Blyth 10-Q 2011
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
8,251,312 Common Shares as of August 31, 2011
BLYTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Blyth, Inc. (the “Company”) is a multi-channel company primarily focused on direct selling. The Company designs and markets home fragrance products and decorative accessories, as well as weight management products, nutritional supplements and energy drinks. The Company’s products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items and personalized gifts, meal replacement shakes, vitamins and energy mixes, as well as products for the foodservice trade. The Company’s products can be found throughout North America, Europe and Australia. Our financial results are reported in three segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment.
1. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Certain of the Company’s subsidiaries operate on a 52 or 53-week fiscal year ending on the Saturday closest to 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, 2011 and the consolidated results of its operations for the three and six month periods ended July 31, 2011 and 2010, and cash flows for the six month periods ended July 31, 2011 and 2010. These interim statements should be read in conjunction with the Company's Consolidated Financial Statements for the fiscal year ended January 31, 2011, as set forth in the Company’s Annual Report on Form 10-K. Operating results for the three and six months ended July 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2012.
The financial statements reflect the operations of Midwest-CBK and Boca Java as discontinued operations, and as such, all amounts have been presented as discontinued operations for all periods presented (see Note 2 to the Consolidated Financial Statements for additional information).
Certain prior year amounts have been reclassified to conform to the 2011 presentation.
Recently Adopted Accounting Guidance
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 December 2010, the FASB issued ASU 2010-28, “Intangible –Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. These changes became effective for Blyth beginning February 1, 2011. The Company’s adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations.
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These changes became effective for Blyth beginning February 1, 2011. The Company’s adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations. The Company will comply prospectively to the extent it makes additional acquisitions.
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 adoption of this update did not have an impact on the Company’s consolidated financial condition or results of operations.
2. Discontinued Operations
On May 27, 2011, the Company sold substantially all of the net assets of its seasonal, home décor and home fragrance business (“Midwest-CBK”) within the Wholesale segment for approximately $36.9 million and incurred a loss of approximately $3.0 million, net of tax benefits. The agreement provided for a net working capital adjustment of $1.4 million, which was received subsequent to the sale in July 2011. The Company received cash proceeds of $23.6 million and a one year promissory note included within Other current assets secured by fixed assets included with the transaction of $11.9 million. The Company also received an advance payment of interest on the promissory note of $0.5 million at the time of closing. For the six months ended July 31, 2011 and 2010, revenues were $17.3 and $21.4 million and loss before income taxes was $4.5 and income of $0.1 million, respectively. For the three months ended July 31, 2011 and 2010, revenues were $2.3 and $6.7 million and loss before income taxes was $1.6 and income of $2.9 million, respectively. Revenues for the year ended January 31, 2011 were $104.6 million.
On February 11, 2011, the Company assigned all the assets and liabilities of the Boca Java business through a court approved assignment for the benefit of its creditors. The proceeds from the sale of the assets were used to discharge the claims of the creditors. In the fourth quarter of fiscal 2011, the Company assessed the recoverability of these assets and recorded a $1.1 million impairment charge. This charge was primarily to write down its fixed assets, inventories on hand and other assets, net of any expected recoveries and was recorded to Cost of goods sold and Administrative expenses in the Consolidated Statement of Earnings (Loss) within the Catalog and Internet Segment in Fiscal 2011. Revenue and losses before income taxes for Boca Java are not significant.
These transactions are presented as discontinued operations in the consolidated financial statements and results of operations for the three and six months ended July 31, 2011 and 2010. The following table provides the detail of the assets and liabilities held for sale as of January 31, 2011:
3. Business Acquisitions
In August 2008, the Company signed a definitive agreement to purchase ViSalus Holdings, LLC (“ViSalus”), a direct seller of weight management products, nutritional supplements and energy drinks, 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 provided ViSalus with a $3.0 million revolving credit facility through July 2014, of which $3.0 million was outstanding as of January 31, 2011 and was subsequently repaid in the first quarter of fiscal 2012. On April 15, 2011, the Company completed the second phase of its acquisition of ViSalus Sciences and currently owns 57.5% of the company. The Company may be required to make additional purchases of ViSalus to increase ownership over time to 72.7% and 100.0%. These additional purchases are conditioned upon ViSalus meeting certain operating targets in calendar years 2012 and 2013. 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 accounted for the acquisition of ViSalus as a business combination under SFAS No. 141 “Business Combinations,” since the Company obtained control of ViSalus prior to the effective date of ASC 805. The Company analyzed the criteria for consolidation in accordance with ASC 810, and determined it had control since ViSalus was majority owned collectively by Blyth and Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC (collectively, “RAM”), a related party (see Note 16 to the Consolidated Financial Statements for additional information). Moreover, the Company took into account the composition of ViSalus’ three-member board of managers, one of whom was an executive officer of the Company, one of whom was a principal of RAM and one of whom was a founder and executive officer of ViSalus. Additionally, the Company and RAM together control ViSalus’ 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 to sell them in certain circumstances. 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 may be 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 has begun recognizing these noncontrolling interests obligations outside of permanent equity and has accreted changes in their redemption value through the date of redemption during the time at which it was probable that the noncontrolling interests would be redeemed. The accretion of the redemption value has been recognized as a charge to retained earnings and to the extent that the resulting redemption value exceeds the fair value of the noncontrolling interests, the differential could result in future adjustments in the Company’s earnings per share (“EPS”) should the redemption value exceed fair value. As of July 31, 2011, the estimated redemption value did not exceed fair value and no adjustment was recorded. For the calendar year 2010, ViSalus did not meet its predefined operating target; however, as noted above, the Company has waived this requirement and increased its ownership interest to 57.5% on April 15, 2011. As such, the noncontrolling interest has become redeemable and we may be required to make the additional purchases of ViSalus in 2012 and 2013 if ViSalus meets it predefined operating targets in those years. As of July 31, 2011, the carrying amount of the redeemable noncontrolling interests was $13.7 million and has been reflected as Redeemable noncontrolling interest in the Consolidated Balance Sheet.
As of July 31, 2011, if ViSalus meets its projected operating forecasts, the total expected redemption value of noncontrolling interest will be approximately $101.8 million paid through 2014. The total expected redemption value could increase or decrease depending upon whether ViSalus exceeds or falls short of its operating projections.
The acquisition of ViSalus by Blyth involves related parties, as discussed in Note 16 to the Consolidated Financial Statements. In addition to Blyth, the other owners of ViSalus, include its three founders (each of whom currently own approximately 9.6% of ViSalus for a total of 28.9%) (“the founders”) and RAM which currently owns 8.3%, and a small group of employees and others who collectively own approximately 5.3% 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), and second investment of $2.2 million was paid to RAM ($1.0 million), each of the three founders ($0.3 million each) and others ($0.3 million in the aggregate). Mr. Goergen, Blyth’s chairman and chief executive officer, beneficially owns approximately 37.0% of 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 January 31, 2011. Interest accrued at 10% per annum payable quarterly in arrears. In addition to the 10% interest, the loan required 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 was due on February 28, 2011. The loan accrued interest at 10% per annum payable quarterly in arrears. These loans, plus interest, were paid when due on February 28, 2011.
As of January 31, 2011, 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. As of July 31, 2011, ViSalus repaid $1.9 million of the loan due to founders and RAM, decreasing the outstanding balance to $1.3 million and fully repaid the loan balance of $3.3 million due to Blyth.
ViSalus has recorded equity incentive compensation expense related to certain equity rights and unit holders that allow the settlement of these awards through a future cash payment. As a result, these awards are classified as a liability and are subject to fair value measurement in accordance with ASC section 718 on “Stock Compensation”. The Company has recorded an expense of $6.0 million and $8.2 million for the three and six months ended July 31, 2011 and an insignificant amount in comparable prior year periods in Administrative and Other expense. Additional expense (expense reduction) may be recorded in future periods for increases (or decreases) in the fair value of these awards. The fair value of these awards is based on ViSalus’ future operating performance.
