Attached files
file | filename |
---|---|
EX-99.1 - EX-99.1 - Spectrum Brands Holdings, Inc. | y91550exv99w1.htm |
EX-23.1 - EX-23.1 - Spectrum Brands Holdings, Inc. | y91550exv23w1.htm |
EX-99.3 - EX-99.3 - Spectrum Brands Holdings, Inc. | y91550exv99w3.htm |
EX-99.4 - EX-99.4 - Spectrum Brands Holdings, Inc. | y91550exv99w4.htm |
8-K - FORM 8-K - Spectrum Brands Holdings, Inc. | y91550e8vk.htm |
EXHIBIT
99.2
Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This Managements Discussion and Analysis of Financial Condition and Results of Operations of
Harbinger Group Inc. (HGI, we, us, our and, collectively with its subsidiaries or as its
accounting predecessor prior to June 16, 2010, the Company) should be read in conjunction with
Selected Financial Data and our consolidated financial statements and related notes (the
Consolidated Financial Statements) included elsewhere in this Report. Certain statements we
make herein constitute forward-looking statements under the Private Securities Litigation Reform
Act of 1995. You should consider our forward-looking statements in light of our consolidated
financial statements, related notes, and other financial information appearing elsewhere in this
Report and our other filings with the Securities and Exchange Commission.
All references to Fiscal 2010, 2009 and 2008 refer to fiscal year periods ended September 30, 2010,
2009 and 2008, respectively.
HGI Overview
We are a holding company that is 93.3% owned by Harbinger Capital Partners Master Fund I, Ltd. (the
Master Fund), Global Opportunities Breakaway Ltd. and Harbinger Capital Partners Special
Situations Fund, L.P. (together, the Principal
Stockholders), not taking into account conversion of the
Series A Participating Convertible Preferred Stock (the
Preferred Stock) discussed below in Recent
Developments.
We are focused on obtaining controlling equity stakes in subsidiaries that operate across a
diversified set of industries. We view the acquisition of Spectrum Brands Holdings, Inc. (Spectrum
Brands) and Fidelity & Guaranty Life Holdings, Inc. (FGL, formerly Old Mutual U.S. Life
Holdings, Inc.), both discussed below under Recent Developments, as first steps in the
implementation of that strategy. We have identified the following six sectors in which we intend to
pursue investment opportunities: consumer products, insurance and financial products,
telecommunications, agriculture, power generation and water and natural resources.
In pursuing our strategy, we will utilize the investment expertise and industry knowledge of
Harbinger Capital, a multi-billion dollar private investment firm based in New York and an
affiliate of the Principal Stockholders. We believe that the team at Harbinger Capital has a track
record of making successful investments across various industries. We believe that our affiliation
with Harbinger Capital will enhance our ability to identify and evaluate potential acquisition
opportunities appropriate for a permanent capital vehicle. Our corporate structure provides
significant advantages compared to the traditional hedge fund structure for long-term holdings as
our sources of capital are longer term in nature and thus will more closely match our principal
investment strategy. In addition, our corporate structure provides additional options for funding
acquisitions, including the ability to use our common stock as a form of consideration.
Recent Developments
On November 15, 2010, we completed an offering of $350 million aggregate principal amount of
10.625% senior secured notes due 2015 (the 10.625% Notes). The net proceeds of the 10.625% Notes
have been subsequently used to acquire FGL on April 6, 2011, as discussed below.
On January 7, 2011, we acquired a 54.5% controlling interest in Spectrum Brands, a diversified
global branded consumer products company, by issuing approximately 119.9 million shares of our
common stock to the Principal Stockholders in exchange for approximately 27.8 million shares of
common stock of Spectrum Brands in a transaction we refer to as the Spectrum Brands Acquisition. As
a result, the Principal Stockholders own approximately 93.3% of our outstanding common stock, not taking into account conversion of the
Preferred Stock.
Spectrum Brands reflects the combination on June 16, 2010, of Spectrum Brands, Inc. (SBI), a
global branded consumer products company, and Russell Hobbs, Inc. (Russell Hobbs), a global
branded small appliance company, in a transaction we refer to as the SB/RH Merger. As a result of
the SB/RH Merger, Spectrum Brands issued an approximately 65% controlling financial interest to the Principal Stockholders and an
approximately 35% noncontrolling financial interest to other stockholders. Prior to the SB/RH
Merger, the Principal Stockholders owned approximately 40% and 100% of the outstanding common stock
of SBI and Russell Hobbs, respectively. Spectrum Brands shares of common stock trade on the New
York Stock Exchange under the symbol SPB.
1
Immediately prior to the Spectrum Brands Acquisition, the Principal Stockholders held the
controlling financial interests in both us and Spectrum Brands. As a result, the Spectrum Brands
Acquisition is considered a transaction between entities under common control under Accounting
Standards Codification (ASC) Topic 805 Business Combinations, and is accounted for similar
to the pooling of interest method. In accordance with the guidance in ASC Topic 805, the assets and
liabilities transferred between entities under common control are recorded by the receiving entity
based on their carrying amounts (or at the historical cost basis of the parent, if these amounts
differ). Although we are the issuer of shares in the Spectrum Brands Acquisition, during the
historical periods presented Spectrum Brands was an operating business and we were not. Therefore,
Spectrum Brands has been reflected as the predecessor and receiving entity in our financial
statements to provide a more meaningful presentation of the transaction to our stockholders.
Accordingly, our financial statements have been retrospectively adjusted to reflect as our
historical financial statements those of Spectrum Brands and SBI, and our assets and liabilities
have been recorded at the Principal Stockholders basis as of the date that common control was
first established (June 16, 2010). As SBI was the accounting acquirer in the SB/RH Merger, the
financial statements of SBI are included as our predecessor entity for periods preceding the SB/RH
Merger.
In connection with the Spectrum Brands Acquisition, we changed our fiscal year end from December 31
to September 30 to conform to the fiscal year end of Spectrum Brands.
On March 9, 2011, we acquired Harbinger F&G, LLC (formerly, Harbinger OM, LLC), a Delaware limited
liability company (HFG), and FS Holdco Ltd., a Cayman Islands exempted limited company (FS
Holdco), from the Master Fund under a transfer agreement (the Transfer Agreement) entered into
on March 7, 2011. As a result, we indirectly assumed the rights and obligations of HFG to acquire
all of the outstanding shares of capital stock of FGL and certain intercompany loan agreements
between OM Group (UK) Limited (OM Group) as lender, and FGL, as borrower, in consideration for
$350 million, which could be reduced by up to $50 million post closing if certain regulatory
approval is not received. FS Holdco Ltd. is a recently formed holding company, which is the
indirect parent company of Front Street Re, L
td. (Front Street), a recently formed Bermuda-based
reinsurer. Neither HFG nor FS Holdco has engaged in any business other than transactions
contemplated under the Transfer Agreement. See Note 17 to our Consolidated Financial Statements for
additional information regarding this transaction.
On April 6, 2011, we completed the acquisition of FGL for a cash purchase price of $350 million,
which could be reduced by up to $50 million post closing if certain regulatory approval is not
received, from OM Group in a transaction we refer to as the FGL Acquisition. We expect to incur
approximately $22 million of expenses related to this transaction, which include
reimbursements to the Master Fund of $13.3 million and a $5 million purchase price adjustment
re-characterized as an expense since OM Group made a $5 million expense reimbursement to the Master
Fund upon closing of the FGL Acquisition. As of April 30, 2011, FGL, through its insurance subsidiaries, is a provider of
fixed annuity products in the U.S., with approximately 790,000 policy holders in the U.S. and a
distribution network of approximately 300 independent marketing organizations representing
approximately 25,000 agents nationwide. At December 31, 2010,
FGL had approximately $16.7 billion in
investment assets. The FGL Acquisition will be accounted for under the acquisition method of
accounting. Accordingly, the results of FGLs operations will be included in our consolidated
financial statements commencing April 6, 2011. See Note 17 to our Consolidated
Financial Statements for additional information regarding this transaction.
On May 13, 2011, we issued 280,000 shares of Preferred Stock in a private placement for total gross proceeds of $280 million. The
Preferred Stock (i) is mandatorily redeemable for cash (or, if a holder does not elect cash,
automatically converted into common stock) on the seventh anniversary of issuance, (ii) is
convertible into our common stock at an initial conversion price of $6.50 per share, subject to
anti-dilution adjustments, (iii) has a liquidation preference of the greater of 150% of the
purchase price or the value that would be received if it were converted into common stock, (iv)
accrues a cumulative quarterly cash dividend at an annualized rate of 8% and (v) has a quarterly
non-cash principal accretion at an annualized rate of 4% that will be reduced to 2% or 0% if we
achieve specified rates of growth measured by increases in our net asset value. The Preferred Stock
is entitled to vote and to receive cash dividends and in-kind distributions on an as-converted basis
2
with the common stock. We expect to use the net proceeds of $269 million, net of
related fees and expenses of approximately $11 million, from the issuance of the Preferred Stock
for general corporate purposes, which may include acquisitions and other investments.
We currently operate in one segment: consumer products. Beginning in the third fiscal quarter of
2011, we will also operate in the insurance business as a result of the FGL Acquisition.
Consumer Products Business
Through Spectrum Brands, we are a diversified global branded consumer products company with
positions in seven major product categories: consumer batteries; pet supplies; home and garden
control products; electric shaving and grooming; small appliances; electric personal care; and
portable lighting.
We manufacture and market alkaline, zinc carbon and hearing aid batteries, herbicides, insecticides
and repellants and specialty pet supplies. We design and market rechargeable batteries,
battery-powered lighting products, electric shavers and accessories, grooming products and hair
care appliances. With the addition of Russell Hobbs we design, market and distribute a broad range
of branded small household appliances and personal care products. Our manufacturing and product
development facilities are located in the United States, Europe, Latin America and Asia.
Substantially all of our rechargeable batteries and chargers, shaving and grooming products, small
household appliances, personal care products and portable lighting products are manufactured by
third-party suppliers, primarily located in Asia.
We sell our products in approximately 120 countries through a variety of trade channels, including
retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and
original equipment manufacturers (OEMs) and enjoy strong name recognition in our markets under
the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80
years, and under the Tetra, 8-in-1, Spectracide, Cutter, Black & Decker, George Foreman, Russell
Hobbs, Farberware and various other brands.
Our Spectrum Value Model is at the heart of our operating approach. This model emphasizes
providing value to the consumer with products that work as well as or better than our competition
for a lower cost. We do this while also delivering higher retailer margins. We concentrate our
efforts to win at point of sale and on creating and maintaining a low-cost, efficient operating
structure.
Our operating performance is influenced by a number of factors including: general economic
conditions; foreign exchange fluctuations; trends in consumer markets; consumer confidence and
preferences; our overall product line mix, including pricing and gross margin, which vary by
product line and geographic market; pricing of certain raw materials and commodities; energy and
fuel prices; and our general competitive position, especially as impacted by our competitors
advertising and promotional activities and pricing strategies.
Chapter 11 Proceedings of SBI in Fiscal 2009
As a
result of substantial leverage, SBI determined that, absent a financial restructuring, it
would be unable to achieve future profitability or positive cash flows on a consolidated basis
solely from cash generated from operating activities or to satisfy certain of its payment
obligations as the same may become due and be at risk of not satisfying the leverage ratios to
which it was subject under its then existing senior secured term loan facility, which ratios became
more restrictive in future periods. Accordingly, on February 3, 2009, SBI, at the time a Wisconsin
corporation, and each of its wholly-owned U.S. subsidiaries (collectively, the Debtors) announced
that it had reached agreements with certain noteholders, representing, in the aggregate,
approximately 70% of the face value of its then outstanding senior subordinated notes, to pursue a
refinancing that, if implemented as proposed, would significantly reduce its outstanding debt. On
the same day, the Debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code, in the
Bankruptcy Court (the Bankruptcy Filing) and filed with the Bankruptcy Court a proposed plan of
reorganization (the Proposed Plan) that detailed the Debtors proposed terms for the refinancing.
The Chapter 11 cases were jointly administered by the Bankruptcy Court as Case No. 09-50455 (the
Bankruptcy Cases). The Bankruptcy Court entered a written order (the Confirmation Order) on
July 15, 2009 confirming the Proposed Plan (as so confirmed, the Plan). The term Predecessor
refers only to SBI prior to the Effective Date and
Successor refers to the
periods subsequent
to the Effective Date.
3
On the Effective Date the Plan became effective, and the Debtors emerged from Chapter 11 of the
Bankruptcy Code. Pursuant to and by operation of the Plan, on the Effective Date, all of the
Predecessors existing equity securities, including the existing common stock and stock options,
were extinguished and deemed cancelled. Spectrum Brands filed a certificate of incorporation
authorizing new shares of common stock. Pursuant to and in accordance with the Plan, on the
Effective Date, Spectrum Brands issued a total of 27,030,000 shares
of common stock and $218 million of 12%
Senior Subordinated Toggle Notes due 2019 (the 12% Notes) to holders of allowed claims with
respect to the Predecessors 8 1/2% Senior Subordinated Notes due
2013 (the 8 1/2 Notes), 7 3/8%
Senior Subordinated Notes due 2015 (the 7 3/8 Notes) and
Variable Rate Toggle Senior Subordinated Notes due 2013 (the Variable Rate Notes) (collectively,
the Senior Subordinated Notes). (See also Note 7, Debt, to our Consolidated Financial Statements
filed with this report.) Also on the Effective Date, Spectrum Brands
issued a total of 2,970,000 shares
of common stock to supplemental and sub-supplemental debtor-in-possession facility participants in
respect of the equity fee earned under the Debtors debtor-in-possession credit facility.
As a result of Spectrum Brands Bankruptcy Filing, Spectrum Brands was able to significantly reduce
its indebtedness. As a result of the SB/RH Merger, Spectrum Brands was able to further reduce its
outstanding debt leverage ratio. However, Spectrum Brands continues to have a significant amount of
indebtedness relative to its competitors and paying down outstanding indebtedness continues to be a
priority for it.
Accounting for Reorganization
Subsequent to the date of the Bankruptcy Filing (the Petition Date), Spectrum Brands financial
statements were prepared in accordance with ASC 852. ASC 852 does not change the application of
accounting principles generally accepted in the United States of
America (""GAAP'') in the preparation of Spectrum Brands consolidated financial statements. However, ASC 852
does require that financial statements, for periods including and subsequent to the filing of a
Chapter 11 petition, distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. In accordance with ASC 852 Spectrum
Brands has done the following:
| On the four column consolidated balance sheet as of August 30, 2009, which is included in Note 2, Voluntary Reorganization Under Chapter 11, to our Consolidated Financial Statements, separated liabilities that are subject to compromise from liabilities that are not subject to compromise; | ||
| On the accompanying Consolidated Statements of Operations, distinguished transactions and events that are directly associated with the reorganization from the ongoing operations of the business, by separately disclosing Reorganization items expense (income), net, consisting of the following: (i) Fresh-start reporting adjustments; (ii) Gain on cancelation of debt; and (iii) Administrative related reorganization items; and | ||
| Ceased accruing interest on the Predecessors then outstanding senior subordinated notes. |
Fresh-Start Reporting
As required by ASC 852, Spectrum Brands adopted fresh-start reporting upon emergence from Chapter
11 of the Bankruptcy Code as of its monthly period ended August 30, 2009 as is reflected in this
Report.
Since the reorganization value of the assets of the Predecessor immediately before the date of
confirmation of the Plan was less than the total of all post-petition liabilities and allowed
claims and the holders of the Predecessors voting shares immediately before confirmation of the
Plan received less than 50 percent of the voting shares of the
emerging entity, Spectrum Brands adopted
fresh-start reporting as of the close of business on August 30, 2009 in accordance with ASC 852.
The Consolidated Balance Sheet as of August 30, 2009 gives effect to allocations
to the carrying value of assets or amounts and classifications of liabilities that were necessary
when adopting fresh-start reporting.
Spectrum Brands analyzed the transactions that occurred during the two-day period from August 29,
2009, the day after the Effective Date, through August 30, 2009, the fresh-start reporting date,
and concluded that such transactions were not material individually or in the aggregate as they
represented less than one-percent of the total Net sales for the entire fiscal year ended September
30, 2009. As such, Spectrum Brands determined that August 30, 2009, would be an appropriate
fresh-start reporting date to coincide with its normal financial period close for the month of
August 2009. Upon adoption of fresh-start reporting, the recorded amounts of assets and liabilities
were adjusted to reflect their estimated fair values. Accordingly, the reported historical
financial statements of the
4
Predecessor prior to the adoption of fresh-start reporting for periods ended prior to August 30,
2009 are not comparable to those of the Successor.
Cost Reduction Initiatives
Spectrum Brands continually seeks to improve operational efficiency, match manufacturing capacity
and product costs to market demand and better utilize manufacturing
resources. Spectrum Brands has undertaken
various initiatives to reduce manufacturing and operating costs.
Fiscal 2009. In connection with Spectrum Brands announcement to reduce its headcount and exit
certain facilities in the U.S., the Company implemented a number of cost reduction initiatives (the
Global Cost Reduction Initiatives). These initiatives also included consultation, legal and
accounting fees related to the evaluation of its capital structure.
Fiscal 2008. In connection with Spectrum
Brands decision to exit its zinc carbon and alkaline
battery manufacturing and distribution facility in Ninghai, China, the Company undertook cost
reduction initiatives (the Ningbo Exit Plan). These initiatives include fixed cost savings by
integrating production equipment into the remaining production facilities and headcount reductions.
Fiscal 2007. In connection with the
Global Realignment Initiatives, Spectrum Brands undertook a
number of cost reduction initiatives, primarily headcount reductions, at the corporate and
operating levels including a headcount reduction of approximately 200 employees.
Spectrum Brands also implemented a series of Latin America Initiatives. These initiatives include
the reduction of certain manufacturing operations in Brazil and the restructuring of management,
sales, marketing and support functions. As a result, Spectrum Brands reduced headcount in Latin
America by approximately 100 employees.
Fiscal 2006. As a result of continued concern regarding the European economy, Spectrum Brands
announced a series of initiatives in the in Europe to reduce operating costs and rationalize its
manufacturing structure (the European Initiatives). These initiatives include the reduction of
certain operations at the Ellwangen, Germany packaging center and relocating those operations to
the Dischingen, Germany battery plant, transferring private label battery production at the
Dischingen, Germany battery plant to the manufacturing facility in China and restructuring the
sales, marketing and support functions. As a result, Spectrum Brands has reduced headcount in
Europe by approximately 350 employees or 24%.
5
Results of Operations
Fiscal Year Ended September 30, 2010 Compared to Fiscal Year Ended September 30, 2009
Fiscal 2010, when referenced within this Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) included in this Report, includes the results of
Spectrum Brands for the full year and the results of Russell Hobbs and HGI for the period of June
16, 2010 through September 30, 2010.
Fiscal 2009, when referenced within this MD&A included in this Report, includes the combined
results of the Predecessor for the period from October 1, 2008 through August 30, 2009 and the
Successor for the period from August 31, 2009 through
September 30, 2009.
Highlights of Consolidated Operating Results
Year over year historical comparisons are influenced by the Spectrum Brands Acquisition and the
acquisition of Russell Hobbs, which is included in our Fiscal 2010 Consolidated Statement of Operations from June 16, 2010, the date of the SB/RH Merger, through the end of the
period. The results of Russell Hobbs are not included in our Fiscal 2009 Consolidated Financial
Statements of Operations. See Note 15, Acquisition, to our Consolidated Financial Statements
filed with this Report for supplemental pro forma information providing additional year over year
comparisons of the impact of the acquisition. In addition, as a result of the HGI acquisition of
Spectrum Brands being accounted for similar to the pooling of interest method, we have included the
results of HGI from June 16, 2010, the date at which both HGI and Spectrum Brands were entities
under common control, through the end of the period. The results of HGI are not included in our
Fiscal 2009 results.
Net Sales. Net sales for Fiscal 2010 increased to $2,567 million from $2,231 million in Fiscal
2009, a 15% increase. Consolidated net sales by product line for Fiscal 2010 and 2009 are as
follows (in millions):
Fiscal Year | Increase | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Product line net sales |
||||||||||||
Consumer batteries |
$ | 866 | $ | 819 | $ | 47 | ||||||
Pet supplies |
566 | 574 | (8 | ) | ||||||||
Home and garden control products |
343 | 322 | 21 | |||||||||
Electric shaving and grooming products |
257 | 225 | 32 | |||||||||
Small appliances |
231 | | 231 | |||||||||
Electric personal care products |
216 | 211 | 5 | |||||||||
Portable lighting products |
88 | 80 | 8 | |||||||||
Total net sales to external customers |
$ | 2,567 | $ | 2,231 | $ | 336 | ||||||
Global consumer battery sales during Fiscal 2010 increased $47 million, or 6%, compared to Fiscal
2009, primarily driven by favorable foreign exchange impacts of $15 million coupled with increased
sales in North America and Latin America. The sales increase in North America was driven by
increased volume with a major customer and the increased sales in Latin America were a result of
increased specialty battery sales, driven by successfully leveraging Spectrum Brands value
proposition, that is, products that work as well as or better than its competitors, at a lower
price. These gains were partially offset by decreased consumer battery sales of $22 million in
Europe, primarily due to the continued exit of low margin private label battery sales.
Pet product sales during Fiscal 2010 decreased $8 million, or 1%, compared to Fiscal 2009. The
decrease of $8 million is attributable to decreased aquatics sales of $11 million and decreased
specialty pet products of $6 million, which was partially offset by the SB/RH Merger as it
accounted for a net sales increase of $6 million during Fiscal 2010. Also offsetting the decreases
was favorable foreign exchange impacts of $3 million. The $11 million decrease in aquatic sales is
due to decreases within the United States and Pacific Rim of $6 million and $5 million,
respectively, as a result of reduction in demand in this product category due to the macroeconomic
slowdown as we maintained our market share in the category. The $6 million decrease in companion
animal sales is due to a $9 million decline in the United States, primarily driven by a distribution
loss of at a major retailer of certain dog shampoo products and the impact of a product recall,
which was tempered by increases of $3 million in Europe.
6
Sales of home and garden control products during Fiscal 2010 versus Fiscal 2009 increased $21
million, or 6%. This increase is a result of additional sales to major customers that was driven by
incentives to retailers and promotional campaigns during the year in both lawn and garden control
products and household control products.
Electric shaving and grooming product sales during Fiscal 2010 increased $32 million, or 14%,
compared to Fiscal 2009 primarily due to increased sales within Europe of $25 million coupled with
favorable foreign exchange translation of $5 million. The increase in Europe sales is a result of
new product launches, pricing and promotions.
Small appliances contributed $231 million or 9% of total net sales for Fiscal 2010. This represents
sales related to Russell Hobbs from the date of the consummation of
the SB/RH Merger, June 16, 2010
through the close of Fiscal 2010.
Electric personal care product sales during Fiscal 2010 increased $5 million, or 2%, when compared
to Fiscal 2009. The increase of $5 million during Fiscal 2010 was attributable to favorable foreign
exchange impacts of $2 million coupled with modest sales increases within Latin America and North
America of $3 million and $1 million, respectively. These sales increases were partially offset by
modest declines in Europe of $2 million.
Sales of portable lighting products in Fiscal 2010 increased $8 million, or 10%, compared to Fiscal
2009 as a result of increases in North America of $3 million coupled with favorable foreign
exchange translation of $2 million. Sales of portable lighting products also increased modestly in
both Europe and Latin America.
Gross Profit. Gross profit for Fiscal 2010 was $921 million versus $816 million for Fiscal 2009.
Our gross profit margin for Fiscal 2010 decreased to 35.9% from 36.6% in Fiscal 2009. The decrease
in our gross profit margin is primarily a result of Spectrum Brands adoption of fresh-start
reporting upon emergence from Chapter 11 of the Bankruptcy Code. Upon the adoption of fresh-start
reporting, in accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations, (SFAS 141), inventory balances were revalued at August 30, 2009 resulting in an
increase in such inventory balances of $49 million. As a result of the inventory revaluation,
Spectrum Brands recognized $34 million in additional cost of goods sold during Fiscal 2010 compared
to $15 million of additional cost of goods sold recognized in Fiscal 2009. The impact of the
inventory revaluation was offset by lower Restructuring and related charges in Cost of goods sold
during Fiscal 2010, which included $7 million of Restructuring and related charges whereas Fiscal
2009 included $13 million of Restructuring and related charges. The Restructuring and related
charges incurred in Fiscal 2010 were primarily associated with cost reduction initiatives announced
in 2009. The $13 million of Restructuring and related charges incurred in Fiscal 2009 primarily
related to the shutdown of our Ningbo, China battery manufacturing facility. See Restructuring and
Related Charges below, as well as Note 14, Restructuring and Related Charges, to our Consolidated
Financial Statements for additional information regarding our restructuring
and related charges.
Selling, General & Administrative Expense. Selling, general and administrative
expenses (SG&A) for Fiscal 2010 totaled $668 million versus $568 million for Fiscal 2009. The
$100 million increase in SG&A for Fiscal 2010 versus Fiscal 2009 was partially driven by $52
million of SG&A for the addition of Russell Hobbs and $2 million of SG&A for the corporate expenses
at HGI, which are reflected commencing June 16, 2010 (the date that common control was first
established over Spectrum Brands and HGI) in the accompanying Consolidated Statements of Operations
for Fiscal 2010. Also included in SG&A for Fiscal 2010 was additional depreciation and
amortization as a result of the revaluation of Spectrum Brands long lived assets in connection
with its adoption of fresh-start reporting upon emergence from Chapter 11 of the Bankruptcy Code,
an increase of $14 million in stock compensation expense and an unfavorable foreign exchange
translation of $7 million.
Acquisition and integration related charges. Acquisition and integration
related charges include but are not limited to transaction costs such as banking, legal and accounting professional fees directly
related to the acquisition, termination and related costs for transitional and certain other
employees, integration related professional fees and other post business combination related
expenses associated with the SB/RH Merger and other acquisition related work at HGI. We incurred
$45 million of Acquisition and integration related charges during Fiscal 2010, which consisted of
the following: (i) $31 million of legal and professional fees; (ii) $10 million of employee
termination charges; and (iii) $4 million of integration costs. There were no comparable expenses
for Fiscal 2009.
7
Restructuring
and Related Charges.
The following table summarizes all restructuring and related charges we incurred in Fiscal
2010 and Fiscal 2009 (in millions):
2010 | 2009 | |||||||
Costs included in cost of goods sold: |
||||||||
Global Cost Reduction Initiatives: |
||||||||
Termination benefits |
$ | 2.6 | $ | 0.2 | ||||
Other associated costs |
2.3 | 2.3 | ||||||
Ningbo Exit Plan: |
||||||||
Termination benefits |
| 0.9 | ||||||
Other associated costs |
2.1 | 8.6 | ||||||
Global Realignment Initiatives: |
||||||||
Termination benefits |
0.2 | 0.3 | ||||||
Other associated costs |
(0.1 | ) | 0.9 | |||||
Latin America Initiatives: |
||||||||
Termination benefits |
| 0.2 | ||||||
Total included in cost of goods sold |
$ | 7.1 | $ | 13.4 | ||||
Costs included in operating expenses: |
||||||||
Global Cost Reduction Initiatives: |
||||||||
Termination benefits |
$ | 4.3 | $ | 6.6 | ||||
Other associated costs |
9.3 | 11.3 | ||||||
Ningbo Exit Plan: |
||||||||
Other associated costs |
| 1.3 | ||||||
Global Realignment Initiatives: |
||||||||
Termination benefits |
5.4 | 7.1 | ||||||
Other associated costs |
(1.9 | ) | 3.5 | |||||
European Initiatives: |
||||||||
Termination benefits |
(0.1 | ) | | |||||
United & Tetra integration: |
||||||||
Termination benefits |
| 2.3 | ||||||
Other associated costs |
| 0.3 | ||||||
Total included in operating expenses |
$ | 17.0 | $ | 32.4 | ||||
Total restructuring and related charges |
$ | 24.1 | $ | 45.8 | ||||
As part of Spectrum
Brands Global Realignment Initiatives, it recorded approximately $4
million and $11 million of pretax restructuring and related charges during Fiscal 2010 and Fiscal
2009, respectively. Costs associated with these initiatives, which are expected to be incurred
through June 30, 2011, relate primarily to severance and are projected at approximately $89
million, of which less than $1 million is expected to be incurred
during the next fiscal year.
During Fiscal 2008,
Spectrum Brands implemented an initiative within the global batteries
and personal care product lines to reduce operating costs and
rationalize its manufacturing structure.
These initiatives, which are substantially complete, include the exit of the battery manufacturing
facility in Ningbo Baowang China (Ningbo) (the Ningbo Exit Plan). Spectrum Brands recorded
approximately $2 million and $11 million of pretax restructuring and related charges during Fiscal
2010 and Fiscal 2009, respectively, in connection with the Ningbo Exit Plan. They have recorded
pretax and restructuring and related charges of approximately $29 million since the inception of
the Ningbo Exit Plan.
During Fiscal 2009,
Spectrum Brands implemented a series of initiatives known as the Global
Cost Reduction Initiatives to reduce operating costs as well as evaluate opportunities to improve
its capital structure. These initiatives include headcount reductions and the exit of certain
facilities in the U.S. related to the pet supplies product line. These initiatives also
included consultation, legal and accounting fees related to the
evaluation of Spectrum Brands
8
capital structure. Spectrum Brands recorded $18 million and $20 million of pretax restructuring and
related charges during Fiscal 2010 and Fiscal 2009, respectively, related to the Global Cost
Reduction Initiatives. Costs associated with these initiatives, which are expected to be incurred
through March 31, 2014, are projected at approximately
$65 million, of which approximately $27 million are expected to
be incurred in future periods.
See Note 14, Restructuring and Related Charges, of our Consolidated Financial Statements for additional information regarding our restructuring and related charges.
See Note 14, Restructuring and Related Charges, of our Consolidated Financial Statements for additional information regarding our restructuring and related charges.
Goodwill and Intangibles Impairment. ASC 350 requires companies to test goodwill and
indefinite-lived intangible assets for impairment annually, or more often if an event or
circumstance indicates that an impairment loss may have been incurred. In Fiscal 2010 and 2009,
Spectrum Brands tested its goodwill and indefinite-lived intangible assets. As a result of this
testing, Spectrum Brands recorded a non-cash pretax impairment charge of $34 million in Fiscal
2009. The $34 million non-cash pretax impairment charge incurred in Fiscal 2009 reflects trade name
intangible asset impairments. See Note 6, Goodwill and Intangibles,
of our Consolidated Financial Statements for further details on this impairment
charge.
Interest Expense. Interest expense in Fiscal 2010 increased to $277 million from $190 million in
Fiscal 2009. The increase was driven primarily by the following unusual items: (i) $55 million
representing the write-off of the unamortized portion of discounts and premiums related to debt
that was paid off in conjunction with the refinancing of Spectrum Brands debt structure, a
non-cash charge; (ii) $13 million related to bridge commitment fees while these debts were being
refinanced; (iii) $7 million representing the write-off of the unamortized debt issuance costs
related to debt that was paid off, a non-cash charge; (iv) $4 million related to a prepayment
premium; and (v) $3 million related to the termination of a Euro-denominated interest rate swap.
Other
Expense (Income), net. Other expense (income), net was $12 million for Fiscal 2010. Fiscal
2010 included a $10 million expense for a foreign exchange loss recognized in connection with the
designation of Spectrum Brands Venezuelan subsidiary as being in a highly inflationary economy, as
well as the devaluation of Venezuelas currency. At January 4, 2010, the beginning of our second
quarter of Fiscal 2010, we determined that Venezuela meets the definition of a highly inflationary
economy under GAAP. As a result, beginning January 4, 2010, the U.S. dollar is the functional
currency for Spectrum Brands Venezuelan subsidiary. Accordingly, going forward, currency
remeasurement adjustments for this subsidiarys financial statements and other transactional
foreign exchange gains and losses are reflected in earnings. Through January 3, 2010, prior to
being designated as highly inflationary, translation adjustments related to the Venezuelan
subsidiary were reflected in stockholders equity as a component
of accumulated other comprehensive (loss) income.
In addition, on January 8, 2010, the Venezuelan government announced its intention
to devalue its currency, the Bolivar fuerte, relative to the U.S. dollar. The official exchange
rate for imported goods classified as essential, such as food and medicine, changed from 2.15 to
2.6 to the U.S. dollar, while payments for other non-essential goods moved to an exchange rate of
4.3 to the U.S. dollar. Some of our imported products fall into the essential classification and
qualify for the 2.6 rate; however, our overall results in Venezuela were reflected at the 4.3 rate
expected to be applicable to dividend repatriations beginning in the second quarter of Fiscal 2010.
As a result, we remeasured the local statement of financial position of our Venezuela entity during
the second quarter of Fiscal 2010 to reflect the impact of the devaluation. Based on actual
exchange activity, we determined on September 30, 2010 that the most likely method of exchanging
its Bolivar fuertes for U.S. dollars will be to formally apply with the Venezuelan government to
exchange through commercial banks at the SITME rate specified by the Central Bank of Venezuela. The
SITME rate as of September 30, 2010 was quoted at 5.3 Bolivar fuerte per U.S. dollar. Therefore, we
changed the rate used to remeasure Bolivar fuerte denominated transactions as of September 30, 2010
from the official non-essentials exchange rate to the 5.3 SITME rate in accordance with ASC 830,
Foreign Currency Matters as it is the expected rate that exchanges of Bolivar fuerte to U.S.
dollars will be settled. There is also an immaterial ongoing impact related to measuring our
Venezuelan statement of operations at the new exchange rate of 5.3 to the U.S. dollar.
Reorganization Items. During Fiscal 2010, Spectrum Brands, in connection with its reorganization
under Chapter 11 of the Bankruptcy Code, recorded Reorganization
items (expense), net of
approximately $(4) million, which primarily consisted of legal and professional fees. During Fiscal
2009, the Predecessor recorded Reorganization items income, net, which represents a gain
of approximately $1,143 million. Reorganization items (expense) income, net included the
following: (i) gain on cancellation of debt of $147 million; (ii) gains in connection with
fresh-start reporting adjustments of $1,088 million; (iii) legal
and professional fees of $(75) million; (iv) write off deferred financing costs related to the
Senior Subordinated Notes of $(11) million; and (v) a provision for rejected leases of $(6) million. During Fiscal 2009, Spectrum Brands
recorded Reorganization items (expense) income, net which represents
expense of $(4) million related to
professional
9
fees. See Note 2, Voluntary Reorganization Under Chapter 11, of our Consolidated
Financial Statements included in this Report for more information related to the reorganization
under Chapter 11 of the Bankruptcy Code.
Income Taxes. We reported a consolidated provision for income taxes, despite a pretax loss from
continuing operations, reflecting an effective rate of (47.8%) for the year ended September 30, 2010. Such rate differs from the
U.S. Federal statutory rate of 35% principally due to (i) deferred income tax provision related to
the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax
purposes but not for book purposes, (ii) pretax losses in the United States and some foreign
jurisdictions for which no tax benefit can be recognized due to full valuation allowances we have
provided on our net operating loss carryforward tax benefits and other deferred tax assets and
(iii) pretax income in other jurisdictions that is subject to tax.
Our effective tax rate on pretax income or losses from continuing operations was approximately 2.0%
for the Predecessor and (256)% for the Successor during Fiscal 2009. The primary drivers of the differences in the
effective rates as compared to the U.S. statutory rate of 35% were the fresh-start reporting valuation adjustment in the Fiscal 2009 Predecessor
period and residual taxes on the actual and deemed distribution of foreign earnings in the Fiscal 2009 Successor period.
As of September 30, 2010, Spectrum Brands has U.S. Federal and state net operating
loss carryforwards of approximately $1,087 million and $936 million, respectively. These net
operating loss carryforwards expire through years ending in 2031, and have foreign loss
carryforwards of approximately $195 million, which will expire beginning in 2011. Certain of the
foreign net operating losses have indefinite carryforward periods. Spectrum Brands is subject to an
annual limitation on the use of its U.S. net operating losses that arose prior to its emergence
from bankruptcy. Spectrum Brands has had multiple changes of ownership, as defined under Internal
Revenue Code (IRC) Section 382, that subject its U.S. federal and state net operating losses and
other tax attributes to certain limitations. The annual limitation is based on a number of factors
including the value of its stock (as defined for tax purposes) on the date of the ownership change,
net unrealized built in gain position on that date, the occurrence of realized built in gains in
years subsequent to the ownership change, and the effects of subsequent ownership changes (as
defined for tax purposes) if any. In addition, separate return year limitations apply to limit
Spectrum Brands utilization of the acquired Russell Hobbs U.S. Federal and state net operating
losses to future income of the Russell Hobbs subgroup. Based on these factors, Spectrum Brands
projects that $296 million of the total U.S. Federal and $463 million of the state net operating
loss will expire unused. In addition, Spectrum Brands projects that $38 million of the total
foreign net operating loss carryforwards will expire unused. A full valuation allowance has been
provided against these deferred tax assets.
Spectrum Brands recognized income tax expense of approximately $124 million related to the gain on
the settlement of liabilities subject to compromise and the modification of the senior secured
credit facility in the period from October 1, 2008 through August 30, 2009. This adjustment, net of
a change in valuation allowance is embedded in Reorganization items expense (income), net. In
accordance with the IRC Section 108, Spectrum Brands has reduced its net operating loss
carryforwards for cancellation of debt income that arose from its emergence from Chapter 11 of the
Bankruptcy Code under IRC Section 382 (1)(6).
The ultimate realization of Spectrum Brands deferred tax assets depends on its ability to generate
sufficient taxable income of the appropriate character in the future and in the appropriate taxing
jurisdictions. Spectrum Brands establishes valuation allowances for deferred tax assets when it
estimates it is more likely than not that the tax assets will not be realized. These estimates are
based on projections of future income, including tax planning strategies, in certain jurisdictions.
Changes in industry conditions and other economic conditions may impact the ability to project
future income. ASC Topic 740: Income Taxes (ASC 740) requires the establishment of a valuation
allowance when it is more likely than not that some portion or all of the deferred tax assets will
not be realized. In accordance with ASC 740, Spectrum Brands periodically assesses the likelihood
that its deferred tax assets will be realized and determine if adjustments to the valuation
allowance are appropriate.
HGIs valuation allowance at September 30, 2010 totaled $5 million principally due to our
inability to recognize an income tax benefit on our pretax losses during 2010.
10
Spectrum Brands total valuation allowance established for the tax benefit of deferred tax assets
that may not be realized is approximately $331 million at September 30, 2010. Of this amount,
approximately $300 million relates to U.S. net deferred tax assets and approximately $31 million
relates to foreign net deferred tax assets. In connection with the SB/RH Merger, Spectrum Brands
established an additional valuation allowance of approximately $104 million related to acquired net
deferred tax assets as part of acquisition accounting. In 2009, the Predecessor recorded a
reduction in the valuation allowance against the U.S. net deferred tax asset exclusive of
indefinite lived intangible assets primarily as a result of utilizing net operating losses to
offset the gain on settlement of liabilities subject to compromise and the impact of the fresh
start reporting adjustments. Spectrum Brands recorded a reduction in the domestic valuation
allowance of $47 million as a reduction to goodwill as a result
of Spectrum Brands income. Total
valuation allowance established for the tax benefit of deferred tax assets that may not be realized
is approximately $133 million at September 30, 2009. Of this amount, approximately $109 million
relates to U.S. net deferred tax assets and approximately $24 million relates to foreign net
deferred tax assets. A non-cash deferred income tax charge of approximately $257 million was
recorded related to a valuation allowance against U.S. net deferred tax assets during Fiscal 2008.
Included in the total is a non-cash deferred income tax charge of approximately $4 million related
to an increase in the valuation allowance against our net deferred tax assets in China in
connection with the Ningbo Exit Plan. It was also determined that a valuation allowance was no
longer required in Brazil and thus a $31 million benefit was recoded to reverse the valuation
allowance previously established. Total valuation allowance, established for the tax benefit of
deferred tax assets that may not be realized, is approximately $496 million at September 30, 2008.
Of this amount, approximately $468 million relates to U.S. net deferred tax assets and
approximately $28 million relates to foreign net deferred tax assets.
ASC 350 requires companies to test goodwill and indefinite-lived intangible assets for impairment
annually, or more often if an event or circumstance indicates that an impairment loss may have been
incurred. During Fiscal 2009 Spectrum Brands recorded a non-cash pretax impairment charge of
approximately $34 million. The tax impact, prior to consideration of the current year valuation
allowance, of the impairment charges was a deferred tax benefit of approximately $13 million. See
Goodwill and Intangibles Impairment above, as well
as Note 6, Goodwill and Intangibles, of our Consolidated Financial Statements for additional information regarding these non-cash impairment charges.
In addition, Spectrum Brands income tax provision for the year ended September 30, 2010 reflects
the correction of a prior period error which increases income tax provision by approximately $6
million.
ASC 740, which clarifies the accounting for uncertainty in tax positions, requires that we
recognize in our financial statements the impact of a tax position, if that position is more likely
than not of being sustained on audit, based on the technical merits of the position. As a result,
we recognized no cumulative effect adjustment at the time of adoption. As of September 30, 2010 and
September 30, 2009, the total amount of unrecognized tax benefits that, if recognized, would affect
the effective income tax rate in future periods was $13 million and $8 million, respectively. See
Note 8, Income Taxes, of our Consolidated Financial Statements for
additional information.
Discontinued Operations. During Fiscal 2009, Spectrum Brands shut down its growing products line,
which included the manufacturing and marketing of fertilizers, enriched soils, mulch and grass
seed. Accordingly, the presentation herein of the results of continuing operations excludes growing
products for all periods presented. See Note 9, Discontinued Operations, of our Consolidated
Financial Statements for further details on the disposal of the growing
products line. The following amounts related to the growing products
line have been segregated from
continuing operations and are reflected as discontinued operations during Fiscal 2010 and Fiscal
2009, respectively (in millions):
2010 | 2009 | |||||||
Net sales |
$ | | $ | 31.3 | ||||
Loss from discontinued operations before income taxes |
$ | (2.5 | ) | $ | (90.9 | ) | ||
Income tax
expense (benefit) |
0.2 | (4.5 | ) | |||||
Loss from discontinued operations, net of tax |
$ | (2.7 | ) | $ | (86.4 | ) | ||
11
Noncontrolling Interest. The net loss attributable to noncontrolling interest of $46 million
in Fiscal 2010 reflects the 45.5% share of the net loss of Spectrum Brands from June 16, 2010 through September 30, 2010 attributable to the noncontrolling interest not owned by HGI. There were no
comparable amounts in the Fiscal 2009 Successor and Predecessor
periods since the net losses for those periods were entirely
attributable to the shareholders of the accounting predecessor, SBI.
Fiscal Year Ended September 30, 2009 Compared to Fiscal Year Ended September 30, 2008
Fiscal 2009, when referenced within this MD&A included in this Report, includes the combined
results of the Predecessor for the period from October 1, 2008 through August 30, 2009 and the
Successor for the period from August 31, 2009 through September 30, 2009.
Fiscal
2008, when referenced within this MD&A included in this Report, includes the results of the
Predecessor for the period from October 1, 2007 through September 30, 2008.
Net
Sales. Consolidated net sales by product line for Fiscal 2009 and 2008 are as follows (in millions):
Fiscal Year | Increase | |||||||||||
2009 | 2008 | (Decrease) | ||||||||||
Product line net sales |
||||||||||||
Consumer batteries |
$ | 819 | $ | 916 | $ | (97 | ) | |||||
Pet supplies |
574 | 599 | (25 | ) | ||||||||
Home and garden control products |
322 | 334 | (12 | ) | ||||||||
Electric shaving and grooming products |
225 | 247 | (22 | ) | ||||||||
Electric personal care products |
211 | 231 | (20 | ) | ||||||||
Portable lighting products |
80 | 100 | (20 | ) | ||||||||
Total net sales to external customers |
$ | 2,231 | $ | 2,427 | $ | (196 | ) | |||||
Global consumer battery sales during Fiscal 2009 decreased $97 million, or 11%, compared to Fiscal
2008, primarily driven by unfavorable foreign exchange impacts of $70 million coupled with
decreased consumer battery sales of $50 million and $15 million in Latin America and Europe,
respectively. These declines were partially offset by increased consumer battery sales, mainly
alkaline batteries, in North America of $38 million. The alkaline battery sales increase in North
America is mainly due to higher volume at a major customer coupled with new distribution. The
decreased consumer battery sales in Latin America is a result of a slowdown in
economic conditions in all countries and inventory de-stocking at retailers mainly in Brazil. Zinc
carbon batteries decreased $35 million while alkaline battery
sales were down $15 million in Latin
America. The decreased consumer battery sales within Europe are primarily attributable to the
decline in alkaline battery sales due to a slowdown in economic conditions and the continued
efforts to exit unprofitable or marginally profitable private label battery sales.
Pet supplies product sales during Fiscal 2009 decreased $25 million, or 4%, compared
to Fiscal 2008. The decrease of $25 million is primarily attributable to decreased aquatics sales
of $27 million coupled with unfavorable foreign exchange impacts of $11 million. These decreases
were partially offset by increases of $13 million within specialty pet products. The decrease in
aquatics sales of $27 million during Fiscal 2009 was attributable to declines in the U.S., Europe
and Pacific Rim of $14 million, $10 million and $3 million, respectively. The declines in the U.S.
were a result of decreased sales of large equipment, such as aquariums, driven by softness in this
product category due to the macroeconomic slowdown as we maintained our market share in the
category. The declines in Europe were due to inventory de-stocking at retailers and weak filtration
product sales, both a result of the slowdown in economic conditions. The declines the Pacific Rim
were also a result of the slowdown in economic conditions. The increase of $13 million in specialty
pet products is a result of increased sales of our Dingo brand dog treats coupled with price
increases on select products, primarily in the U.S.
Sales
of home and garden control products decreased $12 million during Fiscal 2009 versus Fiscal 2008, or 4%, primarily due to retail customers managing their inventory levels to unprecedented
low levels, combined with such retailers ending their outdoor lawn and garden control season six
weeks early as compared to prior year seasons and the decision to exit certain unprofitable or marginally profitable products. This decrease in sales
within lawn and garden control products was partially offset by increased sales of household insect
control products.
12
Electric shaving and grooming product sales during Fiscal 2009 decreased $22 million, or 9%,
compared to Fiscal 2008 primarily due to unfavorable foreign exchange translation of $19 million.
The decline of $3 million, excluding unfavorable foreign exchange, was due to a $7 million decrease
of sales within North America, which was partially offset by slight increases within Europe and
Latin America of $3 million and $1 million, respectively. The decreased sales of electric shaving
and grooming products within North America were a result of delayed inventory stocking at certain
major customers for the 2009 holiday season which in turn resulted in a delay of product shipments
that historically would have been recorded during the fourth quarter of the fiscal year. The increases within Europe and Latin America were driven by new product launches, pricing and
promotions.
Electric personal care product sales during Fiscal 2009 decreased $20 million, or 9%, when compared
to Fiscal 2008. The decrease of $20 million during Fiscal 2009 was attributable to unfavorable
foreign exchange impacts of $24 million and declines in North America of $7 million. These
decreases were partially offset by increases within Europe and Latin America of $8 million and $3
million, respectively. Similar to the electric shaving and grooming products sales, the decreased
sales of electric personal care products within North America was a result of delayed holiday
inventory stocking by customers which in turn resulted in a delay of product shipments that
historically would have been recorded during the fourth quarter of the fiscal year. The increased sales within Europe and Latin America were a result of successful product
launches, mainly in womens hair care.
Sales of portable lighting products in Fiscal 2009 decreased $20 million, or 20%, compared to
Fiscal 2008 as a result of unfavorable foreign exchange impacts of $5 million coupled with declines
in North America, Latin America and Europe of $9 million, $3 million and $1 million, respectively.
The decreases across all regions are a result of the slowdown in economic conditions and decreased
market demand.
Gross
Profit. Gross profit for Fiscal 2009 was $816 million versus $920 million for Fiscal 2008.
Our gross profit margin for Fiscal 2009 decreased to 36.6% from 37.9% in Fiscal 2008.
Gross profit was lower in Fiscal 2009 due to unfavorable foreign exchange impacts of $58 million.
As a result of the adoption of fresh-start reporting upon emergence from Chapter 11 of the
Bankruptcy Code, in accordance with SFAS No. 141, Business Combinations, (SFAS 141), inventory
balances were revalued as of August 30, 2009 resulting in an increase in such inventory balances of
$49 million. As a result of the inventory revaluation, Spectrum
Brands recognized $15 million in
additional cost of goods sold in Fiscal 2009. The remaining $34 million of the inventory
revaluation was recorded during the first quarter of Fiscal 2010. These inventory revaluation
adjustments are non-cash charges. In addition, in connection with the adoption of fresh-start
reporting, and in accordance with ASC 852, Spectrum Brands revalued
its properties as of August 30, 2009 which resulted in an increase to such assets of $34 million. As a
result of the revaluation of properties, during Fiscal 2009, Spectrum Brands
incurred an additional $2 million of depreciation charges within cost of goods sold. See Note 2, Voluntary Reorganization Under
Chapter 11, of our Consolidated Financial Statements for more
information related to the reorganization under Chapter 11 of the Bankruptcy Code and fresh-start
reporting. Offsetting the unfavorable impacts to gross margin, Spectrum Brands incurred $13 million
of Restructuring and related charges, within Costs of goods sold, during Fiscal 2009, compared to
$16 million in Fiscal 2008. The $13 million in Fiscal 2009 primarily related to the 2009 Cost
Reduction Initiatives and the Ningbo Exit Plan, while the Fiscal 2008 charges were primarily
related to the Ningbo Exit Plan. See Restructuring and Related Charges below for additional information regarding restructuring and related charges.
Selling, General & Administrative Expense. SG&A
for Fiscal 2009 totaled $568 million versus $695 million for Fiscal 2008. This $127 million
decrease in SG&A for Fiscal 2009 versus Fiscal 2008 was primarily driven by the positive impact
related to foreign exchange of $37 million in Fiscal 2009 coupled with the non-recurrence of a
charge in Fiscal 2008 of $18 million associated with the depreciation and
13
amortization related to the assets of the growing products line incurred as a result of the
reclassification of the growing products line from discontinued operations to continuing.
Restructuring
and Related Charges. The following table summarizes all restructuring and related charges we incurred in 2009 and 2008
(in millions):
2009 | 2008 | |||||||
Costs included in cost of goods sold: |
||||||||
Global Cost Reduction Initiatives: |
||||||||
Termination benefits |
$ | 0.2 | $ | | ||||
Other associated costs |
2.3 | | ||||||
Ningbo Exit Plan: |
||||||||
Termination benefits |
0.9 | 1.2 | ||||||
Other associated costs |
8.6 | 15.2 | ||||||
Global Realignment initiatives: |
||||||||
Termination benefits |
0.3 | 0.1 | ||||||
Other associated costs |
0.9 | 0.1 | ||||||
Latin America initiatives: |
||||||||
Termination benefits |
0.2 | | ||||||
Other associated costs |
| 0.3 | ||||||
European initiatives: |
||||||||
Termination benefits |
| (0.8 | ) | |||||
Other associated costs |
| 0.1 | ||||||
United & Tetra integration: |
||||||||
Other associated costs |
| 0.3 | ||||||
Total included in cost of goods sold |
$ | 13.4 | $ | 16.5 | ||||
Costs included in operating expenses: |
||||||||
Global Cost Reduction Initiatives: |
||||||||
Termination benefits |
$ | 6.6 | $ | | ||||
Other associated costs |
11.3 | | ||||||
Ningbo Exit Plan: |
||||||||
Other associated costs |
1.3 | | ||||||
Global Realignment: |
||||||||
Termination benefits |
7.1 | 12.3 | ||||||
Other associated costs |
3.5 | 7.5 | ||||||
Latin America initiatives: |
||||||||
Termination benefits |
| 0.1 | ||||||
United & Tetra integration: |
||||||||
Termination benefits |
2.3 | 2.0 | ||||||
Other associated costs |
0.3 | 0.9 | ||||||
Total included in operating expenses |
$ | 32.4 | $ | 22.8 | ||||
Total restructuring and related charges |
$ | 45.8 | $ | 39.3 | ||||
In
connection with the acquisitions of United Industries Corporation
(United)and Tetra Holding GmbH (Tetra) in Fiscal 2005, Spectrum Brands
implemented a series of initiatives to optimize the global resources of the combined companies.
These initiatives included: integrating all of Uniteds home and garden administrative services,
sales and customer service functions into our operations in Madison, Wisconsin; converting all
information systems to SAP; consolidating Uniteds home and garden manufacturing and distribution
locations in North America; rationalizing the North America supply chain; and consolidating
administrative, manufacturing and distribution facilities of our
global pet supplies business. In
addition, certain corporate functions were shifted to Spectrum Brands
then global headquarters in Atlanta, Georgia.
Spectrum Brands
14
recorded approximately $(1) million of restructuring and related charges during Fiscal 2009, to
adjust prior estimates and eliminate the accrual, and no charges during Fiscal 2008.
Effective October 1, 2006, Spectrum Brands suspended initiatives to integrate the activities
of the growing products line into the operations in Madison, Wisconsin. Spectrum Brands recorded $1
million of restructuring and related charges during Fiscal 2009 and de minimis restructuring and
related charges in Fiscal 2008 in connection with the integration of the United home and garden
business.
Integration activities within Global Pet Supplies were substantially complete as of September 30,
2007. Global Pet Supplies integration activities consisted primarily of the rationalization of
manufacturing facilities and the optimization of our distribution network. As a result of these
integration initiatives, two pet supplies facilities were closed in 2005, one in Brea, California
and the other in Hazleton, Pennsylvania, one pet supply facility was closed in 2006, in Hauppauge,
New York and one pet supply facility was closed in 2007 in Moorpark, California. Spectrum Brands
recorded approximately $2 million and $3 million of pretax restructuring and related charges during
Fiscal 2009 and Fiscal 2008, respectively.
Spectrum Brands has implemented a series of initiatives in Europe to reduce operating costs and
rationalize its manufacturing structure (the European Initiatives to reduce operating costs and
rationalize the manufacturing structure. These initiatives include the relocation of certain
operations at the Ellwangen, Germany packaging center to the Dischingen, Germany battery plant,
transferring private label battery production at our Dischingen, Germany battery plant to the
manufacturing facility in China and restructuring Europes sales, marketing and support functions.
In connection with the European Initiatives, Spectrum Brands recorded de minimis pretax
restructuring and related charges in Fiscal 2009 and approximately $(1) million in pretax
restructuring and related charges, representing the true-up of reserve balances, during Fiscal
2008.
Spectrum Brands has implemented a series of initiatives in Latin America to reduce operating costs
(the Latin American Initiatives). The initiatives include the reduction of certain manufacturing
operations in Brazil and the restructuring of management, sales, marketing and support functions.
Spectrum Brands recorded de minimis pretax restructuring and related charges during both Fiscal
2009 and Fiscal 2008 in connection with the Latin American Initiatives.
As part of Spectrum Brands Global Realignment Initiatives, it recorded approximately $11 million
and $20 million of pretax restructuring and related charges during Fiscal 2009 and Fiscal 2008,
respectively. Costs associated with these initiatives relate primarily to severance.
See Note 14, Restructuring and Related
Charges, of our
Consolidated Financial Statements for additional information regarding our
restructuring and related charges.
Goodwill and Intangibles Impairment. ASC 350 requires companies to test goodwill and
indefinite-lived intangible assets for impairment annually, or more often if an event or
circumstance indicates that an impairment loss may have been incurred. In Fiscal 2009 and 2008, we
tested our goodwill and indefinite-lived intangible assets. As a result of this testing, we
recorded a non-cash pretax impairment charge of $34 million and $861 million in Fiscal 2009 and
Fiscal 2008, respectively. The $34 million non-cash pretax impairment charge incurred in Fiscal
2009 reflects trade name intangible asset impairments. The $861 million non-cash pretax impairment
charge incurred in Fiscal 2008 reflects $602 million related to
the impairment of goodwill and $259
million related to the impairment of trade name intangible assets.
See Note 6, Goodwill and Intangibles, of our Consolidated
Financial Statements for further details on these impairment charges.
Interest Expense. Interest expense in Fiscal 2009 decreased to $190 million from $229 million in
Fiscal 2008. The decrease in Fiscal 2009 is primarily due to ceasing the accrual of interest on the
Predecessors Senior Subordinated Notes, partially offset by the accrual of the default interest on
our U.S. Dollar Term B Loan and Euro facility and ineffectiveness related to interest rate
derivative contracts. Contractual interest not accrued on the Senior
15
Subordinated Notes during Fiscal 2009 was $56 million. See Liquidity and Capital ResourcesDebt
Financing Activities and Note 7, Debt, of our Consolidated Financial Statements for additional information regarding our outstanding debt.
