form10q.htm




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

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended April 30, 2009
   
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission File Number 1-13026

BLYTH, INC.
(Exact name of registrant as specified in its charter)
  DELAWARE
36-2984916
             (State or other jurisdiction of incorporation or organization)
   (IRS Employer Identification No.)

One East Weaver Street, Greenwich, Connecticut 06831
(Address of principal executive offices)
(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 
Non-accelerated filer o
Accelerated filer x  
 
Smaller reporting company o

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

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

8,900,819 Common Shares as of May 31, 2009

 



BLYTH, INC.

INDEX
   
Page
 
       
Part I.   Financial Information
   
       
Item 1.
Financial Statements (Unaudited):
   
       
 
3
 
       
 
4
 
       
 
5
 
       
 
6
 
       
 
7-21
 
       
Item 2.
22-28
 
       
Item 3.
28-29
 
       
Item 4.
30
 
       
Part II.   Other Information
   
       
Item 1.
31
 
       
Item 1A.
31
 
       
Item 2.
32
 
       
Item 3.
32
 
       
Item 4.
32
 
       
Item 5.
32
 
       
Item 6.
33
 
       
       
 
34
 
       







2



Part I.   FINANCIAL  INFORMATION
           
Item I.   FINANCIAL STATEMENTS
           
BLYTH, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
   
 
   
 
 
   
April 30,
   
January 31,
 
(In thousands, except share and per share data)
 
 2009
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 143,668     $ 146,424  
Accounts receivable, less allowance for doubtful receivables
               
   of $2,413 and $3,438, respectively
    27,528       29,525  
Inventories
    122,854       137,087  
Prepaid and other
    32,104       30,669  
Deferred income taxes
    40,976       40,574  
       Total current assets
    367,130       384,279  
Property, plant and equipment, at cost:
               
   Less accumulated depreciation of $201,215 and $199,524, respectively
    115,852       120,354  
Other assets:
               
Investments
    23,924       24,975  
Goodwill
    15,489       13,988  
Other intangible assets, net of accumulated amortization
               
of $11,302 and $10,897, respectively
    16,435       16,840  
Deposits and other assets
    12,636       13,667  
       Total other assets
    68,484       69,470  
       Total assets
  $ 551,466     $ 574,103  
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 25,234     $ 37,936  
Accounts payable
    39,777       47,014  
Accrued expenses
    69,569       64,893  
Dividends payable
    892       -  
Income taxes payable
    14,518       17,291  
       Total current liabilities
    149,990       167,134  
Deferred income taxes
    23,497       21,778  
Long-term debt, less current maturities
    107,665       107,795  
Other liabilities
    27,238       28,005  
Commitments and contingencies
    -       -  
Redeemable noncontrolling interest
    1,779       893  
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 12,746,825 shares and 12,733,209 shares, respectively
    255       255  
Additional contributed capital
    142,427       141,307  
Retained earnings
    487,163       486,548  
Accumulated other comprehensive income
    10,591       19,366  
Treasury stock, at cost,  3,846,016 and 3,842,224 shares, respectively
    (399,103 )     (398,978 )
       Total stockholders' equity
    241,333       248,498  
Noncontrolling interest
    (36 )     -  
       Total  equity
    241,297       248,498  
       Total liabilities and equity
  $ 551,466     $ 574,103  
 
The accompanying notes are an integral part of these financial statements.
 

