Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Spectrum Brands Holdings, Inc.hrg-1231201710xqex322.htm
EX-32.1 - EXHIBIT 32.1 - Spectrum Brands Holdings, Inc.hrg-1231201710xqex321.htm
EX-31.2 - EXHIBIT 31.2 - Spectrum Brands Holdings, Inc.hrg-1231201710xqex312.htm
EX-31.1 - EXHIBIT 31.1 - Spectrum Brands Holdings, Inc.hrg-1231201710xqex311.htm
EX-18.1 - EXHIBIT 18.1 - Spectrum Brands Holdings, Inc.hrg-1231201710xqex181.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 December 31, 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
 
 
 
hrggrouprgba05.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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth 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 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    or    No  x
There were 201,842,876 shares of the registrant’s common stock outstanding as of February 6, 2018.
 



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)
 
December 31, 2017
 
September 30, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,647.6

 
$
270.1

Trade receivables, net
278.4

 
266.0

Other receivables, net
83.0

 
19.7

Inventories, net
580.7

 
496.3

Prepaid expenses and other current assets
56.6

 
54.8

Current assets of businesses held for sale
1,990.6

 
28,929.2

Total current assets
4,636.9

 
30,036.1

Property, plant and equipment, net
506.7

 
504.4

Goodwill
2,276.4

 
2,277.1

Intangibles, net
1,598.6

 
1,612.0

Deferred charges and other assets
61.4

 
43.7

Noncurrent assets of businesses held for sale

 
1,376.4

Total assets
$
9,080.0

 
$
35,849.7

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
934.5

 
$
161.4

Accounts payable
321.3

 
373.1

Accrued wages and salaries
31.5

 
56.1

Accrued interest
104.5

 
78.0

Other current liabilities
120.6

 
125.8

Current liabilities of businesses held for sale
608.2

 
26,850.6

Total current liabilities
2,120.6

 
27,645.0

Long-term debt, net of current portion
4,888.4

 
5,544.0

Employee benefit obligations
40.0

 
38.6

Deferred tax liabilities
298.2

 
493.2

Other long-term liabilities
105.2

 
26.2

Noncurrent liabilities of businesses held for sale

 
155.8

Total liabilities
7,452.4

 
33,902.8

 
 
 
 
 Commitments and contingencies

 

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

 
2.0

Additional paid-in capital
1,363.7

 
1,372.9

Accumulated deficit
(418.5
)
 
(925.9
)
Accumulated other comprehensive (loss) income
(126.8
)
 
309.0

Total HRG Group, Inc. shareholders' equity
820.4

 
758.0

 Noncontrolling interest
807.2

 
1,188.9

Total shareholders' equity
1,627.6

 
1,946.9

Total liabilities and equity
$
9,080.0

 
$
35,849.7

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 December 31,
 
 
2017
 
2016
 
 
(Unaudited)
Revenues:
 
 
 
 
Net sales
 
$
646.5

 
$
602.3

Operating costs and expenses:
 
 
 
 
Cost of goods sold
 
403.8

 
362.1

Selling, acquisition, operating and general expenses
 
216.1

 
198.9

Total operating costs and expenses
 
619.9

 
561.0

Operating income
 
26.6

 
41.3

Interest expense
 
(75.5
)
 
(78.7
)
Other income, net
 
1.0

 
1.0

Loss from continuing operations before income taxes
 
(47.9
)
 
(36.4
)
Income tax (benefit) expense
 
(126.0
)
 
5.6

Net income (loss) from continuing operations
 
78.1

 
(42.0
)
Income from discontinued operations, net of tax
 
500.8

 
302.8

Net income
 
578.9

 
260.8

Less: Net income attributable to noncontrolling interest
 
71.5

 
48.6

Net income attributable to controlling interest
 
$
507.4

 
$
212.2

 
 
 
 
 
Amounts attributable to controlling interest:
 
 
 
 
Net income (loss) from continuing operations
 
$
28.8

 
$
(47.2
)
Net income from discontinued operations
 
478.6

 
259.4

Net income attributable to controlling interest
 
$
507.4

 
$
212.2

 
 
 
 
 
Net income per common share attributable to controlling interest:
 
 
 
 
Basic income (loss) from continuing operations
 
$
0.14

 
$
(0.24
)
Basic income from discontinued operations
 
2.39

 
1.30

Basic
 
$
2.53

 
$
1.06

 
 
 
 
 
Diluted income (loss) from continuing operations
 
$
0.14

 
$
(0.24
)
Diluted income from discontinued operations
 
2.37

 
1.30

Diluted
 
$
2.51

 
$
1.06

See accompanying notes to condensed consolidated financial statements.



4


HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
 
 
Three months ended December 31,
 
 
2017
 
2016
 
 
(Unaudited)
Net income
 
$
578.9

 
$
260.8

 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation losses
 
(2.0
)
 
(46.1
)
Net unrealized gain on derivative instruments
 
 
 
 
Changes in derivative instruments before reclassification adjustment
 
(0.8
)
 
43.2

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

 
(4.8
)
Changes in derivative instruments after reclassification adjustment
 
1.8

 
38.4

Changes in deferred income tax asset/liability
 

 
(14.2
)
Net unrealized gain on hedging derivative instruments
 
1.8

 
24.2

Actuarial adjustments to pension plans
 
 
 
 
Changes in actuarial adjustments before reclassification adjustment
 
(0.7
)
 
3.2

Net reclassification adjustment
 
0.8

 
1.3

Changes in actuarial adjustments to pension plans
 
0.1

 
4.5

Changes in deferred income tax asset/liability
 

 
(1.3
)
Deferred tax valuation allowance adjustments
 

 
0.1

Net actuarial adjustments to pension plans
 
0.1

 
3.3

Unrealized investment gains (losses):
 
 
 
 
Changes in unrealized investment gains (losses) before reclassification adjustment
 
26.0

 
(667.0
)
Net reclassification adjustment for gains included in net income
 
(6.3
)
 
(2.1
)
Changes in unrealized investment gains (losses) after reclassification adjustment
 
19.7

 
(669.1
)
Adjustments to intangible assets
 
(0.9
)
 
225.3

Changes in deferred income tax asset/liability
 
(6.7
)
 
154.7

Net unrealized gains (losses) on investments
 
12.1

 
(289.1
)
Deconsolidation of Insurance Operations
 
(445.9
)
 

Net change to derive comprehensive income (loss) for the period
 
(433.9
)
 
(307.7
)
Comprehensive income (loss)
 
145.0

 
(46.9
)
Less: Comprehensive income (loss) attributable to the noncontrolling interest:
 
 
 
 
Net income
 
71.5

 
48.6

Other comprehensive income (loss)
 
2.5

 
(63.8
)
 
 
74.0

 
(15.2
)
Comprehensive income (loss) attributable to the controlling interest
 
$
71.0

 
$
(31.7
)
See accompanying notes to condensed consolidated financial statements.


5


HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

 
Three months ended December 31,
 
2017
 
2016
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
578.9

 
$
260.8

Income from discontinued operations, net of tax
500.8

 
302.8

Net income (loss) from continuing operations
78.1

 
(42.0
)
Adjustments to reconcile net income (loss) to operating cash flows from continuing operations:
 
 
 
Depreciation of properties and amortization of intangibles
33.1

 
30.3

Loan provision and bad debt expense
(0.2
)
 
2.9

Stock-based compensation
4.2

 
9.5

Amortization of debt issuance costs
3.9

 
3.3

Amortization of debt discount
0.3

 
0.4

Non-cash restructuring
(1.5
)
 
0.7

Write-off of debt discount on retired debt

 
1.9

Deferred income taxes
(127.1
)
 
18.5

Purchase accounting inventory adjustment
0.8

 

Pet safety recall inventory write-off
1.6

 

Dividends from subsidiaries classified as discontinued operations
3.1

 
3.1

Changes in operating assets and liabilities
(139.7
)
 
(119.9
)
Net change in cash due to continuing operating activities
(143.4
)
 
(91.3
)
Net change in cash due to discontinued operating activities
82.6

 
172.0

Net change in cash due to operating activities
(60.8
)
 
80.7

Cash flows from investing activities:
 
 
 
Proceeds from investments sold, matured or repaid
0.6

 

Net asset-based loan repayments

 
17.1

Capital expenditures
(17.9
)
 
(21.1
)
Proceeds from sales of assets
1,490.2

 

