fy11form10_k.htm




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

FORM 10-K
 
 
           (Mark One)

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

For the fiscal year ended January 31, 2011

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

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

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

 
Title of each class
Name of each exchange
on which registered
Common Stock, par value $0.02 per share
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

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

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

 
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x      No 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

Large accelerated filer 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 Act). Yes  o      No  x
 

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $202.9 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on July 31, 2010 and based on the assumption, for purposes of this computation only, that all of the registrant’s directors and executive officers are affiliates.

As of March 31, 2011, there were 8,230,502 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2011 Proxy Statement for the Annual Meeting of Shareholders to be held on June 9, 2011 (Incorporated into Part III).



 
 


TABLE OF CONTENTS
PART I
         
Item 1.
   
4
Item 1A.
   
9
Item 1B.
   
15
Item 2.
   
15
Item 3.
   
15
Item 4.
   
16
 
PART II
         
Item 5.
   
17
Item 6.
   
20
Item 7.
   
21
Item 7A.
   
41
Item 8.
   
43
Item 9.
   
82
Item 9A.
   
82
Item 9B.
   
84
 
PART III
         
Item 10.
   
85
Item 11.
   
85
Item 12.
   
85
Item 13.
   
85
Item 14.
   
85
 
PART IV
Item 15.
   
86


 
3


 
PART I

Item 1.  Business
 
(a)   General Development of Business

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

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

(b)   Financial Information about Segments

We report our financial results in three business segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment. These segments accounted for approximately 64%, 18% and 18% of consolidated net sales, respectively, for fiscal 2011. Financial information relating to these business segments for fiscal 2009, 2010 and 2011 appears in Note 20 to the Consolidated Financial Statements and is incorporated herein by reference.

(c)           Narrative Description of Business

Direct Selling Segment

In fiscal 2011, the Direct Selling segment represented approximately 64% of total sales. Our principal Direct Selling business is PartyLite, which sells premium candles and home fragrance products and related decorative accessories. PartyLite® brand products are marketed in North America, Europe and Australia through a network of independent sales consultants using the party plan method of direct selling. These products include fragranced and non-fragranced candles, bath products and a broad range of related accessories.

In October 2008, we acquired our interest in ViSalus, a distributor-based business that sells weight management products, nutritional supplements and energy drinks. ViSalus represented approximately 6% of total sales of the Direct Selling segment during fiscal 2011.

 
4


United States Market

Within the United States market, PartyLite® brand products are sold directly to consumers through a network of independent sales consultants. These consultants are compensated on the basis of PartyLite product sales at parties organized by them and parties organized by consultants recruited by them. Over 18,000 independent sales consultants located in the United States were selling PartyLite products at January 31, 2011. PartyLite products are designed, packaged and priced in accordance with their premium quality, exclusivity and the distribution channel through which they are sold.
 
ViSalus Sciences® (“ViSalus”) brand products are also sold directly to consumers using one-to-one sales model through independent sales distributors, who are compensated based on the products they sell and products sold by distributors recruited by them. Customers and distributors generally set a 90 day fitness goal, known as the Body By Vi Challenge, and purchase and consume ViSalus products to help them achieve their goal. Independent distributors sell ViSalus brand products using a one-to-one direct sales model.

International Market

In fiscal 2011, PartyLite products were sold internationally by more than 45,000 independent sales consultants located outside the United States. These consultants were the exclusive distributors of PartyLite brand products internationally. PartyLite’s international markets at the end of fiscal 2011 were Australia, Austria, Canada, Czech Republic, Denmark, Finland, France, Germany, Italy, Mexico, Norway, Poland, Switzerland, Slovakia and the United Kingdom.

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

Business Acquisition

During fiscal 2009, we signed a definitive agreement to purchase ViSalus, a direct seller of weight management products, nutritional supplements and energy drinks, through a series of investments. On October 21, 2008, we completed the initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash. In addition, we may be required to make additional purchases of ViSalus’ equity interest to increase our equity ownership over time to 57.5%, 72.7% and 100.0%. These additional purchases are currently conditioned upon ViSalus meeting certain operating targets in calendar years 2010, 2011 and 2012. ViSalus did not meet its predefined operating target for calendar year 2010. However, we have the right to waive this requirement and increase our ownership interest to 57.5%. If we elect to increase our ownership interest to 57.5% in ViSalus in 2011, we will be required to make the additional purchases of ViSalus in 2012 and 2013 if ViSalus meets it predefined operating targets in those years.

Catalog & Internet Segment

In fiscal 2011, this segment represented approximately 18% of total sales. We design, market and distribute a wide range of household convenience items, personalized gifts and photo storage products, within this segment. These products are sold through the Catalog and Internet distribution channel under brand names that include As We Changeâ, Easy Comfortsâ, Exposuresâ, Home Marketplaceâ, Miles Kimballâ and Walter Drakeâ.

In February 2011, we assigned the assets and liabilities of Boca Java for the benefit of its creditors and exited this business. The proceeds from the sale of the assets will be used to discharge the claims of the creditors. In January 2011, the Company recorded a $1.1 million impairment charge. The impairment charge recorded was for the write-off of fixed assets, inventories on hand and other assets, net of expected recoveries.

 
5



Wholesale Segment

In fiscal 2011, this segment represented approximately 18% of total sales. Products within this segment include candles and related accessories, seasonal decorations and home décor products such as lamps, picture frames and decorative metal accessories. In addition, chafing fuel and tabletop lighting products and accessories for the “away from home” or foodservice trade are sold in this segment. Our wholesale products are designed, packaged and priced to satisfy the varying demands of retailers and consumers within each distribution channel.

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

Product Brand Names

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

PartyLite®
Well Being by PartyLite®
Two Sisters Gourmetâ by PartyLite®
ViSalus Sciences®
 
The key brand names under which our Catalog & Internet segment products are sold are:
 
As We Change®
Easy Comforts®
Exposures®
Home Marketplace®
Miles Kimball®
Walter Drake®
 
The key brand names under which our Wholesale segment products are sold are:
 
Ambria®
CBK®
Colonial Candle®
Colonial Candle of Cape Cod®
Colonial at HOME®
HandyFuel®
Seasons of Cannon Falls®
Sterno®

New Product Development

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


 
6


Manufacturing, Sourcing and Distribution

In all of our business segments, management continuously works to increase value and lower costs through increased efficiency in worldwide production, sourcing and distribution practices, the application of new technologies and process control systems, and consolidation and rationalization of equipment and facilities. Net capital expenditures over the past five years have totaled $48.9 million and are targeted to technological advancements and significant maintenance and replacement projects at our manufacturing and distribution facilities. We have also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions.

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

Customers

Customers in the Direct Selling segment are individual consumers served by independent sales consultants. Sales within the Catalog & Internet segment are also made directly to consumers. Wholesale segment customers primarily include independent gift and department stores, specialty chains, foodservice distributors, hotels and restaurants. No single customer accounts for 10% or more of Net Sales. One customer within the Wholesale segment accounted for $1.9 million, or approximately 10% of the Accounts Receivables balance as of January 31, 2011.

Competition

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

Employees

As of January 31, 2011, we had approximately 2,300 full-time employees, of whom approximately 30% were based outside of the United States. Approximately 60% of our employees are non-salaried. We do not have any unionized employees in North America. We believe that relations with our employees are good. Since our formation in 1977, we have never experienced a work stoppage.

Raw Materials

All of the raw materials used for our candles, home fragrance products and chafing fuel, principally petroleum-based wax, fragrance, glass containers and corrugate, have historically been available in adequate supply from multiple sources. In fiscal 2011, costs continued to increase for certain raw materials, such as paraffin and other wax products, diethylene glycol (DEG), ethanol and paper, which impacted profitability in all three segments.

 
7



Seasonality

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

Trademarks and Patents

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

Environmental Law Compliance

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

(d)           Financial Information about Geographic Areas

For information on net sales from external customers attributed to the United States and international geographies and on long-lived assets located in and outside the United States, see Note 20 to the Consolidated Financial Statements.




















 
8


Item 1A.  Risk Factors

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

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

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

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

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

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


 
9


The turmoil in the financial markets in recent years could increase our cost of borrowing and impede access to or increase the cost of financing our operations and investments and could result in additional impairments to our businesses.
 
United States and global credit and equity markets have undergone significant disruption in recent years, making it difficult for many businesses to obtain financing on acceptable terms. In addition, in recent years equity markets have experienced rapid and wide fluctuations in value. If these conditions continue or worsen, our cost of borrowing, if needed, may increase and it may be more difficult to obtain financing for our businesses. In addition, our borrowing costs can be affected by short and long term debt ratings assigned by independently rating agencies. A decrease in these rating agencies would likely increase our cost of borrowing and/or make it more difficult for us to obtain financing. In the event current market conditions continue we will more than likely be subject to higher interest costs than we are currently incurring and may require our providing security to guarantee such borrowings. Alternatively, we may not be able to obtain unfunded borrowings in that amount, which may require us to seek other forms of financing, such as term debt, at higher interest rates and with additional expenses.
 
In addition, we may be subject to future impairments of our assets, including accounts receivable, investments, inventories, property, plant and equipment, goodwill and other intangibles, if the valuation of these assets or businesses declines.
 
We face diverse risks in our international business, which could adversely affect our operating results.
 
We are dependent on international sales for a substantial amount of our total revenue. For fiscal 2009, 2010 and 2011, revenue from outside the United States was 41%, 45% and 45% of our total revenue, respectively. We expect international sales to continue to represent a substantial portion of our revenue for the foreseeable future. Due to our reliance on sales to customers outside the United States, we are subject to the risks of conducting business internationally, including:
  
 
 
United States and foreign government trade restrictions, including those which may impose restrictions on imports to or from the United States;
 
 
 
foreign government taxes and regulations, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate funds to the United States;

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

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

 
10


We are dependent upon sales by independent consultants and distributors.

A significant portion of our products are marketed and sold through the direct selling method of distribution, where products are primarily marketed and sold by independent consultants or distributors to consumers without the use of retail establishments. This distribution system depends upon the successful recruitment, retention and motivation of a large number of independent consultants and distributors to offset frequent turnover. The recruitment and retention of independent consultants and distributors depends on the competitive environment among direct selling companies and on the general labor market, unemployment levels, economic conditions, and demographic and cultural changes in the workforce. The motivation of our consultants and distributors depends, in large part, upon the effectiveness of our compensation and promotional programs, its competitiveness compared with other direct selling companies, the successful introduction of new products, and the ability to advance through the consultant ranks.
 
Our sales are directly tied to the levels of activity of our consultants, which is a part-time working activity for many of them. Activity levels may be affected by the degree to which a market is penetrated by the presence of our consultants, the amount of average sales per party, the amount of sales per consultant, the mix of high-margin and low-margin products in our product line and the activities and actions of our competitors.

Earnings of independent sales consultants and distributors are subject to taxation, and in some instances, legislation or governmental agencies impose obligations on us to collect or pay taxes, such as value added taxes, and to maintain appropriate records. In addition, we may be subject to the risk in some jurisdictions of new liabilities being imposed for social security and similar taxes with respect to independent sales consultants and distributors. In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat independent sales consultants or distributors as employees, or that independent sales consultants and distributors are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors or agents under existing laws and interpretations, we may be held responsible for social charges and related taxes in those jurisdictions, plus related assessments and penalties, which could harm our financial condition and operating results.

Our profitability may be affected by shortages or increases in the cost of raw materials.

Certain raw materials could be in short supply due to price changes, capacity, availability, a change in production requirements, weather or other factors, including supply disruptions due to production or transportation delays. While the price of crude oil is only one of several factors impacting the price of petroleum wax, it is possible that recent fluctuations in oil prices may have a material adverse effect on the cost of petroleum-based products used in the manufacture or transportation of our products, particularly in the Direct Selling and Wholesale segments. In recent years, substantial cost increases for certain raw materials, such as paraffin, diethylene glycol (DEG), ethanol and paper, negatively impacted profitability of certain products in all three segments. In addition, a number of governmental authorities in the U.S. and abroad have introduced or are contemplating enacting legal requirements, including emissions limitations, cap and trade systems and other measures to reduce production of greenhouse gases, in response to the potential impacts of climate change. These measures may have an indirect effect on us by affecting the prices of products made from fossil fuels, including paraffin and DEG, as well as ethanol, which is used as an additive to gasoline. Given the wide range of potential future climate change regulations and their effects on these raw materials, the potential indirect impact to our operations is uncertain.

 
11


In addition, the potential impact of climate change on the weather is highly uncertain. The impact of climate change may vary by geographic location and other circumstances, including weather patterns and any impact to natural resources such as water. Severe weather in the locations where fossil fuel based raw materials are produced, such as increased hurricane activity in the Gulf of Mexico, could disrupt the production, availability or pricing of these raw materials.

We expect not to be disproportionately affected by these measures compared with other companies engaged in the same businesses.

We are dependent upon our key corporate management personnel.

Our success depends in part on the contributions of our key corporate management, including our Chairman and Chief Executive Officer, Robert B. Goergen, as well as the members of the Office of the Chairman: Robert H. Barghaus, Vice President and Chief Financial Officer; Robert B. Goergen, Jr., Vice President and President, Multi-Channel Group; and Anne M. Butler, Vice President and President, PartyLite Worldwide. The loss of any of the key corporate management personnel could have a material adverse effect on our operating results.

Our businesses are subject to the risks from increased competition.

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

We depend upon our information technology systems.

We are increasingly dependent on information technology systems to operate our websites, process transactions, manage inventory, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Previously, we have experienced interruptions resulting from upgrades to certain of our information technology systems which temporarily reduced the effectiveness of our operations. Our information technology systems depend on global communications providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have experienced significant system failures and outages in the past. Our systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. Despite the implementation of network security measures, our systems are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our systems. The occurrence of these or other events could disrupt or damage our information technology systems and inhibit internal operations, the ability to provide customer service or the ability of customers or sales personnel to access our information systems.

The Internet plays a major role in our interaction with customers and independent consultants and distributors. Risks such as changes in required technology interfaces, website downtime and other technical failures, security breaches, and consumer privacy are key concerns related to the Internet. Our failure to successfully respond to these risks and uncertainties could reduce sales, increase costs and damage our relationships.

 
12



Management uses information systems to support decision making and to monitor business performance. We may fail to generate accurate financial and operational reports essential for making decisions at various levels of management. Failure to adopt systematic procedures to quality information technology general controls could disrupt our business and reduce sales. In addition, if we do not maintain adequate controls such as reconciliations, segregation of duties and verification to prevent errors or incomplete information, our ability to operate our business could be limited.

Changes in our effective tax rate may have an adverse effect on our reported earnings.

Our effective tax rate and the amount of our provision for income taxes may be adversely affected by a number of factors, including:

 
 
the jurisdictions in which profits are determined to be earned and taxed;
  
 
adjustments to estimated taxes upon finalization of various tax returns;
 
 
changes in available tax credits;
 
 
changes in the valuation of our deferred tax assets and liabilities;
 
 
the resolution of issues arising from uncertain positions and tax audits with various tax authorities;
 
 
changes in accounting standards or tax laws and regulations, or interpretations thereof; and
 
 
penalties and/or interest expense that we may be required to recognize on liabilities associated with uncertain tax positions.
 

ViSalus’ business is affected by extensive laws, governmental regulations and similar constraints, and their failure to comply with those constraints may have a material adverse effect on ViSalus’ financial condition and operating results.

ViSalus is affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints exist at the federal, state or local levels in the United States, including regulations pertaining to:

 
 
the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of their products;
  
 
product claims and advertising, including direct claims and advertising by ViSalus, as well as claims and advertising by distributors, for which they may be held responsible;
 
 
their network marketing program; and
 
 
taxation of their independent distributors (which in some instances may impose an obligation on ViSalus to collect the taxes and maintain appropriate records).

There can be no assurance that ViSalus or its distributors are in compliance with all of these regulations, and the failure by ViSalus or its distributors’ failure to comply with these regulations or new regulations could lead to the imposition of significant penalties or claims and could negatively impact ViSalus’ business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may negatively impact the marketing of ViSalus’ products, resulting in significant loss of sales revenues.

 
13



In addition, ViSalus’ network marketing program is subject to a number of federal and state regulations administered by the FTC and various state agencies in the United States. ViSalus is subject to the risk that, in one or more markets, its network marketing program could be found not to be in compliance with applicable law or regulations.  Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to consumers and that advancement within an organization is based on sales of the organization’s products rather than investments in the organization or other non-retail sales related criteria. The regulatory requirements concerning network marketing programs do not include “bright line” rules and are inherently fact-based, and thus, even in jurisdictions where ViSalus believes that its network marketing program is in full compliance with applicable laws or regulations governing network marketing systems, it is subject to the risk that these laws or regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change. The failure of ViSalus’ network marketing program to comply with current or newly adopted regulations could negatively impact its business in a particular market or in general.

Increased cost of our catalog and promotional mailings can reduce our profitability.

Postal rate increases and paper and printing costs affect the cost of our catalog and promotional mailings. Future additional increases in postal rates or in paper or printing costs would reduce our profitability to the extent that we are unable to pass those increases directly to customers or offset those increases by raising selling prices or by reducing the number and size of certain catalog circulations.

Climate change may pose physical risks that could harm our results of operations or affect the way we conduct our business.

Several of our facilities are located in areas exposed to the risk of hurricanes or tornadoes. The effect of global warming on such storms is highly uncertain. Based on an assessment of the locations of the facilities, the nature and extent of the operations conducted at such facilities, the prior history of such storms in these locations, and the likely future effect of such storms on those operations and on the Company as a whole, we do not currently expect any material adverse effect on the results of operation from such storms in the foreseeable future.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 might have an impact on market confidence in our reported financial information.

We must continue to document, test, monitor and enhance our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We will continue to perform the documentation and evaluations needed to comply with Section 404. If during this process our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert our internal control as effective.


 

 
14


Item 1B.  Unresolved Staff Comments
 
None.

Item 2.  Properties

The following table sets forth the location and approximate square footage of our major manufacturing and distribution facilities as of March 31, 2011:

 
Location
 
Use
 
Business Segment
 
Approximate Square Feet
     
Owned
Leased
Arndell Park, Australia
  Distribution
Direct Selling
38,000
Batavia, Illinois
  Manufacturing and Research & Development
Direct Selling and Wholesale
420,000
Carol Stream, Illinois
  Distribution
Direct Selling
515,000
Cumbria, England
  Manufacturing and related distribution
Direct Selling
90,000
Elkin, North Carolina
  Manufacturing and related distribution
Wholesale
292,300
Heidelberg, Germany
  Distribution
Direct Selling
6,000
Monterrey, Mexico
  Distribution
Direct Selling
45,000
Oshkosh, Wisconsin
  Distribution
Catalog & Internet
386,000
Texarkana, Texas
  Manufacturing and related distribution
Wholesale
154,000
65,000
Tilburg, Netherlands
  Distribution
Direct Selling
442,500
Union City, Tennessee
  Warehouse and distribution
Wholesale
393,000
31,000

Our executive and administrative offices are generally located in leased space (except for certain offices located in owned space).

Item 3.  Legal Proceedings

In August 2008, a state department of revenue proposed to assess additional corporate income taxes on us for fiscal years 2002, 2003 and 2004 in the amount of $34.9 million including interest and penalties. The state department of revenue has subsequently reduced this amount to $16.9 million, including interest and penalties. In February 2011, the state department of revenue issued a notice of intent to assess additional corporate income taxes for fiscal years 2005, 2006 and 2007 in the amount of $14.0 million, including interest and penalties. We intend to vigorously protest all of these assessments. As of January 31, 2011, we established a reserve for this matter which we believe is adequate based on existing facts and circumstances. The ultimate resolution of these matters could exceed our recorded reserve in the event of an unfavorable outcome; however, we cannot estimate such a loss at this time.

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

 
15


Item 4.  Removed and Reserved








 
16


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

Our Common Stock is traded on the New York Stock Exchange under the symbol BTH. The following table provides the closing price range for the Common Stock on the New York Stock Exchange:

   
High
   
Low
 
Fiscal 2010
 
First Quarter
  $ 44.49     $ 16.12  
Second Quarter
    45.98       29.90  
Third Quarter
    47.90       33.81  
Fourth Quarter
    38.75       28.09  
   
Fiscal 2011
 
       First Quarter
  $ 59.03     $ 26.79  
Second Quarter
    59.22       32.57  
Third Quarter
    46.11       36.39  
Fourth Quarter
    45.71       33.39  

Many of our shares are held in “street name” by brokers and other institutions on behalf of stockholders, and we had approximately 2,800 beneficial holders of Common Stock as of March 31, 2011.

During fiscal 2011 and 2010, the Board of Directors declared dividends as follows:

Regular Dividend
 
Fiscal 2010
   
Fiscal 2011
 
        Second Quarter
  $ 0.10     $ 0.10  
Fourth Quarter
  $ 0.10     $ 0.10  
                 
Special Dividend
               
Fourth Quarter
  $ 1.00 1   $ 1.00  
1Declared in January 2010 and paid in first quarter of fiscal 2011.

Our ability to pay cash dividends in the future depends upon, among other things, our ability to operate profitably and to generate significant cash flows from operations in excess of investment and financing requirements that may increase in the future to, for example, fund new acquisitions or retire debt.












 
17


 

The following table sets forth, for the equity compensation plan categories listed below, information as of January 31, 2011:

 
Equity Compensation Plan Information
 
 
 
 
 
 
 
Plan Category
 
(a)
 
 
 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights1
   
(b)
 
 
 
 
Weighted-average
exercise price of outstanding options, warrants and rights1
   
(c)
 
 
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders
    47,600     $ 109.16       821,588  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    47,600     $ 109.16       821,588  

1 The information in this column excludes 137,036 restricted stock units outstanding as of January 31, 2011.

The following table sets forth certain information concerning the repurchases of the Company’s Common Stock made by the Company during the fourth quarter of fiscal 2011.

 
Issuer Purchases of Equity Securities (1)

Period
 
(a) Total Number of Shares Purchased (2)
   
(b) Average Price Paid per Share
   
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
November 1, 2010 -November 30, 2010
    -       -       -       1,182,398  
December 1, 2010 -December 31, 2010
    -       -       -       1,182,398  
January 1, 2011 -January 31, 2011
    -       -       -       1,182,398  
Total
    -       -       -       1,182,398  
_____________________________
1 On September 10, 1998, our Board of Directors approved a share repurchase program pursuant to which we were originally authorized to repurchase up to 250,000 shares of Common Stock in open market transactions. From June 1999 to June 2006, the Board of Directors increased the authorization under this repurchase program, five times (on June 8, 1999 to increase the authorization by 250,000 shares to 500,000 shares; on March 30, 2000 to increase the
authorization by 250,000 shares to 750,000 shares; on December 14, 2000 to increase the authorization by 250,000 shares to 1.0 million shares; on April 4, 2002 to increase the authorization by 500,000 shares to 1.5 million shares; and on June 7, 2006 to increase the authorization by 1.5 million shares to 3.0 million shares). On December 13, 2007, the Board of Directors authorized a new repurchase program, for 1.5 million shares, which became effective after we exhausted the authorized amount under the old repurchase program.  As of January 31, 2011, we have purchased a total of 3,317,602 shares of Common Stock under the old and new repurchase programs.  The repurchase programs do not have expiration dates.  We intend to make further purchases under the repurchase programs from time to time. The amounts set forth in this paragraph have been adjusted to give effect to the reverse stock split executed in fiscal 2009.
 
2 This does not include the 16,760 shares that we withheld in order to satisfy employee withholding taxes upon the distribution of vested restricted stock units.
 
 
18


 
 
Performance Graph

The performance graph set forth below reflects the yearly change in the cumulative total stockholder return (price appreciation and reinvestment of dividends) on our Common Stock compared to the Standard and Poor’s (“S&P”) 500 Index and the S&P SmallCap 600 Index for the five fiscal years ended January 31, 2011. The graph assumes the investment of $100 in Common Stock and the reinvestment of all dividends paid on such Common Stock into additional shares of Common Stock and such indexes over the five-year period.  We believe that we are unique and do not have comparable industry peers. Since our competitors are typically not public companies or are themselves subsidiaries or divisions of public companies engaged in multiple lines of business, we believe that it is not possible to compare our performance against that of our competition. In the absence of a satisfactory peer group, we believe that it is appropriate to compare us to companies comprising S&P SmallCap 600 Index, the index we are currently tracked in by S&P.

Blyth Performance Graph
 
19


Item 6.   Selected Financial Data

Set forth below are selected summary consolidated financial and operating data for fiscal years 2007 through 2011, which have been derived from our audited financial statements for those years. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, appearing elsewhere in this Report. The per share amounts and number of shares outstanding have been adjusted to give effect to the 1-for-4 reverse stock split of our common stock that we implemented on January 30, 2009.


     Year ended January 31,  
(In thousands, except per share and percent data)
 
2007
   
2008
   
2009
   
2010
   
2011
 
Statement of Earnings Data: (1) (4)
                             
  Net sales
  $ 1,220,611     $ 1,164,950     $ 1,050,793     $ 958,077     $ 900,927  
  Gross profit
    596,669       615,471       577,216       525,499       499,630  
  Goodwill and other intangibles impairment
    48,812       49,178       48,751       16,498       -  
  Operating profit (2)
    15,644       30,887       4,028       29,983       46,607  
  Interest expense
    19,074       15,540       10,001       7,755       7,209  
  Earnings (loss) from continuing operations
                                       
    before income taxes and noncontrolling interest
    5,369       21,725       (11,525 )     22,074       38,406  
  Earnings (loss) from continuing operations
                                       
    attributable to Blyth, Inc.
    2,555       11,072       (15,480 )     17,694       25,556  
  Loss from discontinued operations
                                       
    attributable to Blyth, Inc. (3)
    (105,728 )     -       -       -       -  
  Net earnings (loss) attributable to Blyth, Inc.
    (103,173 )     11,072       (15,480 )     17,694       25,556  
  Basic net earnings (loss) from continuing operations
                                       
    attributable per Blyth, Inc. common share
  $ 0.26     $ 1.15     $ (1.73 )   $ 1.99     $ 3.02  
  Basic net loss from discontinued operations
                                       
    attributable per Blyth, Inc. common share
  $ (10.63 )   $ -     $ -     $ -     $ -  
  Basic net earnings (loss) attributable per Blyth, Inc. common share
  $ (10.37 )   $ 1.15     $ (1.73 )   $ 1.99     $ 3.02  
Diluted net earnings (loss) from continuing operations
                                 
    attributable per Blyth, Inc. common share
  $ 0.26     $ 1.14     $ (1.73 )   $ 1.98     $ 3.00  
  Diluted net loss from discontinued operations
                                       
    attributable per Blyth, Inc. common share
  $ (10.56 )   $ -     $ -     $ -     $ -  
  Diluted net earnings (loss) attributable per Blyth, Inc. common share
  $ (10.30 )   $ 1.14     $ (1.73 )   $ 1.98     $ 3.00  
  Cash dividends declared, per share
  $ 2.00     $ 2.16     $ 2.16     $ 1.20     $ 1.20  
  Basic weighted average number
                                       
    of common shares outstanding
    9,945       9,648       8,971       8,912       8,462  
  Diluted weighted average number
                                       
    of common shares outstanding
    10,014       9,732       8,971       8,934       8,508  
Operating Data:
                                       
  Gross profit margin
    48.9 %     52.8 %     54.9 %     54.8 %     55.5 %
  Operating profit margin
    1.3 %     2.7 %     0.4 %     3.1 %     5.2 %
  Net capital expenditures
  $ 17,714     $ 9,421     $ 8,173     $ 5,384     $ 8,218  
  Depreciation and amortization
    34,630       31,974       18,628       16,592       13,697  
Balance Sheet Data:
                                       
  Total assets
  $ 774,638     $ 667,422     $ 574,103     $ 522,993     $ 501,765  
  Total debt
    215,779       158,815       145,731       110,544       110,985  
  Total stockholders' equity
    363,693       299,068       248,498       256,274       249,454  
 
(1) Statement of Earnings Data includes the results of operations for periods subsequent to the respective purchase acquisitions of As We Change, acquired in August 2008, and ViSalus, acquired in October 2008, none of which
  individually or in the aggregate had a material effect on the Company’s results of operations.
(2) Fiscal 2007 and 2008 earnings include restructuring charges recorded in the Wholesale and Direct Selling segments of $24.0 million and $2.3 million, respectively. Fiscal 2009,  2010 and 2011 earnings include changes in estimated
      restructuring charges recorded in the Direct Selling segment of $1.7 million, $0.1 million and $0.8 million, respectively (See Note 4 to the Consolidated Financial Statements).
(3) In fiscal 2007, the Kaemingk Edelman, Euro-Decor, Gies and Colony businesses were sold.  The results of operations for these business units have been reclassified to discontinued operations for all periods presented.
(4) Refer to Note 22 to the Consolidated Financial Statements for the definitive agreement to sell all of the net assets of the Midwest-CBK business.
 
 
 

 
20


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

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

Overview

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

Fiscal 2011 Net sales are comprised of an approximately $579 million Direct Selling business, an approximately $160 million Catalog & Internet business and an approximately $162 million Wholesale business. Sales and earnings growth differ in each segment depending on geographic location, market penetration, our relative market share and product and marketing execution, among other business factors.

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

Recent Developments

In February 2011, we exited our gourmet coffee and tea business, Boca Java, and recorded a $1.1 million charge in fiscal 2011 as further detailed in Note 22 to the Consolidated Financial Statements.

On April 4, 2011, we entered into a definitive agreement to sell substantially all of the net assets of our seasonal, home décor and home fragrance business (“Midwest-CBK”) within the Wholesale segment for approximately $35 million, which, before transaction related costs, is approximately equal to its net book value upon closing. We expect to receive cash proceeds of approximately $23 million and a one year promissory note secured by fixed assets included with the transaction of approximately $12 million. The sale is contingent upon the buyer obtaining financing and is expected to close before the end of May 2011. The agreement provides for the payment of a termination fee if the buyer does not complete the transaction. In fiscal 2011, total net sales for Midwest-CBK were $105.1 million.

These transactions will be presented as discontinued operations in the first quarter of fiscal 2012.

 
21



Business Acquisition

On August 4, 2008, we signed an agreement to purchase ViSalus, a direct seller of weight management products, nutritional supplements and energy drinks, through a series of investments. On October 21, 2008, we completed the initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash. In addition, we may be required to make additional purchases of ViSalus’ equity interest to increase our equity ownership over time to 57.5%, 72.7% and 100.0%. These additional purchases are currently conditioned upon ViSalus meeting certain operating targets in calendar years 2010, 2011 and 2012. ViSalus did not meet its predefined operating target for calendar year 2010. However, we have the right to waive this requirement and increase our ownership interest to 57.5%. If we elect to increase our ownership interest to 57.5% in ViSalus in 2011, we will be required to make the additional purchases of ViSalus in 2012 and 2013 if ViSalus meets it predefined operating targets in those years.

Segments

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

Within the Catalog & Internet segment, we design, source and market a broad range of household convenience items, premium photo albums, frames, holiday cards, personalized gifts and kitchen accessories. These products are sold directly to the consumer under the As We Change®, Easy Comforts®, Exposures®, Home Marketplace®, Miles Kimball® and Walter Drake® brands. These products are sold in North America.

Within the Wholesale segment, we design, manufacture or source, market and distribute an extensive line of home fragrance products, candle-related accessories, seasonal decorations such as ornaments and trim, and home décor products such as picture frames, lamps and textiles.  Products in this segment are sold primarily in North America to retailers in the premium and specialty markets under the CBK®, Colonial Candle of Cape Cod®, Colonial at HOME® and Seasons of Cannon Falls® brands. In addition, chafing fuel and tabletop lighting products and accessories for the “away from home” or foodservice trade are sold through this segment under the Ambria®, HandyFuel® and Sterno® brands.

 
22


 
The following table sets forth, for the periods indicated, the percentage relationship to Net Sales and the percentage increase or decrease of certain items included in our Consolidated Statements of Earnings (Loss):
 
                   
               
Percentage Increase (Decrease) from Prior Period
 
   
Percentage of Net Sales
 
Fiscal 2010 Compared to Fiscal 2009
 
Fiscal 2011 Compared to Fiscal 2010
 
   
Years Ended January 31
   
2009
 
2010
 
2011
Net sales
    100.0     100.0     100.0     (8.8 )   (6.0 )
Cost of goods sold
    45.1     45.2     44.5     (8.7 )   (7.2 )
Gross profit
    54.9     54.8     55.5     (9.0 )   (4.9 )
Selling
    38.1     38.4     37.4     (8.3 )   (8.2 )
Administrative
    11.8     11.6     12.9     (9.9 )   3.9  
Operating profit
    0.4     3.1     5.2     N/M     N/M  
Earnings from continuing operations
    -1.5     1.8     2.8     N/M     N/M  

N/M - Percent change from the prior year is not meaningful in concluding on our performance due to nonrecurring goodwill and other intangible impairments.

Fiscal 2011 Compared to Fiscal 2010

Consolidated Net Sales

Net sales decreased $57.2 million, or approximately 6.0%, from $958.1 million in fiscal 2010 to $900.9 million in fiscal 2011. The decrease is a result of lower sales in PartyLite’s North American business as well as the impact of weaker European currencies versus the U.S. dollar. This decrease was partially offset by an increase in sales in our Wholesale segment. International sales represented 45% of total sales for fiscal 2010 and 2011.

