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BTH > SEC Filings for BTH > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Form 10-K for BLYTH INC


14-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The financial and business analysis below provides information that we believe is relevant to an assessment and understanding of our consolidated financial condition, changes in financial condition and results of operations. This financial and business analysis should be read in conjunction with our consolidated financial statements and accompanying notes to the Consolidated Financial Statements set forth in Item 8 "Financial Statements and Supplementary Data."

Overview

We design and market weight management products, nutritional supplements and energy drinks, as well as home fragrance products and decorative accessories. Our 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 and vitamins and energy drinks. Our products can be found throughout North America, Europe and Australia. Our financial results are reported in three segments: the Health & Wellness segment, the Candles & Home Décor segment and the Catalog & Internet segment.

Our current focus is driving sales growth and profitability of our brands so we may leverage more fully our infrastructure, as well as supporting new infrastructure requirements of some of our businesses. New product development continues to be critical to all three segments of our business. In the Health & Wellness and Candles & Home Décor segments, monthly sales and productivity incentives are designed to attract, retain and increase the earnings opportunity of independent sales promoters and consultants. In the Catalog & Internet segment, product, merchandising and circulation strategy are designed to drive strong sales growth in smaller brands and expand the sales and customer base of our flagship brands.

On December 7, 2011, our Board of Directors approved a change in our fiscal year end from January 31 to December 31. As a result, we reported our results with an eleven month transition period ended December 31, 2011. In addition, we eliminated the lag differences in the reporting year-ends of certain of our subsidiaries to align them with our other subsidiaries fiscal year end.

In 2012 we divested our Sterno business, and in 2011 we sold substantially all of the net assets of Midwest-CBK and disposed of the assets and liabilities of the Boca Java business as more fully detailed in Note 4 to the consolidated financial statements. The results of operations for these businesses have been presented as discontinued operations for all periods.

Acquisition of ViSalus

In August 2008, we signed a definitive agreement to purchase ViSalus, a direct seller of weight management products, nutritional supplements and energy drinks, through a series of investments. In October 2008, we completed the initial investment and acquired a 43.6% equity interest in ViSalus for $13.0 million in cash and incurred acquisition costs of $1.0 million for a total cash acquisition cost of $14.0 million. In April 2011, we completed the second phase of the acquisition of ViSalus for approximately $2.5 million and increased our ownership to 57.5%.

In January 2012, we completed the third phase of our acquisition of ViSalus and increased our ownership to 72.7% for approximately $22.5 million in cash and the issuance of 681,324 unregistered shares of our common stock valued at $14.6 million, of which 340,662 shares may not be sold or transferred prior to January 12, 2014. Due to the restrictions on transfer, the 340,662 shares of common stock that may not be sold or transferred were issued at a discount to the trading price. The payments in the third closing were based upon an estimate of the 2011 EBITDA pursuant to the formula in the original purchase agreement, and were subsequently adjusted in April 2012 for the difference between the actual 2011 EBITDA and the estimate used in the third closing. We paid an additional $6.2 million in April 2012 after determination of the actual 2011 EBITDA, bringing the total third phase acquisition cost to $43.3 million.

In December 2012, we purchased an additional 8.2% of ViSalus which increased our ownership to 80.9% for a payment of $60.5 million to the ViSalus founders and its other noncontrolling members. In addition, the ViSalus founders and other members of ViSalus exchanged their remaining membership interests for Series A and Series B Redeemable Preferred Stock of ViSalus Inc. ("Preferred Stock"), which will become redeemable on December 31, 2017 for a total redemption price of $143.2 million. A total of 8,955,730 shares of Preferred Stock were issued. The shares are redeemable for cash on December 31, 2017 at a price per share equal to $15.99 unless prior thereto ViSalus shall have effected a "Qualified IPO" or the holders, at their option, elect to convert their Preferred Stock into common shares.

ViSalus intends to pay quarterly dividends to its preferred and common stockholders (on and as-converted basis) in an amount equal to its excess cash reserves.


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Segments

Within the Health & Wellness segment, we operate ViSalus, which is focused on selling meal replacement shakes, nutritional supplements, nutritional cookies and energy drinks. Products in this segment are sold through networks of independent sales promoters in the United States and Canada.

Within the Candles & Home Décor segment, we design, manufacture or source, market and distribute 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 Gourmet® by PartyLite® brand name. Products in this segment are sold through networks of independent sales consultants. PartyLite brand products are sold in North America, Europe and Australia.