Other investing activities, net

 
(0.8
)
Net change in cash due to continuing investing activities
1,472.9

 
(4.8
)
Net change in cash due to discontinued investing activities
(181.7
)
 
(601.3
)
Net change in cash due to investing activities
1,291.2

 
(606.1
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of new debt
226.1

 
168.5

Repayment of debt, including tender and call premiums
(122.0
)
 
(141.7
)
Debt issuance costs
(0.1
)
 
(0.5
)
Purchases of subsidiary stock, net
(7.9
)
 
(97.6
)
Dividend paid by subsidiary to noncontrolling interest
(9.8
)
 
(9.6
)
Share based award tax withholding payments
(22.5
)
 
(34.9
)
Other financing activities, net
1.4

 
1.0

Net change in cash due to continuing financing activities
65.2

 
(114.8
)
Net change in cash due to discontinued financing activities
120.4

 
265.9

Net change in cash due to financing activities
185.6

 
151.1

Effect of exchange rate changes on cash and cash equivalents
(0.2
)
 
(6.4
)
Net change in cash and cash equivalents
1,415.8

 
(380.7
)
Net change in cash and cash equivalents in discontinued operations
38.3

 
(228.9
)
Net change in cash and cash equivalents in continuing operations
1,377.5

 
(151.8
)
Cash and cash equivalents at beginning of period
270.1

 
465.2

Cash and cash equivalents at end of period
$
1,647.6

 
$
313.4

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 and Basis of Presentation
Description of Business
HRG Group, Inc. (“HRG”, and collectively with its respective subsidiaries, the “Company”) is a holding company that conducts its operations principally through its majority owned subsidiary, Spectrum Brands Holdings, Inc., which is a diversified global branded consumer products company (“Spectrum Brands”). 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 Consumer Products segment represents the Company’s 59.3% controlling interest in Spectrum Brands. 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 and is in the process of completing the wind-down of its business, 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.
For the results of operations by segment, and other segment data, see Note 18, Segment Data and Note 20, Consolidating Financial Information.
Consumer Products Segment
The Consumer Products segment represents the Company’s 59.3% controlling interest in 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.
Effective December 29, 2017, Spectrum Brands’ Board of Directors approved a plan to explore strategic alternatives, including the planned sale of Spectrum Brands’ Global Batteries & Appliances (“GBA”) segment. Spectrum Brands expects a sale to be realized by December 31, 2018. See Note 3, Divestitures, regarding Spectrum Brands’ agreement to sell its Global Batteries and Lighting (“GBL”) business and its plans to sell its Home and Personal Care (“HPC”) business. The Company reports a business as held for sale when the criteria of Accounting Standard Codification (“ASC”) Topic 360, Property, Plant and Equipment (“ASC 360”) are met. The Company believes ASC 360’s criteria for the GBA segment have been met as of December 31, 2017. As a result, Spectrum Brands’ assets and liabilities associated with the GBA segment have been classified as held for sale in the accompanying Condensed Consolidated Balance Sheets and the respective operations of the GBA segment have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows; and reported separately for all periods presented. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements- Assets Held for Sale and Discontinued Operations. See Note 3, Divestitures for more information on the assets and liabilities classified as held for sale and discontinued operations. See Note 18, Segment Data for more information pertaining to segments of continuing operations.
Corporate and Other Segment
On November 30, 2017, Fidelity & Guaranty Life (“FGL”), a former majority owned subsidiary of the Company, completed its merger (the “FGL Merger”) with CF Corporation and its related entities (collectively, the “CF Entities”) pursuant to its previously disclosed Agreement and Plan of Merger (the “FGL Merger Agreement”). Pursuant to the FGL Merger Agreement, except for certain shares specified in the FGL Merger Agreement, each issued and outstanding share of common stock of FGL was automatically cancelled and converted into the right to receive $31.10 in cash. In addition, pursuant to a share purchase agreement, on November 30, 2017, Front Street Re (Delaware) Ltd., a wholly-owned subsidiary of HRG, sold to the CF Entities (such sale, the “Front Street Sale”) all of the issued and outstanding shares of its former wholly-owned subsidiaries, Front Street Re Cayman Ltd. and Front Street Re Ltd (collectively, “Front Street”, and together with FGL, the “Insurance Operations”). The purchase price for the Front Street Sale was $65.0, subject to reduction for customary transaction expenses. In addition, $6.5 of the purchase price was deposited in escrow for a period of 15 months to support any indemnification claims that might be made (if any) by the CF Entities. Pursuant to the share purchase agreement, on December 5, 2017, the Company repaid the $92.0 of notes (such notes, the “HGI Energy Notes”) issued by HGI Energy, which were held directly and indirectly by Front Street and FGL. Following the completion of the FGL Merger and the Front Street Sale, HRG no longer has any equity interest in FGL or Front Street and our former Insurance Operations segment is presented as discontinued operations for prior periods. HRG deconsolidated FGL and Front Street as of November 30, 2017.

7


Finally, as previously disclosed, HRG, FS Holdco II Ltd. (“FS Holdco”) and the CF Entities entered into an agreement (the “338 Agreement”) on May 24, 2017 pursuant to which the CF Entities agreed that FS Holdco may, at its option, cause the relevant CF Entity 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 (the “338 Tax Election”). Pursuant to the 338 Agreement, if FS Holdco elects to make the 338 Tax Election, FS Holdco and/or CF Corporation will be required to make a payment for the election to the other. As of December 31, 2017, HRG expects to receive an estimated $26.6 net payment from CF Corporation, which has been included in the estimated consideration HRG expects to receive from the FGL Merger. Pursuant to the 338 Agreement, FS Holdco may elect to exercise the 338 Tax Election at any time until 10 business days after final calculation of such incremental tax costs or savings, as the case may be, and it currently expects to exercise such election within such period. Nonetheless, there can be no assurance that FS Holdco will make the election and/or that HRG will receive the expected benefits of such election. In addition, the estimated payment described herein is preliminary as of December 31, 2017 and subject to change, and HRG does not undertake any obligation to update such estimate.
Also on December 15, 2017, HRG issued a notice of redemption to redeem all $864.4 outstanding principal amount of its 7.875% Senior Secured Notes due 2019 (the “7.875% Notes”) at a redemption price equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. The 7.875% Notes were redeemed on January 16, 2018.
In addition, we continued to streamline our business and simplify our holding company structure and also continued to review and evaluate strategic alternatives available to us with a view towards maximizing shareholder value. We believe that HRG is an excellent company that owns great businesses that have generated strong performance over a long period of time. We believe that we are well-positioned to take advantage of the opportunities that may be available to us through the review of strategic alternatives. Strategic alternatives may include, but are not limited to, a merger, sale or other business combination involving the Company and/or its assets. As part of this strategic review process, HRG has made/received, and may in the future make/receive, one or more proposals to/from third parties and/or Spectrum Brands, its management, its board of directors, its stockholders and other persons, including discussions and proposals that may include, but are not limited to, a merger or a sale and/or a business combination of the Company and Spectrum Brands. In connection therewith, the Spectrum Brands board of directors has formed a special committee of independent directors and has hired independent financial and legal advisors. We have not set a definitive schedule to complete our review of strategic alternatives and do not intend to provide any further updates until such time as it determines in its sole discretion or as required by law. The strategic review process may be suspended or terminated at any time without notice. There can be no assurance that any such process will result in a transaction, or if a transaction is undertaken, as to its terms or timing.
Basis of Presentation
The 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.
As of December 31, 2017, the Company changed its method of presenting its financial statements from an unclassified balance sheet in accordance with Article 7, Insurance Companies, and Regulation S-X to a classified balance sheet. The Company believes a classified balance sheet is preferable as a result of the completion of the FGL Merger and Front Street Sale. 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 income 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, 2017, filed with the SEC on November 20, 2017 (the “Form 10-K”). The results of operations for the three months ended December 31, 2017 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2018.
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 December 31, 2017, the non-controlling interest component of total equity primarily represents the 40.7% share of Spectrum Brands not owned by HRG.


8


(2) Significant Accounting Policies and Recent Accounting Pronouncements
Assets Held for Sale and Discontinued Operations
A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the current and prior balance sheets in the period in which the business is classified as held for sale. Transactions between the business held for sale and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale. If a business is classified as held for sale after the balance sheet date but before the financial statements are issued or are available to be issued, the business continues to be classified as held and used in those financial statements when issued or when available to be issued.
The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the business is sold or classified as held for sale, in accordance with ASC 360 and Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 2015) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The results of discontinued operations are reported in “Income from discontinued operations, net of tax” in the accompanying Condensed Consolidated Statements of Operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale.
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.
Recent Accounting Pronouncements Not Yet Adopted
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 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) Divestitures
The following table summarizes the components of “Income from discontinued operations, net of tax” in the accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016:
 
Three months ended December 31,
 
2017
 
2016
Income from discontinued operations, net of tax attributable to Insurance Operations
$
459.9

 
$
250.4

Income from discontinued operations, net of tax attributable to GBA segment
40.9

 
52.4

Income from discontinued operations, net of tax
$
500.8

 
$
302.8

Insurance Operations
On November 30, 2017, FGL completed the FGL Merger pursuant to which, except for certain shares specified in the FGL Merger Agreement, each issued and outstanding share of common stock of FGL was automatically canceled and converted into the right to receive $31.10 in cash, without interest. The total consideration received by the Company as a result of the completion of the FGL Merger was $1,488.3, which includes an estimate of $26.6 related to the 338 Tax Election. See Note 1, Description of Business and Basis of Presentation - Corporate and Other Segment for more information on the 338 Tax Election.
Also on November 30, 2017, Front Street Re (Delaware) Ltd. sold to the CF Entities all of the issued and outstanding shares of Front Street for $65.0, which is subject to reduction for customary transaction expenses. In addition, $6.5 of the purchase price was deposited in escrow for a period of 15 months to support any indemnification claims that might be made (if any) by the CF Entities.
The Insurance Operations were classified as held for sale in the accompanying Condensed Consolidated Balance Sheets at September 30, 2017 and as discontinued operations through November 30, 2017 in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.

9


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 September 30, 2017:
 
September 30, 2017
Assets
 
Investments, including loans and receivables from affiliates
$
23,211.1

Funds withheld receivables
742.7

Cash and cash equivalents
914.5

Accrued investment income
231.3

Reinsurance recoverable
2,358.8

Deferred acquisition costs and value of business acquired, net
1,163.6

Other assets
125.4

Write-down of assets of businesses held for sale to fair value less cost to sell
(421.2
)
Total assets of businesses held for sale
$
28,326.2

Liabilities
 
Insurance reserves
$
24,989.6

Debt
405.0

Accounts payable and other current liabilities
56.2

Deferred tax liabilities
68.0

Other liabilities
831.9

Total liabilities of businesses held for sale
$
26,350.7

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 September 30, 2017, the carrying value of the Company’s interest in FGL and Front Street exceeded their respective estimated fair value less cost to sell by $402.2 and $19.0, respectively.
The higher carrying value of FGL was primarily due to the increase in unrealized gains, net of offsets in FGL’s investment portfolio, with the effects of the unrealized gains, net of offsets, being recorded in accumulated other comprehensive income (“AOCI”). Upon the completion of the FGL Merger, the Company deconsolidated its ownership interest in FGL, which resulted in the reclassification of $445.9 of AOCI attributable to FGL to income from discontinued operations during the three months ended December 31, 2017.
The following table summarizes the components of “Net income from discontinued operations” in the accompanying Condensed Consolidated Statements of Operations for the two months ended November 30, 2017 and the three months ended December 31, 2016:
 
 
Two months ended November 30, 2017
 
Three months ended December 31, 2016
 
 
 
Revenues:
 
 
 
 
Insurance premiums
 
$
6.8

 
$
11.2

Net investment income
 
181.9

 
250.5

Net investment gains
 
154.8

 
22.6

Insurance and investment product fees and other
 
35.1

 
39.0

Total revenues
 
378.6

 
323.3

Operating costs and expenses:
 
 
 
 
Benefits and other changes in policy reserves
 
241.3

 
8.3

Selling, acquisition, operating and general expenses
 
52.8

 
30.7

Amortization of intangibles
 
35.8

 
120.0

Total operating costs and expenses
 
329.9

 
159.0

Operating income
 
48.7

 
164.3

Interest expense
 
(3.9
)
 
(6.1
)
Other expense, net
 
(0.1
)
 

(Write-down) write-up of assets of businesses held for sale to fair value
 
(14.2
)
 
144.5

Reclassification of accumulated other comprehensive income
 
445.9

 

Income from discontinued operations before income taxes
 
476.4

 
302.7

Income tax expense
 
16.5

 
52.3

Net income from discontinued operations
 
459.9

 
250.4

Net income from discontinued operation attributable to noncontrolling interest
 
5.4

 
21.1

Net income from discontinued operations attributable to controlling interest
 
$
454.5

 
$
229.3


10


Consumer Products Segment - GBA Segment
As previously discussed in Note 1, Description of Business and Basis of Presentation, Spectrum Brands’ GBA segment was classified as held for sale in the accompanying Condensed Consolidated Balance Sheets and as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows. The following table summarizes the assets and liabilities of Spectrum Brands’ GBA segment classified as held for sale as of December 31, 2017 and September 30, 2017:
 
December 31, 2017
 
September 30, 2017
Assets
 
 
 
Trade receivables, net
$
282.5

 
$
260.1

Other receivables, net
29.1

 
24.1

Inventories, net
273.3

 
279.1

Prepaid expenses and other current assets
40.7

 
39.7

Property, plant and equipment, net
194.8

 
196.4

Deferred charges and other assets
17.3

 
19.2

Goodwill
348.6

 
348.9

Intangibles, net
804.3

 
811.9

Total assets of businesses held for sale
$
1,990.6

 
$
1,979.4

Liabilities
 
 
 
Current portion of long-term debt
$
23.5

 
$
17.3

Accounts payable
302.3

 
355.9

Accrued wages and salaries
29.8

 
36.9

Other current liabilities
98.8

 
89.8

Long-term debt, net of current portion
51.1

 
51.4

Deferred income taxes
36.8

 
38.2

Other long-term liabilities
65.9

 
66.2

Total liabilities of businesses held for sale
$
608.2

 
$
655.7

The following table summarizes the components of “Net income from discontinued operations” in the accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016:
 
 
Three months ended December 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Net sales
 
$
603.3

 
$
609.5

Operating costs and expenses:
 
 
 
 
Cost of goods sold
 
403.4

 
398.6

Selling, acquisition, operating and general expenses
 
131.7

 
121.3

Total operating costs and expenses
 
535.1

 
519.9

Operating income
 
68.2

 
89.6

Interest expense
 
13.7

 
12.8

Other expense, net
 
0.3

 

Income from discontinued operations before income taxes
 
54.2

 
76.8

Income tax expense
 
13.3

 
24.4

Net income from discontinued operations
 
40.9

 
52.4

Net income from discontinued operation attributable to noncontrolling interest
 
16.8

 
22.3

Net income from discontinued operations attributable to controlling interest
 
$
24.1

 
$
30.1

Interest expense consists of interest from debt directly held by subsidiaries of the business held for sale, including interest from capital leases, and interest on term loans required to be paid down using proceeds received on disposal on sale of a business within 365 days with the exception for funds used for capital expenditures and acquisitions. There has been no impairment loss recognized as the fair value or expected proceeds from the disposal of the businesses is anticipated to be in excess of the asset carrying values.
Energizer Holdings, Inc.
On January 15, 2018, subsequent to the three months ended December 31, 2017, Spectrum Brands entered into a definitive acquisition agreement (the “GBL Sale Agreement”) with Energizer Holdings, Inc. (“Energizer”) pursuant to which Energizer has agreed to acquire from Spectrum Brands its GBL business for an aggregate purchase price of $2,000.0 in cash, subject to customary purchase price adjustments.

11


The GBL Sale Agreement provides that Energizer will purchase the equity of certain subsidiaries of Spectrum Brands, and acquire certain assets and assume certain liabilities of other subsidiaries used or held for the purpose of the GBL business.
In the GBL Sale Agreement, Spectrum Brands and Energizer have made customary representations and warranties and have agreed to customary covenants relating to the acquisition. Among other things, prior to the consummation of the acquisition, Spectrum Brands will be subject to certain business conduct restrictions with respect to its operation of the GBL business.
Spectrum Brands and Energizer have agreed to indemnify each other for losses arising from certain breaches of the GBL Sale Agreement and for certain other matters. In particular, Spectrum Brands has agreed to indemnify Energizer for certain liabilities relating to the assets retained by Spectrum Brands, and Energizer has agreed to indemnify Spectrum Brands for certain liabilities assumed by Energizer, in each case as described in the GBL Sale Agreement.
Spectrum Brands and Energizer have agreed to enter into related agreements ancillary to the acquisition that will become effective upon the consummation of the acquisition, including a customary transition services agreement and reverse transition services agreement.
The consummation of the acquisition is subject to certain customary conditions, including, among other things, (i) the absence of a material adverse effect on GBL, (ii) the expiration or termination of required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the receipt of certain other antitrust approvals in certain specified foreign jurisdictions (the conditions contained in (ii) and (iii) together, the “Antitrust Conditions”), (iv) the accuracy of the representations and warranties of the parties (generally subject to a customary material adverse effect standard (as described in the GBL Sale Agreement) or other customary materiality qualifications), (v) the absence of governmental restrictions on the consummation of the acquisition in certain jurisdictions, and (vi) material compliance by the parties with their respective covenants and agreements under the GBL Sale Agreement. The consummation of the transaction is not subject to any financing condition. The transaction is expected to be consummated prior to December 31, 2018.
The GBL Sale Agreement also contains certain termination rights, including the right of either party to terminate the GBL Sale Agreement if the consummation of the acquisition has not occurred on or before July 15, 2019 (the “Termination Date”). Further, if the acquisition has not been consummated by the Termination Date and all conditions precedent to Energizer’s obligation to consummate the acquisition have otherwise been satisfied except for one or more of the Antitrust Conditions, then Energizer would be required to pay Spectrum Brands a termination fee of $100.0.
The GBL business is part of Spectrum Brands’ GBA business, which also includes shared operations and assets of the remaining components of Spectrum Brands’ HPC business. Spectrum Brands is actively marketing its HPC business with interested parties for a separate transaction(s) expected to be entered into and consummated prior to December 31, 2018.

(4) Acquisition and Integration Costs
The following summarizes acquisition and integration costs for the three months ended December 31, 2017 and 2016:
 
Three months ended December 31,
 
2017
 
2016
Hardware & Home Improvement Business
$
2.7

 
$
1.9

PetMatrix
1.6

 

GloFish
0.4

 

Armored AutoGroup Parent Inc.
0.2

 
1.3

Other
0.3

 
0.1

Total acquisition and integration related charges
$
5.2

 
$
3.3

Acquisition and integration costs include costs directly associated with the completion of the purchase of net assets or equity interest of a business such as a business combination, equity investment, joint venture or purchase of non-controlling interest. Included costs include: transactions costs; advisory, legal, accounting, valuation, and other professional fees; and integration of acquired operations onto Spectrum Brands’ shared service platform and termination of redundant positions and locations.

(5) Restructuring and Related Charges
During the fiscal year ended September 30, 2017, Spectrum Brands implemented a rightsizing initiative within its 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 $8.8 has been incurred to date. The balance is anticipated to be incurred through September 30, 2018.
During the fiscal year ended September 30, 2017, Spectrum Brands implemented an initiative within its hardware and home improvement 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

12


initiative are expected to be approximately $55.0, of which $42.6 has been incurred to date. The balance is anticipated to be incurred through September 30, 2018.
During the fiscal year ended September 30, 2016, Spectrum Brands implemented a series of initiatives in its global auto care product category to consolidate certain operations and reduce operating costs (the “GAC Business Rationalization Initiatives”). These initiatives included headcount reductions and the exit of certain facilities. Total costs associated with these initiatives are expected to be approximately $35.0, of which $33.6 has been incurred to date. The balance is anticipated to be incurred through September 30, 2018.
Spectrum Brands is entering or may enter into small, less significant initiatives and restructuring activities to reduce costs and improve margins throughout the organization (“Other Restructuring Activities”). Individually these activities are not substantial, and occur over a shorter time period (less than 12 months).
The following table summarizes restructuring and related charges incurred during the three months ended December 31, 2017 and 2016, and where those charges are classified in the accompanying Condensed Consolidated Statements of Operations:
 
 
Three months ended December 31,
Initiatives:
 
2017
 
2016
HHI distribution center consolidation
 
$
15.2

 
$

GAC business rationalization initiative
 
4.0

 
1.5

Pet rightsizing initiative
 
0.6

 

Other restructuring activities
 
0.6

 
0.7

Total restructuring and related charges
 
$
20.4

 
$
2.2

Reported as:
 
 
 
 
Cost of goods sold
 
$
1.8

 
$
1.1

Selling, acquisition, operating and general expenses
 
18.6

 
1.1

The following table summarizes restructuring and related charges for the three months ended December 31, 2017 and 2016, and cumulative costs for current restructuring initiatives as of December 31, 2017, by cost type:
 
 
Three months ended December 31,
 
 
 
 
Cost Type:
 
2017
 
2016
 
Cumulative costs through December 31, 2017
 
Future costs to be incurred
Termination benefits
 
$
1.1

 
$
0.8

 
$
12.1

 
$
0.2

Other costs
 
19.3

 
1.4

 
73.9

 
16.0

Total restructuring and related charges
 
$
20.4

 
$
2.2

 
$
86.0

 
$
16.2

Termination benefits 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, cost to retrain employees to use newly deployed assets or systems, lease termination costs, and redundant or incremental transitional operating costs and customer fines and penalties during transition, among others.

(6) Receivables and Concentrations of Credit Risk
The allowance for uncollectible receivables as of December 31, 2017 and September 30, 2017 was $29.0 and $23.5, respectively. Spectrum Brands has a broad range of customers including many large retail outlet chains, three of which exceed 10% of consolidated “Net sales” and/or “Trade receivables, net”. These three customers represented 35.1% and 35.5% of Spectrum Brands’ “Net sales” for the three months ended December 31, 2017 and 2016, respectively; and 29.3% and 36.2% of “Trade receivables, net” in the accompanying Condensed Consolidated Balance Sheets at December 31, 2017 and September 30, 2017, respectively.


13


(7) Inventories, net
Inventories, net” in the accompanying Condensed Consolidated Balance Sheets consist of the following:
 
December 31,
2017
 
September 30,
2017
Raw materials
$
103.2

 
$
95.7

Work-in-process
51.1

 
35.5

Finished goods
426.4

 
365.1

Total inventories, net
$
580.7

 
$
496.3


(8) Property, Plant and Equipment, net
Property, plant and equipment, net in the accompanying Condensed Consolidated Balance Sheets consist of the following:
 
December 31,
2017
 
September 30,
2017
Land, buildings and improvements
$
149.3

 
$
146.6

Machinery, equipment and other
387.5

 
380.8

Capitalized leases
212.2

 
210.8

Construction in progress
45.7

 
40.4

Properties, plant and equipment at cost
794.7

 
778.6

Less: Accumulated depreciation
288.0

 
274.2

Total properties, plant and equipment, net
$
506.7

 
$
504.4

Depreciation expense from property, plant and equipment for the three months ended December 31, 2017 and 2016 was $18.1 and $14.9, respectively.

(9) Goodwill and Intangibles, net
A summary of the changes in the carrying amounts of Spectrum Brands’ goodwill and intangible assets are as follows:
 
 
 
Intangible Assets
 
Goodwill
 
Indefinite Lived
 
Definite Lived
 
Total
Balance at September 30, 2017
$
2,277.1

 
$
1,024.3

 
$
587.7

 
$
1,612.0

Periodic amortization

 

 
(15.0
)
 
(15.0
)
Effect of translation
(0.7
)
 
1.0

 
0.6

 
1.6

Balance at December 31, 2017
$
2,276.4

 
$
1,025.3

 
$
573.3

 
$
1,598.6

Goodwill and indefinite lived tradename intangibles are not amortized and are tested for impairment at least annually at the Company’s August financial period end, or more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests.
Definite Lived Intangible Assets
The carrying value and accumulated amortization for intangible assets subject to amortization as of December 31, 2017 and September 30, 2017 are as follows:
 
December 31, 2017
 
September 30, 2017
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Customer relationships
$
672.6

 
$
(232.4
)
 
$
440.2

 
$
671.7

 
$
(222.3
)
 
$
449.4

Technology assets
231.6

 
(101.2
)
 
130.4

 
194.6

 
(59.7
)
 
134.9

Tradenames
5.5

 
(2.8
)
 
2.7

 
18.5

 
(15.1
)
 
3.4

 
$
909.7

 
$
(336.4
)
 
$
573.3

 
$
884.8

 
$
(297.1
)
 
$
587.7


14


The range and weighted average useful lives for definite-lived intangible assets are as follows:
Asset Type
 
Range
 
Weighted Average
Customer relationships
 
2 to 20 years
 
17.9 years
Technology assets
 
6 to 18 years
 
11.4 years
Tradenames
 
5 to 13 years
 
6.2 years

Certain tradename intangible assets have an indefinite life and are not amortized. The balance of tradenames not subject to amortization was $1,025.3 and $1,024.3 as of December 31, 2017 and September 30, 2017, respectively. During the three months ended December 31, 2017 and 2016, the Company did not recognize an impairment on indefinite-lived intangible assets.
Amortization expense for the three months ended December 31, 2017 and 2016 was $15.0 and $15.4, respectively. 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
2018
 
$
57.5

2019
 
57.4

2020
 
55.0

2021
 
49.7

2022
 
48.0


(10) Debt
The Company’s consolidated debt consists of the following:
 
 
December 31, 2017
 
September 30, 2017
 
 
 
 
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
%
 
890.0

 
7.8
%
 
Fixed rate
HGI Funding
 
 
 
 
 
 
 
 
 
 
2017 Loan, due July 13, 2018
 
50.0

 
4.0
%
 
50.0

 
3.7
%
 
Variable rate, see below
HGI Energy
 
 
 
 
 
 
 
 
 
 
HGI Energy Notes, due June 30, 2018
 

 
%
 
92.0

 
1.5
%
 
Fixed rate
 
 
1,804.4

 
 
 
1,896.4

 
 
 
 
Spectrum Brands
 
 
 
 
 
 
 
 
 
 
USD Term Loan, due June 23, 2022
 
1,241.1

 
3.5
%
 
1,244.2

 
3.4
%
 
Variable rate, see below
CAD Term Loan, due June 23, 2022
 
34.3

 
5.0
%
 
59.0

 
4.9
%
 
Variable rate, see below
6.625% Notes, due November 15, 2022
 
570.0

 
6.6
%
 
570.0

 
6.6
%
 
Fixed rate
6.125% Notes, due December 15, 2024
 
250.0

 
6.1
%
 
250.0

 
6.1
%
 
Fixed rate
5.75% Notes, due July 15, 2025
 
1,000.0

 
5.8
%
 
1,000.0

 
5.8
%
 
Fixed rate
4.00% Notes, due October 1, 2026
 
507.6

 
4.0
%
 
500.9

 
4.0
%
 
Fixed rate
Revolver Facility, expiring March 6, 2022
 
226.0

 
4.1
%
 

 
%
 
Variable rate, see below
Other notes and obligations
 
4.0

 
8.0
%
 
4.7

 
8.0
%
 
Variable rate
Obligations under capital leases
 
200.7

 
5.7
%
 
200.0

 
5.7
%
 
Various
Salus
 
 
 
 
 
 
 
 
 
 
Unaffiliated long-term debt of consolidated variable-interest entity
 
77.0

 
%
 
28.9

 
%
 
Variable rate, see below
Long-term debt of consolidated variable-interest entity with FGL
 

 
%
 
48.1

 
%
 
Variable rate, see below
Total
 
5,915.1

 
 
 
5,802.2

 
 
 
 
Original issuance discounts on debt, net of premiums
 
(19.9
)
 
 
 
(20.7
)
 
 
 
 
Unamortized debt issue costs
 
(72.3
)
 
 
 
(76.1
)
 
 
 
 
Total debt
 
5,822.9

 
 
 
5,705.4

 
 
 
 
Less current maturities and short-term debt
 
934.5

 
 
 
161.4

 
 
 
 
Non-current portion of debt
 
$
4,888.4

 
 
 
$
5,544.0

 
 
 
 

15


HRG
On December 15, 2017, HRG issued a notice of redemption to redeem all $864.4 outstanding principal amount of its 7.875% Notes at a redemption price equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. The 7.875% Notes were redeemed on January 16, 2018. The 7.875% Notes were included in the current portion of long-term debt as of December 31, 2017.
HGI Funding
2017 Loan
On January 13, 2017, the Company, through a wholly-owned subsidiary of HGI Funding, entered into a loan agreement, pursuant to which it may borrow up to an aggregate amount of $150.0 (the “2017 Loan”). The 2017 Loan bears interest at an adjusted International Exchange London Interbank Offered Rate (“LIBOR”), plus 2.35% per annum, payable quarterly and a commitment fee of 75 bps. The 2017 Loan matures on July 13, 2018, with an option for early termination by the borrower. At December 31, 2017, the 2017 Loan was secured by 4.2 million shares of Spectrum Brands owned by a subsidiary of HGI Funding.
HGI Energy
On December 5, 2017, the Company paid off the $92.0 aggregate principal amount of the HGI Energy Notes, which were previously held by the Insurance Operations.
Spectrum Brands
Term Loans and Revolver Facility
The term loans and Revolver Facility due June 23, 2020 (“Revolver Facility”) are subject to variable interest rates, (i) the U.S. dollar denominated term loan facility (the “USD Term Loan”) is subject to either adjusted LIBOR, plus margin of 2.00% per annum, or a base rate plus margin of 1.00% per annum; (ii) the CAD term loan due June 23, 2022 (“CAD Term Loan”) is subject to either Canadian Dollar Offered Rate, subject to a 0.75% floor plus 3.50% per annum, or base rate with a 1.75% floor plus plus 2.50% per annum; (iii) the Revolver Facility is subject to either adjusted LIBOR plus margin ranging from 1.75% to 2.25% per annum, or base rate plus margin ranging from 0.75% to 1.25% per annum. As a result of borrowings and payments under the Revolver Facility, at December 31, 2017, Spectrum Brands had borrowing availability of $454.4, net of outstanding letters of credit of $18.0 and $1.5 allocated to a foreign subsidiary of Spectrum Brands.
Salus
In February 2013, September 2013 and February 2015, Salus completed a collateralized loan obligation (“CLO”) securitization of up to $578.5 notional aggregate principal amount. At December 31, 2017 and September 30, 2017, the outstanding notional aggregate principal amount of $77.0 and $28.9, respectively, was taken up by unaffiliated entities and consisted entirely of subordinated debt in both periods, and $48.1 was taken up by FGL and included in “Current assets of businesses held for sale” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2017. The obligations of the securitization is secured by the assets of the variable interest entity, primarily asset-based loan receivables and carry residual interest subject to maintenance of certain covenants. Due to losses incurred in the CLO, at December 31, 2017 and September 30, 2017, the CLO was not accruing interest on the subordinated debt.

(11) 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 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 December 31, 2017 and September 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 gain estimated to be reclassified from AOCI into earnings over the next 12 months is $0.1, net of tax. Spectrum Brands’ interest rate swaps financial instruments at December 31, 2017 and September 30, 2017 were as follows:
 
 
December 31, 2017
 
September 30, 2017
 
 
Notional Amount
 
Remaining Years
 
Notional Amount
 
Remaining Years
Interest rate swaps - fixed
 
$
300.0

 
2.3
 
$
300.0

 
2.6

16


Commodity Swaps. Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically 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 December 31, 2017, Spectrum Brands had a series of brass swap contracts outstanding through June 2019. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $0.4, net of tax. Spectrum Brands had the following commodity swap contracts outstanding as of December 31, 2017 and September 30, 2017:
 
 
December 31, 2017
 
September 30, 2017
 
 
Notional
 
Contract Value
 
Notional
 
Contract Value
Brass swap contracts
 
1.2 Tons
 
$
6.4

 
1.3 Tons
 
$
6.6

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, Canadian Dollars (“CAD”) or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange rates 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 purchase price variance in “Cost of goods sold”, respectively, in the accompanying Condensed Consolidated Statements of Operations. At December 31, 2017, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through August 2019. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $0.5, net of tax. At December 31, 2017 and September 30, 2017, Spectrum Brands had foreign exchange derivative contracts designated as cash flow hedges with a notional value of $53.2 and $67.5, respectively.
Net Investment Hedge
On September 20, 2016, SBI issued €425.0 aggregate principal amount of 4.00% Notes due October 1, 2026 (“4.00% Notes”). Spectrum Brands’ 4.00% Notes are denominated in Euros and have been 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 December 31, 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 fair value 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 December 31, 2017, Spectrum Brands had a series of forward exchange contracts outstanding through January 2018. At December 31, 2017 and September 30, 2017, Spectrum Brands had $90.5 and $62.9, respectively, of notional value of such foreign exchange derivative contracts outstanding.

17


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
 
December 31,
2017
 
September 30,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
 
Deferred charges and other assets
 
$
2.1

 
$
0.4

Commodity swaps
 
Other receivables, net
 
0.9

 
0.6

Foreign exchange contracts
 
Other receivables, net
 
0.2

 
0.2

Interest rate swaps
 
Other receivables, net
 
0.1

 

Commodity swaps
 
Deferred charges and other assets
 
0.1

 

Total asset derivatives designated as hedging instruments
 
 
 
3.4

 
1.2

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Other receivables, net
 
0.4

 
0.3

Total asset derivatives
 
 
 
$
3.8

 
$
1.5

Liability Derivatives
 
Classification
 
December 31,
2017
 
September 30,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Accounts payable
 
$
1.3

 
$
2.3

Interest rate swaps
 
Other current liabilities
 
0.2

 
0.5

Foreign exchange contracts
 
Other long-term liabilities
 

 
0.3

Interest rate swaps
 
Accrued interest
 

 
0.2

Total liability derivatives
 
 
 
$
1.5

 
$
3.3

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 less than $0.1 as of December 31, 2017 and September 30, 2017.
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 December 31, 2017 and September 30, 2017, there was no cash collateral outstanding. In addition, as of December 31, 2017 and September 30, 2017, Spectrum Brands had no posted standby letters of credit related to such liability positions.

18


The following tables summarize the impact of derivative instruments in the accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016, pre-tax:
Three months ended December 31, 2017
 
Classification
 
Effective Portion
 
 
 
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Continuing Operations
Interest rate swaps
 
Interest expense
 
$
2.0

 
$
(0.3
)
Commodity swaps
 
Cost of goods sold
 
1.8

 
0.3

Net investment hedge
 
Other income, net
 
(6.6
)
 

Foreign exchange contracts
 
Net sales
 

 
0.1

Foreign exchange contracts
 
Cost of goods sold
 
2.0

 
0.2

 
 
 
 
$
(0.8
)
 
$
0.3

Three months ended December 31, 2016
 
Classification
 
Effective Portion
 
 
 
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Continuing Operations
Interest rate swaps
 
Interest expense
 
$
0.1

 
$
(0.3
)
Commodity swaps
 
Cost of goods sold
 
0.1

 

Net investment hedge
 
Other income, net
 
32.5

 

Foreign exchange contracts
 
Net sales
 
0.2

 

Foreign exchange contracts
 
Cost of goods sold
 
10.3

 
0.1

 
 
 
 
$
43.2

 
$
(0.2
)
For the three months ended December 31, 2017, Spectrum Brands had $1.2 of gains from commodity swaps and $4.1 of losses from foreign exchange contracts reclassified from AOCI to income from discontinued operations. For the three months ended December 31, 2016, Spectrum Brands had $0.8 of gains from commodity swaps and $4.2 of gains from foreign exchange contracts reclassified from AOCI to income from discontinued operations.
The following table summarizes the loss associated with derivative contracts not designated as hedges in the accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016:
 
 
 
 
Three months ended December 31,
 
 
Classification
 
2017
 
2016
Foreign exchange contracts
 
Other income, net
 
$
0.3

 
$
(2.1
)

(12) Fair Value of Financial Instruments
Spectrum Brands utilizes valuation techniques that attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. 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. Spectrum Brands has not changed its valuation techniques in measuring the fair value of any derivative assets and liabilities during the quarter.

19


The Company’s consolidated assets and liabilities measured at fair value are summarized according to the hierarchy previously described as follows:
 
December 31, 2017
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Derivative Assets
$

 
$
3.8

 
$

 
$
3.8

 
$

 
$
1.5

 
$

 
$
1.5

Derivative Liabilities

 
1.5

 

 
1.5

 

 
3.3

 

 
3.3

See Note 11, Derivative Financial Instruments, for additional detail.
Non-Recurring Fair Value Measurements
Goodwill, intangible assets and other long-lived assets are tested annually or more frequently if an event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).
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 instruments which are not measured at fair value in the accompanying Condensed Consolidated Balance Sheets are summarized as follows:
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Carrying Amount
Total debt
$

 
$
6,015.0

 
$

 
$
6,015.0

 
$
5,822.9

 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Carrying Amount
Total debt
$

 
$
5,839.3

 
$
92.0

 
$
5,931.3

 
$
5,705.4

The carrying value of cash and cash equivalents, receivables and payables approximate fair value due to their short duration and, accordingly, they are not presented in the tables above. The fair value of debt set forth above is generally based on quoted or observed market prices.

(13) Stock-Based Compensation
The Company recognized consolidated stock-based compensation expense of $4.2 and $9.5 during the three months ended December 31, 2017 and 2016, respectively. Stock-based compensation expense is principally included in “Selling, acquisition, operating and general expenses” in the accompanying Condensed Consolidated Statements of Operations.
A summary of stock option awards outstanding as of December 31, 2017 and related activity during the three months then ended are as follows (option amounts in thousands):
 
 
HRG
Stock Option Awards
 
Options
 
Weighted Average Exercise Price
 
Weighted
Average Grant
Date Fair Value
Stock options outstanding at September 30, 2017
 
3,976

 
$
9.69

 
$
3.88

Exercised
 
(113
)
 
12.25

 
4.82

Stock options outstanding at December 31, 2017
 
3,863

 
9.61

 
3.85

Stock options vested and exercisable at December 31, 2017
 
3,606

 
9.20

 
3.70

Stock options outstanding and expected to vest
 
3,863

 
9.61

 
3.85

A summary of restricted stock awards, restricted stock units and performance restricted stock units outstanding as of December 31, 2017 and related activity during the three months then ended, under HRG’s and Spectrum Brands’ incentive plans are as follows (share and unit amounts in thousands):

20


 
 
HRG
Restricted Stock Awards
 
Shares
 
Weighted
Average Grant
Date Fair Value
Nonvested restricted stock outstanding at September 30, 2017
 
143

 
$
13.36

Granted
 
24

 
16.85

Exercised / Released
 
(143
)
 
13.36

Nonvested restricted stock outstanding at December 31, 2017
 
24

 
16.85

 
 
HRG
 
Spectrum Brands
Restricted Stock Units
 
Units
 
Weighted
Average Grant
Date Fair Value
 
Units
 
Weighted
Average Grant
Date Fair Value
Restricted stock units outstanding at September 30, 2017
 

 
$

 
761

 
$
114.67

Granted
 

 

 
324

 
111.06

Vested/Exercised
 

 

 
(456
)
 
113.24

Forfeited or Expired
 

 

 
(2
)
 
123.78

Restricted stock units outstanding at December 31, 2017
 

 

 
627

 
113.82

A summary of warrants outstanding as of December 31, 2017 and related activity during the three months then ended, under HRG’s incentive plan are as follows (unit amounts in thousands):
 
 
HRG
Warrants
 
Units
 
Weighted Average Exercise Price
 
Weighted
Average Grant
Date Fair Value
Warrants outstanding at September 30, 2017
 
600

 
$
13.13

 
$
3.22

Warrants outstanding at December 31, 2017
 
600

 
13.13

 
3.22

Warrants outstanding and expected to vest
 
600

 
13.13

 
3.22

A summary of time-based and performance-based grants as of December 31, 2017 and related activity during the three months then ended, under HRG’s and Spectrum Brands’ incentive plans are as follows (share amounts in thousands):
 
 
HRG
 
Spectrum Brands
Time-based grants
 
Units
 
Weighted
Average Grant
Date Fair Value
 
Fair Value at Grant Date
 
Units
 
Weighted
Average Grant
Date Fair Value
 
Fair Value at Grant Date
Stock option awards
 

 
$

 
$

 

 
$

 
$

Restricted stock awards
 
24

 
16.85

 
0.4

 

 

 

Restricted stock units
 

 

 

 
92

 
113.29

 
10.4

Total time-based grants
 
24

 
 
 
$
0.4

 
92

 
 
 
$
10.4

 
 
Spectrum Brands
Performance-based grants
 
Units
 
Weighted
Average Grant
Date Fair Value
 
Fair Value at Grant Date
Vesting in less than 12 months
 

 
$

 
$

Vesting in 12 to 24 months
 
116

 
110.17

 
12.8

Vesting in more than 24 months
 
116

 
110.17

 
12.8

Total performance-based grants
 
232

 
110.17

 
$
25.6

Additional Disclosures
During the three months ended December 31, 2017, HRG’s stock option awards and HRG’s restricted stock awards with a total fair value of $2.7 vested. The total intrinsic value of HRG’s share options exercised during the three months ended December 31, 2017 was $0.5, for which HRG received cash of $1.4 in settlement.
Under HRG’s executive compensation plan for the three months ended December 31, 2017, executives will be paid in cash. In addition, at the discretion of the Board, executives may from time to time be granted stock, stock options, and shares of restricted stock.

21


As of December 31, 2017, HRG had $1.0 of total unrecognized compensation cost related to unvested share-based compensation agreements previously granted, which is expected to be recognized over a weighted-average period of 1.18 years.
The fair values of HRG’s restricted stock and restricted stock unit awards are determined based on the market price of HRG’s common stock on the grant date. The fair value of HRG’s stock option awards and warrants are determined using the Black-Scholes option pricing model.
The following assumptions were used in the determination of these grant date fair values for HRG’s options awarded using the Black-Scholes option pricing model:
 
Three months ended December 31, 2016
Risk-free interest rate
1.80% to 2.25%
Assumed dividend yield
—%
Expected option term
5.0 to 6.5 years
Volatility
35.1% to 37.5%
There is no comparative in the table above as there were no options granted during the three months ended December 31, 2017.
The weighted-average remaining contractual term of HRG’s outstanding stock option awards and warrants at December 31, 2017, was 4.06 years.
Spectrum Brands measures share-based compensation expense of restricted stock units based on the fair value of the awards, as determined by the market price of the Spectrum Brands’ shares on the grant date and recognizes these costs on a straight-line basis over the requisite service period of the awards. Certain of Spectrum Brands’ restricted stock units are performance-based awards that are dependent upon achieving specified financial metrics over a designated period of time. In addition to restricted stock units, Spectrum Brands also provides for a portion of its annual management incentive compensation plan to be paid in common stock of Spectrum Brands, in lieu of cash payment, and is considered a liability plan.
The total market value Spectrum Brands’ restricted stock units on the dates of the grants was approximately $36.0. The remaining unrecognized pre-tax compensation cost related to restricted stock units at December 31, 2017 was $43.4.

(14) Employee Benefit Obligations
Defined Benefit Plans
HRG
HRG has a noncontributory defined benefit pension plan (the “HRG Pension Plan”) covering certain of its former U.S. employees. During 2006, the HRG Pension Plan was frozen which caused all existing participants to become fully vested in their benefits.
Additionally, HRG has an unfunded supplemental pension plan (the “Supplemental Plan”) which provides supplemental retirement payments to certain former senior executives of HRG. The amounts of such payments equal the difference between the amounts received under the HRG Pension Plan and the amounts that would otherwise be received if HRG Pension Plan payments were not reduced as the result of the limitations upon compensation and benefits imposed by Federal law. Effective December 1994, the Supplemental Plan was frozen.
On November 15, 2017, the Company’s Board of Directors approved the termination of the HRG Pension Plan, which is a legacy plan. As of December 31, 2017 and September 30, 2017, the HRG Pension Plan’s projected benefit obligation was $15.4 and $15.6, respectively and the fair value of plan assets was $11.2 and $11.6, respectively. The HRG Pension Plan’s termination date is February 15, 2018. The Company expects to purchase annuity contracts in the third quarter of Fiscal 2018 to settle the Company’s obligations to the HRG Pension Plan’s participants. The Company accrued a $1.6 liability as of December 31, 2017 for the estimated additional cost to settle the HRG Pension Plan above the $4.2 unfunded benefit obligation amount.

(15) Income Taxes
For the three months ended December 31, 2017, the Company’s effective tax rate of 263.0% differed from the expected U.S. statutory tax rate of 35.0% and was significantly impacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35.0% to a flat 21.0% rate, effective January 1, 2018. During the three months ended December 31, 2017, Spectrum Brands recorded a provisional $206.7 tax benefit for revaluation of U.S. deferred tax assets and liabilities and a provisional $78.8 of income tax expense for the one-time deemed mandatory repatriation.
For the three months ended December 31, 2016, the Company’s effective tax rate of (15.4)% differed from the expected U.S. statutory tax rate of 35.0% and was impacted by U.S. pretax losses in the Company’s Corporate and Other segment where the tax benefits are not more-likely-than-not to be realized resulting in the recording of valuation allowance.

22


HRG
At December 31, 2017 and September 30, 2017, HRG had approximately $1,565.1 and $1,524.3, respectively, of gross U.S. Federal net operating loss (“NOL”) carryforwards (inclusive of $149.1 and $151.1, respectively, attributable to FGL’s non-life subsidiaries), which, if unused, will expire in tax years ending December 31, 2028 through 2037. At December 31, 2017 and September 30, 2017, HRG had approximately $423.1 and $315.9 of gross U.S. Federal capital loss carryforwards (inclusive of $15.0 and $15.0, respectively, attributable to FGL’s non-life subsidiaries), which, if unused, will expire in tax years December 31, 2019 through 2022. Approximately $387.9 of HRG’s gross U.S. Federal NOL is subject to limitations under Sections 382 of the Internal Revenue Code. The majority of HRG’s NOL and capital loss carryforwards have historically been subject to valuation allowances, as HRG concluded that all or a portion of the related tax benefits are not more-likely-than-not to be realized.
On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a dividends received deduction for dividends from foreign subsidiaries and imposing a tax on deemed repatriated accumulated earnings of foreign subsidiaries. The Tax Reform Act reduces the U.S. corporate income tax rate from a maximum of 35.0% to a flat 21.0% rate, effective January 1, 2018. HRG is a calendar year taxpayer, therefore HRG will be using the flat 21.0% rate for the January 1 to September 30, 2018 tax period and 35.0% for the October 1 to December 31, 2017 tax period. However, Spectrum Brands files its U.S. tax returns on a September fiscal year basis, its U.S. tax rate for Fiscal 2018 will be a blended rate of 24.53%. In response to the enactment of the Tax Reform Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 allows registrants to record provisional amounts during a one year measurement period in a manner similar to accounting for business combinations. The Company has followed the SAB 118 guidance.
As a result of the new corporate tax rate, HRG is required to account for the effects of the change in tax law on its deferred tax balances as of the December 22, 2017 enactment date. HRG revalued its deferred tax balances applying the 21.0% tax rate based on the rate at which the deferred tax balances are expected to reverse in the future. As a result, HRG recognized a $287.2 reduction of tax benefits attributable to its net deferred tax assets. The reduction in tax benefits was fully offset by a reduction in the deferred tax asset valuation allowance. Accordingly, the revaluation of deferred at 21.0% has no impact on the accompanying Condensed Consolidated Statements of Operations for HRG, excluding Spectrum Brands, for the three months ended December 31, 2017. HRG’s valuation allowance at December 31, 2017 and September 30, 2017 totaled $430.8 and $703.2, respectively, (inclusive of $34.4 and $58.1, respectively, attributable to FGL’s non-life subsidiaries). The decrease in HRG’s valuation allowance was primarily due to the reduction of HRG’s deferred tax assets and liabilities as a result of the change in U.S. Federal tax rate, which is discussed further above. 
Spectrum Brands
Spectrum Brands revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $206.7 tax benefit in its income from continuing operations for the three months ended December 31, 2017. Spectrum Brands determined the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because certain of the timing differences reversing at Spectrum Brands’ Fiscal 2018 blended rate must be estimated until the Fiscal 2018 reversing timing differences are known.
Spectrum Brands recognized the provisional tax impacts related to deemed repatriated earnings of $78.8 and the revaluation of deferred tax assets and liabilities mentioned above and included these amounts in the Condensed Consolidated Financial Statements for the three months ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions Spectrum Brands has made, additional regulatory guidance that may be issued, and actions Spectrum Brands may take as a result of the Tax Reform Act. The accounting is expected to be complete when the Fiscal 2018 U.S. corporate income tax return is filed in 2019.
As of December 31, 2017, Spectrum Brands recorded $41.4 of valuation allowance against its U.S. state NOLs. It is currently unclear which of the Tax Reform Act provisions will be adopted by U.S. states. State conformity to the provisions of the Tax Reform Act could have a material impact on the valuation allowance recorded on U.S. state NOLs.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). Spectrum Brands had an estimated $623.1 of undistributed foreign E&P subject to the deemed mandatory repatriation and recognized a provisional $78.8 of income tax expense in its net income from continuing operations for the three months ended December 31, 2017. The mandatory repatriation tax is payable over eight years. The repatriation tax liability is classified as “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2017. The provisional tax expense for the mandatory repatriation is based on currently available information and additional information needs to be prepared, obtained and analyzed in order to determine the final amount, including further analysis of certain foreign exchange gains or losses, earnings and profits, foreign tax credits, and estimated cash and cash equivalents as of the measurement dates in the Tax Reform Act. Tax effects for changes to these items will be recorded in a subsequent quarter, as discrete adjustments to Spectrum Brands’ income tax provision, once complete.

23


The Tax Reform Act provides for additional limitations on the deduction of business interest expense, effective with Spectrum Brands’ Fiscal 2019 tax year. Unused interest deductions can be carried forward and may be used in future years to the extent the interest limitation is not exceeded in those periods. It is possible that a portion of Spectrum Brands’ future U.S. interest expense could be nondeductible and impact Spectrum Brands’ effective tax rate.
The Tax Reform Act also contains additional limits on deducting compensation, including performance-based compensation, in excess of $1.0 paid to certain executive officers for any fiscal year, effective with Spectrum Brands’ Fiscal 2019 tax year. Spectrum Brands’ future compensation payments will be subject to these limits, which could impact Spectrum Brands’ effective tax rate.
Spectrum Brands continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) on Spectrum Brands, which are not effective until fiscal year 2019. Spectrum Brands has not recorded any impact associated with either GILTI or BEAT in the tax rate for the three months ended December 31, 2018. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or treating such taxes as a current-period expense when incurred. Due to the complexity of calculating GILTI under the new law, Spectrum Brands has not determined which method they will apply.
Spectrum Brands has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in the Condensed Consolidated Financial Statements for the three months ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions Spectrum Brands has made, additional regulatory guidance that may be issued, and actions Spectrum Brands may take as a result of the Tax Reform Act.

(16) Related Party Transactions
On October 16, 2017, the Company entered into an engagement letter with Jefferies LLC (“Jefferies”), a wholly owned subsidiary of Leucadia National Corporation (“Leucadia”) a significant stockholder of HRG. Pursuant to the Jefferies engagement letter (as amended, the “Jefferies Engagement Letter”), Jefferies agreed to act as co-advisor to the Company (with the other co-advisors acting as lead financial advisor to the Company) with respect to the Company’s review of strategic alternatives. Under the Jefferies Engagement Letter, Jefferies is entitled to receive up to a $3.0 transaction fee, which may be increased by another $1.0 at the sole discretion of the Company, and reimbursement for all reasonable out of pocket expenses incurred by Jefferies in connection therewith. In addition, the Company has agreed to indemnify Jefferies for certain liabilities in connection with such engagement.

(17) Commitments and Contingencies
Legal and Environmental Matters
The Company and its subsidiaries are involved in litigation and claims arising out of their prior businesses and arising in the ordinary course out of their current businesses, which include, among other things, indemnification and other claims and litigations involving HRG’s and its subsidiaries’ business practices, transactions, workers compensation matters, environmental matters, and personal injury claims. However, based on currently available information, including legal defenses available to the Company, and given the Company’s existing accruals and related insurance coverage, the Company does not believe that the outcome of these legal, environmental and regulatory matters will have a material effect on its financial position, results of operations or cash flows.
HRG
HRG is a defendant in various litigation matters, including litigation arising out of its legacy and/or disposed of businesses. HRG does not believe that any of the matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows. See discussion above under the heading “Legal and Environmental Matters”.
Spectrum Brands
Spectrum Brands is a defendant in various litigation matters generally arising out of the ordinary course of business. Spectrum Brands does not believe that any of the matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.
Environmental. Spectrum Brands has provided for the estimated costs of $4.3 and $4.4 as of December 31, 2017 and September 30, 2017, respectively, associated with environmental remediation activities at some of its current and former manufacturing sites. Spectrum Brands believes that any additional liability in excess of the amounts provided that may result from resolution of these matters, will not have a material adverse effect on the financial condition, results of operations or cash flows of Spectrum Brands.

24


Product Liability. Spectrum Brands may be named as a defendant in lawsuits involving product liability claims. Spectrum Brands has recorded and maintains an estimated liability in the amount of management’s estimate for aggregate exposure for such liabilities based upon probable loss from loss reports, individual cases, and losses incurred but not reported. As of December 31, 2017 and September 30, 2017, Spectrum Brands recognized $4.0 and $5.3 in product liability accruals, respectively, included in “Other current liabilities” in the accompanying Condensed Consolidated Balance Sheets. Spectrum Brands believes that any additional liability in excess of the amounts provided that may result from resolution of these matters, will not have a material adverse effect on the consolidated financial condition, results of operations or cash flows of Spectrum Brands.
Product Warranty. Spectrum Brands recognizes an estimated liability for standard warranty on certain products when revenue on the sale of the warranted products is recognized. Estimated warranty costs incorporate replacement parts, products and delivery, and are recorded as a cost of goods sold at the time of product shipment based on historical and projected warranty claim rates, claims experience and any additional anticipated future costs on previously sold products. Spectrum Brands recognized $5.7 and $5.4 of warranty accruals as of December 31, 2017 and September 30, 2017, respectively, included in “Other current liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Product Safety Recall. On June 10, 2017, Spectrum Brands initiated a voluntary safety recall of various rawhide chew products for dogs sold by Spectrum Brands due to possible chemical contamination. As a result, Spectrum Brands recognized a loss related to the recall of $7.3 for the three months ended December 31, 2017, which comprised of inventory write-offs of $1.6 for inventory at our distribution centers and production facilities that were considered obsolete and disposed, customer losses of $0.4 for returned or disposed product held by our customers, and $5.3 of incremental costs for disposal and operating costs during a temporary shutdown and subsequent start up of production facilities impacted by the recall. Spectrum Brands suspended production at facilities impacted by the product safety recall, completed a comprehensive manufacturing review and subsequently recommenced production during the fiscal year ended September 30, 2017. The impacted production facilities are subject to incremental costs during start-up requiring alternative treatment on affected product SKUs until appropriate regulatory approvals have been received. The amounts for customer losses reflect the cost of the affected products returned to or replaced by Spectrum Brands and the expected cost to reimburse customers for costs incurred by them related to the recall. The incremental costs incurred directly by Spectrum Brands do not include lost earnings associated with interruption of production at Spectrum Brands’ facilities, or the costs to put into place corrective and preventative actions at those facilities. Spectrum Brands’ estimates for losses related to the recall are provisional and were determined based on an assessment of information currently available and may be revised in subsequent periods as Spectrum Brands continues to work with its customers to substantiate claims received to date and any additional claims that may be received. There have been no lawsuits or claims filed against Spectrum Brands related to the recalled product.

(18) Segment Data
The Company follows the accounting guidance which establishes standards for reporting information about operating segments in interim and annual financial statements. 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 reporting segments: (i) Consumer Products and (ii) Corporate and Other. Refer to Note 20, Consolidating Financial Information, for disclosure of total assets for each segment.

25


The Company’s Corporate and Other segment includes the Company’s ownership of Salus, NZCH, HGI Funding and HGI Energy. The following schedules present the Company’s segment information for the three months ended December 31, 2017 and 2016:
 
 
Three months ended December 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Consumer Products
 
$
646.5

 
$
602.3

Corporate and Other
 

 

Total revenues
 
$
646.5

 
$
602.3

 
 
 
 
 
Operating income:
 
 
 
 
Consumer Products
 
$
34.0

 
$
61.5

Corporate and Other and eliminations
 
(7.4
)
 
(20.2
)
Consolidated operating income
 
26.6

 
41.3

Interest expense
 
(75.5
)
 
(78.7
)
Other income, net
 
1.0

 
1.0

Loss from continuing operations before income taxes
 
(47.9
)
 
(36.4
)
Income tax (benefit) expense
 
(126.0
)
 
5.6

Net income (loss) from continuing operations
 
78.1

 
(42.0
)
Income from discontinued operations, net of tax
 
500.8

 
302.8

Net income
 
578.9

 
260.8

Less: Net income attributable to noncontrolling interest
 
71.5

 
48.6

Net income attributable to controlling interest
 
$
507.4