Net Sales – Direct Selling Segment

Net sales in the Direct Selling segment decreased $56.4 million, or 8.9%, from $635.2 million in fiscal 2010 to $578.8 million in fiscal 2011.

PartyLite’s U.S. sales decreased 25% from the prior year due to the impact of continued weakness in consumer discretionary spending and a decline in active independent sales consultants, as well as fewer shows per consultant resulting in less opportunity to promote our products and recruit new consultants. PartyLite’s active independent U.S. sales consultant base declined 17% on a year-over-year basis.

In PartyLite’s European markets, sales decreased 7% in U.S. dollars. On a local currency basis, sales decreased approximately 2% principally due to lower sales in Germany, the United Kingdom and in the Nordic region partly offset by increased sales in France and Austria. PartyLite Europe sales decline is partly attributed to the weakened economy within the European Union and poor weather condition at year end. However, PartyLite’s active independent European sales consultant base increased 4% on a year-over-year basis. PartyLite Europe represented approximately 54% of PartyLite’s worldwide net sales in fiscal 2010 compared to 58% in fiscal 2011.

PartyLite Canada reported a 9% decrease compared to the prior year in U.S. dollars, or a 16% decline on a local currency basis driven primarily by the same factors as PartyLite U.S. PartyLite Canada’s active independent sales consultant base declined 6% on a year-over-year basis.

Sales at ViSalus increased $20.6 million or 157% from $13.1 million in fiscal 2010 to $33.7 million in fiscal 2011. This growth is a result of a 330% increase in distributors on a year-over-year basis.

 
23


Net sales in the Direct Selling segment represented approximately 66% of total Blyth net sales in fiscal 2010 compared to 64% in fiscal 2011.

Net Sales – Catalog & Internet Segment

Net sales in the Catalog & Internet segment decreased $6.1 million, or 3.7%, from $166.0 million in fiscal 2010 to $159.9 million in fiscal 2011. This decline was due to select catalog circulation reductions within Miles Kimball, particularly in the Walter Drake, Exposures and Home Marketplace catalogs in an effort to reduce selling costs while reaching more targeted buyers. In addition, Boca Java sales decreased $3.0 million or 34.5% from $8.7 million in fiscal 2010 to $5.7 million in fiscal 2011. This decline was due to reduce consumer demand for Boca Java products.
 
Net sales in the Catalog & Internet segment accounted for approximately 18% of total Blyth net sales in fiscal 2010 and fiscal 2011.

Net Sales – Wholesale Segment

Net sales in the Wholesale segment increased $5.4 million, or 3.4%, from $156.8 million in fiscal 2010 to $162.2 million in fiscal 2011. The increase in sales was due to a 7% increase within our Midwest-CBK business due to increased volume in the Seasonal product line. This increase was partially offset by a decline in the food service business which continues to feel the impact of weak demand due to higher customer discounts and incentives.

Net sales in the Wholesale segment represented approximately 16% of total Blyth net sales in fiscal 2010 compared to 18% in fiscal 2011.

Consolidated Gross Profit and Operating Expenses

Blyth’s consolidated gross profit decreased $25.9 million, or 4.9%, from $525.5 million in fiscal 2010 to $499.6 million in fiscal 2011. The decrease in gross profit is primarily attributable to the 6% decrease in sales and higher commodity costs partly offset by lower operating expenses. The gross profit margin increased from 54.8% in fiscal 2010 to 55.5% in fiscal 2011 principally due to the sharp increase in sales for ViSalus, which carries a higher gross margin than our other businesses, lower product costs and price increases at the Miles Kimball Company, as well as reduced distribution and restructuring costs at Midwest-CBK associated with the combination of these two businesses, partially offset by higher commodity costs across all business units.

Blyth’s consolidated selling expense decreased $30.3 million, or approximately 8.2%, from $367.5 million in fiscal 2010 to $337.2 million in fiscal 2011. The decrease in selling expense, which includes commission and promotional expenses, is largely due to its variable nature with sales, which decreased 6% versus the prior year.  Selling expense as a percentage of net sales decreased from 38.4% in fiscal 2010 to 37.4% in fiscal 2011. This decline is primarily due to efficiencies gained at Miles Kimball resulting from selected circulation reductions and consolidation of the sales and marketing operations of the Midwest-CBK business.

Blyth consolidated administrative expenses increased $4.3 million, or 3.8%, from $111.5 million in fiscal 2010 to $115.8 million in fiscal 2011. The increase in expense is principally due to the additional equity compensation expense of $1.7 million associated with ViSalus’ improved operating performance and charges of $0.7 million due to the write down of assets for the Boca Java business. In addition, in fiscal 2010 administrative expenses included a $1.9 million non-recurring gain resulting from the settlement of the Miles Kimball Company pension plan.
 
 
24


 
Administrative expenses as a percentage of sales increased from 11.6% for fiscal 2010 to 12.8% for fiscal 2011.
In fiscal 2010, impairment charges of $16.5 million for goodwill and other intangibles were recognized in the Direct Selling segment. ViSalus experienced a substantial decline in revenues and operating margins last year compared to its forecasts. This shortfall in revenues and profit was primarily attributable to decreased consumer spending due to changes in the business environment and a higher than anticipated attrition rate in its distributor base. As a result, the goodwill and intangibles in the Direct Selling segment were determined to be impaired in fiscal 2010.

Blyth’s consolidated operating profit increased $16.6 million from $30.0 million in fiscal 2010 to $46.6 million in fiscal 2011. The increase is primarily due to the goodwill and other intangibles impairment recorded in fiscal 2010 of $16.5 million and cost savings in cost of good sold and selling expenses as previously mentioned, offset by the impact of a 12% decrease in sales at PartyLite Worldwide.

Operating Profit - Direct Selling Segment

Operating profit in the Direct Selling segment increased $5.9 million, from $43.8 million in fiscal 2010 to $49.7 million in fiscal 2011. The increase is primarily due to the non-recurring $16.5 million goodwill and other intangible impairment related to ViSalus recorded in fiscal 2010 and this year’s improved operating results within ViSalus, partially offset by PartyLite’s lower operating profit resulting from lower sales.

Operating (Loss) Profit – Catalog & Internet Segment

Operating profit in the Catalog & Internet segment improved $4.5 million from an operating loss of $4.8 million in fiscal 2010 to a small operating loss of $0.3 million in fiscal 2011. This improvement is primarily due to this year’s improved operating margin within the Miles Kimball Company due to favorable gross margin, lower product costs, price advances and decreased operating expenses as a result of selected catalog circulation reductions. This was partly offset by charges of $1.1 million recorded at Boca Java for the impairment of assets and the recording of a non-recurring gain of $1.9 million on the settlement of the Miles Kimball Company pension plan recorded in fiscal 2010.

Operating Loss – Wholesale Segment

Operating loss in the Wholesale segment decreased $6.2 million from $9.0 million in fiscal 2010 to $2.8 million in fiscal 2011. This improvement is primarily attributable to the 7% increase in sales within Midwest-CBK as well as distribution and administrative cost savings recognized as a result of the Midwest-CBK combination. This was partly offset by lower operating profit at Sterno due to lower sales and sharply higher commodity costs.

Other Expense (Income)

Interest expense decreased $0.6 million, from $7.8 million in fiscal 2010 to $7.2 million in fiscal 2011, primarily due to the payment of the matured 7.90% Senior Notes in October 2009 partially offset by higher interest expense at ViSalus.

Interest income decreased $0.4 million, from $1.4 million in fiscal 2010 to $1.0 million in fiscal 2011, principally due to lower interest rates earned on invested cash during fiscal 2011.

 
25

 
 
Foreign exchange and other losses were $1.6 million in fiscal 2010 compared to $2.0 million in fiscal 2011. The loss recorded in fiscal 2010 and 2011 includes an impairment of auction rate securities of $0.9 million and $1.3 million respectively. The loss recorded in fiscal 2011 of $1.3 million represents the difference between the auction rate security par value of $10.0 million and its liquidated value of $8.7 million. Also included within Foreign exchange and other in fiscal 2011 is a $0.6 million loss due to the impairment of an investment in a LLC.
 
Income tax expense increased $8.0 million from $5.6 million in fiscal 2010 to $13.6 million in fiscal 2011. The increase in income tax expense was due primarily to a reduction in pretax losses in the United States and a $9.1 million tax benefit recorded in the prior year for the favorable closure of audits previously accrued partially offset by the tax impact of the non-deductible portion of goodwill and other intangible impairments and impairments of investments for which a partial tax benefit was recorded. The effective tax rate was 25.6% in fiscal 2010 compared to 35.8% for the current year.
 
The Net earnings attributable to Blyth, Inc. were $17.7 million in fiscal 2010 compared to earnings of $25.5 million in fiscal 2011. The improvement is primarily attributable to the $16.5 million goodwill and intangibles impairment and improved operating results at Midwest-CBK, Miles Kimball and ViSalus, partially offset by lower operating profits at PartyLite, Sterno and Boca Java.

As a result of the foregoing, earnings from operations increased $7.8 million, from earnings of $17.7 million in fiscal 2010 to $25.5 million in fiscal 2011. Basic and diluted earnings per share from operations were $1.99 and $1.98 per share for fiscal 2010 compared to income of $3.02 and $3.00 per share for fiscal 2011.

Fiscal 2010 Compared to Fiscal 2009

Consolidated Net Sales

Net sales decreased $92.7 million, or approximately 9%, from $1,050.8 million in fiscal 2009 to $958.1 million in fiscal 2010. The decrease is a result of a decline in sales in PartyLite’s North American businesses and overall declines in sales in our Wholesale and Catalog & Internet segments. This decrease was partially offset by an increase in sales within PartyLite’s European markets.

Net Sales – Direct Selling Segment

Net sales in the Direct Selling segment decreased $29.3 million, or 4%, from $664.5 million in fiscal 2009 to $635.2 million in fiscal 2010.

PartyLite’s U.S. sales decreased approximately 14% for fiscal 2010 compared to fiscal 2009, due to the U.S. economic recession, which led to lower consumer discretionary spending, a decline in PartyLite shows as well as a decrease in shows per consultant, all resulting in less opportunity to promote our products and recruit new consultants. We increased promotional activities to attract and retain consultants, hostesses and guests to attend shows.  As a result, PartyLite’s active independent U.S. sales consultants remained approximately even on a year-over-year basis.

PartyLite Canada reported a 17% decrease for fiscal 2010 compared to fiscal 2009 in U.S. dollars, or 15% on a local currency basis. The sales decrease in Canada is primarily due to the weak Canadian economy which contributed to the decline in consultant base of 8% and a decrease in PartyLite shows year-over-year.

 
26

 
In PartyLite’s European markets, sales increased 3% in U.S. dollars for fiscal 2010 compared to fiscal 2009, driven by strong sales in Germany, France and Austria. On a local currency basis, PartyLite Europe sales increased approximately 5%, driven by an increase of approximately 2,000 consultants. PartyLite Europe represented approximately 50% of PartyLite’s worldwide net sales in fiscal 2009 compared to 54% in fiscal 2010, reflecting the continued sales growth within the European markets.

