UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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   x

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

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

Indicate by check mark 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.   o

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 x

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $463.8 million based on the closing price of the registrant’s Common Stock on the New York Stock Exchange on July 31, 2006 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, 2007, there were 39,301,262 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2007 Proxy Statement for the Annual Meeting of Shareholders to be held on June 6, 2007 (Incorporated into Part III).

TABLE OF CONTENTS

PART I
Item 1.		Business	2
Item 1A.		Risk Factors	6
Item 1B.		Unresolved Staff Comments	8
Item 2.		Properties	9
Item 3.		Legal Proceedings	9
Item 4.		Submission of Matters to a Vote of Security Holders	9
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		10
Item 6.		Selected Financial Data		13
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		33
Item 8.		Financial Statements and Supplementary Data		35
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		73
Item 9A.		Controls and Procedures		73
Item 9B.		Other Information		75
PART III
Item 10.		Directors and Executive Officers of the Registrant			75
Item 11.		Executive Compensation			75
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			75
Item 13.		Certain Relationships and Related Transactions, and Director Independence			75
Item 14.		Principal Accountant Fees and Services			75
PART IV
Item 15.		Exhibits and Financial Statement Schedules				76

 

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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, 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.

Recent Developments

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. In March 2006, we announced our intention to evaluate additional strategic opportunities that had been identified since the announcement of the spin off, which would likely focus on one or more of our European Wholesale businesses. In fiscal 2007, we sold all of our European Wholesale businesses.

During the third quarter of fiscal 2007, we began the restructuring of our North American mass channel home fragrance business with the announcement that we will be closing our Tijuana, Mexico manufacturing facility. In addition, in fiscal 2007, we commenced the elimination of less profitable customers and streamlining of the Stock Keeping Unit (“SKU”) base of the mass business.

Additional Information

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

(b)   Financial Information about Segments

We report our financial results in three business segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment. These segments accounted for approximately 57%, 16% and 27% of consolidated net sales, respectively, for fiscal 2007. Financial information relating to these business segments for fiscal 2005, 2006 and 2007 appears in Note 18 of the consolidated financial statements and is incorporated herein by reference.

(c)   Narrative Description of Business

In fiscal 2007, there was a change in our senior management structure with the departure of the President of the Wholesale segment. Robert B. Goergen, Jr., the President of the Catalog & Internet segment, assumed responsibility for the Wholesale segment in addition to his other responsibilities. We refer to this new reporting structure as the Multi-channel Group. For segment reporting purposes, we

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continue to report individual segment operating results for the Direct Selling, Catalog & Internet and Wholesale segments.

Direct Selling Segment

In fiscal 2007, the Direct Selling segment represented approximately 57% of total sales. Our 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 include fragranced and non-fragranced candles, bath products and a broad range of related accessories.

In fiscal 2006, the Company acquired a party plan company called Two Sisters Gourmet, which is focused on gourmet food. Two Sisters Gourmet represents substantially less than 1% of total sales of the Direct Selling segment. In fiscal 2007, the Company ceased operations of Purple Tree, which was focused on the craft industry. In the future, the Company may pursue other direct selling business opportunities.

United States Market

Within the United States market, PartyLiteâ 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 46,000 independent sales consultants located in the United States were selling PartyLite products at January 31, 2007. 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 2007, PartyLite products were sold internationally by more than 20,000 independent sales consultants located outside the United States. These consultants were the exclusive distributors of PartyLite products internationally. The following were PartyLite’s international markets during fiscal 2007: Australia, Austria, Canada, Denmark, Finland, France, Germany, Ireland, 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.

Catalog & Internet Segment

In fiscal 2007, this segment represented approximately 16% of total sales. We design, market and distribute a wide range of household convenience items, personalized gifts, coffee and tea, and photo storage products within this segment. These products are sold through the catalog and Internet distribution channel under brand names that include Boca Javaä, Easy Comfortsä, Exposuresâ, Home Marketplaceâ, Miles Kimballâ and Walter Drakeâ.

Wholesale Segment

In fiscal 2007, this segment represented approximately 27% of total sales. Products within this segment include candles and other home fragrance products, a broad range of candle-related accessories, seasonal decorations, 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 designed, packaged and priced to satisfy the varying demands of retailers and consumers within each distribution channel.

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

Product Brand Names

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

PartyLiteâ
Well Being by PartyLiteä
Two Sisters Gourmetâ

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

Boca Javaä
Easy Comfortsä
Exposuresâ
Home Marketplaceâ
Miles Kimballâ
Walter Drakeâ

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

Ambriaâ Carolinaâ CBKâ Colonial Candleâ Colonial Candle of Cape Codâ

Colonial at HOMEâ Florasenseâ HandyFuelâ Seasons of Cannon Fallsâ Sternoâ

 

New Product Development

Concepts for new products and product line extensions are directed to the marketing departments of our business units from within all areas of the Company, as well as from our independent sales consultants 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.

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 $92.2 million and are targeted to technological advancements or capital investments with short payback time frames. We have also closed several facilities and written down the values of certain machinery and equipment in recent years in response to changing market conditions.

We manufacture most of our candles using highly automated processes and technologies, as well as certain hand crafting and finishing, and source nearly all of our other products, primarily from independent manufacturers in the Pacific Rim, Europe and Mexico. Many of our products are manufactured by others based on our design specifications, making our global supply chain approach

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critically important to new product development, quality control and cost management. We have also built a network of stand-alone highly automated distribution facilities in our core markets.

Technological Advancements

We continue to see the benefit of our 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 2007 year-end, show orders placed via the PartyLite extranet had increased to over 90% of total show orders in North America and over 70% 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. Wholesale segment customers include independent gift and department stores, garden centers, mass merchandisers, food and drug stores, specialty chains, foodservice distributors, hotels and restaurants. No single customer accounts for 10% or more of sales.

Competition

All of our business segments are highly competitive, both in terms of pricing and new product introductions. The worldwide market for Home Expressions products is highly fragmented with numerous suppliers serving one or more of the distribution channels served by the Company. In addition, we compete for direct selling consultants with other direct selling companies. Because there are relatively low barriers to entry in all of our business segments, we may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to us. Competition includes companies selling candles manufactured at 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, 2007, we had approximately 4,000 full-time employees, of whom approximately 12% were based outside of the United States. Approximately 75% of our employees are non-salaried. We do not have any unionized employees. We believe that relations with our employees are good. Since our formation in 1977, we have never experienced a work stoppage.

Raw Materials

All of the raw materials used for our candles, home fragrance products and chafing fuel, principally petroleum-based wax, fragrance, glass containers and corrugate, have historically been available in adequate supply from multiple sources. In fiscal 2007, 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.

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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.

Trademarks and Patents

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

Environmental Law Compliance

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

(d)   Financial Information about Geographic Areas

For information on net sales from external customers attributed to the United States and foreign countries and on long-lived assets located in the United States and outside the United States, see Note 18 to the Consolidated Financial Statements.

Item 1A.                Risk Factors

Risk of Inability to Increase Sales or Identify Suitable Acquisition Candidates

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

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

Risks Associated with International Sales and Foreign-Sourced Products

Our international sales growth rate has outpaced that of our United States growth rate in recent years. Moreover, we source a portion of our products in all of our business segments from independent manufacturers in the Pacific Rim, Europe and Mexico. For these reasons, we are 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

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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

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

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. 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. In fiscal 2007, 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.

Dependence on Key Corporate Management Personnel

Our success depends in part on the contributions of key corporate management, including our Chairman and Chief Executive Officer, Robert B. Goergen, as well as the members of the Office of the Chairman: Robert H. Barghaus, Vice President and Chief Financial Officer; Robert B. Goergen, Jr., Vice President and President, Multi-Channel Group; and Frank P. Mineo, Senior Vice President and President, Direct Selling Segment. We do not have employment contracts with any of our key corporate management personnel, except the Chairman and Chief Executive Officer, nor do we 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

Our 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 us. In addition, we compete for direct selling consultants with other direct selling companies. Because there are relatively low barriers to entry in all of our business segments, we may face increased competition from other companies, some of which may have substantially greater financial or other resources than those available to us. Competition includes companies selling candles manufactured at 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 Associated with Proposed FTC Regulations

In April 2006, the U.S. Federal Trade Commission issued a notice of proposed rulemaking that if implemented, will regulate all sellers of “business opportunities” in the United States. The proposed rule would, among other things, require all sellers of business opportunities, which would likely include PartyLite and Two Sisters Gourmet, to implement a seven-day waiting period before entering into an

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agreement with a prospective business opportunity purchaser and provide all prospective business opportunity purchasers with substantial disclosures in writing regarding the business opportunity and the company. Based on information currently available, we anticipate that the final rule may require several years to become final and effective, and may differ substantially from the rule as originally proposed. Nevertheless the proposed rule, if implemented in its original form, would negatively impact our Direct Selling businesses.

Risks Related to Information Technology Systems

Our 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. Our systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. Despite the implementation of network security measures, our systems are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our systems. The occurrence of these or other events could disrupt or damage our information technology systems and inhibit internal operations, the ability to provide customer service or the ability of customers or sales personnel to access our information systems.

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 our major manufacturing and distribution facilities: