blythcy12-2qtr.htm




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

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2012
   
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission File Number 1-13026

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
17,241,833 Common Shares as of July 31, 2012, as adjusted to give effect to the two-for-one stock split as described in Item 1. Financial Statements

 
 

 


BLYTH, INC.

INDEX
   
Page
 
       
Part I.   Financial Information
   
       
Item 1.
   
       
 
3
 
       
 
4
 
       
 
 
5
 
 
 
6
 
 
7
 
       
 
8-22
 
       
Item 2.
23-29
 
       
Item 3.
30
 
       
Item 4.
31
 
       
Part II.   Other Information
   
       
Item 1.
32
 
       
     Item 1A.
32
 
       
Item 2.
33
 
       
Item 3.
33
 
       
Item 4.
34
 
       
Item 5.
34
 
       
Item 6.
34
 
       
       
 
35
 
       





 
2


 
 
Part I.   FINANCIAL  INFORMATION
           
           
 
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
(In thousands, except share and per share data)
 
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 166,654     $ 200,571  
Short-term investments
    39,336       34,742  
Accounts receivable, less allowance for doubtful receivables of $553 and $490, respectively
    12,091       14,289  
Inventories
    123,127       97,362  
Prepaid assets
    20,167       17,794  
Deferred income taxes
    18,535       13,703  
Other current assets
    19,298       29,043  
       Total current assets
    399,208       407,504  
Property, plant and equipment, at cost: Less accumulated depreciation of $161,754 and $158,607, respectively   
    88,588       84,516  
Other assets:
               
Investments
    2,695       5,414  
Goodwill
    2,298       2,298  
Other intangible assets, net of accumulated amortization of $14,264 and $13,929, respectively
    10,496       9,971  
Other assets
    22,125       5,591  
       Total other assets
    37,614       23,274  
       Total assets
  $ 525,410     $ 515,294  
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 702     $ 677  
Accounts payable
    44,883       50,545  
Accrued expenses
    118,023       75,249  
Income taxes payable
    3,490       7,255  
       Total current liabilities
    167,098       133,726  
Deferred income taxes
    2,825       4,892  
Long-term debt, less current maturities
    98,359       99,206  
Other liabilities
    12,670       36,131  
Commitments and contingencies
    -       -  
Redeemable noncontrolling interest
    127,096       87,373  
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 26,470,778 shares and 25,641,484 shares, respectively
    530       514  
Additional contributed capital
    166,175       147,790  
Retained earnings
    363,521       420,349  
Accumulated other comprehensive income
    15,084       11,862  
Treasury stock, at cost, 9,244,441 and 9,204,340 shares, respectively
    (428,165 )     (426,717 )
       Total stockholders' equity
    117,145       153,798  
Noncontrolling interest
    217       168  
       Total  equity
    117,362       153,966  
       Total liabilities and equity
  $ 525,410     $ 515,294  
 
The accompanying notes are an integral part of these financial statements.
 

 
3


 
 
BLYTH, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
 
 
   
Three months ended June 30,
   
Six months ended June 30,
 
(In thousands, except per share data)
 
2012
   
2011
   
2012
   
2011
 
Net sales
  $ 324,802     $ 191,526     $ 607,947     $ 372,568  
Cost of goods sold
    113,895       78,718       213,099       153,900  
    Gross profit
    210,907       112,808       394,848       218,668  
Selling
    137,959       77,927       260,058       152,302  
Administrative and other
    53,961       35,660       96,173       63,829  
    Total operating expense
    191,920       113,587       356,231       216,131  
    Operating profit (loss)
    18,987       (779 )     38,617       2,537  
Other expense (income):
                               
     Interest expense
    1,463       1,570       2,905       3,404  
     Interest income
    (433 )     (311 )     (877 )     (543 )
     Foreign exchange and other, net
    (794 )     (90 )     (1,397 )     798  
     Total other expense
    236       1,169       631       3,659  
    Earnings (loss) from continuing operations before income taxes and noncontrolling interest
    18,751       (1,948 )     37,986       (1,122 )
Income tax expense (benefit)
    7,198       (1,303 )     15,240       (1,999 )
     Earnings (loss) from continuing operations
    11,553       (645 )     22,746       877  
Loss from discontinued operations, net of income tax
    -       (2,056 )     -       (4,411 )
Loss on sale of discontinued operations, net of income tax
    -       (2,645 )     -       (2,645 )
    Net earnings (loss)
    11,553       (5,346 )     22,746       (6,179 )
Less: Net earnings (loss) attributable to the noncontrolling interests
    3,526       (103 )     7,240       87  
    Net earnings (loss) attributable to Blyth, Inc.
  $ 8,027     $ (5,243 )   $ 15,506     $ (6,266 )
Basic:
                               
Net earnings (loss) from continuing operations
  $ 0.46     $ (0.03 )   $ 0.90     $ 0.05  
Net loss from discontinued operations
    -       (0.29 )     -       (0.43 )
    Net earnings (loss) attributable to Blyth, Inc.
  $ 0.46     $ (0.32 )   $ 0.90     $ (0.38 )
Weighted average number of shares outstanding
    17,288       16,578       17,209       16,555  
Diluted:
                               
Net earnings (loss) from continuing operations
  $ 0.46     $ (0.03 )   $ 0.90     $ 0.05  
Net loss from discontinued operations
    -       (0.28 )     -       (0.43 )
    Net earnings (loss) attributable to Blyth, Inc.
  $ 0.46     $ (0.31 )   $ 0.90     $ (0.38 )
Weighted average number of shares outstanding
    17,348       16,677       17,298       16,656  
Cash dividend declared per share
  $ -     $ 0.05     $ 0.08     $ 0.05  
 
The accompanying notes are an integral part of these financial statements.
 



 
4


 
 
BLYTH, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Six months ended June 30 (In thousands)
 
2012
   
2011
 
 Net earnings (loss)
  $ 22,746     $ (6,179 )
Other comprehensive income, net of tax:
               
    Foreign currency translation adjustments
    3,783       7,168  
    Net unrealized gain (loss) on certain investments:
               
           Unrealized holding gain arising during period
    153       254  
           Less: Reclassification adjustments for (gain) loss included in net income
    (477 )     176  
    Net unrealized gain (loss)
    (324 )     430  
    Net unrealized gain (loss) on cash flow hedging instruments
    (237 )     (468 )
Other comprehensive income
    3,222       7,130  
Total comprehensive income, net of tax
    25,968       951  
   Less: comprehensive income attributable to noncontrolling interests
    (7,240 )     (87 )
Comprehensive income attributable to Blyth, Inc.
  $ 18,728     $ 864  
 
The accompanying notes are an integral part of these financial statements.
 


















 
5


 
 
BLYTH, INC. AND SUBSIDIARIES
     
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
     
(Unaudited)
     
                 
(In thousands)
 
Common
Stock
 
Additional
Contributed
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Noncontrolling
Interest
 
Total
Equity
 
Redeemable
Noncontrolling
Interest
 
For the six months ended June 30, 2011:
                                 
Balance, January 1, 2011 (as adjusted for stock split)
  $ 512   $ 146,516   $ 513,587   $ 15,930   $ (424,189 ) $ (2,262 ) $ 250,094      
Net earnings (loss) for the period
                (6,266 )               137     (6,129 )   (50 )
Reclass of noncontrolling interest to redeemable noncontrolling interest
                                  2,333     2,333     (2,333 )
Distribution to noncontrolling interest
                                  (92 )   (92 )      
Other comprehensive income
                      7,130                 7,130        
Stock-based compensation
          600                             600        
Accretion of redeemable noncontrolling interest
                (16,239 )                     (16,239 )   16,239  
Purchase of additional ViSalus interest
                (2,160 )                     (2,160 )      
Dividends declared ($0.05 per share)
                (829 )                     (829 )      
Treasury stock purchases 1
                            (261 )         (261 )      
Balance, June 30, 2011
  $ 512   $ 147,116   $ 488,093   $ 23,060   $ (424,450 ) $ 116   $ 234,447   $ 13,856  
For the six months ended June 30, 2012:
                                                 
Balance, January 1, 2012 (as adjusted for stock split)
  $ 514   $ 147,790   $ 420,349   $ 11,862   $ (426,717 ) $ 168     153,966   $ 87,373  
Net earnings for the period
                15,506                 139     15,645     7,101  
Distribution to noncontrolling interest
                                  (90 )   (90 )      
Other comprehensive income
                      3,222                 3,222        
Stock-based compensation
    2     3,771                             3,773        
Accretion of redeemable noncontrolling interest
                (71,043 )                     (71,043 )   71,043  
Purchase of additional ViSalus interest
    14     14,614                             14,628     (38,421 )
Dividends declared ($0.08 per share)
                (1,291 )                     (1,291 )      
Treasury stock purchases 1
                            (1,448 )         (1,448 )      
Balance, June 30, 2012
  $ 530   $ 166,175   $ 363,521   $ 15,084   $ (428,165 ) $ 217   $ 117,362   $ 127,096  
 
1) This includes shares withheld in order to satisfy employee withholding taxes upon the distribution of vested restricted stock units.
 
 
The accompanying notes are an integral part of these financial statements.
 
















