UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

For the transition period from                    to                  

Commission File number 1-13026

BLYTH, INC.

(Exact name of registrant as specified in its charter)

 

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

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

 

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

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

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

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 þ   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

 

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $776.9 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on July 31, 2005 and based on the assumption, for purposes of this computation only, that all of the registrant’s directors and executive officers are affiliates.

As of March 31, 2006, there were 40,994,644 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2006 Proxy Statement for the Annual Meeting of Shareholders to be held on June 7, 2006 (Incorporated into Part III).

TABLE OF CONTENTS

 

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PART I

Item 1.                        Business

(a)   General Development of Business

Blyth, Inc. (together with its subsidiaries, the “Company,” which may be referred to as “we,” “us” or “our”) is a Home Expressions company competing primarily in the home fragrance and decorative accessories industry. The Company designs, markets and distributes an extensive array of candles, potpourri, decorative accessories, seasonal decorations and household convenience items, as well as tabletop lighting, accessories and chafing fuel for the Away From Home or foodservice trade. The Company’s sales and operations take place primarily in the United States, Canada and Europe, with additional activity in Mexico, Australia and the Far East.

Blyth was incorporated in the state of Delaware in 1977 and became a publicly traded company in 1994, at which time net sales were approximately $157.5 million. Internal growth and acquisitions have contributed to significant overall growth since that time. Internal growth has been generated by increased sales of existing Home Expressions products to consumers and retailers, the introduction of new products and product line extensions and geographic expansion. The Company has also integrated numerous acquisitions into its operations since its formation in 1977.

In September 2005, we announced our proposed intention to spin off the Wholesale segment to our stockholders. We requested and received from the Internal Revenue Service a ruling on the tax-free status for the transaction. We intend to evaluate additional strategic opportunities that have been identified since the announcement of the spin off. We have engaged outside consultants to advise us on potential opportunities within the Wholesale segment, and we will likely focus on one or more of our European Wholesale businesses. Believing that substantial upside opportunities exist in the North American Wholesale business and having made significant investments in sales force integration and productivity, as well as new product development, we remain committed to the success of these and other initiatives despite challenging market conditions impacting the Home Expressions industry.

Additional information is available on our website, www.blyth.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto filed or furnished pursuant to the Securities Exchange Act of 1934 are available on our website free of charge as soon as reasonably practicable following submission to the SEC. Also available on the Company’s website are its Corporate Governance Guidelines, its Code of Conduct, and the charters for its Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, each of which is available in print to any shareholder who makes a request to Blyth, Inc., One East Weaver Street, Greenwich, CT 06831, Attention: Secretary. The information posted to www.blyth.com, however, is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.

(b)   Financial Information about Segments

The Company reports its financial results in three business segments: the Direct Selling segment, the Wholesale segment and the Catalog & Internet segment. These segments accounted for approximately 45%, 43% and 12% of consolidated net sales, respectively, for the fiscal year ended January 31, 2006. Financial information relating to these business segments for the years ended January 31, 2004, 2005 and 2006 appears in Note 19 of the Company’s consolidated financial statements and is incorporated herein by reference.

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(c)   Narrative Description of Business

Direct Selling Segment

In fiscal 2006, the Direct Selling segment represented approximately 45% of Blyth’s total sales. The Company’s principal Direct Selling business is PartyLite. PartyLiteâ brand products are marketed in North America, Europe and Australia through a network of independent sales consultants using the party plan method of direct selling. These products are designed, manufactured or sourced, marketed and distributed and include fragranced and non-fragranced candles, bath products and a broad range of related accessories.

In fiscal 2005, the Company introduced a party plan company called Purple Tree, which is focused on the craft industry, and, in fiscal 2006, the Company acquired a party plan company called Two Sisters Gourmet, which is focused on gourmet food. These two businesses represent substantially less than 1% of total sales from the Direct Selling segment. In the future, the Company may pursue other direct selling business opportunities.

United States Market

Within the United States market, PartyLite brand products are sold directly to consumers through a network of independent sales consultants. These consultants are compensated on the basis of PartyLite product sales at parties organized by them and parties organized by consultants recruited by them. Over 27,000 independent sales consultants located in the United States were selling PartyLite products at January 31, 2006. PartyLite products are designed, packaged and priced in accordance with their premium quality, exclusivity and the distribution channel through which they are sold.

International Market

In fiscal 2006, PartyLite products were sold internationally by more than 19,000 independent sales consultants located outside the United States. These consultants were the exclusive distributors of PartyLite brand products internationally. The following were PartyLite’s international markets during fiscal 2006: Australia, Austria, Canada, Denmark, Finland, France, Germany, Mexico, Switzerland and the United Kingdom.

We support our independent sales consultants with inventory management and control and satisfy delivery requirements through on-line ordering, which is available to all independent sales consultants in the United States and Canada, as well as in most of Europe.

Wholesale Segment

In fiscal 2006, this segment represented approximately 43% of Blyth’s total sales. Products designed, manufactured or sourced, marketed and distributed within this segment include candles and other home fragrance products, a broad range of candle-related accessories, seasonal decorations such as ornaments, artificial trees and trim, and home décor products such as picture frames, lamps and textiles. In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold in this segment. Our wholesale products are sold to more than 40,000 retailers in multiple channels of distribution in North America and Europe under brand names that include Ambria®, Asp-Holmblad®(1), Carolina®, CBK®, Colonial™(1), Colonial Candle of Cape Cod®, Colonial at HOME®, Edelman®, Euro-Decor®(1), Florasense®, Gies®(1), HandyFuel™, Kaemingk™(2), Liljeholmens®, Seasons of Cannon Falls®, Sterno® and Triumph Tree®(1). Our wholesale products are designed, packaged and priced to satisfy the varying demands of retailers and consumers within each distribution channel.

(1)             Registered and sold outside the United States only.

(2)             Sold outside the United States only.

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United States Market

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

International Market

Products sold internationally in the Wholesale segment are marketed to retailers in the premium and mass consumer wholesale channels, as well as to hotels, restaurants and independent foodservice distributors through independent sales representatives and our sales managers. Customers include European mass merchants, garden centers, department and gift stores and foodservice distributors.

Blyth’s international wholesale operations also include exports of products from the United States and various European countries to Canada, Europe, Latin America and the Pacific Rim. Exported products are sold through our sales managers and independent sales representatives to premium and mass retailers, hotels, restaurants and independent foodservice distributors. The Company may expand its international presence through the establishment of additional non-U.S. based marketing and distribution operations.

The Company effectively supports customers with inventory management and control and satisfies delivery requirements through various management ordering systems. The Company’s independent sales representatives and sales managers in the premium wholesale channel are supported by advanced sales tools to support showroom, road and telephone sales efforts.

Recent Dispositions

In January 2006, we sold our Impact Plastics seasonal decorations business to the former owner of that business.

Catalog & Internet Segment

In fiscal 2006, this segment represented approximately 12% of Blyth’s total sales. Blyth designs, markets and distributes a wide range of household convenience items, personalized gifts and photo storage products within this segment. These products are sold through the catalog and Internet distribution channel under brand names that include Easy Comforts™, Exposures®, Home Marketplace®, Miles Kimball® and Walter Drake®.

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Product Brand Names

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

 

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

 

The key brand names under which our Catalog & Internet segment products are sold are:

 

New Product Development

Concepts for new products and product line extensions are directed to the marketing departments of our business units from within all areas of the Company, as well as from the Company’s independent sales representatives and worldwide product manufacturing partners. The new product development process may include technical research, consumer market research, fragrance studies, comparative analyses, the formulation of engineering specifications, feasibility studies, safety assessments, testing and evaluation. New products typically account for at least 40% of our net sales in the first full year following their introduction.

Manufacturing, Sourcing and Distribution

In all of our business segments, management continuously works to increase value and lower costs through increased efficiency in worldwide production, sourcing and distribution practices, the application of new technologies and process control systems, and consolidation and rationalization of equipment and facilities. Capital expenditures over the past five years have totaled $86.4 million and are targeted to technological advancements or capital investments with short payback time frames. Management has also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions.

Blyth manufactures most of its candles and sources nearly all of its other products. In fiscal 2006, Blyth sourced approximately 65% of its products from independent manufacturers in the Pacific Rim, Europe and Mexico. Blyth manufactures approximately 35% of its products using highly automated processes and technologies, as well as certain hand crafting and finishing. Many of the Company’s products are manufactured by others based on Blyth’s design specifications, making the Company’s global supply chain approach critically important to its new product development process, quality control and cost

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management. Management has also built a network of stand-alone highly automated distribution facilities in its core markets.

Technological Advancements

The Company continues to see the benefit of its substantial investment in technological initiatives, particularly Internet-based ordering technology. An Internet-based order-entry and business management system is available to all PartyLite independent sales consultants in the United States, Canada and most of Europe. By fiscal 2006 year-end, show orders placed via the PartyLite Extranet had increased to over 85% of total show orders in North America and over 40% of total show orders in Europe. The Extranet’s automated features eliminate errors common on hand-written paper forms and speed orders through processing and distribution, improving customer service. Furthermore, by easing the administrative workload and providing tools with which to track sales and programs, the Extranet has helped PartyLite independent sales consultants build their businesses more efficiently. The improved accuracy of the automated system also results in administrative savings for the Company.

Customers

Customers in the Direct Selling segment are individual consumers served by independent sales consultants. Sales within the Catalog & Internet segment are also made directly to consumers. Blyth’s Wholesale segment customers include independent gift and department stores, garden centers, mass merchandisers, specialty chains, food and drug stores, foodservice distributors, hotels and restaurants. No single customer accounts for 10% or more of Blyth’s sales.

Competition

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

Employees

As of January 31, 2006, we had approximately 5,500 full-time employees, of whom approximately 29% are based outside of the United States. Approximately 75% of our employees are non-salaried. Blyth does not have any unionized employees in the United States. Approximately 50 employees are represented by the IG Chemie labor union in our German facility at Gies Kerzen and have a General Agreement in place with no termination period. A Wages Agreement is in place for a period of one year from July 2005 until June 2006 and currently may be terminated by either party at the end of that period. Approximately 40 employees are represented by the Chemical Union in our manufacturing and distribution facility located in Promol, Portugal. The union contract has been terminated and the facility is applying the general labor law. Liljeholmens, Sweden has approximately 70 employees represented by the Industrifacket union, a manufacturing union, and the SIF union, a management union. Both union agreements each have a three-year term (April 2004 to March 2007). Management believes that relations with the Company’s employees are good. Since its formation in 1977, Blyth has never experienced a work stoppage.

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Raw Materials

All of the raw materials used by Blyth for its candles, home fragrance products and chafing fuel, principally petroleum-based wax, fragrance, glass containers and corrugate, have historically been available in adequate supply from multiple sources. In fiscal 2006, substantial cost increases for certain raw materials, such as paraffin, dyethelene glycol (DEG) and ethanol, as well as aluminum and paper, negatively impacted profitability of certain products in all three segments.

Seasonality

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

Trademarks and Patents

The Company owns and has pending numerous trademark and patent registrations and applications in the United States Patent and Trademark Office related to its products. Blyth also registers certain trademarks and patents in other countries. While management regards these trademarks and patents as valuable assets to its business, the Company is not dependent on any single trademark or patent or group thereof.

Environmental Law Compliance

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

(d)   Financial Information about Geographic Areas

For information on net sales from external customers attributed to the United States and foreign countries and on long-lived assets located in the United States and outside the United States, see Note 19 of Notes to Consolidated Financial Statements.

Item 1A.                Risk Factors

Risk of Inability to Maintain Growth Rate

The Company has experienced significant sales growth in past years. While management expects continued growth, Blyth’s future growth rate will likely be less than its 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 Blyth’s 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. Blyth’s sales and earnings results can be negatively impacted by the worldwide economic environment, particularly the United States, Canadian and European economies. There can be no assurances that the Company’s financial results will not be materially adversely affected by these factors in the future.

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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.

Risks Associated With International Sales and Foreign-Sourced Products

Blyth’s international sales growth rate has outpaced that of its United States growth rate in recent years. Moreover, the Company sources a portion of its products in all of its business segments from independent manufacturers in the Pacific Rim, Europe and Mexico. For these reasons, Blyth is subject to the following risks associated with international manufacturing and sales:  fluctuations in currency exchange rates, economic or political instability, international public health crises, transportation costs and delays, difficulty in maintaining quality control, restrictive governmental actions, nationalizations, the laws and policies of the United States, Canada and certain European countries affecting the importation of goods (including duties, quotas and taxes) and the trade and tax laws of other nations.

Ability to Respond to Increased Product Demand

The Company’s ability to meet future product demand in all of its business segments will depend upon its success in: sourcing adequate supplies of its products; bringing new production and distribution capacity on line in a timely manner; improving its ability to forecast product demand and fulfill customer orders promptly; improving customer service-oriented management information systems; and training, motivating and managing new employees. The failure of any of the above could result in a material adverse effect on Blyth’s financial results.

Risk of Shortages of Raw Materials

Certain raw materials could be in short supply due to price changes, capacity, availability, a change in requirements, weather or other factors, including supply disruptions due to production or transportation delays. Such shortages have not had and are not presently expected to have a material adverse effect on the Company’s operations. While the price of crude oil is only one of several factors impacting the price of petroleum wax, it is possible that recent fluctuations in oil prices may have a material adverse affect on the cost of petroleum-based products used in the manufacture or transportation of our products, particularly in the Direct Selling and Wholesale business segments.

Dependence on Key Corporate Management Personnel

Blyth’s success depends in part on the contributions of key corporate management, including its Chairman and Chief Executive Officer, Robert B. Goergen, as well as the members of the Office of the Chairman: Robert H. Barghaus, Vice President and Chief Financial Officer; Bruce G. Crain, Senior Vice President and President, Wholesale Group; Robert B. Goergen, Jr., Vice President and President, Catalog & Internet Group; and Frank P. Mineo, Senior Vice President and President, Direct Selling Group. The Company does not have employment contracts with any of its key corporate management personnel except the Chairman and Chief Executive Officer, nor does it maintain any key person life insurance policies. The loss of any of the key corporate management personnel could have a material adverse effect on the Company.

Risk of Increased Competition

Blyth’s business is highly competitive both in terms of pricing and new product introductions. The worldwide market for Home Expressions products is highly fragmented with numerous suppliers serving one or more of the distribution channels served by the Company. In addition, the Company competes for

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direct selling consultants with other direct selling companies. Because there are relatively low barriers to entry in all of Blyth’s business segments, the Company may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to Blyth. Competition includes companies selling candles manufactured at low cost outside of the United States. Moreover, certain competitors focus on a single geographic or product market and attempt to gain or maintain market share solely on the basis of price.

Risks Related to Information Technology Systems

Blyth’s information technology systems are dependent on global communications providers, telephone systems, hardware, software and other aspects of Internet infrastructure that have experienced significant system failures and outages in the past. Blyth’s systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. Despite the implementation of network security measures, our systems are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our systems. The occurrence of these or other events could disrupt or damage our information technology systems and inhibit internal operations, the ability to provide customer service or the ability of customers or sales personnel to access our information systems.

Item 1B.               Unresolved Staff Comments.

None.

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Item 2.                        Properties

The following table sets forth the location and approximate square footage of the Company’s major manufacturing and distribution facilities: