UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended April 30, 2005

 

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                            ý                                    No                                o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes                            ý                                    No                                o

 

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

 

40,963,744 Common Shares as of May 31, 2005

 

 

BLYTH, INC.

 

INDEX

 

Part I.		Financial Information
	Item 1.		Financial Statements:
			Condensed Consolidated Balance Sheets
			Condensed Consolidated Statements of Earnings
			Condensed Consolidated Statements of Stockholders’ Equity
			Condensed Consolidated Statements of Cash Flows
			Notes to Condensed Consolidated Financial Statements
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk
	Item 4.		Controls and Procedures
Part II.		Other Information
	Item 1.		Legal Proceedings
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.		Defaults upon Senior Securities
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits
Signatures

 

2

 

Part I.   FINANCIAL  INFORMATION

Item I.   FINANCIAL STATEMENTS

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		April 30,			January 31,
(In thousands, except share and per share data)		2005			2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	92,726		$	91,695
Accounts receivable, less allowance for doubtful receivables of $3,515 and $4,028, respectively		111,536			124,603
Inventories		230,675			234,984
Prepaid and other		52,621			43,832
Assets held for sale		4,060			3,949
Deferred income taxes		15,081			15,068
Total current assets		506,699			514,131
Property, plant and equipment, at cost:
Less accumulated depreciation of $271,805 and $262,685, respectively		249,073			258,896
Other assets:
Investments		3,243			3,446
Goodwill		243,461			246,182
Other intangible assets, net of accumulated amortization of $4,417 and $3,867, respectively		38,683			39,233
Deposits and other assets		13,729			13,932
		299,116			302,793
Total assets		$	1,054,888		$	1,075,820
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank lines of credit		$	9,369		$	11,813
Current maturities of long-term debt		4,452			4,489
Accounts payable		61,052			81,333
Accrued expenses		97,202			94,847
Dividends payable		8,601			—
Income taxes		11,178			9,477
Total current liabilities		191,854			201,959
Deferred income taxes		46,211			47,740
Long-term debt, less current maturities		271,062			271,573
Other long-term liabilities		32,388			33,199
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock - authorized 10,000,000 shares of $0.01 par value; no shares issued and outstanding		—			—
Common stock - authorized 100,000,000 shares of $0.02 par value; issued 50,492,660 shares and 50,367,827 shares, respectively		1,010			1,007
Additional contributed capital		126,208			118,148
Retained earnings		652,515			651,156
Accumulated other comprehensive income		24,811			36,102
Unearned compensation on restricted stock		(4,036		)	—
Treasury stock, at cost, 9,533,416 shares and 9,468,416 shares, respectively		(287,135		)	(285,064		)
Total stockholders’ equity		513,373			521,349
Total liabilities and stockholders’ equity		$	1,054,888		$	1,075,820

 

The accompanying notes are an integral part of these financial statements.

 

3

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

Three months ended April 30 (In thousands, except per share data)		2005			2004
Net sales		$	355,768		$	358,980
Cost of goods sold		187,423			175,969
Gross profit		168,345			183,011
Selling		111,861			115,075
Administrative		36,853			33,675
		148,714			148,750
Operating profit		19,631			34,261
Interest expense		5,081			5,209
Other expense (income), net		844			(868		)
		5,925			4,341
Earnings before income taxes and minority interest		13,706			29,920
Income tax expense		3,975			12,195
Earnings before minority interest		9,731			17,725
Minority interest		(229		)	50
Net earnings		$	9,960		$	17,675
Basic:
Net earnings per common share		$	0.24		$	0.39
Weighted average number of shares outstanding		40,904			45,665
Diluted:
Net earnings per common share		$	0.24		$	0.38
Weighted average number of shares outstanding		41,221			46,105

 

The accompanying notes are an integral part of these financial statements.

 

4

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)

 

																			Accumulated
							Additional												other
		Common stock					contributed			Retained			Treasury			Unearned			comprehensive
		Shares		Amount			capital			earnings			Stock			Compensation			income (loss)			Total
For the Three months ended April 30, 2004:
Balance, February 1, 2004		49,975,502		$	999		$	107,965		$	570,171		$	(105,389	)	$	—		$	15,224		$	588,970
Net earnings for the period										17,675												17,675
Foreign currency translation adjustments																			(1,192		)	(1,192		)
Unrealized holding losses on certain investments (net of tax of $13)																			(24		)	(24		)
Net gain on cash flow hedging instruments (net of tax of $117)																			208			208
Comprehensive income																						16,667
Common stock issued in connection with long-term incentive plan		204,525		5			5,385															5,390
Tax benefit from stock options							136															136
Dividends										(7,757		)										(7,757		)
Treasury stock purchases													(6,657		)							(6,657		)
Balance, April 30, 2004		50,180,027		$	1,004		$	113,486		$	580,089		$	(112,046	)	$	—		$	14,216		$	596,749
For the Three months ended April 30, 2005:
Balance, February 1, 2005		50,367,827		$	1,007		$	118,148		$	651,156		$	(285,064	)	$	—		$	36,102		$	521,349
Net earnings for the period										9,960												9,960
Foreign currency translation adjustments																			(11,475		)	(11,475		)
Unrealized holding losses on certain investments (net of tax of $23)																			(45		)	(45		)
Net gain on cash flow hedging instruments (net of tax of $118)																			229			229
Comprehensive loss																						(1,331		)
Common stock issued in connection with long-term incentive plan		124,833		3			2,996															2,999
Tax benefit from stock options							281															281
Unearned compensation relating to issuance of restricted stock							4,783									(4,954		)				(171		)
Amortization of unearned compensation																918						918
Dividends										(8,601		)										(8,601		)
Treasury stock purchases													(2,071		)							(2,071		)
Balance, April 30, 2005		50,492,660		$	1,010		$	126,208		$	652,515		$	(287,135	)	$	(4,036	)	$	24,811		$	513,373

 

The accompanying notes are an integral part of these financial statements.

 

5

 

BLYTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three months ended April 30 (In thousands)		2005			2004
Cash flows from operating activities:
Net earnings		$	9,960		$	17,675
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		9,670			9,048
Tax benefit from stock options		281			136
Deferred income taxes		(1,140		)	2,357
Equity in loss of investee		204			23
Minority interest		(268		)	(13		)
Gain on sale of assets held for sale		—			(364		)
Changes in operating assets and liabilities, net of effect of business acquisitions:
Accounts receivable		9,952			2,452
Inventories		1,074			(4,518		)
Prepaid and other		(9,423		)	(1,234		)
Deposits and other assets		141			(240		)
Goodwill disposed of due to sale of assets held for sale		—			(3,621		)
Accounts payable		(18,892		)	(18,859		)
Accrued expenses		3,901			6,156
Other liabilities		544			628
Income taxes		2,048			6,124
Total adjustments		(1,908		)	(1,925		)
Net cash provided by operating activities		8,052			15,750
Cash flows from investing activities:
Purchases of property, plant and equipment		(3,380		)	(2,953		)
Purchases of long-term investments		—			(19,000		)
Proceeds from sale of assets held for sale		—			9,752
Purchase of businesses, net of cash acquired		(22		)	(6,565		)
Net cash used in investing activities		(3,402		)	(18,766		)
Cash flows from financing activities:
Proceeds from issuance of common stock		2,999			5,390
Purchases of treasury stock		(2,071		)	(6,657		)
Borrowings from bank line of credit		8,001			13,816
Repayments on bank line of credit		(10,097		)	(6,716		)
Repayments of long-term debt		(183		)	(188		)
Net cash provided by (used in) financing activities		(1,351		)	5,645
Effect of exchange rate changes on cash		(2,268		)	(88		)
Net increase in cash and cash equivalents		1,031			2,541
Cash and cash equivalents at beginning of period		91,695			229,726
Cash and cash equivalents at end of period		$	92,726		$	232,267

 

The accompanying notes are an integral part of these financial statements.

 

6

 

BLYTH, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      Basis of Presentation

 

Blyth is a designer and marketer of home fragrance products and accessories, home décor, seasonal decorations, household convenience items, personalized gifts and 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 Wholesale segment and the Catalog & Internet segment.  These reportable segments are based on similarities in distribution channels, customers and management oversight.

 

Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories, fragranced bath gels and body lotions and other fragranced products.  These products are sold directly to the consumer under the PartyLite® brand in North America, Europe and Australia through a network of independent sales consultants using the party plan method of direct selling.

 

Within the Wholesale segment, the Company designs, manufactures or sources, markets and distributes an extensive line of home fragrance products, candle-related accessories, seasonal decorations such as ornaments, artificial trees and trim, and home décor products such as picture frames, lamps and textiles.  Products in this segment are sold in North America and Europe to retailers in the premium, specialty and mass channels under the CBK®, Carolina®, Colonial®(1), Colonial Candle of Cape Cod®, Colonial at HOMEâ, Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), Holiday 365™, Kaemingk™(2), Liljeholmens®, Seasons of Cannon Falls® and Triumph Tree®(1) brands.  In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold through this segment under the Ambria®, FilterMate®, HandyFuel® and Sterno® brands.

 

Within the Catalog & Internet segment, the Company designs, sources and markets a broad range of household convenience items, premium photo albums, frames, holiday cards, personalized gifts and kitchen accessories under the Exposuresâ, Miles Kimballâ, Walter Drakeâ, The Home Marketplace® and Directions…the path to better healthâ brands.  These products are sold primarily in North America.

 

The condensed consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  Investments in companies that are not majority owned or controlled are reported using the equity method and are recorded in investments.  Other expense (income), net consists of interest income earned from investments, foreign currency gains and losses, gains and losses from sales of investments and the Company’s equity in the income or losses of unconsolidated investments.  Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to January 31.  European operations maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all accruals necessary for fair presentation of the Company’s consolidated financial position at April 30, 2005 and the consolidated results of its operations and cash flows for the three-month periods ended April 30, 2005 and 2004.  These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended January 31, 2005, as set forth in the Company’s Annual Report on Form 10-K.  Operating results for the three months ended April 30, 2005 are not necessarily indicative of the results that may be expected for the year ending January 31, 2006.