 
6


 
 
BLYTH, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six months ended June 30 (In thousands)
 
2012
   
2011
 
Cash flows from operating activities:
           
Net earnings (loss) attributable to Blyth
  $ 15,506     $ (6,266 )
     Add net earnings attributable to noncontrolling interests
    7,240       87  
     Loss from discontinued operations, net of tax
    -       7,056  
    Earnings from continuing operations
    22,746       877  
    Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: 
               
             Depreciation and amortization
    5,413       5,969  
             Loss (gain) on sale of assets
    (754 )     1,150  
             Stock-based compensation expense
    3,773       668  
             Deferred income taxes
    (8,637 )     (9,348 )
     Changes in operating assets and liabilities, net of effect of business acquisitions and divestitures:
               
             Accounts receivable
    2,102       (4,453 )
             Inventories
    (26,158 )     (8,524 )
             Prepaid and other
    (3,116 )     (4,729 )
             Other long-term assets
    (1,740 )     199  
             Accounts payable
    (6,135 )     (10,462 )
             Accrued expenses
    48,284       (2,160 )
             Income taxes payable
    (3,729 )     (2,173 )
             Other liabilities  and other
    (23,001 )     5,036  
                   Net cash provided by (used in) operating activities of continuing operations
    9,048       (27,950 )
                   Net cash provided by (used in) operating activities of discontinued operations
    (468 )     3,542  
                   Net cash provided by (used in) operating activities
    8,580       (24,408 )
Cash flows from investing activities:
               
    Purchases of property, plant and equipment, net of disposals
    (8,960 )     (4,321 )
    Purchases of short-term investments
    (35,274 )     (900 )
    Proceeds from sale of short-term investments
    30,862       10,592  
    Proceeds form the sale of discontinued operations
    -       29,792  
    Purchases of additional ViSalus interest
    (28,688 )     (2,520 )
    Cash settlement of net investment hedges
    -       638  
    Proceeds from sale of long-term investments
    2,762       1,627  
                   Net cash provided by (used in) investing activities
    (39,298 )     34,908  
Cash flows from financing activities:
               
    Repayments on long-term debt
    (784 )     (2,202 )
    Payments on capital lease obligations
    (49 )     (71 )
    Dividends paid
    (1,291 )     (829 )
    Distributions to noncontrolling interest
    (90 )     (92 )
                   Net cash used in financing activities
    (2,214 )     (3,194 )
Effect of exchange rate changes on cash
    (985 )     4,694  
                   Net increase (decrease) in cash and cash equivalents
    (33,917 )     12,000  
Cash and cash equivalents at beginning of period
    200,571       196,135  
Cash and cash equivalents at end of period
  $ 166,654     $ 208,135  
Supplemental disclosure of cash flow information:
               
Non-cash transactions:
               
       Stock issued for ViSalus acquisition
  $ 14,628     $ -  
 
The accompanying notes are an integral part of these financial statements.
 






 
7




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

Blyth, Inc. (the “Company”) is primarily a direct to consumer business focused on the direct selling and direct marketing channels. The Company designs and markets home fragrance products and decorative accessories, as well as weight management products, nutritional supplements and energy drinks. The Company’s products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items and personalized gifts; nutritional supplements such as meal replacement shakes, vitamins and energy mixes; as well as products for the foodservice trade. The Company’s products can be found throughout North America, Europe and Australia.

1.           Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of items that are normal and recurring in nature) necessary for fair presentation of the Company's consolidated financial position as of June 30, 2012 and the consolidated results of its operations for the three and six month periods ended June 30, 2012 and 2011, and cash flows for the six month periods ended June 30, 2012 and 2011. These interim statements should be read in conjunction with the Company's Consolidated Financial Statements for the eleven month period ended December 31, 2011, as set forth in the Company’s Transition Report on Form 10-K. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

In 2011, we sold substantially all of the net assets of Midwest-CBK and disposed of the assets and liabilities of the Boca Java business as more fully detailed in Note 2 to the consolidated financial statements. The results of operations for these businesses have been presented as discontinued operations.

Recently Adopted Accounting Guidance

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”). ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP. The amendments in ASU No. 2011-04 change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Amendments in ASU No. 2011-04 include those that: (1) clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements, and (2) change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in ASU No. 2011-04 to result in a change in the application of the requirements in Topic 820. The Company adopted ASU No. 2011-04 as of January 1, 2012. This standard did not have an impact on the Company’s consolidated financial condition or results of operations.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05). Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In December 2011, the FASB issued ASU 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" (ASU 2011-12), which deferred the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income while the FASB further deliberates this aspect of the proposal. These amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income and also do not affect how earnings per share is calculated or presented. ASU 2011-05, as amended by ASU 2011-12, was adopted on January 1, 2012. This standard impacted presentation only and did not affect the Company’s consolidated financial condition or results of operations.

 
8

 

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”).  This update amended the procedures surrounding goodwill impairment testing to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other.” ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. This standard did not have an impact on the Company’s consolidated financial condition or results of operations.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company adopted this standard as of January 1, 2012. The early adoption of this standard did not have an impact on the Company’s consolidated financial condition or results of operations.

Change in fiscal year-end

On December 7, 2011, the Board of Directors approved a change in our fiscal year end from January 31st to December 31st, which was effective December 31, 2011. In addition, we have eliminated the lag differences in the reporting year-ends of certain of our subsidiaries to align them with the Company and its other subsidiaries’ fiscal year ends. As a result of the Company’s change in its fiscal year-end, the reported results ended June 30, 2012 and 2011 represent a new quarterly reporting period.

Other Comprehensive Income

The following table discloses the tax effects allocated to each component of other comprehensive income in the financial statements:


Six months ended June 30 (In thousands)
 
2012
   
2011
 
   
Before-Tax Amount
   
Tax (Expense) or Benefit
   
Net-of-tax Amount
   
Before-Tax Amount
   
Tax (Expense) or Benefit
   
Net-of-tax Amount
 
    Foreign currency translation adjustments
  $ 5,164     $ (1,381 )   $ 3,783     $ 1,287     $ 5,881     $ 7,168  
    Net unrealized gain (loss) on certain investments:
                                               
           Unrealized holding gain arising during period
    187       (34 )     153       228       26       254  
           Less: Reclassification adjustments for (gain) loss included in net income
    (733 )     256       (477 )     293       (117 )     176  
          Net unrealized gain (loss)
    (546 )     222       (324 )     521       (91 )     430  
    Net unrealized gain (loss) on cash flow hedging instruments
    (352 )     115       (237 )     (720 )     252       (468 )
Other comprehensive income
  $ 4,266     $ (1,044 )   $ 3,222     $ 1,088     $ 6,042     $ 7,130  
 
Two-for-one stock split

On May 16, 2012, the Company’s Board of Directors announced a two-for-one stock split of its common stock effective in the form of a stock dividend of one share for each outstanding share. The record date for the stock split was June 1, 2012, and the additional shares were distributed on June 15, 2012. Accordingly, all per share amounts, weighted average shares outstanding, shares outstanding and shares repurchased presented in the consolidated financial statements and notes have been adjusted retroactively to reflect the stock split. Shareholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the stock split from Retained Earnings to Common Stock.

 
9



2.           Discontinued Operations

On May 27, 2011, the Company sold substantially all of the net assets of its seasonal, home décor and home fragrance business (“Midwest-CBK”) within the Wholesale segment for $36.9 million and incurred a loss of $2.5 million, net of tax benefits. The agreement provided for a net working capital adjustment of $1.4 million, which was received subsequent to the sale in July 2011. The Company received cash proceeds of $23.6 million and a one year promissory note of $11.9 million, included within Other current assets, partially secured by fixed assets sold at the time of the transaction. The Company also received an advance payment of interest on the promissory note of $0.5 million at the time of closing. For the three and six months ended June 30, 2011, revenues were $7.7 million and $24.4 million, and losses before income taxes were $3.2 million and $5.2 million, respectively.

On May 29, 2012, the Company executed an amendment to the $11.9 million promissory note. This amendment provides the borrower with a ninety day extension to August 25, 2012. Interest on the ninety day extension accrues at 4.5% and is payable in arrears monthly.

On February 11, 2011, the Company assigned all the assets and liabilities of the Boca Java business through a court approved assignment for the benefit of its creditors. The proceeds from the sale of the assets were used to discharge the claims of the creditors. Revenue and losses before income taxes for Boca Java were not significant for the three and six months ended June 30, 2011.

3.          Business Acquisitions

In August 2008, the Company signed a definitive agreement to purchase ViSalus, a direct seller of weight management products, nutritional supplements and energy drinks, through a series of investments.

In October 2008, the Company completed its initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash and incurred acquisition costs of $1.0 million for a total cash acquisition cost of $14.0 million.

In April 2011, the Company completed the second phase of its acquisition of ViSalus for approximately $2.5 million, increasing its ownership to 57.5%.

In January 2012, the Company completed the third phase of its acquisition of ViSalus and increased its ownership to 72.7% for approximately $22.5 million in cash and the issuance of 681,324 unregistered shares of the Company’s common stock valued at $14.6 million, of which 340,662 shares may not be sold or transferred prior to January 12, 2014.  Due to the restrictions on transfer, the common stock was issued at a discount to its trading price. The payments in the third closing were based upon an estimate of the 2011 EBITDA pursuant to the formula in the original purchase agreement, and were subsequently adjusted in April 2012 for the difference between the actual 2011 EBITDA and the estimate used in the third closing. The Company paid an additional $6.2 million in April 2012 after final determination of the actual 2011 EBITDA, bringing the total third phase acquisition cost to $43.3 million.

The Company intends to and may be required to purchase the remaining interest in ViSalus to increase its ownership to 100%. The fourth phase and final purchase of ViSalus is conditioned upon ViSalus meeting its original purchase agreement’s 2012 operating target. The Company has the option, but is not required, to acquire the remaining interest in ViSalus if it does not meet this operating target. However, as of June 30, 2012, the operating target for 2012 requiring the additional purchase is anticipated to be met. If ViSalus meets its current projected 2012 EBITDA forecast, the total expected redemption cost of the fourth and final phase will be approximately $271 million to be paid in 2013. The purchase price of the additional investment is equal to a multiple of ViSalus’s EBITDA, exclusive of certain unusual items. The payment, if any, may be funded in part using existing cash balances from both domestic and international sources, expected future cash flows from operations and the issuance of common stock and may require the Company to obtain additional sources of external financing.

 
10


The Company accounted for the acquisition of ViSalus as a business combination under SFAS No. 141 “Business Combinations,” since the Company obtained control of ViSalus prior to the effective date of ASC 805. The Company analyzed the criteria for consolidation in accordance with ASC 810, and determined it had control since ViSalus was majority owned collectively by Blyth and Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC (collectively, “RAM”), a related party (see Note 15 to the Consolidated Financial Statements for additional information). Moreover, the Company took into account the then composition of ViSalus’s three-member Board of Managers, one of whom was an executive officer of the Company, one of whom was a principal of RAM and one of whom was a founder and executive officer of ViSalus. Additionally, the Company and RAM together control ViSalus’s compensation committee and control the compensation of the ViSalus executive officer who serves on ViSalus’s Board of Managers. Consequently, all of the members of ViSalus’s Board of Managers may be deemed to operate under the Company’s influence.

The Company has also taken into account ViSalus’s governing documents, which afford the Company significant rights with respect to major corporate actions and the right to require the other owners of ViSalus’s equity to sell in certain circumstances. Finally, the Company considered the mechanisms that are in place to permit it to purchase the remaining noncontrolling interest in ViSalus.

As discussed above, the Company may be required to purchase the remaining noncontrolling interests in ViSalus if ViSalus meets its 2012 calendar year operating targets. As a result, these noncontrolling interests were determined to be redeemable and are accounted for in accordance with the guidance of ASC 480-10-S99-3A, and the non-codified portions of Emerging Issues Task Force Topic D-98, “Classification and Measurement of Redeemable Securities.” Accordingly, the Company has begun recognizing these noncontrolling interest obligations outside of permanent equity and has accreted changes in their redemption value through the date of redemption during the time at which it was probable that the noncontrolling interests would be redeemed. The accretion of the redemption value has been recognized as a charge to retained earnings and to the extent that the resulting redemption value exceeds the fair value of the noncontrolling interests, the differential could result in future adjustments in the Company’s earnings per share (“EPS”) should the redemption value exceed fair value. The carrying amount of the redeemable noncontrolling interests was $127.1 million as of June 30, 2012 and has been reflected as Redeemable noncontrolling interest in the Consolidated Balance Sheet. As of June 30, 2012, the estimated redemption value did not exceed fair value and no earnings per share adjustment was recorded. 

The acquisition of ViSalus by Blyth involves related parties, as discussed in Note 15 to the Consolidated Financial Statements. In addition to Blyth, the other owners of ViSalus, include its three founders (each of whom currently own approximately 6.3% of ViSalus for a total of 19.0%) (“the founders”), RAM which currently owns 4.0%, and a small group of employees and others who collectively own approximately 4.2% of ViSalus. Blyth’s initial investment in ViSalus of $13.0 million was paid to ViSalus ($2.5 million), RAM ($3.0 million) and each of the three founders ($2.5 million each). Blyth’s second investment of $2.5 million was paid to RAM ($1.0 million), each of the three founders ($0.3 million each) and others ($0.6 million in the aggregate).  Blyth’s third investment in ViSalus of $28.7 million in cash and the issuance of 681,324 unregistered shares of common stock, was paid to RAM ($11.0 million in cash), the three founders (a total of $10.1 million in cash and the issuance of a total of 681,324 unregistered shares) and others ($7.6 million in cash, in the aggregate). Mr. Goergen, Blyth’s chairman and chief executive officer, beneficially owns approximately 35.0% of Blyth’s outstanding common stock, and together with members of his family, owns substantially all of RAM.

ViSalus has recorded equity incentive compensation expense related to certain equity rights and unit holders that allow the settlement of these awards through a future cash payment. As a result, these awards are classified as a liability and are subject to fair value measurement in accordance with ASC section 718 on “Stock Compensation”.  For the three and six months ended June 30, 2012, the Company has recorded an expense of $9.6 million and $12.6 million  in Administrative and other expense, respectively, and $6.0 million and $8.2 million for the comparable prior year periods.  Additional expense (or expense reduction) may be recorded in future periods for increases (or decreases) in the fair value of these awards. The fair value of these awards is based on ViSalus’s future operating performance and may change significantly if ViSalus’s sales forecasts and operating profits exceed or fall short of projections.



 
11


4.           Investments

The Company considers all money market funds and debt instruments, including certificates of deposit and commercial paper, purchased with an original maturity of three months or less to be cash equivalents, unless the assets are restricted. The carrying value of cash and cash equivalents approximates their fair value.

The Company’s investments as of June 30, 2012 and December 31, 2011 consisted of a number of financial securities including an equity investment in preferred stocks, certificates of deposit, shares in mutual funds invested in short term bonds, pre-refunded and municipal bonds and a cost investment. The Company accounts for its investments in debt and equity instruments in accordance with ASC 320, “Investments – Debt & Equity Securities.” The Company accounts for its cost investments in accordance with ASC 325, “Investments – Other.” 

The following table summarizes, by major security type, the amortized costs and fair value of the Company’s investments:


   
June 30, 2012
   
December 31, 2011
 
(In thousands)
 
Cost Basis 1
   
Fair Value
   
Net unrealized gain (loss) in AOCI
   
Cost Basis 1
   
Fair Value
   
Net unrealized gain (loss) in AOCI
 
Pre-refunded and municipal bonds
  $ 19,308     $ 19,117       (191 )     19,781       19,781       -  
Short-term bond mutual funds
    20,000       20,219       219       15,000       14,961       (39 )
Preferred stocks
    393       574       181       2,172       2,928       756  
Certificates of deposit
    1,759       1,759       -       2,086       2,086       -  
Other investment
    362       362       -       400       400       -  
   Total investments
  $ 41,822     $ 42,031     $ 209     $ 39,439     $ 40,156     $ 717  
1) The cost basis represents the actual amount paid or the basis assumed following a permanent impairment of that asset.
         

As of June 30, 2012 and December 31, 2011, the Company held $19.1 million and $19.8 million, respectively, of available for sale municipal bonds and advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds”), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. These investments are valued based on quoted prices of similar instruments in inactive markets; interest earned on these investments is realized in Interest income in the Consolidated Statements of Earnings (Loss). As of June 30, 2012, the Company recorded an unrealized loss, net of tax of $0.1 million in AOCI and have outstanding contractual maturities through February 1, 2013.
 
As of June 30, 2012 and December 31, 2011, the Company held $20.2 million and $15.0 million, respectively, of short-term bond mutual funds, which are classified as short-term available for sale investments. Unrealized gains and losses on these investments that are considered temporary are recorded in AOCI. These securities are valued based on quoted prices in active markets. As of June 30, 2012, the Company recorded an unrealized gain, net of tax of $0.1 million and an insignificant amount as of December 31, 2012.

As of June 30, 2012 and December 31, 2011, the Company held $0.6 million and $2.9 million of preferred stock investments, respectively, which are classified as available for sale securities. These securities are valued based on quoted prices in inactive markets. The Company recorded an unrealized gain net of tax of $0.1 million and $0.5 million, as of June 30, 2012 and December 31, 2011, respectively, in AOCI.

Also included in long-term investments are certificates of deposit that are held as collateral for the Company’s outstanding standby letters of credit and for foreign operations of $1.8 million and $2.1 million as of June 30, 2012 and December 31, 2011, respectively. These investments are recorded at fair value which approximates cost; interest earned on these is recorded in Interest income in the Consolidated Statements of Earnings.

The Company holds a $0.4 million investment obtained through its ViSalus acquisition. As of June 30, 2012 and December 31, 2011, the Company accounts for this investment on a cost basis under ASC 325. This investment involves related parties as discussed in Note 15.

In addition to the investments noted above, the Company holds mutual funds as part of a deferred compensation plan which are classified as available for sale. As of June 30, 2012 and December 31, 2011, the fair value of these securities was $0.7 million and $0.8 million, respectively. These securities are valued based on quoted prices in an active market. Unrealized gains and losses on these securities are recorded in AOCI. These mutual funds are included in Other assets in the Consolidated Balance Sheets.

 
12

 

The following table summarizes the proceeds and realized gains (losses) on the sale of available for sale investments recorded in Foreign exchange and other within the Consolidated Statements of Earnings (Loss) for the three and six months ended June 30, 2012 and 2011. Gains and losses reclassified from AOCI in the Consolidated Statement of Earnings are calculated using the specific identification method.


 
 
Three months ended June 30,
   
Six months ended June 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
Net proceeds
  $ 19,867     $ 1,627     $ 33,259     $ 12,219  
Realized gains (losses)
  $ 393     $ 173     $ 733     $ (1,126 )
 
5.           Inventories

The components of inventory are as follows:

(In thousands)
 
June 30, 2012
   
December 31, 2011
 
Raw materials
  $ 7,691     $ 6,976  
Finished goods
    115,436       90,386  
Total
  $ 123,127     $ 97,362  
 
 
As of June 30, 2012 and December 31, 2011, the inventory reserves totaled $13.3 million and $14.7 million, respectively and have been netted against the above amounts.

