     $ 1,050,793  
Cost of goods sold
    623,942       549,479       473,577  
    Gross profit
    596,669       615,471       577,216  
Selling
    409,742       405,316       400,658  
Administrative
    122,471       130,090       123,779  
Goodwill and other intangibles impairment
    48,812       49,178       48,751  
    Total operating expense
    581,025       584,584       573,188  
    Operating profit
    15,644       30,887       4,028  
Other expense (income):
                       
    Interest expense
    19,074       15,540       10,001  
    Interest income
    (7,398 )     (7,635 )     (4,261 )
    Foreign exchange and other, net
    (1,401 )     1,257       9,813  
    Total other expense
    10,275       9,162       15,553  
 Earnings (loss) from continuing operations before income taxes and minority interest
    5,369       21,725       (11,525 )
Income tax expense
    2,664       10,547       3,840  
    Earnings (loss)  from continuing operations before minority interest
    2,705       11,178       (15,365 )
Minority interest
    150       106       115  
 Earnings (loss) from continuing operations
    2,555       11,072       (15,480 )
Earnings (loss) from discontinued operations, net of income tax benefit of $3,985
    (105,728 )     -       -  
Net earnings (loss)
  $ (103,173 )   $ 11,072     $ (15,480 )
Basic:
                       
 Earnings (loss) from continuing operations per common share
  $ 0.26     $ 1.15     $ (1.73 )
 Loss from discontinued operations per common share
    (10.63 )     -       -  
 Net earnings (loss) per common share
  $ (10.37 )   $ 1.15     $ (1.73 )
 Weighted average number of shares outstanding
    9,945       9,648       8,971  
Diluted:
                       
 Earnings (loss) from continuing operations per common share
  $ 0.26     $ 1.14     $ (1.73 )
 Loss from discontinued operations per common share
    (10.56 )     -       -  
 Net earnings (loss) per common share
  $ (10.30 )   $ 1.14     $ (1.73 )
 Weighted average number of shares outstanding
    10,014       9,732       8,971  
The accompanying notes are an integral part of these consolidated financial statements.
 

 
46

 
 
 
   
Common stock
   
Additional contributed capital
   
Retained earnings
   
Treasury stock
   
Unearned compensation
   
Accumulated other comprehensive income (loss)
   
Total
 
(In thousands)
Balance at February 1, 2006
  $ 1,010     $ 127,580     $ 657,983     $ (287,744 )   $ (3,070 )   $ (1,935 )   $ 493,824  
Net (loss) for the year
                    (103,173 )                             (103,173 )
Foreign currency translation adjustments
                                            21,413       21,413  
Unrealized gain on certain investments (net of tax of $195)
                                            319       319  
Net gain on cash flow hedging instruments (net of tax of $36)
                                            67       67  
Reversal of minimum pension liability
                                                       
 (net of tax of $578) due to sale of   Edelman and Euro-Décor
                                            1347       1,347  
Reclassification of unearned compensation
            (3,070 )                     3,070               -  
      Comprehensive income (loss)
                                                    (80,027 )
Common stock issued in connection with long-term incentive plan
    3       2,472                                       2,475  
Tax benefit from stock options
            118                                       118  
Restricted stock net of cancellations
            982               (982 )                     -  
SFAS 158 adoption adjustment (net of tax $563)
                                            919       919  
Amortization of unearned compensation
            1,285                                       1,285  
Dividends paid ($2.00 per share)
                    (19,913 )                             (19,913 )
Treasury stock purchases
                            (34,988 )                     (34,988 )
Balance at January 31, 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:
  $