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, 2011, 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. In fiscal 2011, given the limited lease term remaining and market conditions, the Company fully impaired the lease assuming no future sub-lease income through its lease expiration in fiscal 2013.
The following is a tabular rollforward of the lease obligation accrual described above, included in Accrued expenses and Other liabilities:
The Company considers all money market funds and debt instruments, including certificates of deposit and commercial paper, purchased with an original maturity of three months or less to be cash equivalents, unless the assets are restricted. The carrying value of cash and cash equivalents approximates their fair value.
The Company’s investments as of July 31, 2011 consisted of a number of financial securities including preferred stocks, certificates of deposit and an equity investment. 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 January 31, 2011 consisted of an auction rate security valued at $8.7 million. In conjunction with a decision made prior to year end, the ARS was sold in February 2011 and was presented as short-term investments as of January 31, 2011 in the Consolidated Balance Sheets. The Company determined that the decrease in value of its ARS was other than temporary and therefore recorded a charge of $1.3 million representing the difference in the par value of the ARS of $10.0 million and its liquidated value of $8.7 million. The charge of $1.3 million was recorded in Foreign exchange and other in the Consolidated Statements of Earnings (Loss) for the year ended January 31, 2011.
As of July 31 and January 31, 2011, the Company held $4.1 million and $5.1 million of preferred stock investments, respectively, which are classified as long-term available for sale securities. Unrealized gains and/or losses on these investments that are considered temporary are recorded in AOCI. These securities are valued based on quoted prices in inactive markets. For the six months ended July 31, 2011, the Company recorded an unrealized gain, net of tax, of $0.4 million in AOCI.
The following table summarizes the proceeds and realized gains on the sale of available for sale investments recorded in Foreign exchange and other within the
Consolidated Statements of Earnings for the three and six months ended July 31, 2011 and 2010. Gains and losses are calculated using the specific identification method.
The Company holds a $0.4 million equity investment obtained through its ViSalus acquisition. The equity investment was previously accounted for under the equity method of accounting as of January 31, 2011, and was adjusted by the Company's proportionate share of investee's earnings or loss. As of July 31, 2011, the Company has accounted for this investment under ASC 320 as a result of changes in its ownership structure. This investment involves related parties as discussed in Note 16.
As of July 31, 2011, the Company held $5.2 million of advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds”), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. These investments are recorded at cost and interest earned on these is realized in Interest income in the Consolidated Statements of Earnings.
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 on these is realized in Interest income in the Consolidated Statements of Earnings.
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, 2011 and January 31, 2011 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:
7. Goodwill and Other Intangibles
Goodwill is subject to an assessment for impairment using a two-step fair value-based test and as such other intangibles are also subject to impairment reviews, which must be performed at least annually or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired. As of July 31, 2011, there were no indications that a review was necessary.
As of January 31, 2011 and July 31, 2011 the carrying amount of the Company’s goodwill, within the Direct Selling segment, was $2.3 million.
Other intangible assets include indefinite-lived trade names and trademarks and customer relationships related to the Company’s acquisition of Miles Kimball, Walter Drake and As We Change, which are reported in the Catalog and Internet segment and ViSalus, which is reported in the Direct Selling segment. The Company does not amortize the indefinite-lived trade names and trademarks, but rather test for impairment annually as of January 31st, or sooner if circumstances indicate a condition of impairment may exist. As of July 31, 2011, there were no indications that a review was necessary.
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 $0.4 million and $0.6 million for the six months ended July 31, 2011 and 2010, respectively. The estimated annual amortization expense for fiscal year 2012 is $0.7 million. The estimated amortization expense for the remaining four fiscal years beginning with fiscal 2013 is as follows: $0.6 million, $0.6 million, $0.1 million and an insignificant amount to be amortized in fiscal 2016.
8. 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, 2011, and the basis for that measurement, by level within the fair value hierarchy:
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. 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 its preferred stock and pre-refunded bond investments using information classified as level 2. This data consists of quoted prices of identical instruments in an inactive market and third party bid offers. The certificates of deposit that are used to collateralize some of the Company’s letters of credit have been valued using information classified as level 2, as these are not traded on the open market and are held unsecured by one counterparty. The Company owns an equity investment through its ViSalus acquisition. Since there is not an active observable market currently for this security, it has 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 level 3 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. As of July 31, 2011, there were no indications or circumstances indicating that an impairment might exist.
The estimated fair value of the Company’s $108.6 million in debt, including the $100 million Senior Notes, recorded at an amortized cost, as of July 31, 2011 was approximately $110.0 million. The estimated fair value of the Company’s $110.9 million in debt, as of January 31, 2011 was approximately $110.1 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.
9. Derivative Instruments and Hedging Activities
The Company uses foreign exchange forward contracts to hedge the impact of foreign currency fluctuations on foreign denominated inventory purchases, net assets of our foreign operations, intercompany payables and loans. It does not hold or issue derivative financial instruments for trading purposes. The Company has hedged the net assets of certain of its foreign operations through foreign currency forward contracts. The realized and unrealized gains/losses on these hedges are recorded within AOCI until the investment is sold or disposed of. As of July 31, 2011 and January 31, 2011, there were no outstanding net investment hedges. The cumulative net after-tax gain related to net investment hedges in AOCI as of July 31, 2011 and January 31, 2011 was $5.6 million.
The Company has designated its foreign currency forward contracts related to certain foreign denominated loans and intercompany payables as Fair Value hedges. The gains or losses on the Fair Value hedges are recognized into earnings and generally offset the transaction gains or losses in the foreign denominated loans that they are intended to hedge.
The Company has designated forward exchange contracts on forecasted intercompany inventory purchases and future purchase commitments as cash flow hedges and as long as the hedge remains effective and the underlying transaction remains probable, the effective portion of the changes in the fair value of these contracts will be recorded in AOCI until earnings are affected by the variability of the cash flows being hedged. Upon 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 probable of not occurring, the resultant gain or loss on the terminated hedge is recognized into earnings immediately. The net after-tax loss included in accumulated AOCI at July 31, 2011 for cash flow hedges is $0.4 million and is expected to be transferred into earnings within the next twelve months upon settlement of the underlying commitment. The net after-tax loss included in accumulated AOCI at January 31, 2011 for cash flow hedges was $0.1 million.
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 May 2012.
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 and six month period ended July 31, 2011, the Company recorded a loss of $0.2 million and $0.3 million, compared to a gain of $0.3 million and loss of $0.1 million in the comparable prior year period related to foreign exchange forward contracts accounted for as Fair Value hedges to Foreign exchange and other within the Consolidated Statements of Earnings (Loss).
10. Long-Term Debt
On October 20, 2003, the Company issued $100.0 million 5.50% Senior Notes due on November 1, 2013 at a discount of approximately $0.2 million, which is being amortized over the life of the notes. Such notes contain among other provisions, restrictions on liens on principal property or stock issued to collateralize debt.
As of July 31, 2011, 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, 2011 and January 31, 2011, Miles Kimball had approximately $7.0 million and $7.2 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, 2011, ViSalus had $1.3 million of long-term debt outstanding related to notes payable to RAM and ViSalus’ three founders. Under the terms of the notes, interest is accrued at a fixed interest rate of 10.0%.
The Company’s debt is recorded at its amortized cost basis. The estimated fair value of the Company’s $108.6 million total long-term debt (including current portion) at July 31, 2011 was approximately $110.0 million. The estimated fair value of the Company’s $110.9 million in debt, as of January 31, 2011 was approximately $110.1 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, 2011, 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, 2012. As of July 31, 2011, an insignificant amount was outstanding under the facility.
As of July 31, 2011, the Company had $1.8 million in standby letters of credit outstanding that are collateralized with a certificate of deposit.
11. 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.
The components of basic and diluted earnings per share are as follows:
For the three and six month periods ended July 31, 2011, options to purchase 42,550 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, 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.