6.           Goodwill and Other Intangibles

Goodwill is subject to an assessment for impairment using a two-step fair value-based test and as such other intangibles are also subject to impairment reviews, which must be performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired. As of June 30, 2012, there were no indications that a review was necessary.

As of June 30, 2012 and December 31, 2011 the carrying amount of the Company’s goodwill, within the Direct Selling segment, was $2.3 million.

In January 2012, the Company purchased two domain names for $0.9 million within the Direct selling segment. These assets will be accounted for as indefinite-lived intangibles.

Other intangible assets include indefinite-lived trade names, trademarks, domain names and customer relationships related to the Company’s acquisition of Miles Kimball, Walter Drake and As We Change, which are reported in the Catalog and Internet segment and ViSalus, which is reported in the Direct Selling segment. The Company does not amortize the indefinite-lived trade names, trademarks and domain names, but rather tests for impairment annually as of January 31st, or sooner if circumstances indicate a condition of impairment may exist. As of June 30, 2012, there were no indications that a review was necessary.

 

 
13


       Other intangible assets, by segment, consisted of the following:
   
Direct Selling Segment
   
Catalog & Internet Segment
   
Total
 
(In thousands)
 
Indefinite-lived trade
names and trademarks
   
Indefinite-lived trade names and trademarks
   
Customer relationships
   
Indefinite-lived trade names and trademarks
   
Customer
relationships
 
Gross value
  $ 4,200     $ 28,100     $ 15,400     $ 32,300     $ 15,400  
Accumulated amortization
    -       -       (13,929 )     -       (13,929 )
Impairments
    (3,100 )     (20,700 )     -       (23,800 )     -  
Other intangibles at December 31, 2011
    1,100       7,400       1,471       8,500       1,471  
ViSalus additions
    860       -       -       860       -  
Amortization
    -       -       (335 )     -       (335 )
Other intangibles at June 30, 2012
  $ 1,960     $ 7,400     $ 1,136     $ 9,360     $ 1,136  
 
Amortization expense is recorded on an accelerated basis over the estimated lives of the customer lists ranging from 5 to 12 years. Amortization expense for other intangible assets was $0.2 million for the three months ended June 30, 2012 and 2011 and $0.3 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively. The estimated annual amortization expense for 2012 is $0.6 million. The estimated amortization expense for the remaining three years beginning with 2013 is as follows: $0.6 million, $0.2 million and an insignificant amount to be amortized in 2015.

7.           Fair Value Measurements
 
The fair-value hierarchy established in ASC 820, prioritizes the inputs used in valuation techniques into three levels as follows:

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

The following tables summarizes the financial assets and liabilities measured at fair value on a recurring basis as of  June 30, 2012 and December 31, 2011, and the basis for that measurement, by level within the fair value hierarchy:
 
(In thousands)
 
Balance as of June 30, 2012
   
Quoted prices in active
markets for identical assets
(Level 1)
   
Significant other observable inputs
(Level 2)
   
Significant
unobservable inputs
(Level 3)
 
Financial assets
                       
  Certificates of deposit
  $ 1,759     $ -     $ 1,759     $ -  
  Pre-refunded bonds
    19,117       -       19,117       -  
  Short-term bond mutual funds
    20,219       20,219       -       -  
  Preferred stocks
    574       -       574       -  
  Foreign exchange forward contracts
    257       -       257       -  
  Deferred compensation plan assets 1
    743       743       -       -  
    Total
  $ 42,669     $ 20,962     $ 21,707     $ -  
Financial Liabilities
                               
  Foreign exchange forward contracts
  $ (476 )   $ -     $ (476 )   $ -  
1) Recorded as an Other asset with an offsetting liability for the obligation to its employees in Other liabilities.
 


 
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(In thousands)
 
Balance as of 
December 31, 2011
   
Quoted prices in active
markets for identical assets
(Level 1)
   
Significant other observable inputs
(Level 2)
   
Significant unobservable inputs (Level 3)
 
Financial assets
                       
  Certificates of deposit
  $ 2,086     $ -     $ 2,086     $ -  
  Pre-refunded bonds
    19,781       -       19,781       -  
  Short-term bond mutual funds
    14,961       14,961       -       -  
  Preferred stocks
    2,928       -       2,928       -  
  Foreign exchange forward contracts
    674       -       674       -  
  Deferred compensation plan assets 1
    750       750       -       -  
    Total
  $ 41,180     $ 15,711     $ 25,469     $ -  
1) Recorded as an Other asset with an offsetting liability for the obligation to its employees in Other liabilities.
 
 

The Company values its investments in equity securities within the deferred compensation plan and its investments in short term bond mutual funds using level 1 inputs, by obtaining quoted prices in active markets. The deferred compensation plan assets consist of shares of mutual funds. The Company also enters into both cash flow and fair value hedges by purchasing foreign currency exchange forward contracts. These contracts are valued using level 2 inputs, primarily observable forward foreign exchange rates. The Company values its preferred stock and pre-refunded bond investments using information classified as level 2. This data consists of quoted prices of identical instruments in an inactive market and third party bid offers. The certificates of deposit that are used to collateralize some of the Company’s letters of credit have been valued using information classified as level 2, as these are not traded on the open market and are held unsecured by one counterparty.

The carrying values of cash and cash equivalents, trade and other receivables and trade payables are considered to be representative of their respective fair values. 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with ASC 820. The Company’s assets and liabilities measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill, intangibles and other assets. These assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that impairment may exist. As of June 30, 2012 and 2011, there were no indications or circumstances indicating that an impairment might exist.

8.           Derivative Instruments and Hedging Activities

The Company uses foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, net assets of our foreign operations, intercompany payables and loans. It does not hold or issue derivative financial instruments for trading purposes. The Company has hedged the net assets of certain of its foreign operations through foreign currency forward contracts. The realized and unrealized gains/losses on these hedges are recorded within AOCI until the investment is sold or disposed of. As of June 30, 2012, there was one outstanding net investment hedge open. The cumulative net after-tax gain related to net investment hedges in AOCI as of June 30, 2012 and December 31, 2011 was $5.4 million and $5.6 million, respectively.
 
The Company has designated its foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as fair value hedges. The gains or losses on the fair value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.

The Company has designated forward exchange contracts on forecasted intercompany inventory purchases and future purchase commitments as cash flow hedges and 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 settlement 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 upon sale. 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 probable of not occurring, the resultant gain or loss on the terminated hedge is recognized into earnings immediately. The net after-tax unrealized gain included in AOCI at June 30, 2012 for cash flow hedges is $0.2 million and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment. The net after-tax unrealized gain included in AOCI at December 31, 2011 for cash flow hedges was $0.4 million.

 
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For 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. Forward contracts held with each bank are presented within the Consolidated Balance Sheets as a net asset or liability, based on netting agreements with each bank and whether the forward contracts are in a net gain or loss position. The foreign exchange contracts outstanding have maturity dates through March 2013.

The table below details the fair value and location of the Company’s hedges in the Consolidated Balance Sheets:
 
June 30, 2012
   
December 31, 2011
 
(In thousands)
Prepaid and Other
   
Accrued Expenses
   
Prepaid and Other
 
Derivatives designated as hedging instruments                
Foreign exchange forward contracts in asset positions
$ 267     $ -     $ 680  
Foreign exchange forward contracts in liability positions
  (10 )     (476 )     (6 )
Net derivatives at fair value  $ 257     $ (476 )   $ 674  


Gain and loss activity related to the Company’s Cash Flow hedges for the three and six months ended June 30, are as follows:


Cash Flow Hedging Relationships
 
Amount of Gain (Loss)
Recognized in AOCI on Derivative
 (Effective Portion)
 
Location of Gain (Loss) Reclassified from
AOCI  into Income
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified
 from AOCI into Income
(Effective Portion)
 
(In thousands)
 
2012
   
2011
     
2012
 
2011
 
                 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
   
Six Months Ended
 
Foreign currency exchange forward contracts
  $ 111     $ (1,264 )
Cost of goods sold
  $ 148   $ 463   $ (494 )   $ (841 )

For the three and six months ended June 30, 2012, the Company recorded a gain of $0.1 million and a loss of $0.4 million, respectively, compared to a loss of $0.2 million and $0.3 million in both comparable prior year periods related to foreign exchange forward contracts accounted for as Fair Value hedges to Foreign exchange and other.

9.           Accrued Expenses

Accrued expenses consist of the following:

 
(In thousands)
 
June 30, 2012
   
December 31, 2011
 
Compensation and benefits
  $ 36,522     $ 28,947  
Visalus equity incentive compensation (1)
    34,701       4,845  
Deferred revenue
    19,444       17,360  
Promotional
    8,254       6,837  
Taxes, other than income
    5,348       3,875  
Other
    13,754       13,385  
    Total
  $ 118,023     $ 75,249  
(1) Excluded noncurrent portion of Equity incentive compensation of $24.2 million which was included in Other liabilities at December 31, 2011
 






 
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10.           Long-Term Debt

On October 20, 2003, the Company issued $100.0 million 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes. During the first quarter of 2012, the Company repurchased $0.5 million of these notes for $0.5 million, resulting in $92.4 million outstanding at June 30, 2012. Such notes contain among other provisions, restrictions on liens on principal property or stock issued to collateralize debt. As of June 30, 2012, the Company was in compliance with such provisions. Interest is payable semi-annually in arrears on May 1 and November 1. The notes may be redeemed in whole or in part at any time at a specified redemption price. The proceeds of the debt issuances were used for general corporate purposes.