Within the Catalog & Internet segment, we design, source and market a broad range of household convenience items, holiday cards, personalized gifts, kitchen accessories, premium photo albums and frames. These products are sold directly to consumers under the Miles Kimball®, Walter Drake® , Easy Comforts®, As We Change® and Exposures® brands. These products are sold in North America.

The following table sets forth, for the periods indicated, the percentage relationship to net sales and the percentage increase or decrease of certain items included in our Consolidated Statements of Earnings:

                                         Percentage of Net Sales
                                                        Eleven                           Percentage Increase
                                                     months ended                       (Decrease) from Prior
                              Years ended                (1)         Year ended (1)            Period
                                                                                         Year
                                                                                         ended
                                                                                       12/31/12    Year ended
                                                                                       compared     12/31/11
                                                                                        to year    compared to
                                                                                         ended     year ended
                       12/31/2012     12/31/2011      12/31/2011       1/31/2011       12/31/11      1/31/11
                                      (unaudited)
Net sales                  100.0           100.0          100.0              100.0          34.2        19.0
Cost of goods sold          33.2            35.6           35.3               37.0          25.3        14.3
Gross profit                66.8            64.4           64.7               63.0          39.1        21.7
Selling                     43.8            43.6           43.7               42.1          34.6        23.3
Administrative              15.8            17.1           17.2               14.1          24.0        43.9
Operating profit             7.2             3.7            3.9                6.7         162.3       (34.9 )
Earnings from
continuing operations        3.1             2.3            2.6                3.8          82.0       (28.7 )

(1) In 2012, we sold our Sterno business and in 2011 we sold substantially all of the net assets of Midwest-CBK and disposed of the assets and liabilities of the Boca Java business as more fully detailed in Note 4 to the Consolidated financial statements. The results of operations for these businesses have been reclassified to discontinued operations for all periods presented. As a result of our change in fiscal year-end from January 31 to December 31, we have reported our results with an eleven month transition period ended December 31, 2011. In addition, we eliminated the lag differences in the reporting year-ends of certain of our subsidiaries to align them with our and our other subsidiaries fiscal year ends. Net sales for the year ended December 31, 2012, were $1,179.5 million compared to $827.6 million for the eleven month transition period ended December 31, 2011. Net earnings for the year ended December 31, 2012 were $44.0 million compared to $16.2 million for the eleven month transition period ended December 31, 2011. The improved net sales and earnings is attributed to Visalus's improved operating performance and one additional month of activity. In order to provide a comparable analysis we have included the unaudited results for the year-ended December 31, 2011 in addition to the audited results.

For the year ended December 31, 2012 compared to the year ended December 31, 2011

Net Sales

Net sales increased $300.4 million, or approximately 34%, to $1,179.5 million for the year ended December 31, 2012 from $879.1 million for the year ended December 31, 2011 due to increases within the Health & Wellness segment.


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Net Sales - Health & Wellness Segment

Net sales in the Health & Wellness segment increased $393.0 million, or 171%, to $623.5 million for the year ended December 31, 2012 from $230.5 million in the comparable prior year period. This increase was attributed to ViSalus's growth as a result of an increase in promoters to approximately 76,000 at December 31, 2012 from approximately 59,000 at December 31, 2011, as well as increased demand for its products. Net sales in the Health & Wellness segment represented approximately 53% of total Blyth net sales for the year ended December 31, 2012 compared to 26% in the comparable prior year period.

Net Sales - Candles & Home Décor Segment

Net sales in the Candles & Home Décor segment decreased $78.4 million, or 16%, to $417.3 million for the year ended December 31, 2012 from $495.7 million in the comparable prior year period. This decrease was mainly due to the decline in PartyLite's European markets of 16% in U.S. dollars or 10% in local currency, principally due to lower sales in Germany, France and the United Kingdom. PartyLite's active independent European sales consultant base decreased from approximately 34,000 at December 31, 2011 to approximately 30,000 at December 31, 2012. PartyLite Europe represented approximately 62% of PartyLite's worldwide net sales for the year ended December 31, 2012 and the comparable prior year period.

PartyLite's U.S. sales decreased 19% from the prior year due to a decline in active independent sales consultants from approximately 19,000 at December 31, 2011 to approximately 15,000 at December 31, 2012, as well as fewer shows, resulting in less opportunity to promote our products and recruit new consultants.

Net sales in the Candles & Home Décor segment accounted for approximately 35% of total Blyth net sales for the year ended December 31, 2012 compared to 57% in the comparable prior year period.

Net Sales - Catalog & Internet Segment

Net sales in the Catalog & Internet segment decreased $14.2 million, or 9%, to $138.7 million for the year ended December 31, 2012 from $152.9 million in the comparable prior year period. This decrease was due to soft demand for general merchandise products as well as a planned reduction in circulation for general merchandise catalogs, partly offset by an increase in sales and circulation for health and wellness products. Net sales in the Catalog & Internet segment accounted for approximately 12% of total Blyth net sales for the year ended December 31, 2012 compared to 17% in the comparable prior year period.

Gross Profit and Operating Expenses

Blyth's consolidated gross profit increased $221.3 million, or 39%, to $787.5 million for the year ended December 31, 2012 from $566.2 million for the year ended December 31, 2011. This increase was principally due to an increase in ViSalus's gross profit due to higher sales volume partly offset by a decline for PartyLite due to lower sales and restructuring charges associated with the realignment of the PartyLite North American distribution center of $1.6 million and lower gross profits at Miles Kimball due to lower sales. The gross profit margin increased to 66.8% for the year ended December 31, 2012 from 64.4% for the year ended December 31, 2011 principally due to higher sales volume in ViSalus, which carries a higher gross margin than our other businesses.

Blyth's consolidated selling expense increased $132.8 million, or approximately 35%, to $516.4 million for the year ended December 31, 2012 from $383.6 million for the year ended December 31, 2011. This increase was primarily due to higher commission expense at ViSalus associated with higher sales, partially offset by a decline at PartyLite principally due to lower sales. Selling expense as a percentage of net sales increased to 43.8% for the year ended December 31, 2012 from 43.6% for the year ended December 31, 2011.

Blyth's consolidated administrative expenses increased $36.1 million, or 24%, to $186.5 million for the year ended December 31, 2012 from $150.4 million for the year ended December 31, 2011. This increase was principally due to additional employee expenses at ViSalus of $23.3 million, credit card fees of $6.1 million associated with ViSalus's sales growth, fees incurred by ViSalus for their withdrawn stock offering of $4.7 million and PartyLite restructuring charges associated with the realignment of the North American distribution center of $1.6 million. This was partly offset by lower equity incentive charges of $11.3 million incurred this year versus $27.1 million last year and by lower headcount at PartyLite. Administrative expenses as a percentage of net sales decreased to 15.8% for the year ended December 31, 2012 from 17.1% for the comparable prior year period.


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Blyth's consolidated operating profit increased $52.4 million to $84.6 million for the year ended December 31, 2012 from $32.2 million for the year ended December 31, 2011. This increase was mainly due to the aforementioned sales increase at ViSalus and lower equity incentive charges, partially offset by costs incurred by ViSalus for their withdrawn stock offering of $4.7 million and lower sales and operating profit within PartyLite.

Operating Profit - Health & Wellness Segment

Operating profit in the Health & Wellness segment increased to $69.2 million for the year ended December 31, 2012 from $2.6 million for the comparable prior year period. This improvement was primarily due to ViSalus's significantly higher sales partially offset by costs incurred by ViSalus for their withdrawn stock offering fees of $4.7 million and reduced equity incentive charges of $11.3 million this year and $27.1 million last year. Corporate expenses and other allocated costs to the Health & Wellness segment were $11.6 million this year and $5.5 million last year.

Operating Profit - Candles & Home Décor Segment

Operating profit in the Candles & Home Décor segment decreased to $20.4 million for the year ended December 31, 2012 from $30.3 million for the comparable prior year period principally due to lower sales. Earnings include restructuring charges of $3.2 million this year and $3.0 million last year. Corporate expenses and other allocated costs to the Candles & Home Décor Selling segment were $7.6 million this year and $11.3 million last year.

Operating Loss - Catalog & Internet Segment

Operating loss in the Catalog & Internet segment increased to $5.0 million for the year ended December 31, 2012 from $0.6 million for the comparable prior year period. This increased loss was primarily due to lower sales and an impairment charge of $0.8 million. Partly offsetting this loss were lower overhead costs resulting from cost management programs. Corporate expense and other allocated costs to the Catalog & Internet segment were $2.6 million this year and $3.7 million last year.

