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EX-32.2 - EXHIBIT 32.2 - Spectrum Brands Holdings, Inc.hrg-630201710xqex322.htm
EX-32.1 - EXHIBIT 32.1 - Spectrum Brands Holdings, Inc.hrg-630201710xqex321.htm
EX-31.2 - EXHIBIT 31.2 - Spectrum Brands Holdings, Inc.hrg-630201710xqex312.htm
EX-31.1 - EXHIBIT 31.1 - Spectrum Brands Holdings, Inc.hrg-630201710xqex311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission file number: 1-4219
 
 
 
hrggrouprgba06.jpg
HRG Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
74-1339132
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
450 Park Avenue, 29th Floor
New York, NY
10022
(Address of principal executive offices)
(Zip Code)
(212) 906-8555
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
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    or    No  ¨.
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 (section 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    or    No  ¨.
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.
Large Accelerated Filer
x
 
Accelerated Filer
¨
Non-accelerated Filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    or    No  x
There were 200,548,374 shares of the registrant’s common stock outstanding as of August 1, 2017.
 



HRG GROUP, INC.
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
Page
PART II. OTHER INFORMATION
 

2


PART I: FINANCIAL INFORMATION
Item 1.    Financial Statements
HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
June 30,
2017
 
September 30,
2016
 
(Unaudited)
 

ASSETS
 
 
 
Cash and cash equivalents
$
266.2

 
$
465.2

Receivables, net
661.0

 
539.1

Inventories, net
843.7

 
740.6

Deferred tax assets
18.3

 
18.3

Property, plant and equipment, net
675.9

 
543.4

Goodwill
2,621.3

 
2,478.4

Intangibles, net
2,453.4

 
2,372.5

Other assets
144.0

 
138.3

Assets of business held for sale
27,811.7

 
26,284.3

Total assets
$
35,495.5

 
$
33,580.1

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Debt
$
6,032.5

 
$
5,525.8

Accounts payable and other current liabilities
941.8

 
983.2

Employee benefit obligations
117.1

 
125.4

Deferred tax liabilities
596.0

 
546.0

Other liabilities
40.5

 
28.7

Liabilities of business held for sale
25,870.9

 
24,553.8

Total liabilities
33,598.8

 
31,762.9

 
 
 
 
 Commitments and contingencies
 
 
 
 
 
 
 
 HRG Group, Inc. shareholders' equity:
 
 
 
Common stock
2.0

 
2.0

Additional paid-in capital
1,392.5

 
1,447.1

Accumulated deficit
(899.7
)
 
(1,031.9
)
Accumulated other comprehensive income
234.5

 
220.9

Total HRG Group, Inc. shareholders' equity
729.3

 
638.1

 Noncontrolling interest
1,167.4

 
1,179.1

Total shareholders' equity
1,896.7

 
1,817.2

Total liabilities and equity
$
35,495.5

 
$
33,580.1

See accompanying notes to condensed consolidated financial statements.

3


HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
Three months ended June 30,
 
Nine months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Net sales
$
1,303.9

 
$
1,361.6

 
$
3,685.6

 
$
3,790.0

Net investment income
0.1

 
1.2

 
1.1

 
7.9

Other

 

 

 
0.9

Total revenues
1,304.0

 
1,362.8

 
3,686.7

 
3,798.8

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
830.6

 
830.9

 
2,307.1

 
2,355.8

Selling, acquisition, operating and general expenses
325.2

 
343.8

 
966.5

 
1,005.0

Total operating costs and expenses
1,155.8

 
1,174.7

 
3,273.6

 
3,360.8

Operating income
148.2

 
188.1

 
413.1

 
438.0

Interest expense
(89.3
)
 
(98.0
)
 
(269.6
)
 
(289.8
)
Other (expense) income, net
(2.0
)
 
0.2

 
(2.3
)
 
(0.2
)
Income from continuing operations before income taxes
56.9

 
90.3

 
141.2

 
148.0

Income tax expense (benefit)
24.8

 
(2.2
)
 
87.4

 
(4.5
)
Net income from continuing operations
32.1

 
92.5

 
53.8

 
152.5

Income (loss) from discontinued operations, net of tax
7.7

 
(185.5
)
 
195.4

 
(222.6
)
Net income (loss)
39.8

 
(93.0
)
 
249.2

 
(70.1
)
Less: Net income attributable to noncontrolling interest
37.7

 
39.9

 
117.0

 
121.4

Net income (loss) attributable to controlling interest
$
2.1

 
$
(132.9
)
 
$
132.2

 
$
(191.5
)
 
 
 
 
 
 
 
 
Amounts attributable to controlling interest:
 
 
 
 
 
 
 
Net (loss) income from continuing operations
$
(1.5
)
 
$
54.5

 
$
(31.6
)
 
$
44.2

Net income (loss) from discontinued operations
3.6

 
(187.4
)
 
163.8

 
(235.7
)
Net income (loss) attributable to controlling interest
$
2.1

 
$
(132.9
)
 
$
132.2

 
$
(191.5
)
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to controlling interest:
 
 
 
 
 
 
 
Basic (loss) income from continuing operations
$
(0.01
)
 
$
0.27

 
$
(0.16
)
 
$
0.22

Basic income (loss) from discontinued operations
0.02

 
(0.94
)
 
0.82

 
(1.19
)
Basic
$
0.01

 
$
(0.67
)
 
$
0.66

 
$
(0.97
)
 
 
 
 
 
 
 
 
Diluted (loss) income from continuing operations
$
(0.01
)
 
$
0.27

 
$
(0.16
)
 
$
0.22

Diluted income (loss) from discontinued operations
0.02

 
(0.93
)
 
0.82

 
(1.17
)
Diluted
$
0.01

 
$
(0.66
)
 
$
0.66

 
$
(0.95
)
See accompanying notes to condensed consolidated financial statements.



4


HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three months ended June 30,
 
Nine months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net income (loss)
$
39.8

 
$
(93.0
)
 
$
249.2

 
$
(70.1
)
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
30.3

 
(13.7
)
 
5.9

 
(6.0
)
Net unrealized (loss) gain on derivative instruments
 
 
 
 
 
 
 
Changes in derivative instruments before reclassification adjustment
(43.9
)
 
9.6

 
(11.1
)
 
8.8

Net reclassification adjustment for (gains) losses included in net income
(2.6
)
 
1.1

 
(11.2
)
 
0.2

Changes in derivative instruments after reclassification adjustment
(46.5
)
 
10.7

 
(22.3
)
 
9.0

Changes in deferred income tax asset/liability
16.3

 
(2.9
)
 
6.6

 
(1.4
)
Deferred tax valuation allowance adjustments

 

 

 
1.0

Net unrealized (loss) gain on derivative instruments
(30.2
)
 
7.8

 
(15.7
)
 
8.6

Actuarial adjustments to pension plans:
 
 
 
 
 
 
 
Changes in actuarial adjustments before reclassification adjustment
(5.4
)
 
0.9

 
(3.0
)
 
0.4

Net reclassification adjustment
1.4

 
0.6

 
4.0

 
1.8

Changes in actuarial adjustments to pension plans
(4.0
)
 
1.5

 
1.0

 
2.2

Changes in deferred income tax asset/liability
0.8

 
(0.3
)
 