 

(1) Colonial, Euro-Decor, Gies and Triumph Tree trademarks are registered and sold only outside the United States.

(2) Kaemingk is sold only outside the United States.

 

7

 

Employee Stock Options

 

The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and continues to follow Accounting Principles Board (APB) opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock options granted to its employees and directors under the intrinsic value method.  Accordingly, no compensation expense is recorded for the stock options issued to employees unless the option price is below market at the measurement date.  The Company does not at this time issue stock options below market value, therefore no compensation expense has been recorded in the financial statements.  Had compensation expense for the Company’s stock options been determined in accordance with the fair value method in SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, the Company’s reported net income and earnings per share would have been adjusted to the pro forma amounts indicated below:

 

		Three months ended April 30,
(In thousands except per share data)		2005			2004
Net earnings:
As reported		$	9,960		$	17,675
Stock-based employee compensation expense determined under SFAS No. 123 for all awards, net of related tax		478			439
Pro forma		$	9,482		$	17,236
Net earnings per common share:
As reported:
Basic		$	0.24		$	0.39
Diluted		0.24			0.38
Pro forma:
Basic		$	0.23		$	0.38
Diluted		0.23			0.36

 

8

 

2.                                      Business Acquisitions

 

On September 10, 2004, the Company acquired 100% interests in Edelman B.V. (“Edelman”), a designer and marketer of everyday home, garden and seasonal décor, and Euro-Decor B.V. (“Euro-Decor”), a designer and marketer of traditional and contemporary gift and florist products.  The acquisitions align with one component of the Company’s overall growth strategy, which is to grow through selected acquisitions in the Home Expressions industry.  The cash purchase price was approximately $48.6 million less cash acquired of $1.1 million resulting in net cash paid of $47.5 million.  Included in the purchase price is a $9.2 million earn out that was paid in the first quarter of fiscal 2006 and was based on a multiple of 2004 earnings before interest and income taxes that the combined companies had achieved.  The Company also assumed Edelman and Euro-Decor’s long-term debt of approximately $7.2 million.  During the fourth quarter of fiscal 2005, an adjustment was recorded to reflect the final appraised value of the acquired property, plant and equipment for $3.8 million, as well as the net pension asset of $0.6 million.  The excess of the purchase price over the estimated fair value of the net assets acquired approximated $33.0 million, which will not be deductible for income tax purposes.  The results of operations of Edelman and Euro-Decor have been included in the Condensed Consolidated Statements of Earnings of the Company since September 11, 2004.  For segment reporting purposes, Edelman and Euro-Decor are included in the Wholesale segment.

 

The following provides a preliminary allocation of the purchase price of Edelman and Euro-Decor (in thousands):

 

Cash Purchase Price		$	48,609
Less: Assets acquired
Cash		1,112
Accounts receivable		23,684
Inventories		16,964
Prepaid and other		4,044
Property, plant and equipment		10,109
Other assets		624
Total assets acquired		56,537
Plus: Liabilities assumed
Bank line of credit		18,523
Accounts payable		3,227
Accrued expenses		11,911
Other liabilities		22
Debt		7,195
Total liabilities assumed		40,878
Unallocated purchase price (goodwill)		$	32,950

 

9

 

The following unaudited pro forma summary financial information summarizes the estimated combined results of operations of the Company, Edelman and Euro-Decor assuming that the acquisitions of Edelman and Euro-Decor had taken place on February 1, 2004.  The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of Edelman and Euro-Decor and no representation is made by the Company with respect to the accuracy of such information.  The pro forma combined results of operations reflect adjustments for interest income, additional depreciation based on the fair market value of Edelman’s and Euro-Decor’s property, plant, and equipment, and income tax expense.

 

		Three months ended April 30,
(In thousands except per share data)		2005			2004
Net sales		$	355,768		$	381,572
Net earnings		9,960			18,230
Basic:
Net earnings per common share		$	0.24		$	0.40
Diluted:
Net earnings per common share		$	0.24		$	0.40

 

The unaudited pro forma combined results of operations are not necessarily indicative of, and do not purport to represent, what the Company’s results of operations or financial condition actually would have been had the acquisitions been made as of February 1, 2004.

 

3.                                      Inventories

 

The components of inventory are as follows (in thousands):

 

		April 30, 2005			January 31, 2005
Raw materials		$	25,519		$	27,286
Work in process		838			2,641
Finished goods		204,318			205,057
		$	230,675		$	234,984

 

10

 

4.                                      Goodwill and Other Intangibles

 

The following table shows changes in the carrying amount of goodwill for the quarter ended April 30, 2005, by operating segment (in thousands):

 

								Catalog &
		Direct Selling			Wholesale			Internet			Total
Goodwill at January 31, 2005		$	307		$	171,353		$	74,522		$	246,182
Edelman and Euro-Decor acquisition costs		—			22			—			22
Foreign currency translation adjustment related to Kaemingk, Edelman and Euro-Decor goodwill		—			(2,743		)	—			(2,743		)
Total adjustments		—			(2,721		)	—			(2,721		)
Goodwill at April 30, 2005		$	307		$	168,632		$	74,522		$	243,461

 

Other intangible assets consisted of the following (in thousands):

 

		April 30, 2005									January 31, 2005
		Gross			Accumulated Amortization			Net			Gross			Accumulated Amortization			Net
Indefinite-lived trade names and trademarks		$	28,100		$	—		$	28,100		$	28,100		$	—		$	28,100
Customer lists		15,000			4,417			10,583			15,000			3,867			11,133
Total		$	43,100		$	4,417		$	38,683		$	43,100		$	3,867		$	39,233

 

Estimated amortization expense for the next five fiscal years is as follows:  $2.1 million, $1.8 million, $1.5 million, $1.5 million and $1.2 million.

 

5.                                      Earnings per Share

 

The components of basic and diluted earnings per share are as follows (in thousands):

 

		Three months ended April 30,
		2005			2004
Net earnings		$	9,960		$	17,675
Weighted average number of common shares outstanding:
Basic		40,904			45,665
Dilutive effect of stock options and restricted shares		317			440
Weighted average number of common shares outstanding:
Diluted		41,221			46,105

 

For the three-month period ended April 30, 2005 and 2004, options to purchase 53,000 and 645 shares of common stock, respectively, are not included in the computation of earnings per share because the effect would be anti-dilutive.

 

11

 

6.                                      Segment Information

 

Blyth is a designer and marketer of home fragrance products and accessories, home décor, seasonal decorations, household convenience items, personalized gifts and 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 Wholesale segment and the Catalog & Internet segment.  These reportable segments are based on similarities in distribution channels, customers and management oversight.

 

Earnings in all segments represent 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 equity in earnings of investees, which are not allocated to the business segments.  Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations.  Unallocated Corporate within the identifiable assets include corporate cash and cash equivalents, prepaid income tax, corporate fixed assets, deferred bond costs and other long-term investments, which are not allocated to the business segments.

 

		Three months ended April 30,
(In thousands)		2005			2004
Net Sales
Direct Selling		$	173,251		$	189,863
Wholesale		146,319			127,763
Catalog & Internet		36,198			41,354
Total		$	355,768		$	358,980
Earnings
Direct Selling		$	27,994		$	38,002
Wholesale		(6,657		)	(2,679		)
Catalog & Internet		(1,706		)	(1,062		)
		19,631			34,261
Other expense		(5,925		)	(4,341		)
Earnings before income taxes and minority interest		$	13,706		$	29,920
		April 30, 2005			January 31, 2005
Identifiable Assets
Direct Selling		$	255,262		$	249,126
Wholesale		593,890			613,819
Catalog & Internet		166,843			164,237
Unallocated Corporate		38,893			48,638
Total		$	1,054,888		$	1,075,820

 

12

 

7.                                      Assets Held for Sale

 

During the third quarter of fiscal 2005, the Colorado Springs facility, purchased as part of the Walter Drake acquisition, became available for sale and management maintains an active program to locate a buyer.  The fair value of the building of $4.1 million, which approximates the carrying value less selling costs, is classified as assets held for sale in the Condensed Consolidated Balance Sheet as of January 31, 2005 and April 30, 2005.

 

8.                                      Tender Offer

 

On June 7, 2004, the Company announced that its Board of Directors approved a repurchase of up to 4,000,000 outstanding shares of the Company’s common stock, with the right to repurchase up to an additional 2% of the Company’s outstanding shares, at a price per share not greater than $35.00 nor less than $30.00 through a Dutch auction cash tender offer.  The final number of shares repurchased under the tender offer, which expired on July 9, 2004, was 4,906,616 shares for an aggregate purchase price of $172.6 million including fees and expenses.  The tender offer was funded with $86.1 million of available cash and $86.5 million of borrowings against our $200 million Credit Facility.  The Company does not expect the tender offer to affect its share repurchase program, capital expenditures, dividend policy or acquisitions.

 

9.                                      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.

 

13

 

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

 

RESULTS OF OPERATIONS:

 

Overview

 

Blyth is a designer and marketer of home fragrance products and accessories, home décor, seasonal decorations, household convenience items, personalized gifts and 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 Wholesale segment and the Catalog & Internet segment.  These reportable segments are based on similarities in distribution channels, customers and management oversight.

 

Today, on an annualized net sales basis considering the full year impact of recent acquisitions, Blyth is comprised of an approximately $740 million direct selling business, an approximately $720 million wholesale business and an approximately $200 million catalog and Internet business.  Sales and earnings growth differ in each segment depending on geographic location, market penetration, our relative market share and product and marketing execution, among other business factors.  Over the long term, all three segments should experience single-digit growth, most likely within the low to mid-single digit range, again depending on the business factors previously noted.

 

Our current focus is driving sales growth 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.  In the Wholesale segment, we have numerous collaborative initiatives underway, which we believe will help drive sales and leverage the sales and marketing talents across this segment.  These initiatives include customer information sharing and leveraging our in-house sales forces, as well as ongoing global sourcing objectives and other organic strategic initiatives into which we are investing resources.