Other Expense (Income)

Interest expense decreased $0.4 million to $6.1 million for the year ended December 31, 2012 from $6.5 million in the comparable prior year period. This decline was due to lower average outstanding debt this year versus last year, primarily related to repurchases of our Senior Notes.

Interest income increased $0.3 million to $1.7 million for the year ended December 31, 2012 from $1.4 million in the comparable prior year period, mainly due to interest income received of $0.7 million on a promissory note and higher interest rates on invested cash balances.

Foreign exchange and other income was $0.9 million for the year ended December 31, 2012 compared to a loss of $1.5 million in the comparable prior year period. This increase was mainly due to this year's foreign currency exchange rate gains partly offset by a $1.9 million impairment on a promissory note in addition to other adjustments of $0.3 million, for a net write-down of $1.6 million recorded in Foreign exchange and other compared to a prior year loss on impairment of an auction rate security investment of $1.3 million.

Income tax expense increased $25.1 million to $31.6 million for the year ended December 31, 2012 from $6.5 million in the comparable prior year period. The increase in income tax expense was due primarily to an increase in the pretax income in the United States and a valuation allowance recorded against various foreign losses, as well as a $2.3 million benefit recorded in the prior year as a result of the closure of income tax audits and a $2.3 million beneficial tax impact of the release of a valuation allowance previously recorded against a federal net operating loss carryforward also recorded in the prior year. The effective tax rate was 39.0% in 2012 compared to 25.4% for 2011. The increase in the effective tax rate was due primarily to no tax benefit being realized on certain foreign net operating losses as well as the tax impact of a dividend received from a non-consolidated domestic subsidiary. The decrease in the effective rate for 2011 was primarily due to a $2.3 million tax benefit recorded in the current year as a result of a favorable closure of audits previously accrued for and a tax benefit of $2.3 million recorded as the result of a valuation allowance release related to a federal net operating loss carryforward.

The net earnings from discontinued operations increased $13.9 million to $7.7 million for the year ended December 31, 2012 from a loss of $6.2 million for the year ended December 31, 2011. The net earnings for the year ended December 31, 2012 include $5.5 million related to the gain on sale of Sterno as well as net operating earnings of $2.2 million from the business during the period January 1, 2012 through its disposition date. The net loss for the year ended December 31, 2011 includes $2.5 million related to the loss on sale of Midwest-CBK.


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The net earnings attributable to noncontrolling interests increased $14.0 million to $13.2 million for the year ended December 31, 2012 from a loss of $0.8 million in the comparable prior year period. This increase was due to higher earnings associated with ViSalus partly offset by a decrease in the ownership of the noncontrolling stockholders.

Net earnings increased $30.2 million to $44.0 million for the year ended December 31, 2012 from $13.8 million in the comparable prior year period. The increase was primarily attributable to ViSalus's improved operating performance and gain on sale of Sterno, partly offset by lower operating results from PartyLite and Miles Kimball.

For the eleven months ended December 31, 2011 compared to the eleven months ended December 31, 2010

As a result of the change in fiscal year from January 31 to December 31, results below are based on eleven month periods. However, operating results and trends are not significantly different if compared on a full comparable year basis.

Net Sales

Net sales increased $140.1 million, or approximately 20%, to $827.6 million for the eleven months ended December 31, 2011 from $687.5 million for the eleven months ended December 31, 2010 due to increases within the Health & Wellness segment.

Net Sales - Health & Wellness Segment

Net sales in the Health & Wellness segment increased $193.1 million, to $225.8 million from $32.7 million for the eleven months ended December 31, 2010. This growth is a result of an increase in ViSalus's promoters to approximately 59,000 at December 31, 2011 from approximately 8,000 at December 31, 2010, as well as increased demand for its products. Net sales in the Health & Wellness segment represented approximately 27% of total Blyth net sales for the eleven months ended December 31, 2011 compared to 5% in the comparable prior year period.

Net Sales - Candles & Home Décor Segment

Net sales in the Candles & Home Décor segment decreased $51.7 million to $464.4 million from $516.1 million for the eleven months ended December 31, 2010. This decrease was mainly due to PartyLite's U.S. sales decrease of 22% from the eleven months ended December 31, 2010 due to a decline in active independent sales consultants, as well as fewer shows, resulting in less opportunity to promote our products and recruit new consultants. PartyLite's active independent U.S. sales consultant base declined 11% on a year-over-year basis.