(0.3
)
 
(0.5
)
Net actuarial adjustments to pension plans
(3.2
)
 
1.2

 
0.7

 
1.7

Unrealized investment gains:
 
 
 
 
 
 
 
Changes in unrealized investment gains before reclassification adjustment
358.3

 
615.8

 
5.8

 
492.0

Net reclassification adjustment for losses (gains) included in net income
26.9

 
(0.1
)
 
23.0

 
0.2

Changes in unrealized investment gains after reclassification adjustment
385.2

 
615.7

 
28.8

 
492.2

Adjustments to intangible assets
(113.6
)
 
(220.4
)
 
11.6

 
(164.3
)
Changes in deferred income tax asset/liability
(94.4
)
 
(138.1
)
 
(14.3
)
 
(116.0
)
Net unrealized gains on investments
177.2

 
257.2

 
26.1

 
211.9

Net change to derive comprehensive income for the period
174.1

 
252.5

 
17.0

 
216.2

Comprehensive income
213.9

 
159.5

 
266.2

 
146.1

Less: Comprehensive income attributable to the noncontrolling interest:
 
 
 
 
 
 
 
Net income
37.7

 
39.9

 
117.0

 
121.4

Other comprehensive income
33.5

 
49.2

 
1.7

 
44.2

Comprehensive income attributable to the noncontrolling interest
71.2

 
89.1

 
118.7

 
165.6

Comprehensive income (loss) attributable to the controlling interest
$
142.7

 
$
70.4

 
$
147.5

 
$
(19.5
)
See accompanying notes to condensed consolidated financial statements.


5


HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine months ended June 30,
 
2017
 
2016
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
249.2

 
$
(70.1
)
Income (loss) from discontinued operations, net of tax
195.4

 
(222.6
)
Net income from continuing operations
53.8

 
152.5

Adjustments to reconcile net income to operating cash flows from continuing operations:
 
 
 
Depreciation of properties
72.7

 
66.6

Amortization of intangibles
70.9

 
70.5

Impairment of intangible assets and goodwill

 
10.7

Loan provision and bad debt expense
1.9

 
3.5

Stock-based compensation
33.0

 
58.4

Amortization of debt issuance costs
11.7

 
12.5

Amortization of debt discount
1.5

 
1.9

Write-off of debt issuance costs
2.5

 

Deferred income taxes
50.5

 
(54.6
)
Inventory acquisition step up
0.8

 

Pet safety recall inventory write-off
13.0

 

Net recognized gains on investments and derivatives

 
(2.5
)
Dividends from subsidiaries classified as discontinued operations
9.3

 
9.3

Non-cash restructuring and related charges

 
3.3

Changes in operating assets and liabilities
(273.5
)
 
(326.8
)
Net change in cash due to continuing operating activities
48.1

 
5.3

Net change in cash due to discontinued operating activities
182.0

 
381.5

Net change in cash due to operating activities
230.1

 
386.8

Cash flows from investing activities:
 
 
 
Proceeds from investments sold, matured or repaid

 
35.1

Acquisitions, net of cash acquired
(304.7
)
 

Net asset-based loan repayments
29.8

 
171.9

Purchases of property, plant and equipment
(78.1
)
 
(59.6
)
Proceeds from sales of assets
4.3

 
0.9

Other investing activities, net
(1.2
)
 
(1.9
)
Net change in cash due to continuing investing activities
(349.9
)
 
146.4

Net change in cash due to discontinued investing activities
(965.0
)
 
(745.0
)
Net change in cash due to investing activities
(1,314.9
)
 
(598.6
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of new debt
607.5

 
203.9

Repayment of debt, including tender and call premiums
(252.2
)
 
(442.8
)
Debt issuance costs
(7.0
)
 
(1.7
)
Purchases of subsidiary stock, net
(165.9
)
 
(49.6
)
Purchase of non-controlling interest
(12.6
)
 

Dividend paid by subsidiary to noncontrolling interest
(30.3
)
 
(27.9
)
Share based award tax withholding payments
(40.7
)
 
(28.0
)
Other financing activities, net
5.5

 
0.8

Net change in cash due to continuing financing activities
104.3

 
(345.3
)
Net change in cash due to discontinued financing activities
708.8

 
568.6

Net change in cash due to financing activities
813.1

 
223.3

Effect of exchange rate changes on cash and cash equivalents
(1.5
)
 
(1.7
)
Net change in cash and cash equivalents
(273.2
)
 
9.8

Net change in cash and cash equivalents in discontinued operations
(74.2
)
 
205.1

Net change in cash and cash equivalents in continuing operations
(199.0
)
 
(195.3
)
Cash and cash equivalents at beginning of period
465.2

 
643.2

Cash and cash equivalents at end of period
$
266.2

 
$
447.9

See accompanying notes to condensed consolidated financial statements.

6


HRG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share and unit measures or as otherwise specified)
(1) Description of Business
HRG Group, Inc. (“HRG” and collectively with its respective subsidiaries, the “Company”) is a holding company that conducts its operations through its operating subsidiaries. HRG’s shares of common stock trade on the New York Stock Exchange (“NYSE”) under the symbol “HRG.”
The Company’s reportable business segments are organized in a manner that reflects how HRG’s management views those business activities. Accordingly, the Company currently presents the results from its business operations in two reportable segments: (i) Consumer Products and (ii) Corporate and Other.
The Company’s Corporate and Other segment includes the Company’s ownership of Salus Capital Partners, LLC, (“Salus”), which was created for the purpose of serving as an asset-based lender, 99.5% of NZCH Corporation (“NZCH”), a public shell company, HGI Funding, LLC (“HGI Funding”) and HGI Energy Holdings, LLC (“HGI Energy”), which are subsidiaries that the Company uses to manage a portion of its available cash and engage in other activities.
As described further below under “Insurance Operations”, the Company conducts its insurance operations through its 80.4% ownership of Fidelity & Guaranty Life (“FGL”), and the Company’s other wholly-owned subsidiary, Front Street Re (Delaware) Ltd., (“Front Street”), collectively (the “Insurance Operations”). As described further below, as of June 30, 2017, the Company’s Insurance Operations were classified as held for sale in the accompanying Condensed Consolidated Balance Sheets and the Insurance Operations were classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows and reported separately for all periods presented. Any intercompany transactions between FGL and Front Street have been eliminated in the Company’s financial statements. See Note 4, Divestitures.
For the results of operations by segment, and other segment data, see Note 17, Segment Data and Note 18, Consolidating Financial Information.
Consumer Products Segment
The Consumer Products segment represents the Company’s 58.9% controlling interest in Spectrum Brands Holdings, Inc. (“Spectrum Brands”). Through its operating subsidiaries, Spectrum Brands is a diversified global branded consumer products company with positions in multiple product lines and categories: consumer batteries, small appliances, global pet supplies, home and garden control products, personal care products, hardware and home improvement products and global auto care.
For the three months ended June 30, 2017, Spectrum Brands completed the acquisitions of (i) Petmatrix LLC (“Petmatrix”), a manufacturer and marketer of rawhide-free dog chews, for a purchase price of $255.2, (ii) GloFish branded operations (“GloFish”), which primarily consist of the development and licensing of fluorescent fish for sale through mass retail and online channels, for a purchase price of $53.9, and (iii) the remaining 44.0% non-controlling interest of Shaser, Inc. (“Shaser”) for a purchase price of $12.6. See Note 3, Acquisitions.
Corporate and Other Segment
In connection with the Transition Agreement, dated as of November 17, 2016, by and between HRG and Omar Asali, Mr. Asali’s employment as the President and Chief Executive Officer of HRG, as well as his service on the board of directors of the Company and its subsidiaries ceased, effective as of April 14, 2017. On April 14, 2017, Mr. Joseph S. Steinberg, the Chairman of the Board of Directors of the Company, was appointed to the additional position of Chief Executive Officer of the Company.
On March 22, 2017, the Company also appointed Mr. Ehsan Zargar, effective as of January 1, 2017, as Executive Vice President, Chief Operating Officer, General Counsel and Corporate Secretary of the Company.
Also, on November 28, 2016, the Company and David Maura, Managing Director and Executive Vice President of Investments of the Company, entered into a Separation and Release Agreement pursuant to which Mr. Maura resigned his employment with the Company, but will continue to serve as the Executive Chairman of Spectrum Brands and its subsidiaries and as a member of the Company’s Board of Directors.
In addition, as previously announced in November 2016, the Company’s Board of Directors initiated a process to explore and evaluate strategic alternatives, which may include, but are not limited to, a merger, sale or other business combination involving the Company and/or its assets. There can be no assurance that HRG’s review of strategic alternatives will result in a transaction, or that any transaction, if pursued, will be consummated. HRG’s review of strategic alternatives may be terminated at any time with or without notice. Neither HRG nor any of its affiliates intends to disclose developments with respect to this process until such time that it determines otherwise in its sole discretion or as required by applicable law.

