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 October 31, 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 

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        No 

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 
 
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 Exchange Act).
Yes                          No x

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

8,897,844 Common Shares as of November 30, 2009

 



BLYTH, INC.

INDEX
   
Page
 
       
Part I.   Financial Information
   
       
Item 1.
Financial Statements (Unaudited):
   
       
 
3
 
       
 
4
 
       
 
5
 
       
 
6
 
       
 
7-26
 
       
Item 2.
27-36
 
       
Item 3.
36-37
 
       
Item 4.
38
 
       
Part II.   Other Information
   
       
Item 1.
39
 
       
Item 1A.
39
 
       
Item 2.
40
 
       
Item 3.
40
 
       
Item 4.
41
 
       
Item 5.
41
 
       
Item 6.
41
 
       
       
 
42
 
       




2



 
 
Part I.   FINANCIAL  INFORMATION
           
Item I.   FINANCIAL STATEMENTS
           
BLYTH, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
   
October 31,
   
January 31,
 
(In thousands, except share and per share data)
 
 2009
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 128,656     $ 146,424  
 Accounts receivable, less allowance for doubtful receivables of $2,217 and $3,438, respectively
    46,775       29,525  
Inventories
    122,433       137,087  
Prepaid and other
    29,345       30,669  
Deferred income taxes
    11,258       40,574  
       Total current assets
    338,467       384,279  
Property, plant and equipment, at cost:
               
   Less accumulated depreciation of $207,560 and $199,524, respectively
    111,001       120,354  
Other assets:
               
Investments
    23,266       24,975  
Goodwill
    2,298       13,988  
Other intangible assets, net of accumulated amortization of $11,947 and $10,897, respectively
    12,483       16,840  
Other assets
    24,779       13,667  
       Total other assets
    62,826       69,470  
       Total assets
  $ 512,294     $ 574,103  
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 568     $ 37,936  
Accounts payable
    53,444       47,014  
Accrued expenses
    71,151       64,893  
Dividends payable
    894       -  
Income taxes payable
    13,886       17,291  
       Total current liabilities
    139,943       167,134  
Deferred income taxes
    1,160       21,778  
Long-term debt, less current maturities
    107,428       107,795  
Other liabilities
    23,471       28,005  
Commitments and contingencies
    -       -  
Redeemable noncontrolling interest
    (903 )     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 12,764,924 shares and 12,733,209 shares, respectively
    255       255  
Additional contributed capital
    143,899       141,307  
Retained earnings
    471,558       486,548  
Accumulated other comprehensive income
    25,368       19,366  
Treasury stock, at cost,  3,867,080 and 3,842,224 shares, respectively
    (399,879 )     (398,978 )
       Total stockholders' equity
    241,201       248,498  
Noncontrolling interest
    (6 )     -  
       Total  equity
    241,195       248,498  
       Total liabilities and equity
  $ 512,294     $ 574,103  
The accompanying notes are an integral part of these financial statements.

3


 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
   
Three months ended October 31,
   
Nine months ended October 31,
 
(In thousands, except per share data)
 
2009
   
2008
   
2009
   
2008
 
Net sales
  $ 221,578     $ 250,805     $ 635,656     $ 737,439  
Cost of goods sold
    106,545       118,555       296,902       337,751  
    Gross profit
    115,033       132,250       338,754       399,688  
Selling
    83,557       95,838       245,707       282,203  
Administrative and other
    28,491       29,971       82,425       93,019  
Goodwill and other intangibles impairment
    -       45,851       16,498       45,851  
    Total operating expense
    112,048       171,660       344,630       421,073  
    Operating profit (loss)
    2,985       (39,410 )     (5,876 )     (21,385 )
Other expense (income):
                               
     Interest expense
    1,905       2,547       6,140       7,419  
     Interest income
    (206 )     (897 )     (1,092 )     (3,252 )
     Foreign exchange and other
    1,663       1,770       981       6,007  
     Total other expense
    3,362       3,420       6,029       10,174  
     Loss before income taxes
    (377 )     (42,830 )     (11,905 )     (31,559 )
Income tax expense (benefit)
    1,062       (9,948 )     2,940       (2,900 )
     Net loss
    (1,439 )     (32,882 )     (14,845 )     (28,659 )
Less: Net earnings (loss) attributable to the noncontrolling interests
    (469 )     30       (748 )     88  
    Net loss attributable to Blyth, Inc.
  $ (970 )   $ (32,912 )   $ (14,097 )   $ (28,747 )
Basic:
                               
Net loss attributable per Blyth, Inc. common share
  $ (0.11 )   $ (3.70 )   $ (1.58 )   $ (3.20 )
Weighted average number of shares outstanding
    8,930       8,891       8,922       8,984  
Diluted:
                               
Net loss attributable per Blyth, Inc. common share
  $ (0.11 )   $ (3.70 )   $ (1.58 )   $ (3.20 )
Weighted average number of shares outstanding
    8,930       8,891       8,922       8,984  
Cash dividend declared per share
  $ 0.10     $ 1.08     $ 0.20     $ 2.16  
The accompanying notes are an integral part of these financial statements.
 
   


 
4




             
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 nine months ended October 31, 2008:
                                                     
Balance, February 1, 2008
  $ 254     $ 138,927     $ 522,328     $ 25,444     $ (387,885 )   $ -     $ 299,068     $ -     $ -  
Net earnings (loss) for the period
                    (28,747 )                     88       (28,659 )             (28,659 )
Distribution to noncontrolling interest
                                            (88 )     (88 )                
Foreign currency translation adjustments
                            (6,064 )                     (6,064 )             (6,064 )
Net unrealized loss on certain investments  (net of tax benefit of  $442)
                            (968 )                     (968 )             (968 )
Net unrealized loss on cash flow hedging instruments (net of tax liability of $893)
                            1,457                       1,457               1,457  
    Comprehensive loss
                                                                    (34,234 )
Comprehensive income attributable to
the noncontrolling interests
                                                              (88 )
Comprehensive loss attributable to  Blyth, Inc.
                                                                  $ (34,322 )
Common stock issued in connection with long-term incentive plan
    1                                               1                  
Stock-based compensation
            1,916                                       1,916                  
Dividends ($2.16 per share)
                    (19,393 )                             (19,393 )                
Treasury stock purchases
                                    (11,093 )             (11,093 )                
Balance, October 31, 2008
  $ 255     $ 140,843     $ 474,188     $ 19,869     $ (398,978 )   $ -     $ 236,177     $ -          
                                                                         
For the nine months ended October 31, 2009:
                                                                       
Balance, February 1, 2009
  $ 255     $ 141,307     $ 486,548     $ 19,366     $ (398,978 )   $ -       248,498     $ 893     $ -  
Net earnings (loss) for the period
                    (14,097 )                     155       (13,942 )     (903 )     (14,845 )
Distribution to noncontrolling interest
                                            (161 )     (161 )                
Foreign currency translation adjustments
(net of tax benefit of $2,050)
                      7,035                       7,035               7,035  
 Net unrealized gain on certain investments(net of tax liability of  $226)
                            367                       367               367  
Realized loss on permanent impairment of
investment (net of tax benefit of $197)
              322                       322               322  
Realized gain on pension termination (net
of tax liability of $749)
                      (1,153 )                     (1,153 )             (1,153 )
Net unrealized loss on cash flow hedging instruments (net of tax benefit of $309)
                            (569 )                     (569 )             (569 )
    Comprehensive loss
                                                                    (8,843 )
Comprehensive loss attributable to the
noncontrolling interests
                                                              748  
Comprehensive loss attributable to Blyth, Inc.
                                                                  $ (8,095 )
Stock-based compensation
            2,592                                       2,592                  
Dividends ($0.20 per share)
                    (1,786 )                             (1,786 )                
Reversal of accretion of redeemable noncontrolling interest
                    893                               893       (893 )        
Treasury stock purchases
                                    (901 )             (901 )                
Balance, October 31, 2009
  $ 255     $ 143,899     $ 471,558     $ 25,368     $ (399,879 )   $ (6 )   $ 241,195     $ (903 )        
The accompanying notes are an integral part of these financial statements.
 





5


 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
Nine months ended October 31 (In thousands)
 
2009
   
2008
 
Cash flows from operating activities:
           
Net earnings (loss)
  $ (14,845 )   $ (28,659 )
     Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
               
             Depreciation and amortization
    12,254       14,856  
             Goodwill and other intangibles impairment
    16,498       45,851  
             Impairment of assets
    1,226       6,126  
             Stock-based compensation expense
    2,362       1,439  
             Deferred income taxes
    (2,651 )     (9,225 )
             Gain on pension termination
    (1,902 )     -  
             Gain on sale of assets
    (863 )     -  
             Other
    75       (210 )
     Changes in operating assets and liabilities, net of effect of business acquisitions and divestitures:
               
             Accounts receivable
    (16,800 )     (30,914 )
             Inventories
    16,868       (40,691 )
             Prepaid and other
    (4,488 )     (6,181 )
             Other long-term assets
    619       370  
             Accounts payable
    5,881       (9,979 )
             Accrued expenses
    3,832       (4,478 )
             Other liabilities
    362       1,600  
             Income taxes payable
    (3,552 )     684  
                   Net cash provided by (used in) operating activities
    14,876       (59,411 )
Cash flows from investing activities:
               
    Purchases of property, plant and equipment, net of disposals
    (4,080 )     (6,332 )
    Purchases of short-term investments
    -       (60,322 )
    Proceeds from sales of short-term investments
    -       75,190  
    Note receivable issued under revolving credit facility
    -       (4,416 )
    Proceeds from the repayment of note receivable
    -       4,416  
    Purchases of long-term investments
    (390 )     -  
    Proceeds from sale of long-term investments
    2,110       7,204  
    Proceeds from sale of assets, net of costs
    3,939       -  
    Purchase of businesses, net of cash acquired
    -       (15,813 )
    Cash settlement of net investment hedges
    6,563       -  
                   Net cash provided by (used in) investing activities
    8,142       (73 )
Cash flows from financing activities:
               
    Purchases of treasury stock
    (540 )     (11,093 )
    Borrowings from bank line of credit
    -       560,800  
    Repayments on bank line of credit
    -       (560,800 )
    Repayments of long-term debt
    (37,657 )     (11,174 )
    Payments on capital lease obligations
    (170 )     (375 )
    Dividends paid
    (892 )     (9,802 )
    Distributions to noncontrolling interest
    (161 )     -  
                   Net cash used in financing activities
    (39,420 )     (32,444 )
Effect of exchange rate changes on cash
    (1,366 )     (8,684 )
                   Net decrease in cash and cash equivalents
    (17,768 )     (100,612 )
Cash and cash equivalents at beginning of period
    146,424       163,021  
Cash and cash equivalents at end of period
  $ 128,656     $ 62,409  
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 industries.  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.

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 October 31, 2009, the consolidated results of its operations for the three and nine month periods ended October 31, 2009 and 2008, and cash flows for the nine month periods ended October 31, 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 and nine months ended October 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2010.

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 (loss) per share (“EPS”) and stock-based compensation disclosures have been adjusted accordingly.

Recently Adopted Accounting Guidance

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, now referred to as Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principals” (“GAAP”) (“ASC 105”). ASC 105 established the Codification as the single source of authoritative U.S. GAAP superseding all prior guidance, and eliminating the GAAP hierarchy and establishing one level of authoritative GAAP. All other literature is considered non-authoritative. ASC 105 is effective for reporting periods beginning after September 15, 2009, and as such has been adopted for the third quarter of fiscal 2010.  The adoption of this standard has significantly changed the Company’s U.S. GAAP references, however it did not have an impact on the Company’s financial statements.

Effective February 1, 2009, the Company has adopted the requirements of ASC 810, “Consolidation”, which 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 earnings (loss) attributable to the noncontrolling interests has been separately disclosed in the unaudited Condensed Consolidated Statements of Operations. The prior periods presented have also been retrospectively restated to conform to the current classification required by ASC 810.