12. Treasury and Common Stock
13. Income Taxes>
The Company’s effective tax rate for the six months ended July 31, 2011 and 2010 was 130% and 34%, which resulted in a provision for income taxes of a benefit of $2.2 million and an expense of $3.8 million, respectively. The effective tax rate for the six months ended July 31, 2011 was primarily related to the utilization of a net operating loss carry forward for which a valuation allowance had been previously provided. The effective 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 Company’s effective tax rate for the three months ended July 31, 2011 and 2010 was 53% and 49%, which resulted in a provision for income taxes of a benefit of $2.0 million and an expense of $1.0 million, respectively. The effective tax rate for the three months ended July 31, 2011 was primarily related to the utilization of a net operating loss carry forward for which a valuation allowance had been previously provided. The effective rate in 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.
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 2012 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 amount of $34.9 million including interest and penalties. The state department of revenue has subsequently reduced this amount in its actual assessment to $16.9 million, including interest and penalties. In February 2011, the state department of revenue issued a notice of intent to assess additional corporate income taxes for fiscal years 2005, 2006 and 2007 in the amount of $14.0 million, including interest and penalties. In August 2011, the state department of revenue issued a summary of its audit findings indicating that it would issue a notice of intent to assess additional corporate income taxes for fiscal years 2008, and 2009 in the amount of $2.2 million, including interest and penalties. Refer to Note 17 of the Consolidated Financial Statements for further details.
14. Stock Based Compensation
As of July 31, 2011, 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, 2011, 1,020,449 shares were authorized and approximately 805,000 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 three and six months ended July 31, 2011 a total of 5,250 RSUs and 29,524 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 for the three and six months ended July 31, 2011 and 2010 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, 2011 was approximately $0.4 million and $1.0 million, respectively. 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. The total recognized tax benefit for the three and six months ended July 31, 2011 was approximately $0.2 million and $0.3 million. The total recognized tax benefit for the three and six months ended July 31, 2010 was approximately $0.1 million and $0.5 million.
As of July 31, 2011, there was $1.1 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 1.4 years. As of July 31, 2011, approximately 93,000 restricted stock awards with a weighted average grant date fair value of $38.84 are unvested. The total unrecognized stock-based compensation cost to be recognized in future periods as of July 31, 2011 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 meet the stock requirements of its awards in the future.
15. Segment Information
Blyth designs and markets home fragrance products and decorative accessories, as well as weight management products, nutritional supplements and energy drinks. The Company’s products include an extensive array of decorative and functional household products such as candles, accessories, seasonal decorations, household convenience items and personalized gifts, meal replacement shakes, vitamins and energy mixes, as well as products for the foodservice trade. The Company’s products can be found throughout North America, Europe and Australia. Our financial results are reported in three segments: the Direct Selling segment, the Catalog & Internet segment and the Wholesale segment.
Within the Direct Selling segment, the Company designs, manufactures or sources, markets and distributes an extensive line of products including scented candles, candle-related accessories and other fragranced products under the PartyLite® brand. PartyLite also offers gourmet foods under the Two Sisters Gourmetâ by PartyLiteâ brand name. The Company also operates ViSalus Sciences®, a network marketing business, which is focused on selling meal replacement shakes, nutritional supplements, snack cookies and energy drink mixes. Products in this segment are sold in North America through networks of independent sales consultants and distributors. PartyLite brand products are also sold in Europe and Australia.
Within the Catalog & Internet segment, the Company designs, sources and markets a broad range of household convenience items, holiday cards, personalized gifts, kitchen accessories, premium photo albums and frames,. These products are sold directly to the consumer under the As We Change®, Easy Comforts®, Exposuresâ, 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 chafing fuel and tabletop lighting products and accessories for the Away From Home or foodservice trade under the Ambria®, HandyFuel® and Sterno® brands.
Operating profit in all segments represents net sales less operating expenses directly related to the business segments and corporate expenses allocated to the business segments. Other expense includes Interest expense, Interest income, and Foreign exchange and other which are not allocated to the business segments. Identifiable assets for each segment consist of assets used directly in its operations and intangible assets, if any, resulting from purchase business combinations. Unallocated Corporate within the identifiable assets include 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.