Net sales in the Direct Selling segment represented approximately 63% of total Blyth net sales in fiscal 2009 compared to 66% in fiscal 2010.

Net Sales – Catalog & Internet Segment

Net sales in the Catalog & Internet segment decreased $24.1 million, or 13%, from $190.1 million in fiscal 2009 to $166.0 million in fiscal 2010. Sales decreased across all catalogs due to lower consumer discretionary spending, as well as a planned reduction in catalog circulation in an effort to reduce selling costs through more targeted catalog delivery.

Net sales in the Catalog & Internet segment accounted for approximately 18% of total Blyth net sales in fiscal 2009 and fiscal 2010.

Net Sales – Wholesale Segment

Net sales in the Wholesale segment decreased $39.4 million, or 20%, from $196.2 million in fiscal 2009 to $156.8 million in fiscal 2010. The decrease is primarily a result of reduced sales within our home décor, seasonal décor and food service product lines, which have been adversely impacted by the weak housing market and overall economy. Net sales in the Wholesale segment represented approximately 19% of total Blyth net sales in fiscal 2009 compared to 16% in fiscal 2010.

Consolidated Gross Profit and Operating Expenses

Blyth’s consolidated gross profit decreased $51.7 million, or 9%, from $577.2 million in fiscal 2009 to $525.5 million in fiscal 2010. The decrease in gross profit is primarily attributable to the 9% decrease in sales, partially offset by rigorous cost controls. These efforts included consolidating some operations and workforce reductions, specifically related to distribution operations. The gross profit margin decreased slightly from 54.9% in fiscal 2009 to 54.8% in fiscal 2010, primarily due to the impact of sales declining at a greater rate than promotional expenses, partially offset by cost reduction measures and a general decrease in most commodity costs, specifically wax products and diethylene glycol (“DEG”).

Blyth’s consolidated selling expense decreased $33.2 million, or approximately 8%, from $400.7 million in fiscal 2009 to $367.5 million in fiscal 2010. The decrease in selling expense is primarily the result of the reduced sales within the Wholesale segment, PartyLite U.S. and the Catalog & Internet segment. Selling expense as a percentage of net sales increased from 38.1% in fiscal 2009 to 38.4% in fiscal 2010 which is primarily a result of promotional initiatives in the Direct Selling segment to drive sales, partially offset by the consolidation of the sales and marketing operations of our seasonal and home décor Wholesale operations.

Blyth’s consolidated administrative expenses decreased $12.3 million, or 10%, from $123.8 million in fiscal 2009 to $111.5 million in fiscal 2010. This decline is principally due to improved expense management on a year-over-year basis. The consolidation of some of our operations has allowed us to reduce administrative costs. The merger of the Midwest and CBK operations within the Wholesale segment resulted in an approximately 23% reduction in that business unit’s administrative expenses when compared to fiscal 2009. Also contributing to the improvement is a $1.9 million gain on a pension plan settlement. Administrative expenses as a percentage of sales declined slightly from approximately 11.8% for fiscal 2009 to 11.6% for fiscal 2010.

 
27

 
 
Impairment charges of $48.8 million for goodwill and other intangibles were recognized in the Catalog & Internet segment in fiscal 2009, compared to a $16.5 million impairment recorded in the Direct Selling segment in fiscal 2010. In fiscal 2009 and 2010 we reviewed the performance of the Miles Kimball and ViSalus businesses, respectively, and their projected outlooks. Both businesses experienced lower revenue growth and reduced operating margins than anticipated. This shortfall in revenues and profit was primarily attributable to decreased consumer spending due to changes in the business environment and an overall weak economy. As a result, the goodwill and intangibles in the Catalog & Internet segment were determined to be impaired in fiscal 2009 and in the Direct Selling segment during fiscal 2010.

Blyth’s consolidated operating profit increased $26.0 million from $4.0 million in fiscal 2009 to $30.0 million in fiscal 2010. The increase is primarily due to the decrease in goodwill and other intangibles impairments, partially offset by the impact of the 9% decrease in sales.

Operating Profit - Direct Selling Segment

Operating profit in the Direct Selling segment decreased $30.6 million, from $74.4 million in fiscal 2009 to $43.8 million in fiscal 2010. More than half of the decrease is attributable to the $16.5 million goodwill and other intangible impairments related to ViSalus recorded in fiscal 2010. The remaining decline in operating income is attributable to a decline in operating income for PartyLite’s U.S. operations, primarily a result of the 14% decrease in sales. Partially offsetting this decline is sales growth within PartyLite Europe.

Operating Loss – Catalog & Internet Segment

Operating loss in the Catalog & Internet segment decreased from $59.1 million in fiscal 2009, to $4.8 million in fiscal 2010. The lower operating loss is primarily due to the nonrecurring goodwill and other intangibles impairments charges of $48.8 million recorded during fiscal 2009 and a $1.9 million gain as the result of the pension plan settlement realized during fiscal 2010. Excluding the effect of these items, the operating loss would have been $10.3 million in fiscal 2009 as compared to $6.7 million in fiscal 2010. This improvement is principally due to the nonrecurring impact of ERP implementation issues experienced in fiscal 2009 that increased shipping and customer service costs and cost reductions at the Miles Kimball Company and Boca Java.

Operating Loss – Wholesale Segment

Operating loss in the Wholesale segment decreased $2.2 million from $11.2 million in fiscal 2009 to $9.0 million in fiscal 2010. This reduction is primarily the result of a 28% improvement in Selling and Administrative expenses across the segment, primarily due to the merger of the Midwest and CBK operations. This was offset by a 20% decrease in sales across the segment due to a soft housing market and a continuing weak economy.

Consolidated Other Expense (Income)

Interest expense decreased $2.2 million, from $10.0 million in fiscal 2009 to $7.8 million in fiscal 2010, primarily due to the payoff of the matured 7.90% Senior Notes during fiscal 2010.

Interest income decreased $2.9 million, from $4.3 million in fiscal 2009 to $1.4 million in fiscal 2010, due to sharply lower interest rates earned on invested cash during fiscal 2010.

 
28



Foreign exchange and other losses were $9.8 million in fiscal 2009 compared to $1.6 million in fiscal 2010. The loss recorded in fiscal 2009 includes $5.2 million for the permanent impairment of our investment in RedEnvelope and a write-down of $2.1 million related to our preferred stock portfolio that was previously classified as a trading investment. The loss in fiscal 2010 included a $0.9 million loss on the sale of an auction rate security investment.
 
Income tax expense increased $1.8 million from $3.8 million in fiscal 2009 to $5.6 million in fiscal 2010. The increase in income tax expense was due primarily to a reduction in pretax losses in the United States and a $9.1 million reduction in our unrecognized tax benefits, partially offset by the tax impact of the non-deductible portion of goodwill and other intangible impairments and impairments of investments for which a partial tax benefit was recorded. The effective tax rate was a negative 33.3% in fiscal 2009 as a result of our net loss compared to an expense of 25.6% in fiscal 2010.
 
The Net loss attributable to Blyth, Inc. was $15.5 million in fiscal 2009 compared to earnings of $17.7 million in fiscal 2010. The improvement is primarily attributable to the $48.8 million goodwill and intangibles impairments recorded during the third quarter of fiscal 2009, partially offset by the $16.5 million goodwill and intangibles impairment recorded in the second quarter of fiscal 2010 and lower sales in relation in fiscal 2009 compared to fiscal 2010.

As a result of the foregoing, earnings from operations increased $33.2 million, from a loss of $15.5 million in fiscal 2009 to earnings of $17.7 million in fiscal 2010. Basic and diluted earnings (loss) per share from operations were ($1.73) for fiscal 2009 compared to income of $1.99 and $1.98 per share, respectively, for fiscal 2010.

Seasonality

Historically, our operating cash flow for the first nine months of the fiscal year shows little if any positive cash flow due to requirements for meeting working capital needs for inventory purchases and the extension of credit through the holiday season. Our fourth quarter, however, historically generates a surplus of cash resulting from a large concentration of our business occurring during the holiday season. Over one third of our total revenue was recorded in the fourth quarter of fiscal 2011.

Liquidity and Capital Resources

Cash and cash equivalents decreased $1.7 million from $207.4 million at January 31, 2010 to $205.7 million at January 31, 2011.

We typically generate positive cash flow from operations due to favorable gross margins and the variable nature of selling expenses, which constitute a significant percentage of operating expenses. We generated $93.4 million in cash from operations in fiscal 2010 compared to $39.3 million in fiscal 2011. This decline was primarily driven by net changes in operating assets and liabilities which resulted in the use of cash of $13.9 million in fiscal 2011 compared to a source of cash $35.9 million in the prior year. This decrease was primarily driven by higher inventories resulting from lower than expected sales and a reduction in accounts payable as we endeavored to take advantage of early discount programs. Included in earnings in fiscal 2011 were non-cash charges for depreciation and amortization, and amortization of unearned stock-based compensation of $13.7 million and $2.1 million, respectively.

Due to the seasonal nature of our businesses we generally do not have significant positive cash flow from operations until our fourth quarter. Our working capital needs are the highest in late summer prior to the start of the holiday season. If demand for our products falls short of expectations, we could be required to maintain higher inventory balances than forecasted which could negatively impact our liquidity.

 
29



Net cash provided by investing activities was $6.1 million in fiscal 2010, compared to a use of $0.3 million in fiscal 2011. Proceeds from the sale of investments in fiscal 2011 generated $14.1 million of cash primarily through liquidation of equity securities and maturities of short-term certificates of deposit. Uses of cash in fiscal 2011 included purchases of short-term investments of $6.9 million and net capital expenditures for property, plant and equipment of $8.2 million.

Net cash used in financing activities in fiscal 2010 was $41.3 million compared to $39.3 million in fiscal 2011. The current year included the reduction of our long-term debt and capital lease obligations by $0.6 million, compared to long-term debt and capital lease payments of $38.0 million in the prior year. During fiscal 2011, we purchased treasury stock of $20.6 million and paid dividends of $18.8 million compared to $4.0 million and $1.8 million in the prior year. We will continue to monitor carefully our cash position, and will only make additional repurchases of outstanding debt or treasury shares and pay dividends when we have sufficient cash surpluses available to do so.
 
A significant portion of our operations are outside of the United States. A significant downturn in our business in our international markets would adversely impact our ability to generate operating cash flows. Operating cash flows would also be negatively impacted if we experienced difficulties in the recruitment, retention and our ability to maintain the productivity of our independent consultants. Sales decreased in PartyLite’s U.S. market from the prior year by $49.8 million, or 25%, which was driven by lower activity by existing consultants and a lower number of PartyLite shows held resulting from difficult economic conditions. Management’s key areas of focus have included stabilizing the consultant base through training and promotional incentives, which has had several continuous years of decline in the United States. While we are making efforts to stabilize and increase the number of active independent sales consultants, it may be difficult to do so in the current economic climate due to reduced consumer discretionary spending. If our U.S. consultant count continues to decline it will have a negative impact on our liquidity and financial results.