7

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

1.           Basis of Presentation (continued)

The Company has adopted the disclosure requirements of ASC 815, “Derivatives and Hedging”, effective February 1, 2009.  ASC 815 amends and expands the disclosure related to accounting for derivative instruments and hedging activities”.

Effective February 1, 2009, the Company adopted the accounting requirements of ASC 805, “Business Combinations”, which significantly changed the accounting for business combinations and also began applying the provisions of ASC 820, “Fair Value Measurements and Disclosures”, to non-financial assets and liabilities, as permitted by FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157”. Neither of these adopted pronouncements had an impact on the Company’s financial condition or results of operations for the first nine months of fiscal 2010.

ASC 320-10-65, “Investments—Debt and Equity Securities - Transition and Open Effective Date Information”, requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis.  The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in Accumulated other comprehensive income (loss) (“AOCI”).  The recognition and presentation requirements of ASC 320-10-65 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company elected to adopt the requirements of ASC 320-10-65, effective April 30, 2009.  The application of this guidance did not have any effect on the Company’s consolidated financial condition or results of operations.

ASC 825-10-65, “Financial Instruments- Transition and Open Effective Date Information” requires disclosures about fair value of financial instruments in interim and annual financial statements.  The disclosure requirements of ASC 825-10-65 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company has adopted the requirements of ASC 825-10-65, and has included required disclosures in the Company’s Notes to Condensed Consolidated Financial Statements.

ASC 855, “Subsequent Events”, establishes principles and requirements for reviewing and reporting subsequent events.  This requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements are available for issuance or were issued. This accounting guidance was adopted for our second quarter of fiscal 2010. The adoption of this standard did not have an impact on the Company’s financial statements.

ASC 820-10-65 clarifies the approach to and provides additional factors to consider in, measuring fair value when there has been a significant decrease in market activity for an asset or liability and quoted prices associated with transactions are not orderly.  The requirements of ASC 820-10-65 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company elected to adopt the guidance of ASC 820-10-65, effective April 30, 2009. This adoption did not have an effect on the Company’s consolidated financial condition or results of operations.

In August 2009, the FASB issued Accounting Standards Update 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends Topic 820-10, “Fair Value Measurements and Disclosures – Overall”. This update clarifies techniques that may be used to determine the fair value of a liability if an active market for an identical liability does not exist.  This new guidance is effective for the third quarter of fiscal 2010 for the Company. The adoption of this update did not have an impact on the Company’s financial statements.

8


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 contributed capital balances 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 as of January 31, 2009:

               
   
Originally Reported
   
As Now Reported
   
Net Difference
 
 
Common stock
  $ 1,019     $ 255     $ (764 )
 
Additional contributed capital
    140,543       141,307       764  


This reclassification had no impact on the Company’s consolidated financial position, results of operations or cash flows.

Subsequent Events

The Company assessed events occurring subsequent to October 31, 2009 through December 7, 2009, the date the condensed consolidated financials were filed, for potential recognition and disclosure. There were no notable events that warranted further disclosure between the reporting period end and the filing date.

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. Additionally, as provided in the acquisition agreement, and amended in September 2009, the Company has provided ViSalus with a $3.0 million revolving credit facility, of which $2.9 million was outstanding as of October 31, 2009.  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”, since the Company obtained control of ViSalus prior to the effective date of ASC 805. The Company analyzed the criteria for consolidation in accordance with ASC 810, 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

9


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

2.           Business Acquisitions (continued)

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.

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 were determined to be redeemable and are accounted for in accordance with the guidance of ASC 480-10-S99-3A, and the non-codified portions of Emerging Issues Task Force Topic D-98, “Classification and Measurement of Redeemable Securities.” Accordingly, the Company had recognized these noncontrolling interests outside of permanent equity and accreted changes in their redemption value through the date of redemption during the time at which it was probable that the noncontrolling interests would be redeemed.  The accretion of the redemption value had been 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 was reflected in the Company’s EPS.  During the second quarter of fiscal 2010 ViSalus’ revenues forecast for the current fiscal year were revised downward as a result of lower demand for its product, reflecting lower consumer spending attributed to the domestic economic recession and a higher than anticipated attrition rate in its distributor base. These factors together have required management to focus its efforts on stabilizing its distributor base and curtailing its international expansion plans. Accordingly, management has reduced its current year and long-term forecasts in response to the weakening demand for its products. The Company has taken a number of actions in response to its lower forecasts including the review of ViSalus assets for impairment (see Note 6 for further detail) and assessing whether it was probable that the noncontrolling interest would be redeemed based on revised forecasts. The current revisions in ViSalus’ near-term and long-term projections have resulted in management concluding that it is no longer probable that Blyth would be obligated to purchase the remaining ownership interest in ViSalus. As of October 31, 2009 the redeemable noncontrolling interest reflects only the allocation of losses equivalent to the noncontrolling interest’s share of ViSalus, as a result of this redemption feature no longer being probable. Accordingly, during the second quarter of fiscal 2010, the Company reversed its accretion of its redeemable noncontrolling interest to zero on its Condensed Consolidated Balance Sheet and reversed previous EPS accretion adjustments for the portion in excess of fair value. If ViSalus meets its current projected operating targets, the total expected redemption value of noncontrolling interest will be approximately $2.8 million paid through 2013. However at these levels Blyth would not be obligated to purchase the remaining interest in ViSalus but could do so at its discretion. The total expected redemption value could increase or decrease depending upon whether ViSalus exceeds or falls short of its operating projections. Upon expiration of the redemption feature the entire amount of noncontrolling interest will be reclassified into the Equity section of the Condensed Consolidated Balance Sheets.

The acquisition of ViSalus by Blyth involves related parties, as discussed in Note 15 to the Condensed Consolidated Financial Statements. In addition to Blyth, the other owners of ViSalus consist of: its three founders (each of whom currently own approximately 11.7% of ViSalus for a total of 35.3%), RAM which currently owns 15.2%, and a small group of employees who collectively own approximately 5.9% of ViSalus.  Blyth’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, Blyth’s chairman and chief executive officer, beneficially owns approximately 31% of the Blyth’s outstanding common stock, and together with members of his family, owns substantially all of RAM. ViSalus paid a management fee to RAM in the amount of $0.2 million in fiscal 2009, and has agreed to pay a management fee to RAM in the amount of $0.1 million during fiscal 2010.

10


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

2.           Business Acquisitions (continued)

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 Operations.

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 Operations 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 October 31, 2009, the Company had an accrual for approximately $1.4 million for restructuring charges relating to a lease obligation.  The remaining lease payments will be made 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
    (597 )
 
Balance at October 31, 2009
  $ 1,390  


4.           Cash and Cash Equivalents and Investments

The Company considers all money market funds and debt instruments purchased with an original maturity of three months or less to be cash equivalents.

The Company’s investments as of October 31, 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 ASC 320, “Investments – Debt & Equity Securities”. 

The following table summarizes, by major security type, the amortized costs and fair value of the Company’s cash and cash equivalents and investments:
     
October 31, 2009
   
January 31, 2009
 
 
(In thousands)
 
Cost Basis (1)
   
Fair Value
   
Net unrealized gain (loss) in AOCI
   
Cost Basis
   
Fair Value
   
Net unrealized gain (loss) in AOCI
 
 
Cash
  $ 123,656     $ 123,656     $ -     $ 141,424     $ 141,424     $ -  
 
Money market funds
    5,000       5,000       -       5,000       5,000       -  
 
   Total cash and cash equivalents
    128,656       128,656       -       146,424       146,424       -  
 
Equity securities
    16,223       15,677       (546 )     10,000       9,034       (966 )
 
Debt securities
    4,150       4,150       -       5,000       4,481       (519 )
 
Collateral - certificates of deposit
    2,413       2,413       -       3,070       3,070       -  
 
   Total available for sale investments
  $ 22,786     $ 22,240     $ (546 )   $ 18,070     $ 16,585     $ (1,485 )
 
Equity securities
            -                       7,209          
 
Other
            -                       81          
 
   Total trading investments
          $ -                     $ 7,290          
 
Equity method investment in LLC (2)
            1,026                       1,100          
 
   Total cash and cash equivalents and investments
          $ 151,922                     $ 171,399          
                                                   
 
(1) The cost basis may represent the actual amount paid or the basis assumed following a permanent impairment of that asset. The equity securities consist of $10.0 million for ARS and $6.2
 
 
million for preferred stock as of October 31, 2009. The basis for the preferred stock is their fair value as of February 1, 2009, the date that they were reclassified from trading to available for sale.
 
 
(2) The equity method investment is reported at cost, adjusted by the Company's proportionate share of investee's gain or loss. This may not be equal to the investment's fair market value.
 


11

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

4.           Cash and Cash Equivalents and Investments (continued)

The Company’s investments in preferred stocks were originally 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 Operations in Foreign exchange and other through January 31, 2009.

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 AOCI.   These securities are valued based on quoted prices in inactive markets. As of October 31, 2009, the Company has recorded a net of tax unrealized gain of $0.1 million in AOCI.
 
The Company holds other debt and equity auction rate securities (“ARS”) which are classified as long-term, available for sale investments. 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 and are not the result of a credit loss are recorded in AOCI.  Unrealized losses that are considered other than temporary are recorded in the Condensed Consolidated Statements of Operations in Foreign exchange and other. 

As of October 31, 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 weakness within the credit markets has 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 had recorded a pre-tax unrealized loss of $1.5 million to AOCI as of January 31, 2009 and classified these securities as non-current investments. In November 2009 management made the decision to liquidate the debt ARS, at a price below par value and recorded an impairment of $0.9 million to Foreign exchange and other within the Condensed Consolidated Statements of Operations during the third quarter.  As of October 31, 2009, the Company has assessed the pre-tax unrealized loss to be $0.6 million. Both the equity and debt instruments have been in a continuous loss position for greater than 12 months, however the Company deems the equity ARS to be temporarily impaired as management has made the decision to hold the investment until it can be redeemed at par value and the underlying liquidity of the issuer does not indicate that a condition of a permanent impairment exists.




12


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

4.           Cash and Cash Equivalents and Investments (continued)

The following table summarizes the proceeds and gross realized gains and losses on the sale of available for sale investments recorded in Foreign exchange and other within the Condensed Consolidated Statements of Operations. Gains and losses are calculated using the specific identification method.

 
(In thousands)
 
Three months ended October 31,
   
Nine months ended October 31,
 
     
2009
   
2008
   
2009
   
2008
 
 
Net proceeds
  $ 359     $ 5,642     $ 973     $ 14,271  
 
Realized gains (losses)
  $ (12 )   $ 119     $ (15 )   $ (729 )
 
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 minority interest in this company.  The Company records its share of the LLC’s earnings or loss to its investment balance. All earnings and losses are recorded in the Condensed Consolidated Statements of Operations in Foreign exchange and other.  Through October 31, 2009 the Company has recorded losses of $0.1 million related to this investment.  The investment in this LLC involves related parties as discussed in Note 15.
 
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 Operations.

As of October 31, 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 October 31, 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 mutual funds are included in Deposits and other assets in the Condensed Consolidated Balance Sheets.

5.           Inventories

The components of inventory are as follows:

   
October 31, 2009
   
January 31, 2009
 
 
Raw materials
  $ 10,607     $ 9,643  
 
Work in process
    457       -  
 
Finished goods
    111,369       127,444  
 
Total
  $ 122,433     $ 137,087  
 
 
As of October 31, 2009 and January 31, 2009, the inventory valuation adjustments totaled $13.3 million and $15.8 million, respectively.



13


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. 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.