In PartyLite's European markets, sales decreased 4% in U.S. dollars due to lower sales in Germany, France and the United Kingdom. PartyLite's active independent European sales consultant base decreased 4% on a year-over-year basis. PartyLite Europe represented approximately 61% of PartyLite's worldwide net sales for the eleven months ended December 31, 2011 compared to 57% in the comparable prior year period.

Net sales in the Candles & Home Décor segment accounted for approximately 56% of total Blyth net sales for the eleven months ended December 31, 2011 compared to 75% in the comparable prior year period.

Net Sales - Catalog & Internet Segment

Net sales in the Catalog & Internet segment decreased $1.3 million, or 1%, to $137.4 million for the eleven months ended December 31, 2011 from $138.7 million for the eleven months ended December 31, 2010. This decline was due to soft sales for the Miles Kimball and Walter Drake general merchandise catalogs partly offset by a sharp increase for the Easy Comforts health and wellness catalog. Net sales in the Catalog & Internet segment accounted for approximately 17% of total Blyth net sales for the eleven months ended December 31, 2011 compared to 20% in the comparable prior year period.

Gross Profit and Operating Expenses

Blyth's consolidated gross profit increased $101.0 million, or 23%, to $535.8 million for the eleven months ended December 31, 2011 from $434.8 million for the eleven months ended December 31, 2010. This growth was due to an increase in ViSalus's gross profit related to higher sales volume. Partially offsetting these increases was a decrease in gross profit within PartyLite due to lower sales in the United States, Canada and mature markets in Europe, as well as higher promotional and overhead costs. Our gross profit margin increased to 64.7% for the eleven months ended December 31, 2011 from 63.2% for the eleven


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months ended December 31, 2010 principally due to higher sales volume in ViSalus, which carries a higher gross margin than our other businesses.

Blyth's consolidated selling expense increased $72.4 million, or approximately 25%, to $361.3 million for the eleven months ended December 31, 2011 from $288.9 million for the eleven months ended December 31, 2010. This increase was primarily due to higher commission expense at ViSalus associated with higher sales. There was also an increase at the Miles Kimball Company reflecting higher circulation costs focused on the health and wellness products. Partially offsetting these increases was a decline at PartyLite principally due to lower sales. Selling expense as a percentage of net sales increased to 43.7% for the eleven months ended December 31, 2011 from 42.0% for the eleven months ended December 31, 2010.

Blyth's consolidated administrative expenses increased $45.9 million, or 48%, to $142.4 million for the eleven months ended December 31, 2011 from $96.5 million for the eleven months ended December 31, 2010. This increase is principally due to additional ViSalus equity incentive charges of $25.2 million, additional headcount at ViSalus and higher transaction costs associated with ViSalus's sales growth. Also contributing to this increase were restructuring charges representing severance for administrative staff at PartyLite of $2.7 million and costs associated with the realignment of the North American distribution center of $0.3 million. Administrative expenses as a percentage of net sales increased to 17.2% for the eleven months ended December 31, 2011 from 14.0% for the comparable prior year period.

Blyth's consolidated operating profit decreased $17.3 million to $32.1 million for the eleven months ended December 31, 2011 from $49.4 million for the eleven months ended December 31, 2010. This decline is mainly attributable to higher equity incentive charges at ViSalus, lower sales within PartyLite, restructuring charges representing severance for the administrative staff at PartyLite and costs associated with the realignment of the PartyLite North American distribution center.

Operating Profit (Loss) - Health & Wellness Segment

Operating profit in the Health & Wellness segment increased $3.6 million to $2.9 million for the eleven months ended December 31, 2011 from a loss of $0.7 million for the eleven months ended December 31, 2010. This increase was mainly due to higher operating profit due to significantly higher sales partly offset by significantly higher equity incentive charges.

Operating Profit - Candles & Home Décor Segment

Operating profit in the Candles & Home Décor segment decreased to $30.3 million for the eleven months ended December 31, 2011 from $52.7 million for the eleven months ended December 31, 2010. This decline was principally due to lower sales, expenses related to severance for administrative staff and realignment costs for the North American distribution center.

Operating Loss - Catalog & Internet Segment

Operating loss in the Catalog & Internet segment decreased to $1.1 million for the eleven months ended December 31, 2011 from $2.6 million for the eleven months ended December 31, 2010. This improvement was primarily due to improved . . .

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