3



BLYTH, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
(Unaudited)
 
             
Three months ended April 30 (In thousands, except per share data)
 
2009
   
2008
 
Net sales
  $ 214,724     $ 249,848  
Cost of goods sold
    96,922       110,417  
    Gross profit
    117,802       139,431  
Selling
    85,417       98,674  
Administrative and other
    26,599       30,796  
    Total operating expense
    112,016       129,470  
    Operating profit
    5,786       9,961  
Other expense (income):
               
     Interest expense
    2,180       2,423  
     Interest income
    (551 )     (1,312 )
     Foreign exchange and other
    (468 )     3,681  
     Total other expense
    1,161       4,792  
     Earnings before income taxes
    4,625       5,169  
Income tax expense
    2,201       3,980  
     Net earnings
    2,424       1,189  
Less: Net (loss) earnings attributable to the noncontrolling interests
    (367 )     29  
    Net earnings attributable to Blyth, Inc.
    2,791       1,160  
Less: Accretion of redeemable noncontrolling interest in excess of fair value
    356       -  
    Net earnings attributable to Blyth, Inc. common stockholders
  $ 2,435     $ 1,160  
Basic:
               
Net earnings attributable per Blyth, Inc. common share
  $ 0.27     $ 0.13  
Weighted average number of shares outstanding
    8,912       9,069  
Diluted:
               
Net earnings attributable per Blyth, Inc. common share
  $ 0.27     $ 0.13  
Weighted average number of shares outstanding
    8,925       9,152  
 
The accompanying notes are an integral part of these financial statements.
 



4



 
BLYTH, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
(Unaudited)
 
 
                                                     
   
Blyth, Inc.'s Stockholders
                         
                     
Accumulated
                     
(Temporary Equity)
       
         
Additional
         
Other
                     
Redeemable
       
   
Common
   
Contributed
   
Retained
   
Comprehensive
   
Treasury
   
Noncontrolling
   
Total
   
Noncontrolling
   
Comprehensive
 
(In thousands)  
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Interest
   
Equity
   
Interest
   
Income (Loss)
 
For the three months ended April 30, 2008:
                                                     
Balance, February 1, 2008
  $ 254     $ 138,927     $ 522,328     $ 25,444     $ (387,885 )   $ -     $ 299,068     $ -     $ -  
Net earnings (loss) for the period
                    1,160                       29       1,189               1,189  
Distribution to noncontrolling interest
                                            (29 )     (29 )                
Foreign currency translation adjustments
                            4,154                       4,154               4,154  
Net unrealized loss on certain  
    investments (net of tax benefit of  $194)
                            (316 )                     (316 )             (316 )
Net unrealized loss on cash flow hedging
    instruments  (net of tax benefit of $1,058)
                            (1,726 )                     (1,726 )             (1,726 )
    Comprehensive income
                                                                    3,301  
Comprehensive income attributable to the
      noncontrolling interests
                                                              29  
    Comprehensive income attributable to
   Blyth, Inc.
                                                                   $ 3,272  
Common stock issued in connection with
    long-term incentive plan
    1                                                                
Stock-based compensation
            1,413                                       1,413                  
Dividends paid
                    (9,784 )                             (9,784 )                
Treasury stock purchases
                                    (2,510 )             (2,510 )                
Balance, April 30, 2008
  $ 255     $ 140,340     $ 513,704     $ 27,556     $ (390,395 )   $ -     $ 291,460     $ -          
                                                                         
For the three months ended April 30, 2009:
                                                                       
Balance, February 1, 2009
  $ 255     $ 141,307     $ 486,548     $ 19,366     $ (398,978 )   $ -       248,498     $ 893     $ -  
Net earnings (loss) for the period
                    2,791                       31       2,822       (398 )     2,424  
Distribution to noncontrolling interest
                                            (67 )     (67 )                
Foreign currency translation adjustments
                            (7,808 )                     (7,808 )             (7,808 )
 Net unrealized gain on certain
    investments   (net of tax liability of  $192)
                            348                       348               348  
Realized gain on pension termination
    (net of tax of $749)
                            (1,153 )                     (1,153 )             (1,153 )
Net unrealized loss on cash flow hedging
    instruments (net of tax benefit of $101)
                            (162 )                     (162 )             (162 )
    Comprehensive loss
                                                                    (6,351 )
Comprehensive loss attributable to the 
    noncontrolling interests
                                                              (367 )
    Comprehensive loss attributable to
    Blyth, Inc.
                                                                   $ (5,984 )
Stock-based compensation
            1,120                                       1,120                  
Dividends declared ($.10 per share)
                    (892 )                             (892 )                
Accretion of redeemable noncontrolling 
    interest
                    (1,284 )                             (1,284 )     1,284          
Treasury stock purchases
                                    (125 )             (125 )                
Balance, April 30, 2009
  $ 255     $ 142,427     $ 487,163     $ 10,591     $ (399,103 )   $ (36 )   $ 241,297     $ 1,779          
 
The accompanying notes are an integral part of these financial statements.
 