7


Insurance Operations
Through its wholly-owned subsidiaries, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York, FGL is a provider of various types of fixed annuities and life insurance products in the U.S.
Through Bermuda and Cayman-based subsidiaries, Front Street Re Ltd. (“Front Street Bermuda”) and Front Street Re (Cayman) Ltd. (“Front Street Cayman”), Front Street engages in the business of life, annuity and long-term care reinsurance.
On April 17, 2017, FGL terminated its Agreement and Plan of Merger (as amended, the “Anbang/FGL Merger Agreement”) by and among FGL, Anbang Insurance Group Co., Ltd. and its affiliates (collectively, “Anbang”). Prior to its termination, the Anbang/FGL Merger Agreement was amended on November 3, 2016 and on February 9, 2017, each time to extend the outside termination date. As a result of the termination of the Anbang/FGL Merger Agreement, FGL had no remaining obligations thereunder.
On May 24, 2017, FGL entered into an Agreement and Plan of Merger (the “FGL Merger Agreement”) with CF Corporation (“CF Corp”), FGL US Holdings Inc., an indirect wholly owned subsidiary of CF Corp (“CF/FGL US”), and FGL Merger Sub Inc., a direct wholly owned subsidiary of CF/FGL US, pursuant to which CF Corp has agreed to acquire FGL for $31.10 per share (the “FGL Merger”).
In a separate transaction, on May 24, 2017, Front Street entered into a Share Purchase Agreement (the “Front Street Purchase Agreement”) pursuant to which, subject to the terms and conditions set forth therein, Front Street has agreed to sell (the “Front Street Sale”) to CF/FGL US all of the issued and outstanding shares of (i) Front Street Cayman and (ii) Front Street Bermuda (collectively, the “Acquired Companies”). The purchase price is $65.0, subject to customary adjustments for transaction expenses. The definitive documentation contains customary representations, warranties and indemnification obligations. The closing of the transaction is subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals, as well as the consummation of the FGL Merger. The closing of the FGL Merger is not conditioned upon the closing of the Front Street Sale. Prior to the execution of the Front Street Purchase Agreement, the operations of Front Street were reported as the Company’s Insurance segment.
In addition, on May 24, 2017, HRG, FS Holdco II Ltd. (“FS Holdco”), CF Corp and CF/FGL US agreed that FS Holdco may, at its option, cause CF/FGL US and FS Holdco to make a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, with respect to the FGL Merger and the deemed share purchases of FGL’s subsidiaries. If FS Holdco opts to make such an election, it will be required to pay CF/FGL US $30.0, plus additional specified amounts determined by reference to FGL’s incremental current tax costs attributable to the election, if any, and CF/FGL US will be required to pay FS Holdco additional specified amounts determined by reference to FGL’s incremental current tax savings attributable to the election, if any. The Company is considering the financial impact of making such election, the effects of which cannot be reasonably estimated at June 30, 2017.

(2) Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported net loss attributable to controlling interest or accumulated deficit. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, filed with the SEC on November 23, 2016 (the “Form 10-K”). The results of operations for the nine months ended June 30, 2017 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2017.
The Company’s fiscal year ends on September 30 and the quarters end on the last calendar day of the months of December, March and June. Spectrum Brands’ fiscal year ends September 30 and its interim fiscal quarters end every thirteenth Sunday, except for its first fiscal quarter which may end on the fourteenth Sunday following September 30. The Company does not adjust for the difference in fiscal periods between Spectrum Brands and itself, as such difference would be less than 93 days, pursuant to Regulation S-X Rule 3A-02.
At June 30, 2017, the noncontrolling interest component of total equity primarily represents the 41.1% share of Spectrum Brands and the 19.6% of FGL not owned by HRG.

8


Insurance Subsidiary Financial Information and Regulatory Matters
FGL Insurance’s statutory carrying value of Raven Reinsurance Company (“Raven Re”), its wholly-owned subsidiary, reflects the effect of permitted practices Raven Re received to treat the available amount of a letter of credit as an admitted asset which increased Raven Re’s statutory capital and surplus by $115.0 and $201.3 at June 30, 2017 and September 30, 2016, respectively. Raven Re is also permitted to follow Iowa prescribed statutory accounting practice for its reserves on reinsurance assumed from FGL Insurance which increased Raven Re’s statutory capital and surplus by $5.7 and $4.2 at June 30, 2017 and September 30, 2016, respectively. Without such permitted statutory accounting practices, Raven Re’s statutory capital and (deficit) surplus would be $(18.7) and $4.6 as of June 30, 2017 and September 30, 2016, respectively, and its risk-based capital would fall below the minimum regulatory requirements. The letter of credit facility is collateralized by debt securities rated by the National Association of Insurance Commissioners (“NAIC”) as “NAIC-1.” If the permitted practice was revoked, the letter of credit could be replaced by the collateral assets with Nomura Bank International plc’s consent. FGL Insurance’s statutory carrying value of Raven Re at June 30, 2017 and September 30, 2016 was $102.0 and $210.0, respectively.
On November 1, 2013, FGL Insurance re-domesticated from Maryland to Iowa. After re-domestication, FGL Insurance elected to apply Iowa-prescribed accounting practices that permit Iowa-domiciled insurers to report equity call options used to economically hedge fixed indexed annuity (“FIA”) index credits at amortized cost for statutory accounting purposes and to calculate FIA statutory reserves such that index credit returns will be included in the reserve only after crediting to the annuity contract. This resulted in a $28.8 increase to statutory capital and surplus at June 30, 2017.
Use of Estimates and Assumptions
The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.
Adoption of Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the test for goodwill impairment by removing Step 2 from the goodwill impairment test. If goodwill impairment is realized, the amount recognized will be the amount by which the carrying amount exceeds the reporting unit’s fair value; however the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied on a prospective basis and will become effective for public entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption available. The Company elected to early adopt ASU 2017-04 effective March 31, 2017, resulting in no impact to the Condensed Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 requires revenue recognition to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition model requires identifying the contract and performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the updates recognized at the date of the initial application along with additional disclosures. ASU 2014-09 will become effective for the Company beginning in the first quarter of its fiscal year ending September 30, 2019, with early adoption beginning in the first quarter of its fiscal year ending September 30, 2018. The Company has not elected to early adopt. The Company has performed a preliminary risk assessment and scoping of the adoption impact and is currently performing a detailed assessment of various implementation matters that may have an impact on the consolidated financial statements of the Company, but has have not concluded on the materiality or method of adoption.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), which requires an employer to disaggregate the service cost component from the other components of net periodic pension costs within the statement of operations. ASU 2017-07 provides guidance requiring the service cost component to be recognized consistent with other compensation costs arising from service rendered by employees during the period, and all other components to be recognized separately outside of the subtotal of income from operations. ASU 2017-07 is applied on a retrospective basis, and will become effective for public entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption

9


available. This update will be effective for the Company in the first quarter of fiscal year ending September 30, 2019. The net periodic benefit cost for the fiscal year ended September 30, 2016 was $4.8; of which the service cost component was $3.3 and other components were $1.5. The net periodic benefit cost for the fiscal year ending September 30, 2017 will be $7.8, of which the service cost component is $4.3 and other cost components are $3.5.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its Condensed Consolidated Financial Statements and does not believe that there are any other new accounting pronouncements, other than the ones disclosed above and in the Company’s Form 10-K, that have been issued that might have a material impact on its financial condition, results of operations or liquidity.

(3) Acquisitions
The Company applies the acquisition method of accounting. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition.
PetMatrix
On June 1, 2017, Spectrum Brands completed the acquisition of PetMatrix, a manufacturer and marketer of rawhide-free dog chews consisting primarily of the DreamBone® and SmartBones® brands. The results of PetMatrix’s operations since June 1, 2017 are included in the Company’s Condensed Consolidated Statements of Operations within the Consumer Products segment for the three and nine months ended June 30, 2017.
Spectrum Brands has recorded a preliminary allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the June 1, 2017 acquisition date. The excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce. The calculation of purchase price and preliminary purchase price allocation is as follows:
 
 
Purchase Price
Cash consideration
 
$
255.2

 
 
Purchase Price Allocation
Cash and cash equivalents
 
$
0.2

Receivables, net
 
7.8

Inventories, net
 
16.0

Property, Plant and Equipment, net
 
0.8

Goodwill
 
123.8

Intangibles, net
 
110.4

Other assets
 
0.9

Accounts payable and other current liabilities
 
(4.7
)
Total net assets acquired
 
$
255.2

The preliminary purchase price allocation resulted in goodwill of $123.8, which is deductible for tax purposes. The values allocated to intangible assets and the weighted average useful lives are as follows:
 
 
Carrying Amount
 
Weighted Average Useful Life (Years)
Tradenames
 
$
75.0

 
Indefinite
Technology
 
21.0

 
14
Customer relationships
 
12.0

 
16
Non-compete agreement
 
2.4

 
5
Total intangibles acquired
 
$
110.4

 
 

10


Spectrum Brands performed a valuation of the acquired inventories, tradenames, technologies, customer relationships and non-compete agreements. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change, which could be significant, within the measurement period; up to one year from the June 1, 2017 acquisition date. The following is a summary of significant inputs to the valuation:
Inventory - Acquired inventory consists of branded finished goods that were valued based on the comparative sales method, which estimates the expected sales price of the finished goods inventory, reduced for all costs expected to be incurred in its completion or disposition and a profit on those costs.
Tradenames - Spectrum Brands valued indefinite-lived trade names, DreamBone® and SmartBones®, using an income approach, the relief-from-royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade names were not owned. Royalty rates were selected based on consideration of several factors, including prior transactions, related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trade names.
Technology - Spectrum Brands valued technology using an income approach, the relief-from-royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions, related licensing agreements and the importance of the technology and profit levels, among other considerations. Spectrum Brands anticipates using these technologies through the legal life of the underlying patents; therefore, the expected useful life of these technologies is based on the remaining life of the underlying patents.
Customer relationships - Spectrum Brands valued customer relationships using an income approach, the multi-period excess earnings method. In determining the fair value of the customer relationships, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used, which are estimated using annual expected growth rates of 2.0% to 20.0%. Spectrum Brands assumed a customer retention rate of up to 98.0%, which is supported by historical retention rates. Income taxes were estimated at 35.0% and amounts were discounted using a rate of 12.0%.
Non-compete agreements - Spectrum Brands valued the non-compete agreement using the income approach that compares the prospective cash flows with and without the non-compete agreement in place. The value of the non-compete agreement is the difference between the discounted cash flows of the business under each of these two alternative scenarios, considering both tax expenditure and tax amortization benefits.
Pro forma results have not been presented as the PetMatrix acquisition is not considered individually significant to the consolidated results of the Company.
GloFish
On May 12, 2017, Spectrum Brands entered into an asset purchase agreement with Yorktown Technologies LP, for the acquisition of assets consisting of the GloFish branded operations, including transfer of the GloFish® brand, related intellectual property and operating agreements. The GloFish operations primarily consist of the development and licensing of fluorescent fish for sale through mass retail and online channels. The results of GloFish’s operations since May 12, 2017 are included in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017.
Spectrum Brands has recorded a preliminary allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the May 12, 2017 acquisition date. The excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce, including an experienced research team. The calculation of purchase price and preliminary purchase price allocation is as follows:
 
 
Purchase Price
Cash consideration
 
$
49.7

Contingent consideration
 
4.2

Total purchase price
 
$
53.9


11


 
 
Purchase Price Allocation
Receivables, net
 
$
0.4

Property, Plant and Equipment, net
 
0.6

Goodwill
 
15.4

Intangibles, net
 
37.8

Accounts payable and other current liabilities
 
(0.3
)
Total net assets acquired
 
$
53.9

The preliminary purchase price allocation resulted in goodwill of $15.4, which is deductible for tax purposes. The values allocated to intangible assets and the weighted average useful lives are as follows:
 
 
Carrying Amount
 
Weighted Average Useful Life (Years)
Tradenames
 
$
6.1

 
Indefinite
Technology
 
30.2

 
13
Customer relationships
 
1.5

 
10
Total intangibles acquired
 
$
37.8

 
 