In the second quarter of fiscal 2010, the ViSalus business, within the Direct Selling segment, revised downward its revenues forecast for the current fiscal year as a result of lower demand for its product reflecting lower consumer spending attributed to the domestic economic recession and a higher than anticipated attrition rate in its distributor base. These factors together have required management to focus its efforts on stabilizing its distributor base and curtailing its international expansion plans. Accordingly management has reduced its current year and long-term forecasts in response to the weakening demand for its products. The impairment analysis performed indicated that the goodwill in ViSalus was fully impaired, as its fair value was less than its carrying value, including goodwill. Accordingly, the Company recorded a non-cash pre-tax goodwill impairment charge of $13.2 million, during the second quarter of fiscal 2010.

The following table shows the changes in the carrying amount of goodwill within the Direct Selling segment from January 31, 2009 through October 31, 2009:

 
(In thousands)
     
 
Goodwill at January 31, 2009
  $ 13,988  
 
ViSalus acquisition purchase adjustment
    1,501  
 
Impairment of ViSalus goodwill
    (13,191 )
 
Goodwill at October 31, 2009
  $ 2,298  
 
The Company uses 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.


14

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

6.           Goodwill and Other Intangibles (continued)

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 31st, or sooner if circumstances indicate a condition of impairment may exist. As of October 31, 2009, there were no indications that a review was necessary.
 
As part of the previously mentioned impairment analysis performed for the ViSalus business during the second quarter of fiscal 2010, the Company recorded an impairment charge of $3.1 million related to certain of the Company’s trade names and $ 0.2 million related to customer relationships. These impairments are due to adverse economic conditions currently experienced due to decreased consumer spending and the failure to obtain and retain distributors, as noted previously.
 
Other intangible assets consisted of the following:
 
     
Direct Selling Segment
   
Catalog & Internet Segment
   
Total
 
 
(In thousands)
 
Indefinite-lived trade names and trademarks
   
Customer relationships
   
Indefinite-lived trade names and trademarks
   
Customer relationships
   
Indefinite-lived trade names and trademarks
   
Customer relationships
 
                                       
 
Other intangibles at January 31, 2009
  $ 4,200     $ 271     $ 7,850     $ 4,519     $ 12,050     $ 4,790  
 
Amortization
    -       (64 )     -       (986 )     -       (1,050 )
 
Impairments
    (3,100 )     (207 )     -       -       (3,100 )     (207 )
 
Other intangibles at October 31, 2009
  $ 1,100     $ -     $ 7,850     $ 3,533     $ 8,950     $ 3,533  

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 $1.1 million and $1.2 million for the nine months ended October 31, 2009 and 2008, respectively.  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:  $1.1 million, $0.7 million, $0.6 million, $0.6 million and $0.1 million.

7.           Fair Value Measurements
 
The fair-value hierarchy established in ASC 820, 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.
 
For fiscal 2010, the Company is no longer subject to previously existing deferral provisions and is applying the framework for measuring fair value to all nonfinancial assets and liabilities, including those that are not recognized or disclosed at fair value in the financial statements on a recurring basis, and has expanded disclosures to meet these requirements.

15


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

7.           Fair Value Measurements (continued)
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of the measurement date, October 31, 2009, and the basis for that measurement, by level within the fair value hierarchy:

   
Balance as of October 31, 2009
   
Quoted prices in active markets for identical assets (Level 1)
   
Significant other observable inputs
(Level 2)
   
Significant unobservable inputs (Level 3)
 
 
Financial assets
                       
 
  Certificates of deposit
  $ 2,413     $ -     $ 2,413     $ -  
 
  Equity securities
    15,677       -       6,370       9,307  
 
  Debt securities
    4,150       -       -       4,150  
 
  Deferred compensation plan assets 1
    951       951       -       -  
 
    Total
  $ 23,191     $ 951     $ 8,783     $ 13,457  
 
Financial liabilities
                               
 
  Foreign exchange forward contracts
  $ (1,187 )   $ -     $ (1,187 )   $ -  
 
(1) There is an offsetting liability for the obligation to its employees in Other liabilities
 
 
The table below summarizes the changes in the fair value of level 3 financial assets, consisting of debt and equity ARS, for the nine month period ended October 31, 2009:

 
(In thousands)
 
Significant unobservable inputs (Level 3)
 
         
 
Fair value February 1, 2009
  $ 13,515  
 
Unrealized gain 1
    405  
 
Reversal of unrealized loss1
    387  
 
Other than temporary impairment
    (850 )
 
Fair value October 31, 2009
  $ 13,457  
 
(1) These unrealized gains/losses on our available for sale investments are recorded as a component of other comprehensive income.
 
 
The Company values its investments in equity securities within the deferred compensation plan using level 1 inputs, by obtaining quoted prices in active markets.  The deferred compensation plan assets consist of shares of mutual funds, for which there are quoted prices in an active market. The Company also enters into both cash flow and fair value hedges by purchasing forward contracts. These contracts are valued using level 2 inputs, primarily observable forward foreign exchange rates. The Company values certain preferred stock investments using information classified as level 2. This data consists of quoted prices of identical instruments in an inactive market and third party bid offers. The certificates of deposit that are used to collateralize some of the Company’s letters of credit have been valued using information classified as level 2, as these are not traded on the open market and are held unsecured by one counterparty. The debt and equity securities consist of auction rate securities that take into consideration many factors including the credit quality of both the issuer and its guarantor, value of the collateral, the Company’s discounted cash flow analysis and input from broker-dealers in these types of securities. Since there is not an active observable market currently for these securities, they have been classified as a level 3 input.





16


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

7.           Fair Value Measurements (continued)
 
The carrying values of cash and cash equivalents, trade and other receivables and trade payables are considered to be representative of their respective fair values. 
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with ASC 820. The Company’s assets and liabilities measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill, intangibles and other assets. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist.