The Company’s debt is recorded at its amortized cost basis. The estimated fair value of the Company’s $99.1 million and $99.9 million total long-term debt (including current portion) at June 30, 2012 and December 31, 2011 was approximately $101.0 million and $102.0 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. Due to the nature of the information used, the Company considers these inputs to be level 2.

As of June 30, 2012 and December 31, 2011, Miles Kimball had approximately $6.5 million and $6.7 million, respectively, of long-term debt outstanding under a real estate mortgage note payable which matures June 1, 2020.  Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

As of June 30, 2012, the Company had a total of $2.0 million available under an uncommitted bank facility to be used for letters of credit. The issuance of letters of credit under this facility will be available until January 31, 2013.  As of June 30, 2012, no amount was outstanding under this facility.

As of June 30, 2012, the Company had $1.5 million in standby letters of credit outstanding that are collateralized with a certificate of deposit.

11.           Earnings per Share

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

 

 
17


The components of basic and diluted earnings per share are as follows:
                         
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net earnings from continuing operations
  $ 11,553     $ (645 )   $ 22,746     $ 877  
Less net earnings attributable to noncontrolling interests
    3,526       (103 )     7,240       87  
Net loss from discontinued operations
    -       (2,056 )     -       (4,411 )
Loss on sale of discontinued operations, net of tax
    -       (2,645 )     -       (2,645 )
Net earnings (loss) attributable to Blyth, Inc.
  $ 8,027     $ (5,243 )   $ 15,506     $ (6,266 )
                                 
Weighted average number outstanding:
                               
Common shares
    17,213       16,495       17,133       16,477  
Vested restricted stock units
    75       83       76       78  
Weighted average number of common shares outstanding:
                               
         Basic
    17,288       16,578       17,209       16,555  
         Dilutive effect of stock options and non-vested restricted shares units
    60       99       89       101  
         Diluted
    17,348       16,677       17,298       16,656  
Basic earnings per share
                               
Net earnings (loss) from continuing operations
  $ 0.46     $ (0.03 )   $ 0.90     $ 0.05  
Net loss from discontinued operations
    -       (0.29 )     -       (0.43 )
    Net earnings (loss) attributable to Blyth, Inc.
  $ 0.46     $ (0.32 )   $ 0.90     $ (0.38 )
Diluted earnings per share
                               
Net earnings (loss) from continuing operations
  $ 0.46     $ (0.03 )   $ 0.90     $ 0.05  
Net loss from discontinued operations
    -       (0.28 )     -       (0.43 )
    Net earnings (loss) attributable to Blyth, Inc.
  $ 0.46     $ (0.31 )   $ 0.90     $ (0.38 )
 
As of June 30, 2012 and 2011, options to purchase 32,250 shares and 85,100 shares common stock are not included in the computation of earnings per share because the effect would be anti-dilutive. 

All weighted average shares outstanding in the calculation of basic and diluted earnings per share have been adjusted retroactively to reflect the two-for-one stock split that took place on June 15, 2012.

12.           Treasury and Common Stock

Treasury Stock

Changes in Treasury Stock were (In thousands, except shares):
 
Shares
   
Amount
 
Balance at January 1, 2011
    9,122,028     $ (424,189 )
Treasury stock purchased in connection with long-term incentive plan
    11,156       (261 )
Balance at June 30, 2011
    9,133,184     $ (424,450 )
                 
Balance at January 1, 2012
    9,204,340     $ (426,717 )
Treasury stock purchased in connection with long-term incentive plan
    40,101       (1,448 )
Balance at June 30, 2012
    9,244,441     $ (428,165 )

 
Common Stock
 
Changes in Common Stock were (In thousands, except shares):
 
Shares
   
Amount
 
Balance at January 1, 2011
    25,583,030     $ 512  
Common stock issued in connection with long-term incentive plan
    52,778       -  
Balance at June 30, 2011
    25,635,808     $ 512  
                 
Balance at January 1, 2012
    25,641,484     $ 514  
Common stock issued for the purchase of additional ViSalus interest
    681,324       14  
Common stock issued in connection with long-term incentive plan
    147,970       2  
Balance at June 30, 2012
    26,470,778     $ 530  
 
All share amounts, including shares outstanding and activity of Treasury stock and Common stock have been adjusted retroactively to reflect the two-for-one stock split that took place on June 15, 2012.


 
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13.          Income Taxes
 
The Company’s effective tax rate for the six months ended June 30, 2012 was 40%, which resulted in a provision for income taxes of $15.2 million. The effective rate in the six months ended June 30, 2012 was increased primarily as a result of no tax benefit being realized on certain foreign net operating losses.
 
For the six months ended June 30, 2011, the Company recorded a tax benefit of $2.0 million on a loss from continuing operations of $1.1 million.  The effective tax rate for the six months ended June 30, 2011 was primarily impacted by the utilization of a net operating loss carry forward for which a valuation allowance had been previously provided.
 
The Company’s effective tax rate for the three months ended June 30, 2012 and 2011 was 38% and 67%, respectively, which resulted in a provision for income taxes of an expense of $7.2 million and a benefit of $1.3 million, respectively. The effective rate in the three months ended June 30, 2012 was increased primarily due to no tax benefit being realized on certain foreign net operating losses.  The effective tax rate for the three months ended June 30, 2011 was decreased primarily as a result of the utilization of a net operating loss carry forward for which a valuation allowance had been previously provided.

Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be significant changes in the amount of unrecognized tax benefits in 2012 but the amount cannot be estimated. There has been no material change in the Company’s contingency reserve for the three and six months ended June 30, 2012.

14.           Stock Based Compensation
 
As of June 30, 2012, the Company had one active stock-based compensation plan, the Amended and Restated 2003 Omnibus Incentive Plan (“2003 Plan”), available to grant future awards. In addition, the Company maintains two inactive stock-based compensation plans (the Amended and Restated 1994 Employee Stock Option Plan and the Amended and Restated 1994 Stock Option Plan for Non-Employee Directors), under which vested and unexercised options remain outstanding. There were 2,040,897 shares authorized for grant under these plans as of June 30, 2012, and there were approximately 1,742,577 shares available for grant under these plans. The Company’s policy is to issue new shares of common stock for all stock options exercised and restricted stock grants.

The Board of Directors and the stockholders of the Company have approved the adoption and subsequent amendments of the 2003 Plan. The 2003 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock unit awards to officers and employees. The 2003 Plan also provides for grants of nonqualified stock options to directors of the Company who are not, and who have not been during the immediately preceding 12-month period, officers or employees of the Company or any of its subsidiaries. Restricted stock and RSUs are granted to certain employees to incent performance and retention. RSUs issued under these plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed. The release of RSUs on each of the vesting dates is contingent upon continued active employment by the employee until the vesting dates. During the three and six months ended June 30, 2012, a total of 40,104 RSUs and 76,998 RSUs were granted, respectively.

In accordance with U.S. GAAP, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock and RSUs based on estimated fair values.

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period.  Stock-based compensation expense recognized in the Company’s Consolidated Statements of Earnings for the three and six month periods ended June 30, 2012 and 2011 included compensation expense for restricted stock, RSUs and stock-based awards granted subsequent to January 31, 2006 based on the grant date fair value estimated in accordance with the provisions of ASC 718, “Compensation—Stock Compensation” (“ASC 718”). The Company recognizes these compensation costs net of a forfeiture rate for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is over periods of 3 years for stock options; 2 to 5 years for employee restricted stock and RSUs; and 1 to 2 years for non-employee restricted stock and RSUs. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 
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Transactions involving restricted stock and RSUs are summarized as follows:

   
Shares
   
  Weighted Average
Grant Date Fair Value
   
Aggregate
Intrinsic Value
(In thousands)
 
Nonvested restricted stock and RSUs at December 31, 2011
    202,656      $ 21.10        
    Granted
    76,998       36.18        
    Vested
    (144,698 )     20.08        
    Forfeited
    (4,500 )      17.96        
Nonvested restricted stock and RSUs at June 30, 2012
    130,456      $ 31.24     $ 4,509  
Total restricted stock and RSUs at June 30, 2012
    209,942      $ 33.41     $ 7,256  


Compensation expense related to restricted stock and RSUs for three months ended June 30, 2012 and 2011 was approximately $2.8 million and $0.3 million, respectively. The total recognized tax benefit for the three months ended June 30, 2012 and 2011 was approximately $1.1 million and $0.1 million. Compensation expense related to restricted stock and RSUs for six months ended June 30, 2012 and 2011 was approximately $3.8 million and $0.7 million, respectively. The total recognized tax benefit for the six months ended June 30, 2012 and 2011 was approximately $1.4 million and $0.2 million.

As of June 30, 2012, there was $2.4 million of unearned compensation expense related to non-vested restricted stock and RSU awards. This cost is expected to be recognized over a weighted average period of 2.0 years. The total unrecognized stock-based compensation cost to be recognized in future periods as of June 30, 2012 does not consider the effect of stock-based awards that may be issued in subsequent periods.

Transactions involving stock options are summarized as follows:

 
   
Option
Shares
   
 
Weighted Average Exercise Price
   
Weighted Average
Remaining
Contractual Life
   
Aggregate
Intrinsic Value
 
Outstanding at December 31, 2011
    70,100     $ 54.88       0.91     $ -  
    Options expired
    (37,850 )     55.03       -       -  
Outstanding and exercisable at June 30, 2012
    32,250     $ 54.71       0.94     $ -  
 
Authorized unissued shares may be used under the stock-based compensation plans. The Company intends to issue shares of its common stock to meet the stock requirements of its awards in the future.
 