Spectrum Brands performed a valuation of the acquired tradenames, technologies, customer relationships and contingent consideration. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change, which could be significant, within the measurement period, up to one year from the May 12, 2017 acquisition date. The following is a summary of significant inputs to the valuation:
Tradenames - Spectrum Brands valued indefinite-lived trade names using an income approach, the relief-from-royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade names were not owned. Royalty rates were selected based on consideration of several factors, including prior transactions, related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trade names.
Technology - Spectrum Brands valued technology using an income approach, the relief-from-royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions, related licensing agreements and the importance of the technology and profit levels, among other considerations. Spectrum Brands anticipates using these technologies through the legal life of the underlying patents; therefore, the expected useful life of these technologies is based on the remaining life of the underlying patents.
Customer relationships - Spectrum Brands valued customer relationships using a replacement cost. The replacement cost approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationships after deducting the cost to recreate key customer relationships. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Income taxes were estimated at 35.0% and amounts were discounted using a rate of 12.0%.
Contingent consideration - Spectrum Brands’ purchase of GloFish includes a future payment that is contingent upon the achievement of future financial performance, and was valued using at its fair value at the acquisition date. The fair value of the contingent consideration is sensitive to increases or decreases in revenue projections used in the assumptions.
Pro forma results have not been presented as the GloFish acquisition is not considered individually significant to the consolidated results of the Company.
Shaser
On May 18, 2017, Spectrum Brands completed the purchase of the remaining 44.0% non-controlling interest of Shaser with a purchase price of $12.6. Effective May 18, 2017, Shaser is a wholly owned subsidiary of Spectrum Brands and all recognized non-controlled interest associated with Shaser is part of the Spectrum Brands’ equity.

12


Acquisition and Integration Costs
The following table summarizes acquisition and integration related charges incurred by Spectrum Brands for the three and nine months ended June 30, 2017 and 2016:
 
Three months ended June 30,
 
Nine months ended June 30,
 
2017
 
2016
 
2017
 
2016
HHI Business
$
1.8

 
$
4.4

 
$
5.7

 
$
12.0

PetMatrix
1.7

 

 
2.0

 

GloFish
0.8

 

 
0.8

 

Armored AutoGroup
0.6

 
2.6

 
3.0

 
13.2

Shaser
0.2

 

 
1.4

 

Other
0.7

 
1.0

 
2.1

 
6.0

Total acquisition and integration related charges
$
5.8

 
$
8.0

 
$
15.0

 
$
31.2

Restructuring and Related Charges
During the second quarter of the fiscal year ending September 30, 2017, Spectrum Brands implemented a rightsizing initiative in the global pet supplies product category to streamline certain operations and reduce operating costs (the “Pet Rightsizing Initiative”). The initiative includes headcount reductions and the rightsizing of certain facilities. Total costs associated with this initiative are expected to be approximately $9.0, of which $2.8 has been incurred to date. The balance is anticipated to be incurred through September 30, 2018.
During the second quarter of the fiscal year ending September 30, 2017, Spectrum Brands implemented an initiative in the hardware and home improvement product product category to consolidate certain operations and reduce operating costs (the “HHI Distribution Center Consolidation”). The initiative includes headcount reductions and the exit of certain facilities. Total costs associated with the initiative are expected to be approximately $23.0, of which $9.1 has been incurred to date. The balance is anticipated to be incurred through September 30, 2019.
During the third quarter of the fiscal year ended September 30, 2016, Spectrum Brands implemented an initiative in the global auto care product category to consolidate certain operations and reduce operating costs (the “GAC Business Rationalization Initiative”). The initiative includes headcount reductions and the exit of certain facilities. Total costs associated with the initiative are expected to be approximately $33.0, of which $25.1 has been incurred to date. The balance is anticipated to be incurred through December 31, 2017.
Spectrum Brands is entering or may enter into small, less significant initiatives and restructuring activities to reduce costs and improve margins throughout the organization. Individually these activities are not substantial, and occur over a shorter time period (less than 12 months).
The following summarizes restructuring and related charges for the three and nine months ended June 30, 2017 and 2016:
 
 
Three months ended June 30,
 
Nine months ended June 30,
Initiatives:
 
2017
 
2016
 
2017
 
2016
GAC Business Rationalization Initiative
 
$
12.8

 
$
3.6

 
$
19.8

 
$
3.6

HHI Distribution Center Consolidation
 
9.0

 

 
9.1

 

Pet Rightsizing Initiative
 
2.2

 

 
2.8

 

Other restructuring activities
 
(2.8
)
 
1.8

 
1.0

 
4.6

Total restructuring and related charges
 
$
21.2

 
$
5.4

 
$
32.7

 
$
8.2

Reported as:
 
 
 
 
 
 
 
 
Cost of goods sold
 
$
11.2

 
$

 
$
16.5

 
$
0.4

Selling, acquisition, operating and general expenses
 
10.0

 
5.4

 
16.2

 
7.8


13


The following table summarizes restructuring and related charges for the three and nine months ended June 30, 2017 and 2016 and cumulative costs for current restructuring initiatives as of June 30, 2017, by cost type. Termination costs consist of involuntary employee termination benefits and severance pursuant to a one-time benefit arrangement recognized as part of a restructuring initiative. Other costs consist of non-termination type costs related to restructuring initiatives such as incremental costs to consolidate or close facilities, relocate employees, costs to retrain employees to use newly deployed assets or systems, lease termination costs, asset write-downs and disposals, carrying costs of closed facility until sale, and redundant or incremental transitional operating costs and customers fines during transition, among others:
 
 
Termination Benefits
 
Other Costs
 
Total
Three months ended June 30, 2017
 
$
4.4

 
$
16.8

 
$
21.2

Three months ended June 30, 2016
 
1.3

 
4.1

 
5.4

Nine months ended June 30, 2017
 
7.7

 
25.0

 
32.7

Nine months ended June 30, 2016
 
3.0

 
5.2

 
8.2

Cumulative costs through June 30, 2017
 
8.0

 
30.0

 
38.0

Future costs to be incurred
 
7.9

 
20.3

 
28.2

The following table is a rollforward of the accrual related to all restructuring and related activities, included in “Other liabilities” in the accompanying Condensed Consolidated Balance Sheets, as of June 30, 2017:
 
 
Termination Benefits
 
Other Costs
 
Total
Accrual balance at September 30, 2016
 
$
1.6

 
$
1.0

 
$
2.6

Provisions
 
5.7

 
4.1

 
9.8

Cash expenditures
 
(2.0
)
 
(0.4
)
 
(2.4
)
Accrual balance at June 30, 2017
 
$
5.3

 
$
4.7

 
$
10.0


(4) Divestitures
The following table summarizes the components of “Income (loss) from discontinued operations, net of tax” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016:
 
Three months ended June 30,
 
Nine months ended June 30,
 
2017
 
2016
 
2017
 
2016
Income (loss) from discontinued operations, net of tax attributable to Insurance Operations
$
7.7

 
$
(183.4
)
 
$
195.4

 
$
(219.1
)
Loss from discontinued operations, net of tax attributable to Compass Production Partners, LP (“Compass”)

 
(2.1
)
 

 
(3.5
)
Income (loss) from discontinued operations, net of tax
$
7.7

 
$
(185.5
)
 
$
195.4

 
$
(222.6
)
Insurance Operations
As previously discussed in Note 1, Description of Business, the Insurance Operations were classified as held for sale in the accompanying Condensed Consolidated Balance Sheets and the Insurance Operations were classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations.