The following table summarizes the assets and liabilities measured at fair value on a nonrecurring basis as of the measurement date, October 31, 2009, by level within the fair value hierarchy and identifies the losses recorded during the fiscal year:

 
(In thousands)
 
Balance as of October 31, 2009
   
Quoted prices in active markets for identical assets (Level 1)
   
Significant other observable inputs
(Level 2)
   
Significant unobservable inputs (Level 3)
   
Total impairment losses
 
 
  Goodwill
  $ 2,298     $ -     $ -     $ 2,298     $ (13,191 )
 
  Indefinite-lived trade names and trademarks
    8,950       -       -       8,950       (3,100 )
 
  Customer Relationships
    3,533       -       -       3,533       (207 )
 
  Assets held for sale
    6,868       -       -       6,868       (376 )
                                      $ (16,874 )


Goodwill and intangibles are subject to impairment testing on an annual basis, or sooner if circumstances indicate a condition of impairment may exist. The valuation uses assumptions such as interest and discount rates, growth projections and other assumptions of future business conditions. These valuation methods require a significant degree of management judgment concerning the use of internal and external data. In the event these methods indicate that fair value is less than the carrying value, the asset is recorded at fair value as determined by the valuation models. As such, the Company classifies goodwill and other intangibles subjected to nonrecurring fair value adjustments as level 3. See Note 6 for further details on the asset impairment review performed during the second quarter of fiscal 2010.

The fair value of the Company’s assets held for sale is reviewed periodically, as the market for these assets change. For fiscal 2010 these assets consisted of both a building and land that are classified as assets held for sale and are reported as non-current assets in Deposits and other assets within the Condensed Consolidated Balance Sheets. The valuation of these assets uses a significant amount of management’s judgment and relies heavily on the information provided by third parties. The current local real estate market, regional comparatives, estimated concessions and transaction costs are all considered when determining the fair value of these assets. Due to the nature of this information and the assumptions made by management the Company has classified the inputs used in valuing these assets as level 3.

The estimated fair value of the Company’s $108.0 million in debt, including the $100 million Senior Notes, recorded at an amortized cost, as of October 31, 2009 was approximately $85.8 million.  The fair value of the liability is determined using the fair value of its notes when traded as an asset in an inactive market and is based on current interest rates, relative credit risk and time to maturity.  Due to nature of the information used the Company considers these inputs to be level 2.


17


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

8.           Derivative Instruments and Hedging Activities

The Company uses foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, intercompany payables and certain loans. It does not hold or issue derivative financial instruments for trading purposes.  The Company has hedged the net assets of certain of its foreign operations through foreign currency forward contracts. The cumulative net after-tax gain related to the derivative net investment hedges in AOCI as of October 31, 2009 and January 31, 2009 was $5.2 million and $5.4 million, respectively.

The Company has designated 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 realized in the Condensed Consolidated Statements of Operations.  If a hedging instrument is sold or terminated prior to maturity,
gains and losses are deferred in AOCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  The net after-tax loss included in accumulated AOCI at October 31, 2009 is $0.5 million and is expected to be transferred into earnings within the next twelve months upon payment of the underlying commitment.
 
The Company has designated its foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as fair value hedges.  The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.

For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the Condensed Consolidated Statement of Cash Flows with the items being hedged. Forward contracts held with each bank are presented within the Condensed Consolidated Balance Sheets as a net asset or liability, based on netting agreements with each bank and whether the forward contracts are in a net gain or loss position. The foreign exchange contracts outstanding have maturity dates through April 2010.

The table below details the fair value and location of the Company’s hedges in the Condensed Consolidated Balance Sheets:

 
Fair Values of Derivative Instruments
 
As of October 31, 2009 (In thousands)
     
  Derivatives designated as hedging instruments under Subtopic 815-20     Accrued Expenses
 
 
Foreign exchange forward contract in an asset position
  $ 41  
 
Foreign exchange forward contract in a liability position
    (1,228 )
 
   Net derivatives at fair value
  $ (1,187 )








18


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

8.           Derivative Instruments and Hedging Activities (continued)

Gain and loss activity related to the Company’s Cash Flow hedges for the three and nine months ended October 31, 2009 are as follows:

 
Derivatives in Subtopic 815-20 Cash Flow
Hedging Relationships
 
Amount of Loss Recognized in AOCI on Derivative (Effective Portion)
 
Location of Loss Reclassified from AOCI into
Income (Effective Portion)
 
Amount of Loss Reclassified from AOCI into Income (Effective Portion)
 
 
(In thousands)
         
Three Months Ended
   
Nine Months Ended
 
 
Foreign exchange forward contract
  $ (878 )
Cost of goods sold
  $ (868 )   $ (842 )
 
For the nine month period ended October 31, 2009, the Company recorded a gain of $0.7 million to AOCI related to foreign exchange forward contracts accounted for as Net Investment hedges.

For the three and nine month period ended October 31, 2009, the Company recorded losses of  $0.1 million and $1.0 million respectively to Foreign exchange and other related to foreign exchange forward contracts accounted for as Fair Value hedges.

9.           Long-Term Debt

In May 1999, the Company filed a shelf registration statement for issuance of up to $250.0 million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.4 million, which was amortized over the life of the notes.  During the first nine months of fiscal 2010 the Company repurchased $12.6 million of these notes, settling the debt early, and made principal payments of $24.7 million, upon maturity.

On October 20, 2003, the Company issued $100.0 million 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes.  Such notes contain among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  As of October 31, 2009, the Company was in compliance with such provisions.  Interest is payable semi-annually in arrears on May 1 and November 1. The notes may be redeemed in whole or in part at any time at a specified redemption price.  The proceeds of the debt issuances were used for general corporate purposes.

As of October 31, 2009 and January 31, 2009, Miles Kimball had approximately $7.8 million and $8.2 million, respectively, of long-term debt outstanding under a real estate mortgage note payable which matures June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

As of October 31, 2009 and January 31, 2009, Midwest-CBK had $0.1 million of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025. The bond is backed by an irrevocable letter of credit issued by a bank and is collateralized by certain of Midwest-CBK’s assets.  The amount outstanding under the IRB bears interest at short-term floating rates, which on a weighted average was 0.4% at October 31, 2009.  Payments of interest are required monthly under the terms of the bond.

The Company’s debt is recorded at its amortized cost basis. The estimated fair value of the Company’s $108.0 million total long-term debt (including current portion) at October 31, 2009 was approximately $85.8 million.  The fair value of the liability is determined using the fair value of its notes when traded as an asset in an inactive market and is based on current interest rates, relative credit risk and time to maturity.