All per share amounts, including weighted average option exercise prices and weighted average grant date fair value amounts, as well as shares outstanding and all share activity have been adjusted retroactively to reflect the two-for-one stock split.

 
15.           Segment Information

Blyth designs and markets home fragrance products and decorative accessories, as well as weight management products, nutritional supplements and energy drinks. The Company’s products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items and personalized gifts, meal replacement shakes, vitamins and energy mixes, as well as products for the foodservice trade. The Company’s products can be found throughout North America, Europe and Australia. Our financial results are reported in three segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment.

Within the Direct Selling segment, we design, manufacture or source, market and distribute an extensive line of products including scented candles, candle-related accessories and other fragranced products under the PartyLite® brand.  PartyLite also offers gourmet foods under the Two Sisters Gourmetâ by PartyLiteâ brand name. PartyLite brand products are sold in North America, Europe and Australia. We also operate ViSalus Sciences®, which is focused on selling meal replacement shakes, nutritional supplements, nutritional cookies and energy drinks. Products in this segment are sold through networks of independent sales Consultants and Promoters. ViSalus brand products are sold in North America. The Company has aggregated these two businesses to form the Direct Selling segment based upon similarities in distribution channels, customers, operating metrics and management oversight.

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

Within the Wholesale segment, the Company designs, manufactures or sources, markets and distributes chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade under the Ambria®, HandyFuel® and Sterno® brands.

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

The geographic area data includes net trade sales based on product shipment destination and long-lived assets, which consist of fixed assets, based on physical location.

     
Three months ended June 30,
   
Six months ended June 30,
 
(In thousands)
 
2012
   
2011
   
2012
   
2011
 
Net sales:
                       
Direct Selling
  $ 278,304     $ 140,862     $ 514,721     $ 270,977  
Multi-channel Group:
                               
 
Catalog & Internet
    31,165       33,803       64,960       71,020  
 
Wholesale
    15,333       16,861       28,266       30,571  
Subtotal Multi-channel Group
    46,498       50,664       93,226       101,591  
        Total
  $ 324,802     $ 191,526     $ 607,947     $ 372,568  
Earnings from continuing operations before income taxes:
                               
Direct Selling
  $ 20,674     $ 1,153     $ 41,806     $ 4,936  
Multi-channel Group:
                               
 
Catalog & Internet
    (2,067 )     (1,411 )     (3,261 )     (583 )
 
Wholesale
    380       (521 )     72       (1,816 )
Subtotal Multi-channel Group
    (1,687 )     (1,932 )     (3,189 )     (2,399 )
 
Total
  $ 18,987     $ (779 )   $ 38,617     $ 2,537  
       Other expense
    (236 )     (1,169 )     (631 )     (3,659 )
Total
  $ 18,751     $ (1,948 )   $ 37,986     $ (1,122 )
                                   
     
June 30, 2012
   
December 31, 2011
                 
 
Identifiable assets:
                               
 
 Direct Selling
  $ 318,564     $ 262,144                  
 
 Multi-channel Group:
                               
 
   Catalog & Internet
    51,043       52,335                  
 
   Wholesale
    22,693       21,956                  
 
Subtotal Multi-channel Group
    73,736       74,291                  
 
  Unallocated Corporate
    133,110       178,859                  
 
 Total
  $ 525,410     $ 515,294                  
 
16.           Related Party Transactions

As discussed in Note 3 to the Consolidated Financial Statements, the acquisition of ViSalus in October 2008 involved related parties. ViSalus is currently owned in part by RAM, which owns a significant noncontrolling interest in ViSalus. Robert B. Goergen, Chairman of the Board and Chief Executive Officer of the Company; Robert B. Goergen, Jr., President, PartyLite Worldwide and President, Direct Selling Group; and Todd A. Goergen, son of Robert B. Goergen and Pamela Goergen (who is also a director of the Company), and brother of Robert B. Goergen, Jr., own, directly or indirectly, substantially all of the interests in RAM. Todd A. Goergen is a member of the Board of Managers of ViSalus. Mr. Goergen, the Company’s chairman and chief executive officer, beneficially owns approximately 35.0% of the Company’s outstanding common stock, and together with members of his family, owns substantially all of RAM.

As discussed in Note 4 to the Consolidated Financial Statements, the Company owns an investment through its ViSalus acquisition which involves related parties. RAM holds an approximate 5.4% interest in the investment. In addition to this interest, RAM also has a significant influence on the management of the investee and representation on its Board of Managers.

 
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ViSalus entered into an agreement with FragMob LLC in October 2011 that extends to December 31, 2012 and is renewable. FragMob agreed to provide ViSalus with software development and hosting services for a mobile phone application which allows ViSalus’s promoters to access their ViNet distributor account information on their smart phones. ViSalus paid $150,000 to FragMob for services provided beginning in March 2011 through December 31, 2011. In March 2012, ViSalus added a second application, a credit card swiper for mobile phones, to the services provided by FragMob pursuant to the agreement. Fees paid to FragMob for the three and six months ended June 30, 2012 for both services were $0.6 million and $1.2 million, respectively. FragMob is owned in part by Ropart Asset Management Fund LLC, a related party, and the three founders of ViSalus.

RAM paid $0.2 million to the Company during the eleven month transition period ended December 31, 2011 and $0.1 million for the six months ended June 30, 2012 to sublet office space, which we believe approximates the fair market rental for the rental period.

17.           Contingencies

The Company has contingent liabilities that have arisen in the ordinary course of its business, including pending litigation. The Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

Included within Other assets on the Company’s June 30, 2012 consolidated balance sheet is restricted cash of approximately $10 million which is being held by a third party bank in connection with a dispute with a former credit card processor for ViSalus. To recover the funds ViSalus has filed suit against the third parties who hold the ViSalus funds.
 
 





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

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.

Our current focus is driving sales growth and profitability of our brands so we may more fully leverage our infrastructure. New product development continues to be critical to all three segments of our business. In the Direct Selling segment, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales consultants and promoters. In the Catalog & Internet segment, 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.

On May 16, 2012, the Company’s Board of Directors announced a two-for-one stock split of its common stock effective in the form of a stock dividend of one share for each outstanding share. The record date for the stock split was June 1, 2012, and the additional shares were distributed on June 15, 2012. Accordingly, all per share amounts, average shares outstanding, shares outstanding and shares repurchased presented in the consolidated financial statements and notes have been adjusted retroactively to reflect the stock split. Shareholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the stock split to Common stock from Retained earnings.


RESULTS OF OPERATIONS - Three and six months ended June 30, 2012 versus 2011:

Net Sales
 
Net sales for the six months ended June 30, 2012 increased $235.3 million, or 63% to $607.9 million, from $372.6 million in the comparable prior year period due to strong sales growth in the direct selling segment.
 
Net sales for the three months ended June 30, 2012 increased $133.3 million, or 70% to $324.8 million, from $191.5 million in the comparable prior year period due to strong sales growth in the direct selling segment.

Net Sales - Direct Selling Segment

Net sales in the Direct Selling segment for the six months ended June 30, 2012 increased $243.7 million, or 90%, to $514.7 million from $271.0 million in the comparable prior year period. ViSalus’ Net sales increased $266.4 million, or 440% to $327.0 million from $60.6 million last year. This growth is a result of an increase in the number of promoters to over 114,000 as of June 30, 2012 from over 28,000 in the comparable prior year period.

PartyLite’s Net sales decreased $25.6 million, to $188.2 million from $213.8 million last year. Net sales of PartyLite Europe and Canada were negatively impacted by foreign exchange rate fluctuations, therefore, excluding the impact of foreign currency, sales in PartyLite Europe and Canada declined 8% and 12%, respectively. Net sales for PartyLite U.S., Europe and Canada declined on a U.S. dollar basis by 9%, 14% and 15%, respectively, primarily due to lower active independent consultants, as well as fewer shows, resulting in less opportunity to promote our products and recruit new consultants.

Net sales in the Direct Selling segment for the three months ended June 30, 2012 increased $137.4 million, or 98%, to $278.3 million from $140.9 million in the comparable prior year period. ViSalus’ Net sales increased $149.8 million, or 369% to $190.4 million from $40.6 million last year. As mentioned above, this growth is a result of an increase in promoters over last year, as well as increased demand for its products due to a growing customer base.

 
23

 

PartyLite’s Net sales decreased $13.3 million, or 13%, to $86.8 million from $100.1 million last year. Net sales of PartyLite Europe and Canada were negatively impacted by foreign exchange rate fluctuations, therefore,  excluding the impact of foreign currency sales in PartyLite Europe and Canada declined 6% and 10%, respectively.  Net sales for PartyLite U.S., Europe and Canada declined on a U.S. dollar basis by 11%, 16% and 14%, respectively, primarily due to lower active independent consultants, as well as fewer shows, resulting in less opportunity to promote our products and recruit new consultants.

Net Sales - Catalog & Internet Segment

Net sales in the Catalog & Internet segment for the six months ended June 30, 2012 decreased $6.0 million, or 8%, to $65.0 million from $71.0 million in the comparable prior year period.  This decrease was due to soft demand for general merchandise products as well as a planned reduction in circulation for general merchandise catalogs. This decrease was partly offset by an increase in sales and circulation for health and wellness products.

Net sales in the Catalog & Internet segment for the three months ended June 30, 2012 decreased $2.6 million, or 8%, to $31.2 million from $33.8 million in the comparable prior year period. This decrease was due to soft demand for general merchandise products as well as a planned reduction in circulation for general merchandise catalogs, partly offset by an increase in sales and circulation for health and wellness products.

Net Sales - Wholesale Segment

Net sales in the Wholesale segment in the six months ended June 30, 2012 decreased $2.3 million, or 8% to $28.3 million from $30.6 million in the comparable prior year period. The decrease in sales is due to lower case volume, partly offset by price increases instituted in the early part of last year to offset higher commodity costs and freight surcharges.

Net sales in the Wholesale segment in the three months ended June 30, 2012 decreased $1.6 million, or 9% to $15.3 million from $16.9 million in the comparable prior year period. The decrease in sales is due to lower case volume, partly offset by price increases instituted in the latter part of last year to offset higher commodity costs and freight surcharges.

Gross Profit

Gross profit for the six months ended June 30, 2012, increased $176.1 million, or 81%, to $394.8 million from $218.7 million in the comparable prior year period. This increase was principally due to an increase in ViSalus’ gross profit due to higher sales volume partly offset by a decline for PartyLite due to lower sales in Europe, U.S., and Canada and restructuring charges associated with the realignment of the PartyLite North American distribution center of $0.7 million. Gross profit margin for the six months ended June 30, 2012 increased to 64.9% of Net sales from 58.7% in the comparable prior year period principally due to increased sales for ViSalus, which has a higher gross margin than our other businesses.

Gross profit for the three months ended June 30, 2012, increased $98.1 million, or 87%, to $210.9 million from $112.8 million in the comparable prior year period. This increase was principally due to an increase in ViSalus’ gross profit due to higher sales volume partly offset by a decline for PartyLite due to lower sales in Europe, U.S., and Canada. Gross profit margin for the three months ended June 30, 2012 increased to 64.9% of Net sales from 58.9% in the comparable prior year period principally due to increased sales for ViSalus, which has a higher gross margin than our other businesses.

Selling Expense

Selling expense for the six months ended June 30, 2012, increased $107.8 million, or 71%, to $260.1 million from $152.3 million in the comparable prior year period. This increase was primarily due to higher commission expense at ViSalus resulting from higher sales, as well as an increase at the Miles Kimball Company reflecting increased catalog circulation for health and wellness products. Partially offsetting these increases was a decline at PartyLite principally due to its sales shortfalls in Europe and North America. As a percentage of Net sales, selling expense increased to 42.8% for the six months ended June 30, 2012, compared to 40.9% for the comparable prior year period.

 
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Selling expense for the three months ended June 30, 2012, increased $60.1 million, or 77%, to $138.0 million from $77.9 million in the comparable prior year period. This increase was primarily due to higher commission expense at ViSalus resulting from higher sales. Partially offsetting this increase was a decline at PartyLite principally due to its sales shortfalls in Europe and North America. As a percentage of Net sales, selling expense increased to 42.5% for the three months ended June 30, 2012, compared to 40.7% for the comparable prior year period.

Administrative and Other

Administrative and other expense for the six months ended June 30, 2012, increased $32.4 million, or 51%, to $96.2 million from $63.8 million in the comparable prior year period.  This increase was principally due to additional headcount at ViSalus, larger-scale promotional events resulting from an increased number of ViSalus promoters, higher credit card costs associated with ViSalus’ sales growth, and equity incentive charges of $12.6 million incurred this year versus $8.2 million last year. Also contributing to this increase were PartyLite restructuring charges associated with the realignment of the North American distribution center of $0.7 million. These increases were partially offset by lower headcount at PartyLite as well as cost management programs in the Wholesale and Catolog & Internet segments. As a percent of Net sales, administrative expense was 15.8% for the six months ended June 30, 2012 and 17.1% for the comparable prior year period.

Administrative and other expense for the three months ended June 30, 2012, increased $18.3 million, or 51%, to $54.0 million from $35.7 million in the comparable prior year period. This increase was principally due to additional headcount at ViSalus and higher credit card costs associated with ViSalus’ sales growth as well as equity incentive charges of $9.6 million incurred this year versus $6.0 million last year. These increases were partially offset by lower headcount at PartyLite as well as cost management programs in the Wholesale and Catolog & Internet segments. As a percent of Net sales, administrative expense was 16.6% for the three months ended June 30, 2012 and 18.6% for the comparable prior year period.

Operating Profit (Loss)

Operating profit for the six months ended June 30, 2012 increased $36.1 million to $38.6 million in the current period, compared to $2.5 million in the comparable prior year period. This increase is mainly due to the aforementioned sales increase at ViSalus, partially offset by lower sales within PartyLite, and restructuring charges associated with the realignment of the PartyLite North American distribution center of $1.4 million. Included within operating profit are ViSalus equity incentive charges of $12.6 million this year and $8.2 million last year.

Operating profit for the three months ended June 30, 2012 increased $19.8 million to $19.0 million in the current period, compared to operating loss of $0.8 million in the comparable prior year period. This increase is mainly due to the aforementioned sales increase at ViSalus, partially offset by lower sales within PartyLite and restructuring charges of $0.2 million associated with the realignment of the PartyLite North American distribution center. Included within operating profit are ViSalus equity incentive charges of $9.6 million this year and $6.0 million last year.

Operating Profit - Direct Selling Segment

Operating profit for the six months ended June 30, 2012 in the Direct Selling segment was $41.8 million compared to $4.9 million in the comparable prior year period. This increase was primarily due to increased operating profit at ViSalus due to significantly higher sales. Included within operating profit are ViSalus equity incentive charges of $12.6 million this year and $8.2 million last year. Partially offsetting this increase were lower sales within PartyLite and realignment costs for the PartyLite North American distribution center of $1.4 million.

Operating profit for the three months ended June 30, 2012 in the Direct Selling segment was $20.7 million compared to $1.2 million in the comparable prior year period. This increase was primarily due to increased operating profit at ViSalus due to significantly higher sales. Included within operating profit are ViSalus equity incentive charges of $9.6 million this year and $6.0 million last year. Partially offsetting this increase were lower sales within PartyLite and realignment costs of $0.2 million for the PartyLite North American distribution center.

 
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Operating Profit (Loss) - Catalog & Internet Segment

Operating loss for the six months ended June 30, 2012 in the Catalog & Internet segment was $3.3 million compared to $0.6 million in the prior year. This decrease is primarily due to lower sales and increased catalog circulation focused on health and wellness products partly offset by lower overhead costs resulting from  cost management programs.

Operating loss for the three months ended June 30, 2012 in the Catalog & Internet segment was $2.1 million compared to $1.4 million in the prior year. This decrease is primarily due to lower sales.

Operating Profit - Wholesale Segment
 
Operating profit for the six months ended June 30, 2012 in the Wholesale segment increased $1.9 million to $0.1 million versus an operating loss of $1.8 million in the comparable prior year period. The improvement is primarily the result of price increases instituted in the prior year as well as lower commodity and freight costs and savings related to cost management programs, partially offset by decreased sales from lower case volumes.
 
Operating profit for the three months ended June 30, 2012 in the Wholesale segment increased $0.9 million to $0.4 million versus an operating loss of $0.5 million in the comparable prior year period. The improvement is primarily the result of price increases instituted in the prior year as well as lower commodity and freight costs and savings related to cost management programs, partially offset by decreased sales from lower case volumes.

Interest Expense, Interest Income, and Foreign Exchange and Other

Interest expense for the six months ended June 30, 2012 decreased approximately $0.5 million to $2.9 million from $3.4 million in the comparable prior year period. Interest expense for the three months ended June 30, 2012 decreased approximately $0.1 million to $1.5 million from $1.6 million in the comparable prior year period. These declines were due to lower average outstanding debt this year versus last year, primarily related to repurchases of Senior Notes made this and last year.
 
Interest income for the six months ended June 30, 2012 increased approximately $0.4 million to $0.9 million from $0.5 million in the comparable prior year period. Interest income for the three months ended June 30, 2012 increased approximately $0.1 million to $0.4 million from $0.3 million in the comparable prior year period. These increases were mainly due to higher returns obtained from short-term investments and interest income on a promissory note related to the sale of Midwest-CBK.

Foreign exchange and other, net was income of $1.4 million for the six months ended June 30, 2012 compared to a loss of $0.8 million in the comparable prior year. This year’s income includes gains on the sale of investments of approximately $0.6 million while last year’s loss includes an impairment of an auction rate security investment of $1.3 million. Foreign exchange and other, net was income of $0.8 million for the three months ended June 30, 2012 compared to income of $0.1 million in the comparable prior year.

Discontinued Operations

The net loss from discontinued operations (including loss on sale of discontinued operations of $2.6 million for the three and six months ended June 30, 2011) of $4.7 million and $7.1 million for the three and six months ended June 30, 2011 was associated with the Midwest-CBK business sold in May 2011 and the closure of Boca Java in February 2011.

Income Taxes

Our effective tax rate for the six months ended June 30, 2012 was 40% which resulted in a provision for income taxes of $15.2 million. The effective rate in the six months ended June 30, 2012 was increased primarily as a result of no tax benefit being realized on certain foreign net operating losses.

 
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For the six months ended June 30, 2011, we recorded a tax benefit of $2.0 million on a loss from continuing operations of $1.1 million. The effective tax rate for the six months ended June 30, 2011 was primarily impacted by the utilization of a net operating loss carry forward for which a valuation allowance had been previously provided.

Our effective tax rate for the three months ended June 30, 2012 was 38% which resulted in a provision for income taxes of an expense of $7.2 million. This compares to 67% for the three months ended June 30, 2011, which resulted in a benefit of $1.3 million. The effective rate in the three months ended June 30, 2012 was increased primarily due to no tax benefit being realized on certain foreign net operating losses. The effective tax rate for the three months ended June 30, 2011 was decreased primarily as a result of the utilization of a net operating loss carry forward for which a valuation allowance had been previously provided.

