Blyth 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
For the transition period from ______________ to _____________
Commission File Number 1-13026
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
8,229,234 Common Shares as of August 31, 2010
BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Blyth, Inc. (the “Company”) is a multi-channel company competing primarily in the home fragrance and decorative accessories industries. The Company designs, markets and distributes an extensive array of decorative and functional household products including candles, accessories, seasonal decorations, household convenience items and personalized gifts, as well as products for the foodservice trade, nutritional supplements and weight management products. The Company competes primarily in the global home expressions industry and its products can be found throughout North America, Europe and Australia. Our financial results are reported in three segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment.
1. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The investment in a company that is not majority owned or controlled is reported using the equity method and is recorded as an investment. 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 and one domestic direct selling entity maintain a calendar year accounting period, which is consolidated with the Company’s fiscal period. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of items that are normal and recurring in nature) necessary for fair presentation of the Company's consolidated financial position as of July 31, 2010 and the consolidated results of its operations for the three and six month periods ended July 31, 2010 and 2009, and cash flows for the six month periods ended July 31, 2010 and 2009. These interim statements should be read in conjunction with the Company's Consolidated Financial Statements for the fiscal year ended January 31, 2010, as set forth in the Company’s Annual Report on Form 10-K. Operating results for the three and six months ended July 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2011.
Recently Adopted Accounting Guidance
In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 amends the guidance of ASC 810, “Consolidation”, to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity (“VIE”) and requires that the entity identify the primary beneficiary of the VIE as the enterprise that has both (a) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. This amendment also requires an ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a VIE and additional disclosures about an enterprise’s involvement in VIE. The amendment is effective for reporting periods beginning after November 15, 2009 and as such was adopted by the Company as of February 1, 2010. The adoption of this standard did not have an impact on the Company’s consolidated financial condition or results of operations.
In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements" (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. This update did not have a material impact on the Company’s consolidated financial condition or results of operations.
In April 2010, the FASB issued ASU 2010-13, "Compensation—Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades (A consensus of the FASB Emerging Issues Task Force)" (“ASU 2010-13”). ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This clarification of existing practice is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The Company's early adoption of this update did not have an impact on the consolidated financial condition or results of operations.
The Company assessed events occurring subsequent to July 31, 2010 through the date the consolidated financials were filed for potential recognition and disclosure. There were no notable events that warranted further disclosure between the reporting period end and the filing date.
2. Business Acquisitions
In August 2008, the Company signed a definitive agreement to purchase ViSalus Holdings, LLC (“ViSalus”), a direct seller of vitamins, weight management products and other related nutritional supplements, through a series of investments.
On October 21, 2008, the Company completed its initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash. Additionally, as provided in the acquisition agreement, and amended in September 2009, the Company has provided ViSalus with a $3.0 million revolving credit facility through July 2014, of which $3.0 million was outstanding as of July 31, 2010. The Company may be required to make additional purchases of ViSalus’ equity interest to increase our equity ownership over time to 57.5%, 72.7% and 100.0%. These additional purchases are conditioned upon ViSalus meeting certain operating targets in calendar year 2010, 2011 and 2012. The purchase prices of the additional investments are based on ViSalus’ future operating results. The Company has the option to acquire the remaining interest in ViSalus even if they do not meet the predefined operating targets.
The Company has accounted for the acquisition of ViSalus as a business combination under SFAS No. 141 “Business Combinations”, since the Company obtained control of ViSalus prior to the effective date of ASC 805. The Company analyzed the criteria for consolidation in accordance with ASC 810, and has determined it has control of ViSalus based on the following factors. ViSalus is currently majority owned collectively by Blyth and Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC (collectively, “RAM”), a related party (see Note 15 to the Consolidated Financial Statements for additional information). Moreover, the Company has taken into account the composition of ViSalus’ three-member board of managers, one of whom is an executive officer of the Company, one of whom is a principal of RAM and one of whom is a founder and executive officer of ViSalus. Additionally, the Company and RAM together control ViSalus’ compensation committee and control the compensation of the ViSalus executive officer who serves on ViSalus’ board of managers. Consequently, all of the members of ViSalus’ board of managers may be deemed to operate under the Company’s influence.
The Company has also taken into account ViSalus’ governing documents, which afford the Company significant rights with respect to major corporate actions and the right to force the other owners of ViSalus’ equity instruments to sell them in some corporate transactions. Finally, the Company considered the mechanisms that are in place to permit it to purchase the remaining noncontrolling interest in ViSalus over the next several years.
As discussed above, the Company is required to purchase the remaining noncontrolling interests in ViSalus if ViSalus meets certain operating targets. As a result, these noncontrolling interests were determined to be redeemable and are accounted for in accordance with the guidance of ASC 480-10-S99-3A, and the non-codified portions of Emerging Issues Task Force Topic D-98, “Classification and Measurement of Redeemable Securities.” Accordingly, the Company had begun recognizing these noncontrolling interests outside of permanent equity and accreted changes in their redemption value through the date of redemption during the time
at which it was probable that the noncontrolling interests would be redeemed. The accretion of the redemption value had been recognized as a charge to retained earnings, and to the extent that the resulting redemption value exceeds the fair value of the noncontrolling interests, the differential was reflected in the Company’s earnings per share (“EPS”). During the second quarter of fiscal 2010 ViSalus’ revenues forecast for the prior fiscal year was revised downward as a result of lower demand for its product, reflecting lower consumer spending attributed to the domestic economic recession and a higher than anticipated attrition rate in its distributor base. These factors together have required management to focus its efforts on stabilizing its distributor base and curtailing its international expansion plans. Accordingly, management reduced its long-term forecasts in response to the weakening demand for its products. The revisions in ViSalus’ near-term and long-term projections have resulted in management concluding that it is no longer probable that Blyth would be obligated to purchase the remaining ownership interest in ViSalus. Accordingly, during the second quarter of fiscal 2010, the Company reversed both its accretion of its redeemable noncontrolling interest to zero and the previous EPS accretion adjustment for the portion in excess of fair value. As of July 31, 2010, the redeemable noncontrolling interest reflects only the allocation of losses equivalent to the noncontrolling interest’s share of ViSalus, as a result of this redemption feature no longer being probable. If ViSalus meets its current projected operating targets, the total expected redemption value of noncontrolling interest will be approximately $4.5 million paid through 2014. However at these levels Blyth would not be obligated to purchase the remaining interest in ViSalus but could do so at its discretion. The total expected redemption value could increase or decrease depending upon whether ViSalus exceeds or falls short of its operating projections. Upon expiration of the redemption feature the entire amount of noncontrolling interest will be reclassified into the Equity section of the Consolidated Balance Sheets.
The acquisition of ViSalus by Blyth involves related parties, as discussed in Note 15 to the Consolidated Financial Statements. In addition to Blyth, the other owners of ViSalus consist of: its three founders (each of whom currently own approximately 11.7% of ViSalus for a total of 35.3%) (“the founders”), RAM which currently owns 15.2%, and a small group of employees who collectively own approximately 5.9% of ViSalus. Blyth’s initial investment in ViSalus of $13.0 million was paid to ViSalus ($2.5 million), RAM ($3.0 million) and each of the three founders ($2.5 million each). Mr. Goergen, Blyth’s chairman and chief executive officer, beneficially owns approximately 33.5% of the Blyth’s outstanding common stock, and together with members of his family, owns substantially all of RAM.
On February 1, 2010, ViSalus received a financing commitment from the founders and RAM for up to $1.2 million to fund its operations for calendar year 2010, $0.6 million of which has been borrowed as of July 31, 2010. The loan is due February 28, 2011 and interest accrues at 10% per annum payable quarterly in arrears. In addition to the 10% interest, the loan requires ViSalus to pay a further lump-sum interest payment at maturity of $0.6 million in addition to its principal amount due. In April 2010, the Company also loaned ViSalus an additional $0.3 million which is due on February 28, 2011. The loan accrues interest at 10% per annum payable quarterly in arrears. These loans are secured by ViSalus’ assets and have preference over existing loans from the founders, RAM and the Company.
As of July 31, 2010, ViSalus had outstanding notes payable excluding interest to RAM and the founders of $3.2 million, in addition to $3.3 million due to Blyth.
During fiscal 2007, the Company initiated a restructuring plan within the North American operations of the Company’s Direct Selling segment. As of July 31, 2010, the Company had an accrual for approximately $1.0 million for restructuring charges relating to a lease obligation. The remaining lease payments will be made through fiscal 2013.
The following is a tabular rollforward of the lease obligation accrual described above, included in Accrued expenses:
The Company’s investments as of July 31, 2010 consisted of a number of financial securities including equity securities, preferred stocks, money markets, short-term and long-term certificates of deposit, an investment in a limited liability company and restricted cash. The Company accounts for its investments in equity instruments in accordance with ASC 320, “Investments – Debt & Equity Securities”.
The following table summarizes, by major security type, the amortized costs and fair value of the Company’s investments:
Short-term investments held as of July 31, 2010 and January 31, 2010 consisted of $5.0 million of certificates of deposit that have a maturity greater than three months but less than twelve months. These investments are recorded at cost and interest earned is recorded in Interest income in the Consolidated Statements of Earnings (Loss).
As of July 31, 2010 and January 31, 2010, the Company held $5.3 million and $6.3 million of preferred stock investments which are classified as long-term available for sale securities. Unrealized losses on these investments that are considered temporary are recorded in AOCI. These securities are valued based on quoted prices in inactive markets. During the three and six months ended July 31, 2010, the Company recorded a net of tax unrealized loss of $0.1 million and a gain of $0.2 million, respectively, in AOCI.
The Company holds an equity auction rate security (“ARS”) which is classified as a long-term available for sale investment. Realized gains and losses on this security are determined using the specific identification method and are recorded in Foreign exchange and other. Unrealized losses on these securities that are considered temporary and are not the result of a credit loss are recorded in AOCI. Unrealized losses that are considered other than temporary are recorded in the Consolidated Statements of Earnings (Loss) in Foreign exchange and other.
As of July 31, 2010 and January 31, 2010, the Company held $9.3 million and $9.4 million, respectively of ARS classified as available-for-sale securities. ARS are instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at predetermined intervals in days. This mechanism generally allows investors to rollover their holdings and continue to own their respective securities or liquidate their holdings by selling their securities at par value. The Company generally invested in these securities for short periods of time as part of its cash management program. The Company’s auction rate security held as of July 31, 2010 is an AAA/Aaa rated investment in a closed-end fund consisting of preferred stock of various utilities that maintains assets equal to or greater than 200% of the liquidation preference of its preferred stock. This security’s valuation considered the financial conditions of the issuer, as well as the value of the collateral. The Company has assessed the credit risk associated with the ARS to be minimal. If the credit ratings of the issuer or the collateral deteriorate, the Company may adjust the carrying value of this investment.
The weakness within the credit markets has prevented the Company and other investors from liquidating all of their holdings by selling their securities at par value. Historically, the par value of these ARS approximated fair value as a result of the resetting of the interest rate. In the first quarter of fiscal 2009 market auctions, including auctions for substantially all the Company’s ARS, began to fail due to insufficient buyers. As a result of these failed auctions and the uncertainty of when these securities could successfully be liquidated at par (liquidity risk), the Company has recorded a pre-tax unrealized loss of $0.7 million to AOCI as of July 31, 2010 and classified these securities as non-current investments. This instrument has been in a continuous loss position for greater than 12 months, however the Company deems the ARS to be temporarily impaired as management has made the decision to hold the investment until it can be redeemed at par value and the underlying liquidity of the issuer does not indicate that a condition of a permanent impairment exists.
The following table summarizes the proceeds and realized gains and losses on the sale of available for sale investments recorded in Foreign exchange and other within the Consolidated Statements of Earnings (Loss). Gains and losses are calculated using the specific identification method.
The Company holds an investment in a limited liability company (“LLC”) obtained through its ViSalus acquisition. The LLC is accounted for under the equity method as the Company holds a significant minority interest in this company. The Company records its share of the LLC’s earnings or loss to its investment balance. During the first six months of fiscal 2011 an insignificant amount of losses were recorded in the Consolidated Statements of Earnings (Loss) in Foreign exchange and other. The investment in this LLC involves related parties as discussed in Note 15.
Also included in long-term investments are certificates of deposit that are held as collateral for the Company’s outstanding standby letters of credit. These investments are recorded at cost and interest earned is recorded in Interest income in the Consolidated Statements of Earnings (Loss).
In addition to the investments noted above, the Company holds mutual funds as part of a deferred compensation plan which are classified as available for sale. As of July 31, 2010 and January 31, 2010, the fair value of these securities was $1.1 million and $1.0 million, respectively. These securities are valued based on quoted prices in an active market. Unrealized gains and losses on these securities are recorded in AOCI. These mutual funds are included in Other assets in the Consolidated Balance Sheets.
The components of inventory are as follows:
6. Goodwill and Other Intangibles
Goodwill is subject to an assessment for impairment using a two-step fair value-based test and as such other intangibles are also subject to impairment reviews, which must be performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired.
The Company performs its annual assessment of impairment as of January 31. For goodwill, the first step is to identify whether a potential impairment exists. This is done by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Fair value for each of the Company’s reporting units is estimated utilizing a combination of valuation techniques, namely the discounted cash flow methodology and the market multiple methodology. The discounted cash flow methodology assumes the fair value of an asset can be estimated by the economic benefit or net cash flows the asset will generate over the life of the asset, discounted to its present value. The discounting process uses a rate of return that accounts for both the time value of money and the investment risk factors. The market multiple methodology estimates fair value based on what other participants in the market have recently paid for reasonably similar assets. Adjustments are made to compensate for differences between the reasonably similar assets and the assets being valued. If the fair value of the reporting unit exceeds the carrying value, no further analysis is necessary. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the estimated fair value of the goodwill. If fair value is less than the carrying amount, an impairment loss is reported as a reduction to the goodwill and a charge to operating expense.
In the second quarter of fiscal 2010, the ViSalus business, within the Direct Selling segment, revised downward its revenues forecast for the current fiscal year as a result of lower demand for its product reflecting lower consumer spending attributed to the domestic economic recession and a higher than anticipated attrition rate in its distributor base. These factors together have required management to focus its efforts on stabilizing its distributor base and curtailing its international expansion plans. Accordingly management reduced its short term and long-term forecasts in response to the weakening demand for its products. The impairment analysis performed indicated that the goodwill in ViSalus was fully impaired, as its fair value was less than its carrying value, including goodwill. Accordingly, the Company recorded a non-cash pre-tax goodwill impairment charge of $13.2 million, during the second quarter of fiscal 2010.
As of July 31, 2010, the gross value of all goodwill, by operating segment, was $98.0 million in the Wholesale segment, $77.7 million in the Catalog & Internet segment and $15.5 million in the Direct Selling segment. As of January 31, 2010 and July 31, 2010 the carrying amount of the Company’s of goodwill, all within the Direct Selling segment, was $2.3 million.
The Company uses the relief from royalty method to estimate the fair value for indefinite-lived intangible assets. The underlying concept of the relief from royalty method is that the inherent economic value of intangibles is directly related to the timing of future cash flows associated with the intangible asset. Similar to the income approach or discounted cash flow methodology used to determine the fair value of goodwill, the fair value of indefinite-lived intangible assets is equal to the present value of after-tax cash flows associated with the intangible asset based on an applicable royalty rate. The royalty rate is determined by using existing market comparables for royalty agreements using an intellectual property data base. The arms-length agreements generally support a rate that is a percentage of direct sales. This approach is based on the premise that the free cash flow is a more valid criterion for measuring value than “book” or accounting profits.
Other intangible assets include indefinite-lived trade names and trademarks and customer relationships related to the Company’s acquisition of Miles Kimball and Walter Drake in fiscal 2004 and As We Change during fiscal 2009, which are reported in the Catalog and Internet segment and ViSalus, acquired during fiscal 2009, which is reported in the Direct Selling segment. The Company does not amortize the indefinite-lived trade names and trademarks, but rather tests for impairment annually as of January 31st, or sooner if circumstances indicate a condition of impairment may exist. As of July 31, 2010, there were no indications that a review was necessary.
As part of the previously mentioned impairment analysis performed for the ViSalus business during the second quarter of fiscal 2010, the Company recorded an impairment charge of $3.1 million related to certain of the Company’s trade names and $ 0.2 million related to customer relationships. These impairments were due to adverse economic conditions experienced due to decreased consumer spending and the failure to obtain and retain distributors, as noted previously.
As of July 31, 2010, the gross value of all indefinite trade names and trademarks by segment was $28.1 million in the Catalog & Internet segment and $4.2 million in the Direct Selling segment. The gross value of all customer relationships by segment was $15.4 million in the Catalog & Internet segment and $0.3 million in the Direct Selling segment.
Amortization expense is recorded on an accelerated basis over the estimated lives of the customer lists ranging from 5 to 12 years. Amortization expense for other intangible assets was $0.6 million and $0.7 million for the six months ended July 31, 2010 and 2009, respectively. The estimated annual amortization expense for fiscal year 2011 is $1.1 million. The estimated amortization expense for the next five fiscal years beginning with fiscal 2012 is as follows: $0.7 million, $0.6 million, $0.6 million, $0.1 million and an insignificant amount to be amortized in fiscal 2016.
7. Fair Value Measurements
The fair-value hierarchy established in ASC 820, prioritizes the inputs used in valuation techniques into three levels as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of the measurement date, July 31, 2010, and the basis for that measurement, by level within the fair value hierarchy:
The table below summarizes the changes in the fair value of level 3 financial assets and liabilities for the six month period ended July 31, 2010:
The Company values its investments in equity securities within the deferred compensation plan using level 1 inputs, by obtaining quoted prices in active markets. The deferred compensation plan assets consist of shares of mutual funds, for which there are quoted prices in an active market. The Company also enters into both cash flow and fair value hedges by purchasing forward contracts. These contracts are valued using level 2 inputs, primarily observable forward foreign exchange rates. The Company values certain preferred stock investments using information classified as level 2. This data consists of quoted prices of identical instruments in an inactive market and third party bid offers. The certificates of deposit that are used to collateralize some of the Company’s letters of credit have been valued using information classified as level 2, as these are not traded on the open market and are held unsecured by one counterparty. The equity ARS takes into consideration many factors including the credit quality of the issuer and the value of its collateral, the Company’s discounted cash flow analysis and input from broker-dealers in these types of securities. Since there is not an active observable market currently for these securities, they have been classified as a level 3 input.
The carrying values of cash and cash equivalents, trade and other receivables and trade payables are considered to be representative of their respective fair values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with ASC 820. The Company’s assets and liabilities measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill, intangibles and other assets. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments annually or sooner in certain circumstances, such as when there is evidence that impairment may exist. No assets or liabilities were determined to be impaired during the six months ended July 31, 2010.
Goodwill and intangibles are subject to impairment testing on an annual basis, or sooner if circumstances indicate a condition of impairment may exist. The valuation uses assumptions such as interest and discount rates, growth projections and other assumptions of future business conditions. These valuation methods require a significant degree of management judgment concerning the use of internal and external data. In the event these methods indicate that fair value is less than the carrying value, the asset is recorded at fair value as determined by the valuation models. As such, the Company classifies the inputs used in valuing goodwill and other intangibles subjected to nonrecurring fair value adjustments as level 3.
The fair value of the Company’s property plant and equipment and assets held for sale are reviewed annually for impairment or sooner if circumstances indicate a condition for impairment may exist. For fiscal 2011 assets held for sale consisted of both a building and land that are classified as assets held for sale and are reported as non-current assets in Deposits and other assets within the Consolidated Balance Sheets. The valuation of these assets uses a significant amount of management’s judgment and relies heavily on the information provided by third parties. The current local real estate market, regional comparatives, estimated concessions and transaction costs are all considered when determining the fair value of these assets. Due to the subjective nature of this information and the assumptions made by management the Company has classified the inputs used in valuing these assets as level 3.
The estimated fair value of the Company’s $111.3 million in debt, including the $100 million Senior Notes, recorded at an amortized cost, as of July 31, 2010 was approximately $100.8 million. The fair value of the liability is determined using the fair value of its notes when traded as an asset in an inactive market and is based on current interest rates, relative credit risk and time to maturity. Due to nature of the information used the Company considers these inputs to be level 2.
8. Derivative Instruments and Hedging Activities
The Company uses foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, intercompany payables and loans. It does not hold or issue derivative financial instruments for trading purposes. The Company has hedged the net assets of certain of its foreign operations through foreign currency forward contracts. As of July 31, 2010 and January 31, 2010 there were no open Net Investment hedges. The cumulative net after-tax gain related to the derivative Net Investment hedges in AOCI as of July 31, 2010 and January 31, 2010 was $5.2 million.
The Company has designated forward exchange 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 AOCI 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 AOCI and is realized in the Consolidated Statements of Earnings (Loss). If a hedging instrument is sold or terminated prior to maturity, gains and losses are deferred in AOCI until the hedged item is settled. However, if the hedged item is no longer probable to occur, the resultant gain or loss on the terminated hedge is recognized into earnings immediately. The net after-tax gain included in accumulated AOCI at July 31, 2010 is $0.1 million and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment.
The Company has designated its foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as Fair Value hedges. The gains or losses on the Fair Value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.
For financial statement presentation, net cash flows from such hedges are classified in the categories of the Consolidated Statement of Cash Flows with the items being hedged. Forward contracts held with each bank are presented within the Consolidated Balance Sheets as a net asset or liability, based on netting agreements with each bank and whether the forward contracts are in a net gain or loss position. The foreign exchange contracts outstanding have maturity dates through January 2011.
The table below details the fair value and location of the Company’s hedges in the Consolidated Balance Sheets:
Gain and loss activity related to the Company’s Cash Flow hedges for the three and six months ended July 31, are as follows:
For the three month period ended July 31, 2010, the Company recorded a gain of $0.3 million, compared to a loss of $0.9 million in the comparable prior year period related to foreign exchange forward contracts accounted for as Fair Value hedges to Foreign exchange and other.
For the six month period ended July 31, 2010, the Company recorded losses of $0.1 million, compared to a loss of $0.9 million in the comparable prior year period related to foreign exchange forward contracts accounted for as Fair Value hedges to Foreign exchange and other.
9. Long-Term Debt
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 was amortized over the life of the notes. During the first nine months of fiscal 2010, the Company repurchased $12.6 million of these notes, settling the debt early, and made principal payments of $24.7 million, upon maturity.
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 among other provisions, restrictions on liens on principal property or stock issued to collateralize debt. As of July 31, 2010, the Company was in compliance with such provisions. Interest is payable semi-annually in arrears on May 1 and November 1. The notes may be redeemed in whole or in part at any time at a specified redemption price. The proceeds of the debt issuances were used for general corporate purposes.
As of July 31, 2010 and January 31, 2010, Miles Kimball had approximately $7.5 million and $7.7 million, respectively, of long-term debt outstanding under a real estate mortgage note payable which matures June 1, 2020. Under the terms of the note, payments of principal and interest are required monthly at a fixed interest rate of 7.89%.
As of July 31, 2010 and January 31, 2010, Midwest-CBK had $0.1 million of long-term debt outstanding under an Industrial Revenue Bond (“IRB”), which matures on January 1, 2025. The bond is backed by an irrevocable letter of credit issued by a bank and is collateralized by certain of Midwest-CBK’s assets. The amount outstanding under the IRB bears interest at short-term floating rates, which on a weighted average was 0.6% at July 31, 2010. Payments of interest are required monthly under the terms of the bond.
As of July 31, 2010, ViSalus had two long-term loans totaling $3.2 million outstanding related to notes payable to RAM and ViSalus’ three founders. Under the terms of the notes, interest is accrued at a fixed annual interest rate of 10.0% in addition to the $0.6 million interest cost as a result of ViSalus achieving certain performance criteria (see Note 2 to the Consolidated Financial Statements for additional information).
The Company’s debt is recorded at its amortized cost basis. The estimated fair value of the Company’s $111.3 million total long-term debt (including current portion) at July 31, 2010 was approximately $100.8 million. The fair value of the liability is determined using the fair value of its notes when traded as an asset in an inactive market and is based on current interest rates, relative credit risk and time to maturity.
As of July 31, 2010, the Company had $2.0 million available under an uncommitted bank facility to be used for letters of credit. The issuance of letters of credit under this facility will be available until January 31, 2011. As of July 31, 2010, $0.1 million was outstanding under this facility.
As of July 31, 2010 the Company had $2.0 million in standby letters of credit outstanding that are collateralized with a certificate of deposit.
10. Earnings per Share
Vested restricted stock units issued under the Company’s stock-based compensation plans participate in a cash equivalent of the dividends paid to common shareholders and are not considered contingently issuable shares.
Accordingly these RSUs are included in the calculation of basic and diluted earnings per share as common stock equivalents. RSUs that have not vested and are subject to a risk of forfeiture are included in the calculation of diluted earnings per share.
In accordance with ASC 480-10-S99-3A, the accretion of the redeemable noncontrolling interest’s carrying value in excess of its fair value has been reflected in determining EPS for the Company’s common shareholders for the three month period ended July 31, 2009. As discussed in Note 2, there was no effect on EPS for the six month period ended July 31, 2009 as the Company’s redeemable noncontrolling interest obligation was reversed as management determined it was no longer probable that the Company would be obligated to make future investments. For the three months ended July 31, 2009, the effect of reversing the previously recorded non-fair value portion of the redeemable noncontrolling interest of $0.4 million has been included in the determination of EPS.
The components of basic and diluted earnings per share are as follows:
For the three and six month periods ended July 31, 2010, options to purchase 53,475 shares of common stock are not included in the computation of earnings per share because the effect would be anti-dilutive. Also, for the three and six month periods ended July 31, 2009, options to purchase 63,625 shares of common stock are not included in the computation of earnings per share because the effect would be anti-dilutive.
11. Treasury and Common Stock
12. Income Taxes>
The Company’s effective tax rate for the six months ended July 31, 2010 and 2009 was 37% and negative 16%, which resulted in a provision for income taxes of $2.8 million and $1.9 million, respectively. The effective tax rate for the six months ended July 31, 2010 was primarily affected by the recording of a reserve for various income tax audits, including current period interest on the Company’s income tax reserves, offset by the favorable closure of an income tax audit. The higher effective rate in the six months ended July 31, 2009 was primarily related to the ViSalus goodwill impairment of $13.2 million for which no tax benefit was recorded, in addition to interest on the Company’s income tax reserves.
The Company’s effective tax rate for the three months ended July 31, 2010 and 2009 was 63% and 2%, which resulted in a provision for income taxes of $1.2 million and a benefit of $0.3 million, respectively. The effective tax rate for the three months ended July 31, 2010 was primarily affected by international operating tax losses for which no benefit was recorded and the recording of a reserve for various income tax audits, including current period interest on the Company’s income tax reserves. The lower effective rate in the three months ended July 31, 2009 was primarily related to the ViSalus goodwill impairment of $13.2 million for which no tax benefit was recorded, in addition to interest on the Company’s income tax reserves.
The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of July 31, 2010 that may be resolved within fiscal 2011 is approximately $0.5 million, as a result of filing amended tax returns, closing of statutes, and audit settlements. Due to the various jurisdictions in which the Company files tax returns and the uncertainty regarding the timing of the settlement of tax audits, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in fiscal 2011 but the amount cannot be estimated.
In August 2008, a state department of revenue proposed to assess additional corporate income taxes on the Company for fiscal years 2002, 2003 and 2004 in the net amount of $34.9 million, which includes interest. Refer to Note 16 of the Consolidated Financial Statements for further details.
13. Stock Based Compensation
As of July 31, 2010, the Company had one active stock-based compensation plan, the 2003 Long-Term Incentive Plan (“2003 Plan”), available to grant future awards and two inactive stock-based compensation plans (the Amended and Restated 1994 Employee Stock Option Plan and the Amended and Restated 1994 Stock Option Plan for Non-Employee Directors), under which vested and unexercised options remain outstanding. As of July 31, 2010, 1,020,449 shares were authorized and approximately 810,000 shares were available for grant under these plans. The Company’s policy is to issue new shares of common stock for all stock options exercised and restricted stock grants.
The Board of Directors and the stockholders of the Company have approved the adoption and subsequent amendments of the 2003 Plan. The 2003 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other stock unit awards to officers and employees. The 2003 Plan also provides for grants of nonqualified stock options to directors of the Company who are not, and who have not been during the immediately preceding 12-month period, officers or employees of the Company or any of its subsidiaries.
Restricted stock and restricted stock units (“RSUs”) are granted to certain employees to incent performance and retention. RSUs issued under the plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed. The release of RSUs on each of the vesting dates is contingent upon continued active employment by the employee until the vesting dates. During the six and three months ended July 31, 2010, a total of 41,060 RSUs and 5,250 RSUs were granted, respectively.
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Consolidated Statements of Earnings (Loss) for the three and six months ended July 31, 2010 and 2009 includes compensation expense for restricted stock, RSUs and other stock-based awards granted subsequent to January 31, 2006 based on the grant date fair value estimated in accordance with the provisions of ASC 718, “Compensation—Stock Compensation” (“ASC 718”). The Company recognizes these compensation costs net of a forfeiture rate for only those awards expected to vest, on a straight-line basis over the requisite service period of the award, which is over periods of 3 years for stock options; 2 to 5 years for employee restricted stock and RSUs; and 1 to 2 years for non-employee restricted stock and RSUs. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Transactions involving restricted stock and RSUs are summarized as follows:
Compensation expense related to restricted stock and RSUs for three and six months ended July 31, 2010 was approximately $0.3 million and $1.3 million, respectively. Compensation expense related to restricted stock and RSUs for three and six months ended July 31, 2009 was approximately $0.5 million and $1.6 million, respectively. The total recognized tax benefit for the three and six months ended July 31, 2010 was approximately $0.1 million and $0.5 million, respectively. The total recognized tax benefit for the three and six months ended July 31, 2009 was approximately $0.3 million and $0.5 million, respectively.
As of July 31, 2010, there was $1.9 million of unearned compensation expense related to non-vested restricted stock and RSU awards. This cost is expected to be recognized over a weighted average period of 1.7 years. As of July 31, 2010, 104,834 restricted stock awards with a weighted average grant date fair value of $40.55 are unvested. The total unrecognized stock-based compensation cost to be recognized in future periods as of July 31, 2010 does not consider the effect of stock-based awards that may be issued in subsequent periods.
Transactions involving stock options are summarized as follows:
Authorized unissued shares may be used under the stock-based compensation plans. The Company intends to issue shares of its common stock to incent performance for its key employees and officers.
14. Segment Information
Blyth designs, markets and distributes an extensive array of decorative and functional household products including candles, accessories, seasonal decorations, household convenience items and personalized gifts, as well as products for the foodservice trade, nutritional supplements and weight management products.
The Company competes in the global home expressions industry and the Company’s products can be found throughout North America, Europe and Australia. Our financial results are reported in three segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment.
Within the Direct Selling segment, 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 under the PartyLite® brand. PartyLite also offers gourmet foods under the Two Sisters Gourmet by PartyLite brand name. The Company also holds a controlling interest in ViSalus, a distributor-based business that sells nutritional supplements, energy drinks and weight management products. All direct selling products are sold directly to the consumer through networks of independent sales consultants and distributors. Products in this segment are sold primarily in North America, Europe and Australia.
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, kitchen accessories and gourmet coffee and tea. These products are sold directly to the consumer under the As We Change®, Boca Java®, Easy Comforts®, Exposuresâ, Home Marketplace®, Miles Kimballâ and Walter Drakeâ brands. These products are sold in North America.
Within the Wholesale segment, the Company designs, manufactures or sources, markets and distributes an extensive line of home fragrance products, candle-related accessories, seasonal decorations such as ornaments and trim and home décor products such as picture frames, lamps and textiles. Products in this segment are sold primarily in North America to retailers in the premium and specialty channels under the CBK®, Colonial Candle®, Colonial at HOMEâ and Seasons of Cannon Falls® brands. In addition, chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade are sold through this segment under the Ambria®, HandyFuel® and Sterno® brands.
Operating profit in all segments represents net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments. Other expense includes Interest expense, Interest income, and Foreign exchange and other which are not allocated to the business segments. Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations. Unallocated Corporate within the identifiable assets include corporate cash and cash equivalents, short-term investments, prepaid income tax, corporate fixed assets, deferred bond costs and other long-term investments, which are not allocated to the business segments.