As of October 31, 2009, the Company had a total of $2.0 million available under an uncommitted bank facility to be used for letters of credit. The issuance of letters of credit under this facility will be available until January 31, 2010.  As of October 31, 2009, no letters of credit were outstanding under this facility.


19


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

9.           Long-Term Debt (continued)

As of October 31, 2009 the Company had $2.4 million in standby letters of credit outstanding that are collateralized with a certificate of deposit.

10.           Earnings per Share

Effective January 30, 2009, the Company’s common stock and related equity-based instruments were subject to a 1-for-4 reverse stock split. In accordance with ASC 260, “Earnings Per Share” all historical earnings per share amounts have been adjusted accordingly.

Vested restricted stock units issued under the Company’s stock-based compensation plans participate in a cash equivalent of the dividends paid to common shareholders and are not considered contingently issuable shares. Accordingly these RSUs are included in the calculation of basic and diluted earnings per share as common stock equivalents. RSUs that have not vested and are subject to a risk of forfeiture are included in the calculation of diluted earnings per share.

In accordance with ASC 480-10-S99-3A, the accretion of the redeemable noncontrolling interest’s carrying value in excess of its fair value has been reflected in determining EPS for the Company’s common shareholders for the three and nine month periods ended October 31, 2009. As discussed in Note 2, there was no effect on EPS for the three and nine month period ended October 31, 2009 as the Company’s redeemable noncontrolling interest obligation was reversed as management has determined it was no longer probable that the Company would be obligated to make future investments.

The components of basic and diluted earnings per share are as follows:
 
     
Three months ended October 31,
   
Nine months ended October 31,
 
     
2009
   
2008
   
2009
   
2008
 
 
Net earnings attributable to Blyth, Inc.
  $ (970 )   $ (32,912 )   $ (14,097 )   $ (28,747 )
 
Weighted average number outstanding:
                               
 
Common shares
    8,905       8,891       8,901       8,984  
 
Vested restricted stock units
    25       -       21       -  
 
Weighted average number of common shares outstanding:
                               
 
         Basic
    8,930       8,891       8,922       8,984  
 
         Dilutive effect of stock options and non-vested restricted shares units
    -       -       -       -  
 
         Diluted
    8,930       8,891       8,922       8,984  
 
Basic earnings per share
  $ (0.11 )   $ (3.70 )   $ (1.58 )   $ (3.20 )
 
Diluted earnings per share
  $ (0.11 )   $ (3.70 )   $ (1.58 )   $ (3.20 )

For the three and nine month periods ended October 31, 2009 and 2008, options to purchase 62,875 shares and 95,025 shares, respectively, of common stock are not included in the computation of earnings per share because the effect would be anti-dilutive. 

In accordance with ASC 260, diluted earnings per share for both the three and nine month periods ended October 31, 2008 and 2009 have been computed in the same manner as basic earnings per share due to the net loss from continuing operations.








20


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

11.           Treasury and Common Stock


             
 
Changes in Treasury Stock were (In thousands, except shares):
 
Shares
   
Amount
 
 
Balance at February 1, 2008
    3,639,338     $ 387,885  
 
Treasury stock purchases
    202,886       11,093  
 
Balance at October 31, 2008
    3,842,224     $ 398,978  
                   
 
Balance at February 1, 2009
    3,842,224     $ 398,978  
 
Treasury stock purchases
    15,268       540  
 
Treasury stock withheld in connection with long-term incentive plan
    9,588       361  
 
Balance at October 31, 2009
    3,867,080     $ 399,879  



             
 
Changes in Common Stock were (In thousands, except shares):
 
Shares
   
Amount
 
 
Balance at February 1, 2008
    12,730,615     $ 254  
 
Common stock issued in connection with long-term incentive plan
    2,594       1  
 
Balance at October 31, 2008
    12,733,209     $ 255  
                   
 
Balance at February 1, 2009
    12,733,209     $ 255  
 
Common stock issued in connection with long-term incentive plan
    31,715       -  
 
Balance at October 31, 2009
    12,764,924     $ 255  

12.           Income Taxes
 
The Company’s effective tax rate for the nine months ended October 31, 2009 was a negative 24.7%, resulting in an income tax expense of $2.9 million, compared to the prior year effective tax rate of 9.2%, resulting in an income tax benefit of $2.9 million.  Included in this year’s pretax operating loss of $11.9 million was the ViSalus goodwill impairment of $13.2 million and operating losses incurred in various international jurisdictions for which no tax benefit was recorded.  In addition, the current year’s effective tax rate includes the fiscal 2009 income tax return-to-provision adjustments which increased the tax expense by $0.9 million.

Included in last year’s pre-tax operating loss of $31.6 million was an impairment of goodwill in the amount of $30.9 million and a write-off of an investment of $5.2 million for which no tax benefit was recorded.   The prior year’s effective tax rate also included a tax benefit of approximately $7.0 million recorded as a result of an international restructuring plan that was completed in the third quarter of fiscal 2009. This benefit was offset in part by an additional tax provision of $1.9 million related to a state voluntary disclosure settlement proposal.  

The effective tax rate for the three months ended October 31, 2009 was a negative 281.7% compared to 23.2% in the prior year.  The change in the effective tax rate for the current quarter is due primarily to the fiscal 2009 income tax return-to-provision adjustments, as well as operating losses incurred in various international jurisdictions for which no tax benefit was recorded.  The effective tax rate for the three months ended October 31, 2008 included an additional tax provision of $1.9 million related to a state voluntary disclosure settlement proposal, which was offset in part by a tax benefit of approximately $7.0 million recorded as a result of an international restructuring plan that was completed in the third quarter of the prior year.  





21


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

12.           Income Taxes (continued)

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of October 31, 2009 that may be resolved within the next 12 months is approximately $13.6 million, as a result of the filing of amended tax returns, closing of statutes, and audit settlements.  Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in fiscal 2010, but the amount cannot be reasonably estimated.