 

With the acquisitions of Miles Kimball in April 2003 and Walter Drake in December 2003, we entered the Catalog and Internet channel of distribution, giving us a presence in all of our desired channels.  The operations of Walter Drake have been integrated into those of Miles Kimball and form the core of our Catalog & Internet segment.

 

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Net Sales

 

Net Sales in the quarter ended April 30, 2005, decreased $3.2 million, or 0.9%, to $355.8 million from $359.0 million a year earlier.  The decline in Net Sales was primarily due to soft sales in the North American Direct Selling markets and the Wholesale home fragrance businesses.

 

Net Sales - Direct Selling Segment

 

Net Sales in the Direct Selling segment for the quarter ended April 30, 2005 decreased $16.6 million, or 8.7%, to $173.3 million in fiscal 2006 from $189.9 million in fiscal 2005.  PartyLite’s U.S. sales decreased approximately 16.7% compared to the prior year.  PartyLite Canada reported an approximate 8.5% decrease versus the prior year in U.S. dollars.  Management believes that sales in the U.S. and Canadian markets continued to be negatively impacted by increased competition for hostesses and party guests due to a substantial increase in channel competition.  There was a reduction in the number of shows principally due to the decrease in active consultants.  A number of leadership development and promotional programs have been instituted to address these issues.  In PartyLite’s European markets, sales increased approximately 7.4% in U.S. dollars (2.2% in local currencies), driven by strong sales in the developing markets.

 

Net Sales - Wholesale Segment

 

Net Sales in the Wholesale segment in the quarter ended April 30, 2005, increased $18.5 million, or 14.5%, to $146.3 million from $127.8 million a year earlier.  The increase in this segment is due to the addition of sales from Edelman and Euro-Decor, which were acquired in September 2004, partially offset by a decrease in worldwide sales in the home fragrance businesses.

 

Net Sales - Catalog & Internet Segment

 

Net Sales in the Catalog & Internet segment decreased $5.2 million, or 12.6%, to $36.2 million in the quarter ended April 30, 2005, compared with $41.4 million in the same period in fiscal 2005.  The decline from last year is primarily attributable to the absence of one of this segment’s catalogs, the number of editions of which has been limited this year, as well as sales softness and the timing of catalog mailings among the existing titles.

 

Gross Profit

 

Gross profit in the quarter ended April 30, 2005 decreased $14.7 million, or 8.0% to $168.3 million from $183.0 million in fiscal 2005.  Gross profit margin decreased from 51.0% in the first quarter of fiscal 2005 to 47.3% in fiscal 2006.  This decline is principally due to sales shortfalls within our North American Direct Selling channel, the margins of which are higher than Blyth’s overall average, as well as gross margin declines in our Wholesale businesses, principally due to business mix and higher commodity and freight costs, which were not offset by price increases.

 

Selling Expense

 

Selling expense decreased $3.2 million, or 2.8%, from $115.1 million in the first three months ended April 30, 2004, when selling expense was 32.1% of net sales, to $111.9 million in the first three months of fiscal 2006, or 31.4% of net sales.  The decrease in selling expense is primarily due to the impact of reduced sales in the North American Direct Selling channel.

 

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Administrative Expense

 

Administrative expense increased $3.2 million, or 9.5%, from $33.7 million in the first quarter ended April 30, 2004 to $36.9 million in the first three months of fiscal 2006.  Administrative expenses increased due to the acquisitions of Edelman and Euro-Decor.  As a percent of sales, administrative expense was 10.4% in the first quarter of fiscal 2006 versus 9.4% in the same period last year.

 

Operating Profit

 

Operating profit decreased $14.7 million, or 42.9%, from $34.3 million in the quarter ended April 30, 2004 to $19.6 million in the quarter ended April 30, 2005.  The sales shortfall in the Direct Selling segment is the primary reason for the decrease in operating profit.

 

Operating Profit - Direct Selling Segment

 

Operating profit in the quarter ended April 30, 2005 in the Direct Selling segment decreased $10.0 million, or 26.3%, to $28.0 million when compared to $38.0 million a year earlier.  The decreased profitability resulted from the sales shortfall in PartyLite’s North American operations, as noted above, and continued investments in organic strategic initiatives.

 

Operating Loss - Wholesale Segment

 

Operating loss in the quarter ended April 30, 2005 in the Wholesale segment was $6.7 million versus a loss of $2.7 million a year earlier.  Sales volume declines and continued pressure on raw materials costs more than offset the benefit of the recent acquisitions on operating profit.

 

Operating Loss - Catalog & Internet Segment

 

Operating loss in the quarter ended April 30, 2005 in the Catalog & Internet segment was $1.7 million versus a loss of $1.1 million a year earlier.  Operating loss was above prior year due to the impact of reduced sales.

 

Interest Expense

 

Interest expense decreased approximately $0.1 million from $5.2 million in the quarter ended April 30, 2004 to $5.1 million in the quarter ended April 30, 2005.  This decrease is due to a decrease in foreign borrowings and payments on private placement notes.

 

Income Taxes

 

Income tax expense decreased $8.2 million, or 67.2%, from $12.2 million in the quarter ended April 30, 2004 to $4.0 million in the same period in the current fiscal year.  This decrease is primarily due to the decrease in earnings and to a lower expected effective tax rate for fiscal 2006.  The effective tax rate for the quarter ended April 30, 2005 was approximately 29.0% compared to 40.8% in the first quarter of fiscal 2005 due to more income being earned in lower tax jurisdictions, as well as the disposal of non tax-deductible goodwill of $3.6 million related to the sale of Jeanmarie Creations in fiscal 2005.

 

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Net Earnings

 

As a result of the foregoing, net earnings decreased $7.7 million, or 43.5%, from $17.7 million in the first quarter of fiscal 2005 to $10.0 million for the quarter ended April 30, 2005.

 

Basic earnings per share for the quarter ended April 30, 2005, were $0.24, a decrease of $0.15, or 38.5%, compared to $0.39 for the quarter ended April 30, 2004.  Diluted earnings per share were $0.24 for the quarter ended April 30, 2005, compared to $0.38 for the same period last year, a decrease of $0.14 or 36.8%.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities decreased to $8.1 million in the first three months of fiscal 2006 from $15.8 million in the same three-month period of fiscal 2005.  The 48.7% decrease in cash provided by operations in fiscal 2006 was primarily due to the reduction in net earnings.

 

Capital expenditures for property, plant and equipment were $3.4 million in the quarter ended April 30, 2005 compared to $3.0 million in the prior year period.  Capital expenditures consisted primarily of investments in information technology and upgrades of equipment and facilities.  The Company expects total capital spending of approximately $20 million for fiscal 2006.

 

On June 2, 2005, the Company replaced its prior $200 million credit facility with a new $150 million unsecured revolving credit facility having a five year term (the “Credit Facility”).  The Company has the ability to increase the Credit Facility, under certain circumstances, by an additional $50 million.  The Credit Facility may be used for seasonal working capital needs, general corporate purpose, funding for strategic acquisitions and borrowing to repatriate retained earnings from its European subsidiaries.  The Credit Facility contains, among other provisions, requirements for maintaining certain financial ratios and limitations on certain payments.  Amounts outstanding under the Credit Facility bear interest, at the Company’s option, at JPMorgan Chase Bank’s prime rate or at the Eurocurrency rate plus a credit spread ranging from 0.360% to 0.800%, calculated on the basis of the Company’s senior unsecured long-term debt rating.  On April 30, 2005, there were no amounts outstanding under the prior $200 million credit facility.

 

As of April 30, 2005, the Company had a total of $15.0 million available under an uncommitted bank line of credit with LaSalle Bank National Association, which matures in June 2005.  Amounts outstanding under the line of credit bear interest at short-term fixed rates.  No amounts were outstanding under the uncommitted line of credit at April 30, 2005.

 

At April 30, 2005, the Company had a total of $10.0 million available under an uncommitted line of credit with Bank of America to be used for letters of credit.  At April 30, 2005, approximately $5.7 million of letters of credit were outstanding under this credit line.

 

As of March 31, 2005, The Gies Group (“Gies”) had available lines of credit of approximately $35.0 million of which approximately $1.3 million was outstanding.  The amounts outstanding under the lines of credit bear interest at a weighted average rate of 2.7% at March 31, 2005.  The lines of credit are renewed annually.

 

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As of March 31, 2005, Kaemingk had available lines of credit of approximately $35.6 million with ING Bank N.V.  The lines of credit are collateralized by certain real estate and equipment owned by Kaemingk.  No amounts were outstanding at March 31, 2005.

 

Colony Gift Corporation Limited (“Colony”) has a $17.0 million short-term revolving credit facility with Barclays Bank, which matures in August 2005.  As of March 31, 2005, Colony had borrowings under the credit facility of approximately $5.5 million, at a weighted average interest rate of 5.8%.

 

As of March 31, 2005, Edelman B.V. and Euro-Decor B.V. had available lines of credit of approximately $32.4 million with ABN Amro Bank N.V.  The lines of credit are collateralized by inventory and receivables owned by Edelman B.V. and Euro-Decor B.V.  At March 31, 2005, approximately $2.6 million was outstanding at a weighted average interest rate of 2.9%.

 

At April 30, 2005, Miles Kimball had approximately $9.8 million of long-term debt outstanding under a real estate mortgage note payable to John Hancock Life Insurance Company, 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%.

 

At March 31, 2005, Kaemingk had approximately $8.3 million of long-term debt outstanding under six loans with ING Bank N.V. at a weighted average interest rate of 5.0%.  The bank loans have maturity dates ranging from 2008 through 2020.  The loans are collateralized by certain real estate and equipment owned by Kaemingk.