14


The following table summarizes the major categories of assets and liabilities of the Insurance Operations classified as held for sale in the accompanying Condensed Consolidated Balance Sheets at June 30, 2017 and September 30, 2016:
 
June 30,
2017
 
September 30,
2016
Assets
 
 
 
Investments, including loans and receivables from affiliates
$
22,767.2

 
$
21,160.6

Funds withheld receivables
728.6

 
671.6

Cash and cash equivalents
821.8

 
896.0

Receivables, net
6.7

 
17.4

Accrued investment income
204.5

 
213.7

Reinsurance recoverable
2,352.8

 
2,344.4

Properties, plant and equipment, net
24.3

 
18.5

Deferred acquisition costs and value of business acquired, net
1,134.2

 
1,065.5

Other assets
98.8

 
259.4

Write-down of assets of business held for sale to fair value less cost to sell
(327.2
)
 
(362.8
)
Total assets of business held for sale
$
27,811.7

 
$
26,284.3

Liabilities
 
 
 
Insurance reserves
$
24,515.9

 
$
23,404.6

Debt
405.0

 
398.8

Accounts payable and other current liabilities
59.4

 
63.1

Deferred tax liabilities
14.1

 
9.9

Other liabilities
876.5

 
677.4

Total liabilities of business held for sale
$
25,870.9

 
$
24,553.8

In accordance with ASC 360, Property, Plant and Equipment, long-lived assets classified as held for sale are measured at the lower of their carrying value or fair value less cost to sell at the balance sheet date. At June 30, 2017, the carrying value of the Company’s interest in FGL was $304.8 higher than the fair value less cost to sell based on the sales price of FGL and as a result, during the nine months ended June 30, 2017, the Company partially reversed the previously recorded $362.8 write-down of assets of business held for sale by $58.0. At June 30, 2017, the carrying value of the Company’s interest in Front Street was $22.4 higher than the fair value less cost to sell based on the sales price of Front Street and as a result, during the three and nine months ended June 30, 2017, the Company recorded a $22.4 write-down of assets of business held for sale.
The following table summarizes the components of “Net income (loss) from discontinued operations” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016:
 
Three months ended June 30,
 
Nine months ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Insurance premiums
$
12.7

 
$
21.9

 
$
27.0

 
$
54.3

Net investment income
269.4

 
252.8

 
778.6

 
734.1

Net investment gains
102.8

 
38.7

 
237.5

 
73.5

Other
44.0

 
33.8

 
127.6

 
96.4

Total revenues
428.9

 
347.2

 
1,170.7

 
958.3

Operating costs and expenses:
 
 
 
 
 
 
 
Benefits and other changes in policy reserves
266.0

 
247.7

 
575.4

 
660.1

Selling, acquisition, operating and general expenses
42.7

 
27.7

 
109.1

 
89.7

Amortization of intangibles
53.5

 
7.4

 
210.0

 
41.3

Total operating costs and expenses
362.2

 
282.8

 
894.5

 
791.1

Operating income
66.7

 
64.4

 
276.2

 
167.2

Interest expense
(6.1
)
 
(5.1
)
 
(18.2
)
 
(16.9
)
(Write-down) write-up of assets of business held for sale to fair value less cost to sell
(36.1
)
 
(217.2
)
 
35.6

 
(240.7
)
Net income (loss) before income taxes
24.5

 
(157.9
)
 
293.6

 
(90.4
)
Income tax expense (a)
16.8

 
25.5

 
98.2

 
128.7

Net income (loss)
7.7

 
(183.4
)
 
195.4

 
(219.1
)
Less: net income attributable to noncontrolling interest
4.1

 
1.9

 
31.6

 
13.1

Net income (loss) - attributable to controlling interest
$
3.6

 
$
(185.3
)
 
$
163.8

 
$
(232.2
)
(a) Included in the income tax expense for the nine months ended June 30, 2016 was a $90.9 of net income tax expense related to the establishment of a deferred tax liability of $253.0 at June 30, 2016, which was a result of classifying the Company’s ownership interest in FGL as held for sale. The deferred tax liability was partially offset by a $162.1 reduction of valuation allowance on HRG’s net operating and capital loss carryforwards expected to offset the FGL taxable gain at June 30, 2016. The remaining liability is expected to be offset by losses recognized in continuing operations except for the $15.0 of estimated alternative minimum taxes.

15


Compass
On July 1, 2016, HGI Energy entered into an agreement to sell its equity interests in Compass to a third party (such agreement, the “Compass Sale Agreement”). During the fourth quarter of the fiscal year 2016, the transactions contemplated by the Compass Sale Agreement were consummated. This sale represented the disposal of all of the Company’s oil and gas properties, which were accounted for using the full-cost method prior to their disposal. The Company has determined that the completion of HGI Energy’s sale of its equity interests in Compass to a third party represented a strategic shift for the Company and, accordingly, has presented the results of operations for Compass as discontinued operations in the accompanying Condensed Consolidated Statements of Operations.
The following table summarizes the components of “Net income (loss) from discontinued operations” attributable to Compass in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2016.
 
Three months ended
 
Nine months ended
 
June 30, 2016
Revenues:
 
 
 
Oil and natural gas revenues
$
9.7

 
$
36.0

 
 
 
 
Operating costs and expenses:
 
 
 
Oil and natural gas direct operating costs
9.1

 
35.4

Selling, acquisition, operating and general expenses
5.0

 
20.6

Impairments
17.7

 
93.3

Total operating costs and expenses
31.8

 
149.3

Operating loss
(22.1
)
 
(113.3
)
Interest expense
(1.6
)
 
(5.3
)
Gain on sale of oil and gas properties

 
105.6

Other expense, net
(2.3
)
 

Net loss before income taxes
(26.0
)
 
(13.0
)
Income tax expense
(23.9
)
 
(9.5
)
Net loss
$
(2.1
)
 
$
(3.5
)

(5) Receivables, net
The allowance for uncollectible receivables as of June 30, 2017 and September 30, 2016 was $49.6 and $46.8, respectively. Through Spectrum Brands, the Company has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represents approximately 18.3% and 13.5% of the Company’s “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets at June 30, 2017 and September 30, 2016, respectively.

(6) Inventories, net
Inventories, net” in the accompanying Condensed Consolidated Balance Sheets consist of the following:
 
June 30,
2017
 
September 30,
2016
Raw materials
$
141.6

 
$
127.5

Work-in-process
59.5

 
43.6

Finished goods
642.6

 
569.5

Total Inventories, net
$
843.7

 
$
740.6



16


(7) Property, Plant and Equipment, net
Property, plant and equipment, net” in the accompanying Condensed Consolidated Balance Sheets consist of the following:
 
June 30,
2017
 
September 30,
2016
Land, buildings and improvements
$
196.2

 
$
196.9

Machinery, equipment and other
597.2

 
553.1

Capital leases
262.9

 
130.0

Construction in progress
79.3

 
57.7

Property, plant and equipment at cost
1,135.6

 
937.7

Less: Accumulated depreciation
459.7

 
394.3

Total Property, plant and equipment, net
$
675.9

 
$
543.4


(8) Derivative Financial Instruments
Cash Flow Hedges
Interest Rate Swaps. Spectrum Brands uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in Accumulated Other Comprehensive Income (“AOCI”) and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counterparties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest from the underlying debt to which the swap is designated. At June 30, 2017, Spectrum Brands had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at 1.76% for a notional principal amount of $300.0 through May 2020. The derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $0.6, net of tax. The Company’s interest rate swap financial instruments at June 30, 2017 and September 30, 2016 were as follows:
 
 
June 30, 2017
 
September 30, 2016
 
 
Notional Amount
 
Remaining Years
 
Notional Amount
 
Remaining Years
Interest Rate Swaps - fixed
 
$
300.0

 
2.8
 
$
300.0

 
0.5
Commodity swaps. Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with the purchase of these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At June 30, 2017, Spectrum Brands had a series of zinc and brass swap contracts outstanding through December 2018. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $0.8, net of tax. Spectrum Brands had the following commodity swap contracts outstanding as of June 30, 2017 and September 30, 2016:
 
 
June 30, 2017
 
September 30, 2016
 
 
Notional
 
Contract Value
 
Notional
 
Contract Value
Zinc swap contracts
 
7.4 Tons
 
$
18.2

 
6.7 Tons
 
$
12.8

Brass swap contracts
 
1.3 Tons
 
5.9

 
1.0 Tons
 
4.0

Foreign exchange contracts. Spectrum Brands periodically enters into forward foreign exchange contracts to hedge a portion of the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Canadian Dollars (“CAD”) or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to “Net sales” or “Cost of goods sold”, respectively, in the accompanying Condensed Consolidated Statements of Operations. At June 30, 2017, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through December 2018. The derivative net loss estimated to be reclassified from AOCI into earnings over the next 12 months is $3.2, net of tax. At June 30, 2017 and September 30, 2016, Spectrum Brands had foreign exchange derivative contracts designated as cash flow hedges with a notional value of $283.5 and $224.8, respectively.

17


Net Investment Hedges
On September 20, 2016, Spectrum Brands, Inc., a subsidiary of Spectrum Brands, issued €425.0 aggregate principal amount of 4.00% Notes at par value, due October 1, 2026 (“4.00% Notes”). Spectrum Brands’ 4.00% Notes are denominated in Euros and were designated as a net investment hedge of the translation of Spectrum Brands’ net investments in Euro denominated subsidiaries at the time of issuance. As a result, the translation of the Euro denominated debt is recognized in AOCI with any ineffective portion recognized as foreign currency translation gains or losses in the accompanying Condensed Consolidated Statements of Operations when the aggregate principal exceeds the net investment in its Euro denominated subsidiaries. Net gains or losses from the net investment hedge are reclassified from AOCI into earnings upon a liquidation event or deconsolidation of Euro denominated subsidiaries. As of June 30, 2017, the hedge was fully effective and no ineffective portion was recognized in earnings.
Derivative Contracts Not Designated as Hedges for Accounting Purposes
Foreign exchange contracts. Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge a portion of the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, CAD, Euros, Pounds Sterling, Taiwanese Dollars, Hong Kong Dollars or Australian Dollars. These foreign exchange contracts are economic hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At June 30, 2017, Spectrum Brands had a series of forward exchange contracts outstanding through July 2017. At June 30, 2017 and September 30, 2016, Spectrum Brands had $204.2 and $131.4, respectively, of notional value for such foreign exchange derivative contracts outstanding.
Commodity Swaps. Spectrum Brands periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The commodity swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in the fair value of the commodity swap contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the commodity swap contracts. The commodity swap contracts effectively fix the floating price on a specified quantity of silver through a specified date. At June 30, 2017, Spectrum Brands had a series of commodity swaps outstanding through November 2018. Spectrum Brands had the following commodity swaps outstanding as of June 30, 2017 and September 30, 2016:
 
 
June 30, 2017
 
September 30, 2016
 
 
Notional
 
Contract Value
 
Notional
 
Contract Value
Silver (troy oz.)
 
27.0
 
$
0.5

 
31.0
 
$
0.6


18


Fair Value of Derivative Instruments
The fair value of outstanding derivatives recorded in the accompanying Condensed Consolidated Balance Sheets were as follows:
Asset Derivatives
 
Classification
 
June 30,
2017
 
September 30,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Commodity swaps
 
Receivables, net
 
$
2.1

 
$
2.9

Foreign exchange contracts
 
Receivables, net
 
0.1

 
5.5

Interest rate swaps
 
Other assets
 
0.2

 

Commodity swaps
 
Other assets
 
0.2

 

Foreign exchange contracts
 
Other assets
 

 
0.1

Total asset derivatives designated as hedging instruments
 
 
 
2.6

 
8.5

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Other assets
 
0.3

 
0.2

Total asset derivatives
 
 
 
$
2.9

 
$
8.7

Liability Derivatives
 
Classification
 
June 30,
2017
 
September 30,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Accounts payable and other current liabilities
 
$
7.6

 
$
1.7

Foreign exchange contracts
 
Other liabilities
 
1.1

 
0.1

Interest rate swaps
 
Other liabilities
 
1.0

 
0.4

Commodity swaps
 
Accounts payable and other current liabilities
 
0.1

 
0.1

Interest rate swaps
 
Accounts payable and other current liabilities
 

 
0.7

Total liability derivatives designated as hedging instruments
 
 
 
9.8

 
3.0

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Accounts payable and other current liabilities
 
1.0

 
0.2

Total liability derivatives
 
 
 
$
10.8

 
$
3.2

Spectrum Brands is exposed to the risk of default by the counterparties with which Spectrum Brands transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. Spectrum Brands monitors counterparty credit risk on an individual basis by periodically assessing each counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are concentrated with certain domestic and foreign financial institution counterparties. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which was insignificant as of June 30, 2017 and September 30, 2016.
Spectrum Brands’ standard contracts do not contain credit risk related contingent features whereby Spectrum Brands would be required to post additional cash collateral as a result of a credit event. However, Spectrum Brands is typically required to post collateral in the normal course of business to offset its liability positions. As of June 30, 2017 and September 30, 2016, there was no cash collateral outstanding. In addition, as of June 30, 2017 and September 30, 2016, Spectrum Brands had no posted standby letters of credit related to such liability positions.
For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign currency payments, commodity purchases and interest rate payments, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. The Company recognizes all derivative instruments as assets or liabilities in the accompanying Condensed Consolidated Balance Sheets at fair value.