Net Earnings Attributable to Noncontrolling Interests

The Net earnings attributable to noncontrolling interests for six months ended June 30, 2012 was $7.2 million compared to $0.1 million for the comparable prior year. This improvement is primarily the result of the increase in ViSalus’ operating performance.

The Net earnings attributable to noncontrolling interests for the three months ended June 30, 2011 was $3.5 million compared to a loss of $0.1 million for the comparable prior year.  This improvement is primarily the result of the increase in ViSalus’ operating performance.

Net Earnings (Loss) Attributable to Blyth, Inc.

Net earnings increased $21.8 million, to $15.5 million for the six months ended June 30, 2012 from a loss of $6.3 million in the comparable prior year period. The increase is primarily attributable to the increase in ViSalus’ operating performance this year and the loss from discontinued operations of $7.1 million recorded in the prior year.

Net earnings increased $13.2 million, to $8.0 million for the three months ended June 30, 2012 from a loss of $5.2 million in the comparable prior year period. The increase is primarily attributable to the increase in ViSalus’ operating performance this year and the loss from discontinued operations of $4.7 million recorded in the prior year.

Liquidity and Capital Resources

Cash and cash equivalents decreased $33.9 million to $166.7 million at June 30, 2012 from $200.6 million at December 31, 2011. This decrease in cash during the six months ended June 30, 2012 was primarily attributed to the purchase of additional ownership interest in ViSalus, changes in working capital requirements due to growth of ViSalus, capital expenditures and payment of dividends. Cash held in foreign locations was $64.1 million as of June 30, 2012.

Cash provided by operating activities of continuing operations was $9.0 million in the first six months of 2012. This was an increase of $37.0 million compared to cash used in continuing operations of $28.0 million in the prior year. This improvement in cash from operations is due primarily to the improved operating performance at ViSalus and lower inventory balances at PartyLite. Offsetting this increase were higher working capital needs at ViSalus mainly in inventories due to the growth of ViSalus. Included in operating earnings were non-cash charges for depreciation and amortization, and amortization of unearned stock-based compensation of $5.4 million and $3.8 million, respectively.

Management is presently increasing inventory purchases in preparation for this year’s forecasted sales, and expects a use of cash exceeding the levels experienced in the prior year. If demand for our products falls short of expectations this will result in higher inventory balances than forecasted and could negatively impact our liquidity. Additionally, the existing credit environment may negatively impact the ability of our customers within our Wholesale segment to obtain credit and consequently could negatively impact our sales and the collection of our receivables. We have taken steps to limit our exposure to our customers’ credit risk, including adjusting payment terms and expanding our credit approval procedures within our wholesale business.

 
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Net cash used in investing activities was $39.3 million in the first six months of 2012. The primary uses of cash were for the additional purchase of ViSalus ownership for $28.7 million, a net increase in short term investments of $4.4 million and $9.0 million for capital expenditures.

We anticipate total capital spending of approximately $20.0 million for 2012. A major influence on the forecasted expenditures is our investment in the growth of the ViSalus and PartyLite operations as well as investments in information technology systems.

Net cash used in financing activities was $2.2 million. This was primarily due to dividends paid of $1.3 million in April 2012 and $0.5 million for the early retirement of our senior notes due in November 2013.

We intend to and may be required to purchase the remaining interest in ViSalus to increase its ownership to 100%. The fourth phase and final purchase of ViSalus is conditioned upon ViSalus meeting its original purchase agreement’s 2012 operating target.  We have the option, but are not required, to acquire the remaining interest in ViSalus if it does not meet this operating target. However, as of June 30, 2012, the operating target for 2012 requiring the additional purchase is anticipated to be met. If ViSalus meets its current projected 2012 EBITDA forecast, the total expected redemption cost of the fourth and final phase will be approximately $271 million to be paid in the first half of 2013. The purchase price of the additional investment is equal to a multiple of ViSalus’s EBITDA, exclusive of certain unusual items. The payment, if any, may be funded in part using existing cash balances from both domestic and international sources, expected future cash flows from operations and the issuance of common stock and may require us to obtain additional sources of external financing.

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. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies.  A decrease in these ratings would likely increase our cost of borrowing and/or make it more difficult for us to obtain financing.  Obtaining a new credit facility will more than likely require higher interest costs and may require our providing security to guarantee such borrowings.  Alternatively, we may not be able to obtain unfunded borrowings, which may require us to seek other forms of financing, such as term debt, at higher interest rates and additional expense. 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 costs limiting our ability to repatriate funds to the United States.

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

As of June 30, 2012, we had $2.0 million available under an uncommitted facility issued by a bank, to be used for letters of credit through January 31, 2013.  As of June 30, 2012, no amount was outstanding under this facility.

As of June 30, 2012, the Company had $1.5 million in standby letters of credit outstanding that are fully collateralized through a certificate of deposit.

As of June 30, 2012, Miles Kimball had approximately $6.5 million of long-term debt outstanding under a real estate mortgage note payable which matures June 1, 2020. Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.

The estimated fair value of our $99.1 million and $99.9 million total long-term debt (including capital leases) at June 30, 2012 and December 31, 2011 was approximately $101.0 million and $102.0 million, respectively. The fair value of the liability is determined using the fair value of our notes when traded as an asset in an inactive market and is based on current interest rates, relative credit risk and time to maturity. 

 
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On December 13, 2007, our Board of Directors authorized a new stock repurchase program for 3,000,000 shares, in addition to 6,000,000 shares authorized under the previous plan, which became effective after we exhausted the authorized amount under the old repurchase program. We have not repurchased any shares during the first six months of 2012. As of June 30, 2012, the cumulative total shares purchased under the old and new programs was 6,705,204, at a total cost of approximately $251.6 million. The acquired shares are held as common stock in treasury at cost.

On March 15, 2012, the Board of Directors declared a cash dividend of $0.08 per share on the Company's common stock, for a total dividend payment of $1.3 million. The dividend was payable to shareholders of record as of April 2, 2012 and was paid on April 16, 2012.

Critical Accounting Policies

There were no changes to our critical accounting policies in the second quarter of 2012. For a discussion of the Company’s critical accounting policies see our Transition Report on Form 10-K for the eleven month period ended December 31, 2011.

 
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

We have operations outside of the United States and sell our products worldwide.  Our activities expose us to a variety of market risks, including the effects of changes in 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, and also in order to mitigate our non-performance risk.

Investment Risk

We are subject to investment risks on our investments due to market volatility. As of June 30, 2012, we held $20.2 million of short-term bond mutual funds and $19.1 million of pre-refunded and municipal bonds, which have been adjusted to fair value based on current market data.

Foreign Currency Risk

We use foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, 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 Accumulated other comprehensive income (“AOCI) until the investment is sold or disposed of. The net after-tax gain related to the derivative net investment hedges in AOCI as of June 30, 2012 and December 31, 2011 was $5.4 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.

We have designated forward exchange contracts on forecasted intercompany inventory purchases and future purchase commitments as cash flow hedges and 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 settlement 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 upon sale. 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 probable of not occurring, the resultant gain or loss on the terminated hedge is recognized into earnings immediately. The net after-tax unrealized gain included in AOCI at June 30, 2012 for cash flow hedges is $0.2 million and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment. The net after-tax gain included in AOCI at December 31, 2011 for cash flow hedges was $0.4 million.
 
 
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 June 30, 2012:

   
 
   
 
       
(In thousands, except average contract rate)
 
U.S. Dollar
Notional Amount
   
Average
Contract Rate
   
 
Unrealized Gain
 
Euro
  $ 5,450       1.33     $ 257  


 
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All foreign exchange contracts outstanding have maturity dates through March 2013.

Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.
 
We conducted an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a−15(e) and 15d−15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2012.

 (b) Changes in internal control over financial reporting.
 
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the second quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

 
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Part II.  OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no changes to the risks described in the Company’s Transition Report on Form 10-K for the eleven months ended December 31, 2011.

 
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Part II.  OTHER INFORMATION (continued)

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

The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the second quarter of the year ending December 31, 2012.

ISSUER PURCHASES OF EQUITY SECURITIES1

Period
 
(a)
Total Number of Shares Purchased
   
(b)
Average Price Paid
per Share
   
(c)
Total Number of Shares Purchased as Part of Publicly Announced
 Plans or Programs
   
(d)
Maximum of Shares that May Yet Be
Purchased Under the
Plans or Programs
 
April 1, 2012 – April 30, 2012
    -     $ -       -       2,294,796  
May 1, 2012 – May 31, 2012
    -       -       -       2,294,796  
June 1, 2012– June 30, 2012
    -       -       -       2,294,796  
Total
    -       -       -       2,294,796  

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 500,000 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 500,000 shares to 1,000,000 shares; on March 30, 2000 to increase the authorization by 500,000 shares to 1,500,000 shares; on December 14, 2000 to increase the authorization by 500,000 shares to 2.0 million shares; on April 4, 2002 to increase the authorization by 1,000,000 shares to 3.0 million shares; and on June 7, 2006 to increase the authorization by 3.0 million shares to 6.0 million shares). On December 13, 2007, the Board of Directors authorized a new repurchase program, for 3.0 million shares, which became effective after we exhausted the authorized amount under the old repurchase program. As of June 30, 2012, we have purchased a total of 6,705,204 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 1-for-4 reverse stock split executed for the year ended January 31, 2009 and the 2-for-1 stock split executed for the quarter ended June 30, 2012.
 
 
Item 3. Defaults upon Senior Securities