5



BLYTH, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
Three months ended April 30 (In thousands)
 
2009
   
2008
 
Cash flows from operating activities:
           
Net earnings
  $ 2,424     $ 1,189  
     Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
               
             Depreciation and amortization
    4,214       5,106  
             Write down of investments
    -       5,471  
             Unrealized gain on trading investments
    -       (30 )
             Stock-based compensation expense
    1,144       731  
             Deferred income taxes
    477       3,500  
             Gain on pension termination
    (1,902 )     -  
             Other
    46       4  
     Changes in operating assets and liabilities, net of effect of business acquisitions and divestitures:
               
             Accounts receivable
    1,538       (1,931 )
             Inventories
    13,004       (6,379 )
             Prepaid and other
    (7,051 )     (4,914 )
             Other long-term assets
    1,364       790  
             Accounts payable
    (6,176 )     (17,763 )
             Accrued expenses
    5,321       960  
             Other liabilities
    203       (224 )
             Income taxes payable
    (2,547 )     (7,966 )
                   Net cash provided by (used in) operating activities
    12,059       (21,456 )
Cash flows from investing activities:
               
    Purchases of property, plant and equipment, net of disposals
    (1,721 )     (2,317 )
    Purchases of short-term investments
    -       (24,431 )
    Proceeds from sales of short-term investments
    -       34,342  
    Purchases of long-term investments
    (42 )     -  
    Proceeds from sale of long-term investments
    1,491       100  
    Cash settlement of net investment hedges
    6,563       -  
                   Net cash provided by investing activities
    6,291       7,694  
Cash flows from financing activities:
               
    Purchases of treasury stock
    -       (2,510 )
    Repayments of long-term debt
    (12,717 )     (2,559 )
    Payments on capital lease obligations
    (135 )     (116 )
    Distributions to noncontrolling interest
    (67 )     -  
                   Net cash used in financing activities
    (12,919 )     (5,185 )
Effect of exchange rate changes on cash
    (8,187 )     3,420  
                   Net decrease in cash and cash equivalents
    (2,756 )     (15,527 )
Cash and cash equivalents at beginning of period
    146,424       163,021  
Cash and cash equivalents at end of period
  $ 143,668     $ 147,494  
 
The accompanying notes are an integral part of these financial statements.
 












6


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Blyth, Inc. (the “Company”) is a multi-channel company competing primarily in the home fragrance and decorative accessories industry.  The Company designs, markets and distributes an extensive array of decorative and functional household products including candles, accessories, seasonal decorations, household convenience items and personalized gifts, as well as products for the foodservice trade, nutritional supplements and weight management products. The Company competes primarily in the global home expressions industry, and its 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.

Effective January 30, 2009, the Company’s common stock and related equity based instruments were subject to a 1-for-4 reverse stock split. All historical share, per share, earnings per share (“EPS”) and stock-based compensation disclosures have been adjusted accordingly.

1.           Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated.  The investment in a company that is not majority owned or controlled is reported using the equity method and is recorded as an investment.  Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to January 31.  European operations and one domestic direct selling entity maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of items that are normal and recurring in nature) necessary for fair presentation of the Company's consolidated financial position as of April 30, 2009 and the consolidated results of its operations and cash flows for the three-month periods ended April 30, 2009 and 2008.  These interim statements should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended January 31, 2009, as set forth in the Company’s Annual Report on Form 10-K.  Certain reclassifications of prior period amounts have been made to conform to current year presentation. Operating results for the three months ended April 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2010.