19


The following tables summarize the impact of the effective portion of designated hedges and the gain (loss) recognized in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016:
 
 
 
 
Three months ended June 30,
 
 
 
 
2017
 
2016
 
 
Classification
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
Interest rate swaps
 
Interest expense
 
$
(0.7
)
 
$

 
$
(0.2
)
 
$
(0.4
)
Commodity swaps
 
Cost of goods sold
 
(0.5
)
 
1.3

 
2.1

 
(0.8
)
Net investment hedge
 
Other (expense) income, net
 
(32.6
)
 

 

 

Foreign exchange contracts
 
Net sales
 
0.2

 

 
(0.3
)
 

Foreign exchange contracts
 
Cost of goods sold
 
(10.3
)
 
1.3

 
8.0

 
0.1

 
 
 
 
$
(43.9
)
 
$
2.6

 
$
9.6

 
$
(1.1
)
 
 
 
 
Nine months ended June 30,
 
 
 
 
2017
 
2016
 
 
Classification
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
Interest rate swaps
 
Interest expense
 
$
(1.0
)
 
$
(1.0
)
 
$
(0.5
)
 
$
(1.4
)
Commodity swaps
 
Cost of goods sold
 
3.3

 
3.8

 
2.9

 
(3.8
)
Net investment hedge
 
Other (expense) income, net
 
(9.3
)
 

 

 

Foreign exchange contracts
 
Net sales
 
0.3

 

 
(0.4
)
 

Foreign exchange contracts
 
Cost of goods sold
 
(4.4
)
 
8.4

 
6.8

 
5.0

 
 
 
 
$
(11.1
)
 
$
11.2

 
$
8.8

 
$
(0.2
)
During the three and nine months ended June 30, 2017 and 2016, the Company recognized the following gains and losses on its derivatives:
 
 
 
 
Three months ended June 30,
 
Nine months ended June 30,
 
 
Classification
 
2017
 
2016
 
2017
 
2016
Commodity swaps
 
Cost of goods sold
 
$

 
$

 
$
0.1

 
$

Foreign exchange contracts
 
Other (expense) income, net
 
(1.0
)
 
0.8

 
(2.4
)
 
1.6


(9) Fair Value of Financial Instruments
The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
Level 1 — Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.
Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.
Level 3 — Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lower level of input that is significant to the fair value measurement.

20


The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.
The Company’s consolidated assets and liabilities measured at fair value are summarized according to the hierarchy previously described as follows:
 
June 30, 2017
 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Derivative Assets
$

 
$
2.9

 
$

 
$
2.9

 
$

 
$
8.7

 
$

 
$
8.7

Derivative Liabilities

 
10.8

 

 
10.8

 

 
3.2

 

 
3.2

See Note 8, “Derivative Financial Instruments” for additional detail.
Valuation Methodologies
Derivatives
Spectrum Brands’ derivative assets and liabilities are valued on a recurring basis using internal models, which are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities, which are generally based on quoted or observed market prices and classified as Level 2. The fair value of certain derivatives is estimated using pricing models based on contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as using prices of one delivery point to calculate the price of the contract’s different delivery point. The nominal value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by applying a credit reserve which is calculated based on credit default swaps or published default probabilities for the actual and potential asset value, the fair value of Spectrum Brands’ derivative assets reflects the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing the requirements of a reserve for non-performance which is calculated based on the probability of default by Spectrum Brands, it adjusts its derivative liabilities to reflect the price at which a potential market participant would be willing to assume Spectrum Brands’ liabilities.
The Company has not changed its valuation techniques in measuring the fair value of any derivative assets and liabilities during the quarter.
Non-Recurring Fair Value Measurements
Goodwill, intangible assets and other long-lived assets are tested annually or if an event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).

21


Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instrument assets and liabilities which are not measured at fair value in the accompanying Condensed Consolidated Balance Sheets are summarized as follows:
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Carrying Amount
Assets (a)
 
 
 
 
 
 
 
 
 
Asset-based loans, included in other assets
$

 
$

 
$
1.7

 
$
1.7

 
$
1.7

Liabilities (a)
 
 
 
 
 
 
 
 
 
Total debt (b)

 
6,191.3

 

 
6,191.3

 
6,032.5

 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Carrying Amount
Assets (a)
 
 
 
 
 
 
 
 
 
Asset-based loans, included in other assets
$

 
$

 
$
33.3

 
$
33.3

 
$
33.3

Liabilities (a)
 
 
 
 
 
 
 
 
 
Total debt (b)

 
5,700.1

 
29.9

 
5,730.0

 
5,525.8

(a) The carrying value of cash and cash equivalents, trade receivables, accounts payable and accrued investment income approximate fair value due to their short duration and, accordingly, they are not presented in the tables above.
(b) The fair value of debt set forth above is generally based on quoted or observed market prices.
Valuation Methodology
Asset-based loans
The fair value of the asset-based loans originated by Salus approximate their net carrying value. Such loans carry a variable rate that are typically revolving in nature and can be settled at the demand of either party. Nonaccrual loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. As the loans are collateral dependent, Salus measures such impairment based on the estimated fair value of eligible proceeds. This is generally based on estimated market prices, which may be obtained from a variety of sources, including in certain instances from appraisals prepared by third parties. The impaired loan balance represents those nonaccrual loans for which impairment was recognized during the quarter.

(10) Goodwill and Intangibles, net
A summary of the changes in the carrying amounts of goodwill and intangible assets are as follows:
 
 
 
Intangible Assets
 
Goodwill
 
Indefinite Lived
 
Definite Lived
 
Total
Balance at September 30, 2016
$
2,478.4

 
$
1,473.5

 
$
899.0

 
$
2,372.5

Additions
139.2

 
81.1

 
65.8

 
146.9

Periodic amortization

 

 
(70.9
)
 
(70.9
)
Effect of translation
3.7

 
3.5

 
1.4

 
4.9

Balance at June 30, 2017
$
2,621.3

 
$
1,558.1

 
$
895.3

 
$
2,453.4

Goodwill and indefinite lived trade name intangibles are not amortized and are tested for impairment at least annually, or more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests.

22


Definite Lived Intangible Assets
The range and weighted average useful lives for definite lived intangible assets are as follows:
 
June 30, 2017
 
September 30, 2016
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Customer relationships
$
1,001.6

 
$
(344.3
)
 
$
657.3

 
$
984.8

 
$
(302.9
)
 
$
681.9

Technology assets
287.2

 
(114.1
)
 
173.1

 
237.2

 
(96.7
)
 
140.5

Trade names
165.7

 
(100.8
)
 
64.9

 
165.7

 
(89.1
)
 
76.6

 
$
1,454.5

 
$
(559.2
)
 
$
895.3

 
$
1,387.7

 
$
(488.7
)
 
$
899.0

At June 30, 2017, the range and weighted average useful lives for definite-lived intangibles assets were as follows:
Asset Type
 
Range
 
Weighted Average
Customer relationships
 
2 to 20 years
 
18.4 years
Technology assets
 
5 to 18 years
 
11.6 years
Trade names
 
5 to 13 years
 
11.4 years
Amortization expense for definite lived intangible assets for the three months ended June 30, 2017 and 2016 was $23.8 and $23.5, respectively, and $70.9 and $70.5 for the nine months ended June 30, 2017 and 2016, respectively, and was included in “Selling, acquisition, operating and general expenses” within the accompanying Condensed Consolidated Statements of Operations. Excluding the impact of any future acquisitions or change in foreign currency, the Company estimates annual amortization expense of amortizable intangible assets for the next five fiscal years will be as follows:
Fiscal Year
 
Estimated Amortization Expense
2017
 
$
93.0

2018
 
90.8

2019
 
90.5

2020
 
89.0

2021
 
83.9



23


(11) Debt
The Company’s consolidated debt consists of the following:
 
 
June 30, 2017
 
September 30, 2016
 
 
 
 
Amount
 
Rate
 
Amount
 
Rate
 
Interest rate
HRG
 
 
 
 
 
 
 
 
 
 
7.875% Senior Secured Notes, due July 15, 2019
 
$
864.4

 
7.9
%
 
$
864.4

 
7.9
%
 
Fixed rate
7.75% Senior Unsecured Notes, due January 15, 2022
 
890.0

 
7.8