 

In July 1995, the Company privately placed $25.0 million aggregate principal amount of 7.54% Senior Notes due 2005.  As of April 30, 2005, $3.6 million of principal remained outstanding.  Such senior notes contain, among other provisions, requirements for maintaining certain financial ratios and net worth.  At April 30, 2005, the Company was in compliance with such provisions.  Payment on the notes commenced in June 1999 and annual installments of principal and interest are required to be paid through June 2005.

 

In May 1999, the Company filed a shelf registration statement for issuance of up to $250.0 million in debt securities with the Securities and Exchange Commission.  On September 24, 1999, the Company issued $150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.4 million, which is being amortized over the life of the notes.  Such notes contain, among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.  At April 30, 2005, the Company was in compliance with such provisions.  Interest is payable semi-annually in arrears on April 1 and October 1.  On October 20, 2003, the Company issued $100.0 million 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes.  Such notes contain provisions and restrictions similar to those in the 7.90% Senior Notes.  At April 30, 2005, 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 issuance were used for general corporate purposes.

 

At April 30, 2005, CBK had $4.5 million of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025.  The bond is backed by an irrevocable letter of credit issued by La Salle Bank National Association.  The loan is collateralized by certain of CBK’s assets.  The amount outstanding under the IRB bears interest at short-term floating rates, which equaled a weighted average interest rate of 3.0% at April 30, 2005.  Payments of principal are required annually and interest payments are required monthly under the terms of the bond.

 

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The Company’s Board of Directors has authorized the Company to repurchase up to 6,000,000 shares of common stock under the Company’s share repurchase program.  Since January 31, 2005, the Company has purchased an additional 65,000 shares on the open market for a cost of $2.1 million, bringing the cumulative total purchased shares to 4,626,800 as of April 30, 2005 for a total cost of approximately $114.5 million.  The acquired shares are held as common stock in treasury at cost.

 

On June 7, 2004 the Company announced that its Board of Directors approved a repurchase of up to 4,000,000 outstanding shares of the Company’s common stock, with the right to repurchase up to an additional 2% of the Company’s outstanding shares, at a price per share not greater than $35.00 nor less than $30.00 through a Dutch auction cash tender offer.  The final number of shares repurchased under the tender offer, which expired on July 9, 2004, was 4,906,616 shares for an aggregate purchase price of $172.6 million including fees and expenses.  The tender offer was funded with $86.1 million of available cash and $86.5 million of borrowings against our old $200 million credit facility.  The Company does not expect the tender offer to affect its share repurchase program, capital expenditures, dividend policy or acquisitions.

 

On March 17, 2005, the Company announced that it had declared a cash dividend of $0.21 per share of common stock for the six months ended January 31, 2005.  The dividend was payable to shareholders of record as of April 29, 2005, and was paid on May 13, 2005.  The total dividend payment was $8.6 million.

 

Critical Accounting Policies

 

There were no changes to our critical accounting policies in the first quarter of fiscal 2006.  For a discussion of the Company’s critical accounting policies see our Annual Report on Form 10-K for the fiscal year ended January 31, 2005.

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share-Based Payment”. This Standard requires companies to measure share-based payments at grant-date fair value and recognize the compensation expense in their financial statements.  While we previously adopted, for disclosure purposes only, the fair value based method of accounting pursuant to SFAS No. 123, “Accounting for Stock Based Compensation”, SFAS No. 123R requires a forfeiture assumption for our unvested awards. Additionally, SFAS No. 123R amends the presentation of the statement of cash flows and requires additional annual disclosures.  We will apply the provisions of this Standard using the modified prospective method for the unvested portion of previously issued awards that remain outstanding at February 1, 2006.  The implementation of this standard is not expected to have a material impact on the financial statements.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk

 

The Company has operations outside of the United States and sells its products worldwide.  The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and commodity prices.  These financial exposures are actively monitored and, where considered appropriate, managed by the Company.

 

Interest Rate Risk

 

As of April 30, 2005, the Company is subject to interest rate risk on approximately $16.8 million of variable rate debt.  Each 1-percentage point change in the interest rate would impact pre-tax earnings by approximately $0.2 million if applied to the total.

 

On July 10, 2003, the Company terminated the interest rate swap agreement in relation to $50.0 million of our outstanding 7.90% Senior Notes, which mature on October 1, 2009.  This termination resulted in a deferred gain of approximately $5.0 million, which is being amortized over the remaining term of the Notes.

 

Foreign Currency Risk

 

The Company uses foreign exchange forward and options contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, intercompany payables and certain intercompany loans.  The Company does not hold or issue derivative financial instruments for trading purposes.

 

The Company has designated its forward exchange and options contracts on forecasted intercompany purchases and future purchase commitments as cash flow hedges and, as such, as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in accumulated other comprehensive income (loss) (“OCI”) until earnings are affected by the variability of the cash flows being hedged.  With regard to commitments for inventory purchases, upon payment of each commitment, the underlying forward contract is closed and the corresponding gain or loss is transferred from accumulated OCI and is included in the measurement cost of the acquired asset.  If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in accumulated OCI until the hedged item is settled.  However, if the hedged item is no longer likely to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately.  Approximately $0.2 million of hedge gains are included in accumulated OCI at April 30, 2005, and are expected to be transferred into earnings within the next twelve months upon payment of the underlying commitment.

 

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

 

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

 

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The following table provides information about the Company’s foreign exchange forward and options contracts at April 30, 2005:

 

		U.S. Dollar			Average		Estimated
(In thousands, except average contract rate)		Notional Amount			Contract Rate		Fair Value
Canadian Dollar		$	6,344		0.80		$	30
Euro		36,405			1.31		317
		$	42,749				$	347

 

The foreign exchange contracts outstanding have maturity dates through 2005.

 

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Item 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of April 30, 2005.

 

(b) Remediation of material weakness.

 

As discussed in Item 9A. Controls and Procedures-Management’s Report on Internal Control over Financial Reporting in our Form 10-K, as of January 31, 2005, there was a material weakness in our internal control over financial reporting related to our income tax accounting and reconciliation processes, procedures and controls, including the identification of income tax contingencies.  In fiscal 2005, and through the date of this filing, we have taken the following steps to improve our internal controls around our income tax accounting and reconciliation processes, procedures and controls:

 

•                                          Enhanced the levels of review in and accelerated the timing of the preparation of the quarterly and annual income tax provision;

 

•                                          Formalized processes, procedures and documentation standards relating to income tax provisions;

 

•                                          Enhanced and restructured our Tax Department to ensure appropriate segregation of duties regarding preparation and review of the quarterly and annual income tax provision; and

 

•                                          Engaged Ernst & Young LLP to assist the Company in its accounting for income taxes.

 

We believe we have taken steps necessary to remediate this material weakness relating to our income tax accounting and reconciliation processes, procedures and controls, however, certain of the corrective processes, procedures and controls relate to annual controls that cannot be tested until the preparation of our 2006 annual income tax provision.  Accordingly, we will continue to monitor the effectiveness of our internal controls over financial reporting related to the accounting for income taxes and will make any further changes management determines appropriate.

 

(c) Changes in internal control over financial reporting.

 

Other than the change discussed in (b) above, 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 our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II.  OTHER INFORMATION

 

Item 1.           Legal Proceedings

 

None.

 

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 first quarter of the fiscal year ending January 31, 2006.

 

ISSUER PURCHASES OF EQUITY SECURITIES(1)

 

 

(1) On September 10, 1998, the Company’s Board of Directors approved the Company’s share repurchase program (the “Repurchase Program”) pursuant to which the Company was authorized to repurchase up to 1,000,000 shares of its issued and outstanding Common Stock in open market transactions.  On June 8, 1999, the Company’s Board of Directors amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 1,000,000 to 2,000,000 shares.  On March 30, 2000, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 2,000,000 to 3,000,000 shares.  On December 14, 2000, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 1,000,000 shares, from 3,000,000 to 4,000,000 shares.  On April 4, 2002, the Company’s Board of Directors further amended the Repurchase Program and increased the number of shares of Common Stock to be repurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.  As of April 30, 2005, the Company has purchased a total of 4,626,800 shares of Common Stock under the Repurchase Program.  The Repurchase Program does not have an expiration date.  The Company intends to make further purchases under the Repurchase Program.

 

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Item 3.           Defaults upon Senior Securities

 

None

 

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

 

None

 

Item 5.           Other Information

 

The Company is including the following cautionary statement in this Report to make applicable, and to take advantage of, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts.  From time to time, the Company and its representatives may publish or otherwise make available forward-looking statements of this nature.  All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are expressly qualified by the following cautionary statements.  Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.  Such forward-looking statements are expected to be based on various assumptions, many of which are based, in turn, upon further assumptions.

 

There can be no assurance that management’s expectations, beliefs or projections will occur or be achieved or accomplished.  In addition to other factors and matters discussed elsewhere in this Report and in the Company’s other public filings and statements, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the Company’s forward-looking statements.  The Company disclaims any obligation to update any forward-looking statements, or the following factors, to reflect events or circumstances after the date of this Report.

 

Risk of Inability to Maintain Sales Growth Rate

 

The Company has experienced significant sales growth in past years.  While management expects continued growth, our future growth rate will likely be less than our historical growth rate.  The Company expects faster sales growth in its international market versus its United States market.  The Company’s ability to increase sales depends on numerous factors, including market acceptance of existing products, the successful introduction of new products, growth of consumer discretionary spending, the ability to recruit new independent sales consultants, sourcing of raw materials and demand-driven increases in production and distribution capacity.  Business in all of our segments is driven by consumer preferences.  Accordingly, there can be no assurances that the Company’s current or future products will maintain or achieve market acceptance.  Our sales and earnings results can be negatively impacted by the worldwide economic environment, particularly the Canadian, United States and European economies.  There can be no assurances that the Company’s financial results will not be materially adversely affected by these factors in the future.

 

The Company’s historical growth has been due in part to acquisitions and management continues to consider additional strategic acquisitions.  There can be no assurances that management will continue to identify suitable acquisition candidates, consummate acquisitions on terms favorable to the Company, finance acquisitions or successfully integrate acquired operations.

 

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