Effective February 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51”, effective February 1, 2009 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests, including changes in a parent’s ownership interest in a subsidiary, and requires, among other things, that noncontrolling interests in subsidiaries be classified within equity. As a result of the adoption, the Company has reported noncontrolling interests, other than Redeemable noncontrolling interests, as a component of equity in the unaudited Condensed Consolidated Balance Sheets and the Net (loss) earnings attributable to the noncontrolling interests has been separately disclosed in the unaudited Condensed Consolidated Statements of Earnings. The prior periods presented have also been retrospectively restated to conform to the current classification required by SFAS 160.

The Company has adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(“SFAS No. 161”) for fiscal 2010.  SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities”.
 
Effective February 1, 2009, the Company also adopted SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS No. 141(R)”), which significantly changed the accounting for business combinations, and also began applying the provisions of SFAS No. 157, “Fair Value Measurements, (“SFAS No. 157”) to non-financial assets and liabilities, as permitted by FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157”. Neither of the adopted pronouncements noted above had an impact on the Company’s financial condition or results of operations for the first quarter of fiscal 2010.
 






7


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.           Basis of Presentation (continued)
 
Reclassification

On January 30, 2009, the Company executed a 1-for-4 reverse stock split.  Concurrent with this split the Company reduced its authorized common shares from 100,000,000 to 50,000,000 but did not adjust the par value of each common share, which was and remains at $0.02 per share. The fiscal 2009 Common stock and Additional paid in capital should have reflected this change. The Company has corrected the classification between these two equity accounts. The following table displays the impact to the individual line items of the Condensed Consolidated Balance Sheets:
 
     
Fiscal 2009
       
 
(In thousands)
 
Originally Reported
   
As Now Reported
   
Net Difference
 
 
Common stock
  $ 1,019     $ 255     $ (764 )
 
Additional paid in capital
    140,543       141,307       764  
 
        This reclassification has no impact on the Company’s consolidated financial position, results of operations or cash flows.

2.           Business Acquisitions

In August 2008, the Company signed a definitive agreement to purchase ViSalus Holdings, LLC (“ViSalus”), a direct seller of vitamins, weight management products and other related nutritional supplements, through a series of investments.

On October 21, 2008, the Company completed its initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash. In addition, the Company is required, subject to the conditions in the acquisition agreement, to make additional purchases of ViSalus’ equity interest to increase its equity ownership over time to 57.5%, 72.7% and 100.0%.  The requirement for additional purchases is conditioned upon ViSalus meeting certain operating targets during the current year and fiscal 2011 and 2012, subject to a one-time, one-year extension in any year.  The purchase prices of the additional investments are based on ViSalus’ future operating results as defined in the agreement. The Company has the option to acquire the remaining interest in ViSalus even if ViSalus does not meet the predefined operating targets.

The Company has accounted for the acquisition of ViSalus as a business combination under SFAS No. 141 “Business Combinations”.  The Company analyzed the criteria for consolidation in accordance with ARB No. 51 “Consolidated Financial Statements” and its supporting literature, and has determined it has control of ViSalus based on the following factors.  ViSalus is currently majority owned collectively by Blyth and Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC (collectively, “RAM”), a related party (see Note 15 to the Condensed Consolidated Financial Statements for additional information).  Moreover, the Company has taken into account the composition of ViSalus’ six-member board of managers, two of whom are the Company’s executive officers, one of whom is a principal of RAM, two of whom are founders and executive officers of ViSalus and one of whom is independent.  Additionally, the Company and RAM together control ViSalus’ compensation committee and control the compensation of the two ViSalus executive officers who serve on ViSalus’ board of managers.  Consequently, five of the six members of ViSalus’ board of managers may be deemed to operate under the Company’s influence.

The Company has also taken into account ViSalus’ governing documents, which afford the Company significant rights with respect to major corporate actions and the right to force the other owners of ViSalus’ equity instruments to sell them in some corporate transactions.  Finally, the Company considered the mechanisms that are in place to permit it to purchase the remaining noncontrolling interest in ViSalus over the next several years.

 






8


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.           Business Acquisitions (continued)

As discussed above, the Company is required to purchase the remaining noncontrolling interests in ViSalus if ViSalus meets certain operating targets.  As a result, these noncontrolling interests have been determined to be redeemable and are accounted for in accordance with the guidance in Emerging Issues Task Force Topic D-98, “Classification and Measurement of Redeemable Securities” (“EITF Topic D-98”).  Accordingly, the Company has recognized these noncontrolling interests outside of permanent equity, and will accrete changes in their redemption value through the date of redemption if it continues to be probable that the noncontrolling interests will be redeemed.  The accretion of the redemption value is recognized as a charge to retained earnings, and to the extent that the resulting redemption value exceeds the fair value of the noncontrolling interests, the differential will be reflected in the Company’s EPS.  As of April 30, 2009 and January 31, 2009 the carrying amount of the redeemable noncontrolling interests was $1.8 million and $0.9 million, respectively, and has been reflected as Redeemable noncontrolling interest in the Condensed Consolidated Balance Sheet. The accretion of the redemption in excess of fair value during the first three months of fiscal 2010 of $0.4 million has been reflected in EPS calculation in accordance with this guidance. If ViSalus meets its current projected operating targets, the total expected redemption value of noncontrolling interest will be approximately $19.7 million paid over fiscal 2011, 2012 and 2013. The total expected redemption value could increase or decrease depending upon whether ViSalus exceeds or falls short of its operating projections.

The acquisition of ViSalus by the Company involves related parties, as discussed in Note 15 to the Condensed Consolidated Financial Statements. The other owners of ViSalus include its three founders (each of whom currently own 11.7% of ViSalus) and a small group of employees who collectively own approximately 5.9% of ViSalus.  The Company’s initial investment in ViSalus of $13.0 million was paid to ViSalus ($2.5 million), RAM ($3.0 million) and each of the three founders ($2.5 million each).  Mr. Goergen, the Company’s chairman and chief executive officer, beneficially owns approximately 30.0% of the Company’s outstanding common stock, and together with members of his family, owns substantially all of RAM.
 
The Company has incurred $1.0 million in costs related to the ViSalus transaction which has been accounted for as part of the cost of the acquisition. ViSalus is included in the Direct Selling segment, and its operating results since October 21, 2008, the date of acquisition, are included in the Company’s Condensed Consolidated Statements of Earnings.

During fiscal 2009, the Company acquired certain assets of As We Change, a catalog and internet retailer, for $2.3 million in cash. The results of operations for As We Change, which were not material, are included in the Condensed Consolidated Statements of Earnings (Loss) of the Company since August 3, 2008, the date of acquisition. As We Change is included in the Catalog & Internet reporting segment.

3.           Restructuring

During fiscal 2007, the Company initiated a restructuring plan within the North American operations of the Company’s Direct Selling segment. As of April 30, 2009, the Company had an accrual for approximately $1.8 million for restructuring charges relating to lease obligations.  The remaining lease obligations will be paid through fiscal 2013.

The following is a tabular rollforward of the lease obligation accrual described above, included in Accrued expenses:

 
(In thousands)
 
Lease Obligation
 
 
Balance at January 31, 2009
  $ 1,987  
 
Payments made in fiscal 2010
    (203 )
 
Balance at April 30, 2009
  $ 1,784  







9


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.           Investments

The Company’s investments as of April 30, 2009 consisted of a number of financial securities including debt instruments, preferred stocks, mutual funds, an investment in a limited liability company and restricted cash.  The Company accounts for its investments in debt and equity instruments in accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”. 
 
The Company’s investments in preferred stocks were bought and sold on a short-term basis with the sole purpose of generating a profit on price differences. Accordingly, these investments were classified as short-term trading investments. Realized and unrealized gains and losses on these securities were recorded in the Condensed Consolidated Statements of Earnings in Foreign exchange and other. The Company changed its investment strategy and, in connection with that change, changed the classification of the preferred stock investments to long-term available for sale securities. With the change in designation to available for sale, the unrealized losses on these investments that are considered temporary are now recorded in Accumulated other comprehensive income (“AOCI”).   These securities are valued based on quoted prices in inactive markets. During the quarter ended April 30, 2009, the Company recorded net of tax unrealized gains $0.3 million in AOCI.

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

As of April 30, 2009 and January 31, 2009, the Company held $13.5 million of ARS classified as available-for-sale securities. ARS are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at predetermined intervals in days. This mechanism generally allows investors to rollover their holdings and continue to own their respective securities or liquidate their holdings by selling their securities at par value. The Company generally invested in these securities for short periods of time as part of its cash management program. The Company’s auction rate securities are all AAA/Aaa rated investments and consist of a student loan portfolio with the vast majority of the student loans guaranteed by the U.S. Government under the Federal Family Education Loan Program and a closed-end fund consisting of preferred stock of various utilities that maintains assets equal to or greater than 200% of the liquidation preference of its preferred stock. These securities’ valuations considered the financial conditions of the issuer and its guarantor as well as the value of the collateral.  The Company has assessed the credit risk associated with the ARS to be minimal. If the credit ratings of the issuer or the collateral deteriorate, the Company may adjust the carrying value of these investments.

The current uncertainties surrounding the credit markets have prevented the Company and other investors from liquidating all of their holdings by selling their securities at par value. Historically, the par value of these securities approximated fair value as a result of the resetting of the interest rate. In the first quarter of fiscal 2009 market auctions, including auctions for substantially all the Company’s ARS, began to fail due to insufficient buyers. As a result of these failed auctions and the uncertainty of when these securities could successfully be liquidated at par (liquidity risk), the Company has recorded a pre-tax unrealized loss of $1.5 million to AOCI as of January 31, 2009 and has classified these securities as non-current investments. The Company deems these securities to be temporarily impaired because of the Company’s ability to hold these securities to maturity, if necessary, and the underlying liquidity of the issuer and its guarantor, which does not indicate that a condition of a permanent impairment exists.




10


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.           Investments (continued)

The Company holds an investment in a limited liability company (“LLC”) obtained through its ViSalus acquisition. The LLC is accounted for under the equity method as the Company holds a significant equity interest in this company.  The Company records its share of the LLC’s earnings or loss to its investment balance. All gains and losses are recorded in the Condensed Consolidated Statements of Earnings in Foreign exchange and other.
 
Also included in long-term investments are certificates of deposit that are held as collateral for the Company’s outstanding standby letters of credit.  These are recorded at cost and interest earned on these is realized in Interest income in the Condensed Consolidated Statements of Earnings.
 
Investments, by category:
 
 
(In thousands)
 
April 30, 2009
   
January 31, 2009
 
 
Equity securities
  $ 16,072     $ 16,243  
 
Debt securities
    4,481       4,481  
 
Investment in LLC
    1,055       1,100  
 
Collateral - certificate of deposit
    2,316       3,070  
 
Other
    -       81  
 
   Total  investments
  $ 23,924     $ 24,975  
 
As of April 30, 2009 and January 31, 2009, the Company held debt securities totaling $5.0 million, at par, with contractual maturities greater than ten years from the Balance Sheet date. All income generated from these debt securities was recorded as Interest income. Actual maturities may differ from contractual maturities as the borrower has the right to call its obligations.

In addition to the investments noted above, the Company holds mutual funds as part of a deferred compensation plan which are classified as available-for-sale. As of April 30, 2009 and January 31, 2009 the fair value of these securities was $1.0 million and $1.3 million, respectively.  These securities are valued based on quoted prices in an active market. Unrealized gains and losses on these securities are recorded in AOCI.  These investment balances are included in Deposits and other assets in the Condensed Consolidated Balance Sheets.

5.           Inventories

The components of inventory are as follows:

 
 
 
(In thousands)
 
April 30, 2009
   
January 31, 2009
 
 
Raw materials
  $ 9,926     $ 9,643  
 
Work in process
    382       -  
 
Finished goods
    112,546       127,444  
 
Total
  $ 122,854     $ 137,087  
 
 
As of April 30, 2009 and January 31, 2009, the inventory valuation reserves totaled $13.2 million and $15.8 million, respectively.





11


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.           Goodwill and Other Intangibles

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

The Company performs its annual assessment of impairment as of January 31.  For goodwill, the first step is to identify whether a potential impairment exists. This is done by comparing the fair value of a reporting unit to its carrying amount, including goodwill.  Fair value for each of the Company’s reporting units is estimated utilizing a combination of valuation techniques, namely the discounted cash flow methodology and the market multiple methodology. The discounted cash flow methodology assumes the fair value of an asset can be estimated by the economic benefit or net cash flows the asset will generate over the life of the asset, discounted to its present value. The discounting process uses a rate of return that accounts for both the time value of money and 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. The fair value of the reporting units is derived by calculating the average of the outcome of the two valuation techniques described above.  If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the estimated fair value of the goodwill. If fair value is less than the carrying amount, an impairment loss is reported as a reduction to the goodwill and a charge to operating expense.

The following table shows the carrying amount of goodwill within the Direct Selling segment as of April 30, 2009 and January 31, 2009:

 
(In thousands)
     
 
Goodwill at January 31, 2009
  $ 13,988  
 
ViSalus acquisition purchase adjustment
    1,501  
 
Goodwill at April 30, 2009
  $ 15,489  
 
Other intangible assets include indefinite-lived trade names and trademarks and customer relationships related to the Company’s acquisition of Miles Kimball and Walter Drake in fiscal 2004 and As We Change during fiscal 2009, which are reported in the Catalog and Internet segment and ViSalus, acquired during fiscal 2009, which is reported in the Direct Selling segment. The Company does not amortize the indefinite-lived trade names and trademarks, but rather test for impairment annually as of January 31, or upon the occurrence of a triggering event.
 
Other intangible assets consisted of the following:
 
     
April 30, 2009
   
January 31, 2009
 
 
(In thousands)
 
Gross
   
Accumulated Amortization
   
Net
   
Gross
   
Accumulated Amortization
   
Net
 
 
 Indefinite-lived trade names and trademarks
  $ 4,200     $ -     $ 4,200     $ 4,200     $ -     $ 4,200  
 
 Customer relationships
    300       61       239       300       29       271  
 
   Total Direct Selling segment
    4,500       61       4,439       4,500       29       4,471  
 
 Indefinite-lived trade names and trademarks
    7,850       -       7,850       7,850       -       7,850  
 
 Customer relationships
    15,387       11,241       4,146       15,387       10,868       4,519  
 
   Total Catalog & Internet segment
    23,237       11,241       11,996       23,237       10,868       12,369  
 
   Total intangible assets
  $ 27,737     $ 11,302     $ 16,435     $ 27,737     $ 10,897     $ 16,840  




12


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.           Goodwill and Other Intangibles (continued)

Amortization expense is recorded on an accelerated basis over the estimated lives of the customer lists ranging from 5 to 12 years.  Amortization expense for other intangible assets was $0.4 million for the three months ended April 30, 2009 and 2008.  The estimated annual amortization expense for fiscal year 2010 is $1.4 million.  The estimated amortization expense for the next five fiscal years beginning with fiscal 2011 is as follows:  $1.2 million, $0.8 million, $0.6 million, $0.6 million and $0.1 million.

7.           Fair Value Measurements
 
The fair-value hierarchy established in No. 157, Fair Value Measurements (“SFAS No. 157”) prioritizes the inputs used in valuation techniques into three levels as follows:

 
 
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;
  
 
Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data;
  
 
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.