We anticipate total capital spending of approximately $9.0 million for fiscal 2012. A major influence on the forecasted expenditures is our investment in the growth of the PartyLite European operations as well as investments in information technology systems. We have grown in part through acquisitions and, as part of our growth strategy, we expect to continue from time to time in the ordinary course of business to evaluate and pursue acquisition opportunities as appropriate. We believe our financing needs in the short and long term can be met from cash generated internally.  Information on debt maturities is presented in Note 12 to the Consolidated Financial Statements.

On October 21, 2008, we acquired a 43.6% interest in ViSalus for $13.0 million and incurred acquisition costs of $1.0 million for a total cash acquisition cost of $14.0 million. We may purchase additional interests in ViSalus that will require additional capital resources, increasing our ownership to 100%. These additional purchases are currently conditioned upon ViSalus meeting certain operating targets in calendar years 2010, 2011 and 2012. ViSalus did not meet its predefined operating target for calendar year 2010. However, we have the right to waive this requirement and increase our ownership interest to 57.5%. As such the amount representing the allocation of losses equivalent to the noncontrolling interest in ViSalus has been reclassified to Stockholder’s equity as noncontrolling interest as it is no longer probable of being redeemed. If we elect to increase our ownership interest to 57.5% in ViSalus in 2011, we will be required to make the additional purchases of ViSalus in 2012 and 2013 if ViSalus meets it predefined operating targets in those years. As of January 31, 2011, if ViSalus meets its projected operating targets, the total expected redemption value of noncontrolling interest will be approximately $37.6 million paid through 2014. The total expected redemption value could increase or decrease depending upon whether ViSalus exceeds or falls short of its operating projections. We expect the payment, if any, will be out of existing cash balances and future cash flows from operations.

 
30



The current status of the United States and global credit and equity markets have made it difficult for many businesses to obtain financing on acceptable terms. If these conditions continue or worsen, our cost of borrowing may increase and it may be more difficult to obtain financing for our businesses. Obtaining a new credit facility will more than likely require higher interest costs and may require our providing security to guarantee such borrowings. Alternatively, we may not be able to obtain unfunded borrowings, which may require us to seek other forms of financing, such as term debt, at higher interest rates and additional expense. A significant amount of our cash and cash equivalents are held by our international subsidiaries in foreign banks, and as such may be subject to foreign taxes, unfavorable exchange rate fluctuations and other factors limiting our ability to repatriate funds to the United States.

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

Cash held in foreign locations was approximately $58 million and $82 million as of January 31, 2010 and 2011, respectively. We had no short term borrowings outstanding as of January 31, 2010 and 2011 or at anytime during the past year.

As of January 31, 2011, we had $2.0 million available under an uncommitted facility issued by a bank, to be used for letters of credit through January 31, 2012.  As of January 31, 2011, no amount was outstanding under this facility.

As of January 31, 2011, we had $2.1 million in standby letters of credit outstanding that are fully collateralized through a certificate of deposit funded by us.

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

On October 20, 2003, we issued $100.0 million 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes. Such notes contain among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  As of January 31, 2011, we were in compliance with such provisions. Interest is payable semi-annually in arrears on May 1 and November 1. The notes may be redeemed in whole or in part at any time at a specified redemption price. The proceeds of the debt issuances were used for general corporate purposes.

As of January 31, 2010 and 2011, Miles Kimball had approximately $7.7 million and $7.2 million, respectively, of long-term debt (including current portion) outstanding under a real estate mortgage note payable, which matures on June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

 
31


As of January 31, 2010 and 2011, 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.  The loan 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 0.6 % as of January 31, 2011. Interest payments are required monthly and the principal is due upon maturity.

As of January 31, 2010 and 2011 ViSalus had two long-term loans totaling $2.7 million and $3.2 million outstanding related to notes payable to RAM and ViSalus’ three founders. Under the terms of the notes, interest is accrued at a fixed annual interest rate of 10.0% in addition to the $0.6 million interest cost as a result of ViSalus achieving certain performance criteria (see Note 3 to the Consolidated Financial Statements for additional information).

On February 28, 2011, ViSalus repaid $0.6 million of the loan due to founders and RAM and also the lump-sum interest payment of $0.6 million due at maturity on the loan. In March 2011, ViSalus paid the loan balance of $3.3 million including interest accrued due to Blyth.

The estimated fair value of our $110.5 million and $111.0 million total long-term debt (including Capital leases) at January 31, 2010 and 2011 was approximately $95.6 million and $110.2 million, respectively. 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. 

The following table summarizes the maturity dates of our contractual obligations as of January 31, 2011:

Payments Due by Period
 
         
Less than
               
More than
 
Contractual Obligations (In thousands)
 
Total
   
1 year
   
1 - 3 Years
   
3 - 5 Years
   
5 Years
 
  Long-Term Debt(1)
  $ 110,730     $ 1,239     $ 103,916     $ 1,421     $ 4,154  
  Capital Leases(2)
    255       90       135       30       -  
  Interest(3)
    18,235       6,112       10,600       760       763  
  Purchase Obligations(4)
    33,284       32,025       1,259       -       -  
  Operating Leases
    47,835       15,030       16,951       7,819       8,035  
  Unrecognized Tax Benefits(5)
    12,211       -       -       -       -  
     Total Contractual Obligations
  $ 222,550     $ 54,496     $ 132,861     $ 10,030     $ 12,952  
(1) Long-term debt includes 5.5% Senior Notes due November 1, 2013, a mortgage note payable-maturity June 1, 2020, and an Industrial Revenue Bond ("IRB") with a maturity date of January 1, 2025 (See Note 12 to the Consolidated Financial Statements).
 
(2) Amounts represent future lease payments, excluding interest, due on five capital leases, which end between fiscal 2011 and fiscal 2013 (See Note 14 to the Consolidated Financial Statements).
 
(3) Interest expense on long-term debt is comprised of $15.1 million relating to Senior Notes, $3.0 million in mortgage interest, $16 thousand of interest due on the MKC Wisconsin Loan, $4 thousand of interest due on the CBK Industrial Revenue Bond, $27 thousand relating to the Visalus founder loans and approximately $39 thousand of interest relating to future capital lease obligations.
 
(4) Purchase obligations consist primarily of open purchase orders for inventory.
                         
(5) There are no unrecognized tax benefits expected to be realized within the next 12 months, and $12.2 million for which we are not able to
 
reasonably estimate the timing of the potential future payments (See Note 15 to the Consolidated Financial Statements).
 


On December 13, 2007, our Board of Directors authorized a new stock repurchase program for 1,500,000 shares, in addition to 3,000,000 shares authorized under the previous plan. The new stock repurchase program became effective after we exhausted the authorized amount under the old repurchase program. We repurchased approximately 582,000 shares during fiscal 2011. As of January 31, 2011, the cumulative total shares purchased under the new and old program was 3,317,602, at a total cost of approximately $249.4 million. The acquired shares are held as common stock in treasury at cost.

 
32


During fiscal 2011, we paid $18.8 million in dividends, compared to $1.8 million in fiscal 2010. The total dividends declared during fiscal 2011 were approximately $10.0 million, which includes the $8.2 million special dividend declared in November 2010 and paid in December 2010. Our ability to pay cash dividends in the future is dependent upon, among other things, our ability to operate profitably and to generate significant cash flows from operations in excess of investment and financing requirements that may increase in the future to, for example, fund new acquisitions or retire debt. As we normally do, we will review our dividend policy prior to our next dividend payment (historically we have paid dividends in May and November), and may adjust the rate of our semi-annual dividend if necessary.

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

Critical Accounting Policies

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

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

Revenue Recognition

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

Generally, our sales are based on fixed prices from published price lists. We record estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions.  Should market conditions decline, we may increase customer incentives with respect to future sales. We also record reductions to revenue based primarily on historical experience, for estimated customer returns and chargebacks that may arise as a result of shipping errors, product damage in transit or for other reasons that can only become known subsequent to recognizing the revenue. If the amount of actual customer returns and chargebacks were to increase significantly from the estimated amount, revisions to the estimated allowance would be required. In some instances, we receive payment in advance of product delivery. Such advance payments occur primarily in our direct selling and direct marketing channels and are recorded as deferred revenue in Accrued expenses in the Consolidated Balance Sheets. Upon delivery of product for which advance payment has been made, the related deferred revenue is reversed and recorded as revenue.

 
33


We establish an allowance for doubtful accounts for trade and note receivables. The allowance is determined based on our evaluation of specific customers’ ability to pay, aging of receivables, historical experience and the current economic environment. While we believe we have appropriately considered known or expected outcomes, our customers’ ability to pay their obligations, including those to us, could be adversely affected by declining retail sales resulting from such factors as contraction in the economy or a general decline in consumer spending. Some of our wholesale business units offer seasonal dating programs pursuant to which customers that qualify for such programs are offered extended payment terms for seasonal product shipments, which is a common practice in some of our channels. The sales price for our products sold pursuant to such seasonal dating programs is fixed prior to the time of shipment to the customer. Customers do not have the right to return product, except for rights to return that we believe are typical of our industry for such reasons as damaged goods, shipping errors or similar occurrences. We are not required to repurchase products from our customers, nor do we have any regular practice of doing so. We believe that we are reasonably assured of payment for products sold pursuant to such seasonal dating programs based on our historical experience with the established list of customers eligible for such programs. If, however, product sales by our Wholesale segment’s customers during the seasonal selling period should fall significantly below expectations, such customers’ financial condition could be adversely affected, increasing the risk of not collecting these seasonal dating receivables and, possibly, resulting in additional bad debt charges. We do not make any sales under consignment or similar arrangements.

Inventory valuation

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

Restructuring and impairment charges on long-lived assets

In response to changing market conditions and competition, our management regularly updates our business model and market strategies, including the evaluation of facilities, personnel and products.  Future adverse changes in economic and market conditions could result in additional organizational changes and possibly additional restructuring and impairment charges. Historically, we have reviewed long-lived assets, including property, plant and equipment and other intangibles with definite lives for impairment whenever events or changes in circumstances indicated that the carrying amount of such an asset might not be recoverable. Management determines whether there has been an impairment on long-lived assets held for use in the business by comparing anticipated undiscounted future cash flow from the use and eventual disposition of the asset or asset group to the carrying value of the asset.  The amount of any resulting impairment is calculated by comparing the carrying value to the fair value. Long-lived assets that meet the definition of held for sale are valued at the lower of carrying amount or net realizable value. Assets or asset groups are determined at the lowest level possible for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets whose aggregate undiscounted cash flows are less than its carrying value, the assets are considered potentially impaired and actual impairments, if any, would be determined to the extent the assets carrying value exceeds its aggregate fair value.

 
34


Goodwill and other indefinite lived intangibles

We had approximately $11.2 million and $10.9 million of goodwill and other indefinite lived intangibles, as of January 31, 2010 and 2011, respectively. Goodwill and other indefinite lived intangibles are subject to an assessment for impairment using a two-step fair value-based test and other intangibles are also subject to impairment reviews, which are performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired.

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

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

 
35



· unexpected increase in competition resulting in lower prices or lower volumes,
· entry of new products into the marketplace from competitors,
· lack of acceptance of our new products into the marketplace,
· loss of a key employee or customer,
· significantly higher raw material costs, and
· economic downturn
· other micro/macroeconomic factors.


Goodwill

Miles Kimball

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

Direct Selling Segment

In the second quarter of fiscal 2010, ViSalus 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 required management to focus its efforts on stabilizing its distributor base and curtailing its international expansion plans. Accordingly, management 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, we recorded a non-cash pre-tax goodwill impairment charge of $13.2 million, during the second quarter of fiscal 2010. The January 31, 2011 impairment assessment of the remaining $2.3 million of the goodwill within this segment indicates that it is fully recoverable.

Other

In August 2005, we acquired a 100% interest in Boca Java, a small gourmet coffee and tea company. Boca Java sells its products primarily through the Internet and is included in the Catalog & Internet segment. Boca Java represents a separate reporting unit and is reviewed for impairment on an annual basis. We completed an impairment assessment during fiscal 2009 which indicated that the goodwill of $1.9 million was fully impaired and recorded a charge to write off the goodwill.

Significant assumptions

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

 
36

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

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

Trade Names and Trademarks

Our trade name and trademark intangible assets relate to our acquisitions of Miles Kimball and Walter Drake (reported in the Catalog & Internet segment) and our acquisition of a controlling interest in ViSalus in October 2008 (reported in the Direct Selling segment). We had approximately $9.0 million and $8.6 million in trade names and trademarks as of January 31, 2010 and 2011, respectively.
 
We perform our annual assessment of impairment for indefinite-lived intangible assets as of January 31, which is our fiscal year-end, or upon the occurrence of a triggering event. We use the relief from royalty method to estimate the fair value for indefinite-lived intangible assets. The underlying concept of the relief from royalty method is that the inherent economic value of intangibles is directly related to the timing of future cash flows associated with the intangible asset. Similar to the income approach or discounted cash flow methodology used to determine the fair value of goodwill, the fair value of indefinite-lived intangible assets is equal to the present value of after-tax cash flows associated with the intangible asset based on an applicable royalty rate. The royalty rate is determined by using existing market comparables for royalty agreements using an intellectual property data base. The arms-length agreements generally support a rate that is a percentage of direct sales. This approach is based on the premise that the free cash flow is a more valid criterion for measuring value than “book” or accounting profits.
 
As a result of our fiscal 2009 impairment assessments, we determined that the recorded values of trade names and trademarks in the Miles Kimball reporting unit, in the Catalog & Internet segment, were impaired. In the third and fourth quarters of fiscal 2009 we performed additional impairment assessments due to changes in the business environment and adverse economic conditions currently experienced due to the continued decrease in consumer spending. As a result of these impairment analyses performed, the trade names and trademarks in this reporting unit were determined to be impaired, as their fair value was less than their carrying value. Accordingly, we recorded non-cash pre-tax impairment charges of $15.0 million and $2.9 million in the third and fourth quarters, respectively of fiscal 2009.
 
 
 
37

 

During the second quarter of fiscal 2010, we performed impairment assessments due to adverse economic conditions currently experienced due to the continued decrease in consumer spending and a higher then expected distributor attrition rate. We determined that the recorded values of trade names, trademarks and customer relationships within ViSalus, in the Direct Selling segment, were impaired. As a result of these impairment analyses performed, the intangible assets were determined to be impaired, as their fair value was less than their carrying value. Accordingly, we recorded a non-cash pre-tax impairment charge of $3.1 million related to the trade names and trademarks and $0.2 million related to customer relationships.

During fiscal 2011, the Exposure’s brand in the Miles Kimball business, within the Catalog & Internet segment, experienced substantial declines in revenues when compared to forecasts and prior years. The Company believes this shortfall in revenue was primarily attributable to decreased consumer spending and adverse economic conditions. As a result of the impairment analysis performed, the indefinite-lived trade name in this brand was determined to be partially impaired, as the fair value of this brand was less than its carrying value. Accordingly, the Company recorded a non-cash pre-tax impairment charge of $0.3 million, resulting in carrying value as of January 31, 2011 of $1.4 million.

As of January 31, 2011, we performed our annual impairment analysis on the trade names and trademarks of the Catalog & Internet and ViSalus assets. The three primary assumptions used in the relief from royalty method are the discount rate, the perpetuity growth rate and the royalty rate. This discount rate is used to value the expected net cash flows to be derived from the royalty to its net present value. The discount rate uses a rate of return to account for the time value of money and an investment risk factor. The perpetuity growth rate estimates the businesses sustainable long-term growth rate. The royalty rate is based upon past royalty performance as well as the expected royalty growth rate using both macro and microeconomic factors surrounding the business. A change in the discount rate is often used by management to risk adjust the discounted cash flow analysis if there is a higher degree of risk that the estimated cash flows from the indefinite-lived intangible asset may not be fully achieved. These risks are often based upon the business units’ past performance, competition, position in the marketplace, acceptance of new products in the marketplace and other macro and microeconomic factors surrounding the business. If, however, actual cash flows should fall significantly below expectations, this could result in an impairment of our indefinite-lived intangible assets.

If the discount rate had increased by 0.5% and royalty rate had decreased by 0.5%, the estimated fair value of the trade names and trademarks within the Catalog & Internet segment would have decreased by $2.8 million to $4.7 million. This decrease would have required us to take an additional impairment charge of $2.8 million to write-down our indefinite lived intangibles to its estimated fair value. Conversely, if the discount rate had decreased by 0.5% and the royalty rate had increased by 0.5%, the estimated fair value of the trade names and trademarks within the Catalog and Internet segment would have increased by $3.9 million, resulting in no impairment charge. There would have been no impact in the recorded value of the ViSalus trade names and trademarks within the Direct Selling segment, if the same changes in discount and royalty rate assumptions had occurred as the value would have exceeded its recorded value by $2.8 million and $8.6 million, respectively.

 
38



Accounting for income taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our actual current tax exposure (state, federal and foreign), together with assessing permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property and equipment, and valuation of inventories. Temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or change the allowance in a period, we would include this as an expense within the tax provision in the accompanying Consolidated Statements of Earnings (Loss). Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Amounts accrued for the tax uncertainties, primarily recorded in long-term liabilities, total $12.3 million and $12.2 million at January 31, 2010 and 2011, respectively. Accruals relate to tax issues for U.S. federal, domestic state, and taxation of foreign earnings.

Blyth’s historical policy has been to consider its unremitted foreign earnings as not indefinitely invested except for amounts deemed required for working capital and expansion needs and as such provide deferred income tax expense on these undistributed earnings. The Company periodically reassesses whether the non-US subsidiaries will invest their undistributed earnings indefinitely.

As of January 31, 2011, we determined that $236.2 million of cumulative undistributed foreign earnings were not reinvested indefinitely by our non-U.S. subsidiaries. During fiscal 2010 and fiscal 2011, we repatriated $150.0 million and $16 million respectively. As a result, $3.3 million of a reduction to deferred taxes was recorded in the current year as an increase to our Net earnings on those unremitted earnings.

In August 2008, a state department of revenue proposed to assess additional corporate income taxes on us for fiscal years 2002, 2003 and 2004 in the amount of $34.9 million including interest and penalties.  The state department of revenue has subsequently reduced this amount to $16.9 million, including interest. In February 2011, the state department of revenue issued a notice of intent to assess additional corporate income taxes for fiscal years 2005, 2006 and 2007 in the amount of $14.0 million, including interest and penalties. We intend to vigorously protest all of these assessments.  As of January 31, 2011, we established a reserve for this matter which we believe is adequate based on existing facts and circumstances. The ultimate resolution of these matters could exceed our recorded reserve in the event of an unfavorable outcome; however, we cannot estimate such a loss at this time.

 Impact of Adoption of Recently Issued Accounting Standards

We have reviewed all guidance issued but not implemented as of the filing date and have determined that only the following could or do have a significant affect on our financial statements.

 
39


In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These changes become effective for Blyth beginning February 1, 2011. The Company’s adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations.

In December 2010, the FASB issued ASU 2010-28, “Intangible –Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. These changes become effective for Blyth beginning February 1, 2011. Based on the most recent impairment review of Blyth’s goodwill in January 2011, management has determined these changes will not have an impact on the Company’s consolidated financial condition or results of operations.
 
In April 2010, the FASB issued ASU 2010-13, "Compensation—Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades (A consensus of the FASB Emerging Issues Task Force)" (“ASU 2010-13”). ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This clarification of existing practice is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The Company’s adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations.

In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements" (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. This update has changed a portion of our disclosures beginning February 1, 2010 and will change our disclosure in fiscal 2012 regarding the activity within Level 3. This update is not expected to have a material impact on our consolidated financial condition or results of operations.

 
40

 
Forward-looking and Cautionary Statements

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

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We have operations outside of the United States and sell our products worldwide. Our activities expose us to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates and commodity prices. These financial exposures are actively monitored and, where considered appropriate, managed by us. We enter into contracts, with the intention of limiting these risks, with only those counterparties that we deem to be creditworthy, in order to also mitigate our non-performance risk. International sales represented 45% of total sales of the Company for fiscal 2011.

Interest Rate Risk

We are subject to interest rate risk variable rate debt. As of January 31, 2011, we are subject to interest rate risk on approximately $0.1 million of variable rate debt. A 1-percentage point increase in the interest rate would not have a significant impact on pre-tax earnings.
 
Investment Risk

We are subject to investment risk on our marketable securities due to market volatility. As of January 31, 2011, we held equity instruments with an adjusted cost basis of $13.8 million which have been adjusted to its fair value based on current market data.

Foreign Currency Risk

We use foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, net assets of our foreign operations, intercompany payables and certain foreign denominated loans. We do 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 realized and unrealized gains/losses on these hedges are recorded within AOCI until the investment is sold or disposed of. The net after-tax gain related to the derivative net investment hedges in Accumulated other comprehensive income (“AOCI”) as of January 31, 2010 and January 31, 2011 was $5.2 million and $5.6 million, respectively.

We have designated our foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as fair value hedges. The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.
 

 
41


 
We have designated our forward exchange contracts on forecasted intercompany inventory 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. Upon payment of each
commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from AOCI and is included in the measurement of the cost of the acquired asset. If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in AOCI until the hedged item is settled. However, if the hedged item is no longer probable to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately. The net after-tax gain included in AOCI at January 31, 2011 is $0.1 million and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment.

For consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the Consolidated Statement of Cash Flows with the items being hedged.

The following table provides information about our foreign exchange forward contracts accounted for as cash flow hedges as of January 31, 2011:


   
US Dollar
   
Average
   
Unrealized
 
(In thousands, except average contract rate)
 
Notional Amount
   
Contract Rate
   
Gain (Loss)
 
Canadian Dollar
  $ 2,050       1.00     $ 15  
Euro
  $ 11,475     $ 1.32     $ (181 )
    $ 13,525             $ (166 )

The foreign exchange contracts outstanding have maturity dates through October 2011.


 
42


 
Item 8.   Financial Statements and Supplementary Data
 

Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of Blyth, Inc.


We have audited the accompanying consolidated balance sheets of Blyth, Inc. and Subsidiaries (the “Company”) as of January 31, 2011 and 2010, and the related consolidated statements of earnings (loss), stockholders' equity, and cash flows for the years then ended.  Our audits also included the financial statement schedule listed at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at January 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 8, 2011 expressed an unqualified opinion thereon.