13.       Stock Based Compensation

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 stock-based compensation disclosures have been adjusted accordingly.
 
As of October 31, 2009, the Company had one active stock-based compensation plan, the 2003 Long-Term Incentive Plan (“2003 Plan”), available to grant future awards and two inactive stock-based compensation plans (the Amended and Restated 1994 Employee Stock Option Plan and the Amended and Restated 1994 Stock Option Plan for Non-Employee Directors), under which vested and unexercised options remain outstanding. As of October 31, 2009, 1,020,449 shares were authorized and approximately 840,000 shares were available for grant under these plans.  The Company’s policy is to issue new shares of common stock for all stock options exercised and restricted stock grants.

The Board of Directors and the stockholders of the Company have approved the adoption and subsequent amendments of the 2003 Plan. The 2003 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock unit awards to officers and employees. The 2003 Plan also provides for grants of   nonqualified stock options to directors of the Company who are not, and who have not been during the  immediately preceding 12-month period, officers or employees of the Company or any of its subsidiaries. Restricted stock and restricted stock units (“RSUs”) are granted to certain employees to incent performance and retention. RSUs issued under the plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed. The release of RSUs on each of the vesting dates is contingent upon continued active employment by the employee until the vesting dates. During the nine months ended October 31, 2009 a total of 83,089 RSUs were granted.

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2009 and 2008 includes compensation expense for restricted stock, RSUs and other stock-based awards granted subsequent to January 31, 2006 based on the grant date fair value estimated in accordance with the provisions of ASC 718, “Compensation—Stock Compensation” (“ASC 718”). The Company recognizes these compensation costs net of a forfeiture rate for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is over periods of 3 years for stock options; 2 to 5 years for employee restricted stock and RSUs; and 1 to 2 years for non-employee restricted stock and RSUs. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.









22


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
13.           Stock Based Compensation (continued)
 
Transactions involving restricted stock and RSUs are summarized as follows:
 
                 
 
 
           
 
   
 
 
     
Shares
   
Weighted Average
Grant Date Fair Value
   
Aggregate
Intrinsic Value
(In thousands)
 
 
Nonvested restricted stock and RSUs at January 31, 2009
    75,119     $ 89.51        
 
    Granted
    83,089       32.64        
 
    Vested
    (45,987 )     89.74        
 
    Forfeited
    (7,178 )     64.73        
 
Nonvested restricted stock and RSUs at October 31, 2009
    105,043       43.28     $ 3,722  
 
Total restricted stock and RSUs at October 31, 2009
    135,120     $ 55.25     $ 4,787  

Compensation expense related to restricted stock and RSUs for three and nine months ended October 31, 2009 was approximately $0.7 million and $2.4 million, respectively.  Compensation expense related to restricted stock and RSUs for the three and nine month periods ended October 31, 2008 was approximately $0.1 million and $1.4 million, respectively.

As of October 31, 2009, there was $2.0 million of unearned compensation expense related to non-vested restricted stock and RSU awards. This cost is expected to be recognized over a weighted average period of 1.6 years. As of October 31, 2009, approximately 105,000 restricted stock awards with a weighted average grant date fair value of $43.28 are unvested.  The total unrecognized stock-based compensation cost to be recognized in future periods as of October 31, 2009 does not consider the effect of stock-based awards that may be issued in subsequent periods.

Transactions involving stock options are summarized as follows:
 
                 
 
       
     
Option
   
Weighted Average
   
Weighted Average
Remaining
   
Aggregate
 
     
Shares
   
Exercise Price
   
Contractual Life
   
Intrinsic Value
 
 
Outstanding at January 31, 2009
    79,425     $ 107.10       3.30     $ -  
 
    Options expired
    (16,550 )     105.33       -       -  
 
Outstanding and exercisable at October 31, 2009
    62,875     $ 107.56       2.64     $ -  
 
Authorized unissued shares may be used under the stock-based compensation plans. The Company intends to issue shares of its common stock to meet the stock requirements of its awards in the future.
 
14.           Segment Information

Blyth 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 in the global home expressions industry and the Company’s 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.

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories, fragranced bath gels and body lotions and other fragranced products under the PartyLite® brand.  Effective March 31, 2009, the Company has combined the Two Sisters Gourmet brand into our PartyLite business and will continue to offer these products as part of the PartyLite brand. The Company also holds a controlling interest in ViSalus, a distributor-based

23

 
BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
14.           Segment Information (continued)
 
business that sells nutritional supplements, energy drinks and weight management products.  All direct selling products are sold directly to the consumer through a network of independent sales consultants and distributors.  Products in this segment are sold primarily in North America, Europe and Australia.

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

Within the Wholesale segment, the Company designs, manufactures or sources, markets and distributes an extensive line of home fragrance products, candle-related accessories, seasonal decorations such as ornaments and trim and home décor products such as picture frames, lamps and textiles.  Products in this segment are sold primarily in North America to retailers in the premium and specialty channels under the CBK®, Colonial Candle®, Colonial at HOMEâ and Seasons of Cannon Falls® brands.  In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold through this segment under the Ambria®, HandyFuel® and Sterno® brands.

Operating profit in all segments represents net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments.  Other expense includes Interest expense, Interest income, and Foreign exchange and other which are not allocated to the business segments.  Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations.  Unallocated Corporate within the identifiable assets include corporate cash and cash equivalents, short-term investments, prepaid income tax, corporate fixed assets, deferred bond costs and other long-term investments, which are not allocated to the business segments.








24


BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
14.           Segment Information (continued)

       
Three months ended October 31,
   
Nine months ended October 31,
 
 
(In thousands)
 
2009
   
2008
   
2009
   
2008
 
 
Net sales
                       
 
Direct Selling
  $ 131,118     $ 139,190     $ 402,969     $ 449,271  
 
Multi-channel Group:
                               
 
   Catalog & Internet
    38,678       49,730       108,004       125,718  
 
   Wholesale
    51,782       61,885       124,683       162,450  
 
Subtotal Multi-channel Group
      90,460