 
                                                                        
                                                                  /s/ Ernst & Young LLP

Stamford, Connecticut
April 8, 2011





 
43


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Blyth, Inc.
Greenwich, Connecticut

We have audited the accompanying consolidated statements of loss, stockholders' equity, and cash flows for the period ended January 31, 2009 of Blyth, Inc. and subsidiaries (the "Company").  Our audit also included information for fiscal year ended 2009 in the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above of Blyth, Inc. and subsidiaries present fairly, in all material respects, the results of their operations and their cash flows for the period ended January 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2009 information in such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated financial statements have been retrospectively adjusted for the adoption of new accounting guidance for the presentation and disclosure of noncontrolling interests.


/S/ DELOITTE & TOUCHE LLP


Stamford, Connecticut
April 13, 2009 (April 9, 2010 as to the effects of the immaterial restatement discussed in Note 1, and the effects of  the adoption of new accounting guidance for the presentation and disclosure of noncontrolling interests as discussed in Note 1)

 
44


 
 
BLYTH, INC. AND SUBSIDIARIES
 
 
As of January 31, (In thousands, except share and per share data)
 
2010
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 207,394     $ 205,748  
Short-term investments
    5,000       8,700  
Accounts receivable, less allowance for doubtful receivables $2,243 in 2010 and $1,344 in 2011
    18,694       17,586  
Inventories
    102,203       108,222  
Prepaid and other
    23,997       27,583  
Deferred income taxes
    6,769       2,096  
       Total current assets
    364,057       369,935  
Property, plant and equipment, at cost:
               
Land and buildings
    103,997       103,521  
Leasehold improvements
    7,944       8,212  
Machinery and equipment
    129,299       127,703  
Office furniture, data processing equipment and software
    68,641       64,758  
Construction in progress
    914       1,643  
      310,795       305,837  
    Less accumulated depreciation
    202,808       204,336  
      107,987       101,501  
Other assets:
               
Investments
    19,072       7,576  
Goodwill
    2,298       2,298  
Other intangible assets, net of accumulated amortization of $12,254 in 2010 and $13,338 in 2011
    12,176       10,792  
Other assets
    17,403       9,663  
       Total other assets
    50,949       30,329  
       Total assets
  $ 522,993     $ 501,765  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 582     $ 1,330  
Accounts payable
    57,338       51,783  
Accrued expenses
    60,895       61,102  
Dividend payable
    8,826       -  
Income taxes payable
    4,913       3,581  
       Total current liabilities
    132,554       117,796  
Deferred income taxes
    686       2,049  
Long-term debt, less current maturities
    109,962       109,655  
Other liabilities
    24,984       25,195  
Commitments and contingencies
    -       -  
Redeemable noncontrolling interest
    (1,470 )     -  
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 12,765,919 shares in 2010 and 12,791,515 shares in 2011
    255       256  
Additional contributed capital
    144,233       146,355  
Retained earnings
    494,524       510,102  
Accumulated other comprehensive income
    20,591       16,951  
Treasury stock, at cost, 3,972,112 shares in 2010 and 4,561,014 shares in 2011
    (403,329 )     (424,210 )
       Total stockholders' equity
    256,274       249,454  
Noncontrolling interest
    3       (2,384 )
       Total  equity
    256,277       247,070  
       Total liabilities and equity
  $ 522,993     $ 501,765  
The accompanying notes are an integral part of these consolidated financial statements.
 


 
45


 
 
BLYTH, INC. AND SUBSIDIARIES
 
 
For the year ended January 31, (In thousands, except per share data)
 
2009
   
2010
   
2011
 
Net sales
  $ 1,050,793     $ 958,077     $ 900,927  
Cost of goods sold
    473,577       432,578       401,297  
    Gross profit
    577,216       525,499       499,630  
Selling
    400,658       367,487       337,191  
Administrative
    123,779       111,531       115,832  
Goodwill and other intangibles impairment
    48,751       16,498       -  
    Total operating expense
    573,188       495,516       453,023  
    Operating profit
    4,028       29,983       46,607  
Other expense (income):
                       
     Interest expense
    10,001       7,755       7,209  
     Interest income
    (4,261 )     (1,410 )     (1,007 )
     Foreign exchange and other, net
    9,813       1,564       1,999  
    Total other expense
    15,553       7,909       8,201  
     Earnings (loss) before income taxes
    (11,525 )     22,074       38,406  
Income tax expense
    3,840       5,649       13,618  
     Net earnings (loss)
    (15,365 )     16,425       24,788  
Less: Net earnings (loss) attributable to the noncontrolling interests
    115       (1,269 )     (768 )
Net earnings (loss) attributable to Blyth, Inc.
    (15,480 )     17,694       25,556  
Basic:
                       
Net earnings (loss) attributable per Blyth, Inc. common share
  $ (1.73 )   $ 1.99     $ 3.02  
Weighted average number of shares outstanding
    8,971       8,912       8,462  
Diluted:
                       
Net earnings (loss) attributable per Blyth, Inc. common share
  $ (1.73 )   $ 1.98     $ 3.00  
Weighted average number of shares outstanding
    8,971       8,934       8,508  
Cash dividend declared per share
  $ 2.16     $ 1.20     $ 1.20  
The accompanying notes are an integral part of these consolidated financial statements.
 









 
46


 
 
BLYTH, INC. AND SUBSIDIARIES
 
 
   
Blyth, Inc.'s Stockholders
                 
               
Accumulated
             
Redeemable
     
       
Additional
     
Other
             
Noncontrolling
     
   
Common
 
Contributed
 
Retained
 
Comprehensive
 
Treasury
 
Noncontrolling
 
Total
 
Interest
 
Comprehensive
 
(In thousands)
 
Stock
 
Capital
 
Earnings
 
Income (Loss)
 
Stock
 
Interest
 
Equity
 
(Temporary Equity)
 
Income (Loss)
 
Balance at January 31, 2008
  $ 254   $ 138,927   $ 522,328   $ 25,444   $ (387,885 ) $ -   $ 299,068   $ -   $ -  
Net loss for the year
                (15,480 )               115     (15,365 )         (15,365 )
Distribution to noncontrolling interest
                                  (115 )   (115 )            
Foreign currency translation adjustments
                      (4,318 )               (4,318 )         (4,318 )
Net unrealized loss on certain investments (net of tax benefit of $546)
                      (2,375 )               (2,375 )         (2,375 )
Net gain on cash flow hedging instruments (net of a tax liability of $377)
                      615                 615           615  
      Comprehensive loss
                                                    (21,443 )
Comprehensive income attributable to the noncontrolling interests
                                                    (115 )
      Comprehensive loss attributable to Blyth, Inc.
                                                  $ (21,558 )
Common stock issued in connection with long-term incentive plan
    1                                   1              
Amortization of unearned compensation
          2,380                             2,380              
Dividends paid ($2.16 per share)
                (19,406 )                     (19,406 )            
Treasury stock purchases
                            (11,093 )         (11,093 )            
Accretion of redeemable noncontrolling interest
                (893 )                     (893 )   893        
Balance at January 31, 2009
  $ 255   $ 141,307   $ 486,549   $ 19,366   $ (398,978 ) $ -   $ 248,499   $ 893   $ -  
Net earnings (loss) for the year
                17,694                 201     17,895     (1,470 )   16,425  
Distribution to noncontrolling interest
                                  (198 )   (198 )            
Foreign currency translation adjustments (net of tax liability of $261)
                      1,558                 1,558           1,558  
Net unrealized gain on certain investments (net of tax liability of $315)
                      438                 438           438  
Realized loss on sale of available
for sale investment (net of tax benefit
of $197)
                      322                 322           322  
Realized gain on pension plan termination (net of tax liability of $749)
                      (1,153 )               (1,153 )         (1,153 )
 Net unrealized gain on cash flow hedging
instruments (net of tax liability of $30)
                      60                 60           60  
      Comprehensive income
                                                    17,650  
Comprehensive loss attributable to the noncontrolling interests
                                                    1,269  
      Comprehensive income attributable to Blyth, Inc.
                                                  $ 18,919  
Stock-based compensation
          2,926                             2,926              
Dividends declared ($1.20 per share)
                (10,612 )                     (10,612 )            
Reversal of accretion of redeemable noncontrolling interest
                893                       893     (893 )      
Treasury stock purchases
                            (4,351 )         (4,351 )            
Balance at January 31, 2010
  $ 255   $ 144,233   $ 494,524   $ 20,591   $ (403,329 ) $ 3   $ 256,277   $ (1,470 ) $ -  
Net earnings (loss) for the year
                25,556                 224     25,780     (992 ) $ 24,788  
Distribution to noncontrolling interest
                                  (149 )   (149 )            
Reclass of Redeemable Noncontrolling
Interest to Noncontrolling Interest
                                  (2,462 )   (2,462 )   2,462        
Foreign currency translation adjustments
(net of tax benefit of $286)
                    (5,108 )               (5,108 )         (5,108 )
Reclassification adjustments for realized
and unrealized gain (loss) activity (net of
tax liability of $201)
                  1,271                 1,271           1,271  
 Net unrealized gain on net investment
hedginginstruments (net of tax liability
of $239)
                      399                 399           399  
 Net unrealized loss on cash flow hedging
instruments (net of tax benefit of $109)
                      (202 )               (202 )         (202 )
      Comprehensive Income
                                                    21,148  
 Comprehensive loss attributable to the
noncontrolling interests
                                                    768  
      Comprehensive Income attributable to Blyth, Inc.
                                                  $ 21,916  
Common stock issued in connection with long-term incentive plan
    1     (1 )                           -              
Stock-based compensation
          2,123                             2,123              
Dividends declared ($1.20 per share)
                (9,978 )                     (9,978 )            
Treasury stock purchases 1
                            (20,881 )         (20,881 )            
Balance, January 31, 2011
  $ 256   $ 146,355   $ 510,102   $ 16,951   $ (424,210 ) $ (2,384 ) $ 247,070   $ -        
                                                         
1) This includes shares withheld in order to satisfy employee withholding taxes upon the distribution of vested restricted stock units.
                               


 
47


 
 
BLYTH, INC. AND SUBSIDIARIES
 
 
Year ended January 31, (In thousands)
 
2009
   
2010
   
2011
 
Cash flows from operating activities:
                 
     Net earnings (loss)
  $ (15,365 )   $ 16,425     $ 24,788  
     Adjustments to reconcile net earnings (loss) to net cash
                       
        provided by operating activities:
                       
      Depreciation and amortization
    18,628       16,592       13,697  
      Goodwill and other intangibles impairment charges
    48,751       16,498       -  
      Impairment of assets
    8,034       376       3,523  
      (Gain) Loss on sale of assets
    13       30       (267 )
      Stock-based compensation expense
    1,836       2,695       2,123  
      Unrealized loss on trading investments
    2,096       -       -  
      Deferred income taxes
    (13,376 )     6,630       8,827  
      Equity in (earnings) losses of investee
    (116 )     120       587  
      Gain on pension plan termination
    -       (1,902 )     -  
    Changes in operating assets and liabilities, net of effect of business acquisitions and divestitures:
                       
      Accounts receivable
    5,062       10,977       926  
      Inventories
    (5,972 )     36,160       (7,183 )
      Prepaid and other
    7,566       252       2,001  
      Other long-term assets
    2,510       1,268       1,793  
      Acc