Reorganization Items. During Fiscal 2009, the Predecessor, in connection with Spectrum Brands
reorganization under Chapter 11 of the Bankruptcy Code, recorded Reorganization items income, net, which represents a gain of approximately $1,143 million. Reorganization items
expense (income), net included the following: (i) gain on cancellation of debt of $147 million;
(ii) gains in connection with fresh-start reporting adjustments of $1,088 million; (iii) legal
and professional fees of $(75) million; (iv) write off deferred financing costs related to the Senior
Subordinated Notes of $(11) million; and (v) a provision
for rejected leases of $(6) million. During
Fiscal 2009, Spectrum Brands recorded Reorganization items (expense), net which represents
expense of $(4) million related to professional fees. See Note 2, Voluntary Reorganization Under
Chapter 11, of our Consolidated Financial Statements for more
information related to our reorganization under Chapter 11 of the Bankruptcy Code.
Income
Taxes. Our effective tax rate on pretax income or loss from
continuing operations was approximately 2.0% for
the Predecessor and (256)% for the Successor during Fiscal 2009.
Our effective tax rate on pretax loss from continuing operations was approximately 1.0% for Fiscal 2008. The primary drivers of the
change in our effective rate for Spectrum Brand for Fiscal 2009 as compared to Fiscal 2008 relate
to residual income taxes recorded on the actual and deemed distribution of foreign earnings in
Fiscal 2009. The change in the valuation allowance related to these dividends was recorded against
goodwill as an adjustment for release of valuation allowance. The primary drivers for Fiscal 2008
include tax expense recorded for an increase in the valuation allowance associated with our net
U.S. deferred tax asset and the tax impact of the impairment charges.
We recognized income tax expense of approximately $124 million related to the gain on the
settlement of liabilities subject to compromise and the modification of the senior secured credit
facility in the period from October 1, 2008 through August 30, 2009. This adjustment, net of a
change in valuation allowance is embedded in Reorganization items
expense (income), net. In 2010, we
reduced our net operating loss carryforwards for any cancellation of debt income in accordance
with IRC Section 108 that arises from Spectrum Brands emergence from Chapter 11 of the Bankruptcy
Code under IRC Section 382 (1)(6).
In 2009, the Predecessor
recorded a reduction in the valuation allowance against the U.S. net deferred tax asset exclusive
of indefinite lived intangible assets primarily as a result of utilizing net operating losses to
offset the gain on settlement
16
of liabilities subject to compromise and the impact of the fresh start reporting adjustments.
Spectrum Brands recorded a reduction in the domestic valuation allowance of $47 million as a
reduction to goodwill as a result of the recognition of pre-fresh start deferred tax assets to
offset Spectrum Brands income. Our total valuation allowance established for the tax benefit of
deferred tax assets that may not be realized was approximately $133 million at September 30, 2009.
Of this amount, approximately $109 million relates to U.S. net deferred tax assets and
approximately $24 million related to foreign net deferred tax assets. We recorded a non-cash
deferred income tax charge of approximately $257 million related to a valuation allowance against
U.S. net deferred tax assets during Fiscal 2008. Included in the total is a non-cash deferred
income tax charge of approximately $4 million related to an increase in the valuation allowance
against our net deferred tax assets in China in connection with the Ningbo Exit Plan. We also
determined that a valuation allowance was no longer required in Brazil and thus recorded a $31
million benefit to reverse the valuation allowance previously established. Our total valuation
allowance, established for the tax benefit of deferred tax assets that may not be realized, was
approximately $496 million at September 30, 2008. Of this amount, approximately $468 million
related to U.S. net deferred tax assets and approximately $28 million related to foreign net
deferred tax assets.
ASC 350 requires companies to test goodwill and indefinite-lived intangible assets for impairment
annually, or more often if an event or circumstance indicates that an impairment loss may have been
incurred. During Fiscal 2009 and Fiscal 2008, we recorded non- cash pretax impairment charges of
approximately $34 million and $861 million, respectively. The tax impact, prior to consideration of
the current year valuation allowance, of the impairment charges was a deferred tax benefit of
approximately $13 million and $143 million, respectively. See Goodwill and Intangibles Impairment
above for additional information
regarding these non-cash impairment charges.
See Note 8, Income Taxes, of our Consolidated Financial Statements for additional information.
Discontinued
Operations. During Fiscal 2009, Spectrum Brands shut down the growing products, which
included the manufacturing and marketing of fertilizers, enriched soils, mulch and grass seed.
Accordingly, the presentation herein of the results of continuing operations excludes growing
products for all periods presented. See Note 9, Discontinued
Operations, of our Consolidated
Financial Statements for further details on the disposal of the growing
products The following amounts related to the growing products line have been segregated from continuing operations and are reflected as discontinued
operations during Fiscal 2009 and Fiscal 2008, respectively (in millions):
2009 | 2008 | |||||||
Net sales |
$ | 31.3 | $ | 261.4 | ||||
Loss from discontinued operations before income taxes |
$ | (90.9 | ) | $ | (27.1 | ) | ||
Income tax benefit |
(4.5 | ) | (2.1 | ) | ||||
Loss from discontinued operations, net of tax |
$ | (86.4 | ) | $ | (25.0 | ) | ||
In accordance with ASC 360, long-lived assets to be disposed of are recorded at the lower of
their carrying value or fair value less costs to sell. During Fiscal 2008, Spectrum Brands
recorded a non-cash pretax charge of $6 million in discontinued operations to reduce the carrying
value of intangible assets related to the growing products in order to reflect the estimated fair
value of this business.
On
November 1, 2007, Spectrum Brands sold the Canadian division of
the growing products line to a new
company formed by RoyCap Merchant Banking Group and Clarke Inc. Cash proceeds received at closing,
net of selling expenses, totaled approximately $15 million and was used to reduce outstanding debt.
These proceeds are included in net cash provided by investing activities of discontinued operations
in the Consolidated Statements of Cash Flows
17
included in this Report. On February 5, 2008, Spectrum Brands finalized the contractual working
capital adjustment in connection with this sale which increased the received proceeds by
approximately $1 million. As a result of the finalization of the contractual working capital
adjustments a loss on disposal of approximately $1 million, net of tax benefit, was recorded.
Accordingly, the presentation herein of the results of continuing operations excludes the Canadian
division of the growing products line for all periods presented. See Note 9, Discontinued Operations, of
our Consolidated Financial Statements for further details on this sale.
The
following amounts related to the Canadian division of the growing
products line have been segregated from continuing operations and are reflected as discontinued
operations during Fiscal 2008:
2008(A) | ||||
Net sales |
$ | 4.7 | ||
Loss from discontinued operations before income taxes |
$ | (1.9 | ) | |
Income tax benefit |
(0.7 | ) | ||
Loss from discontinued operations, net of tax |
$ | (1.2 | ) | |
(A) | Fiscal 2008 represents results from discontinued operations from October 1, 2007 through November 1, 2007, the date of sale. Included in the Fiscal 2008 loss is a loss on disposal of approximately $1 million, net of tax benefit. |
Liquidity and Capital Resources
HGI
HGIs liquidity needs are primarily for interest
payments on our 10.625% Notes (approximately $37 million per year)
and dividend payments on our Preferred Stock (approximately $22 million per year), professional fees
(including advisory services, legal and accounting fees), salaries and benefits, office rent, pension expense and insurance
costs. HGIs current source of liquidity is its cash, cash equivalents and investments. Because HGI has historically limited
its investments principally to U.S. Government instruments, HGI does not presently earn significant interest income. In the future,
HGI may expand its investment approach to include investments that will generate greater returns. HGI is exploring alternative
investment opportunities for its cash while it searches for acquisition opportunities. HGI expects its cash, cash equivalents
and investments to continue to be a source of liquidity except to the extent they may be used to fund the acquisition of
operating businesses or assets.
HGI is a holding company that is dependent on the proceeds realized
from investments and dividends or distributions from its subsidiaries as its primary source of cash. The ability of HGIs subsidiaries
to generate sufficient net income and cash flows to make upstream cash distributions is subject to numerous factors, including
restrictions contained in its subsidiaries financing agreements, availability of sufficient funds in such subsidiaries and applicable
state laws and regulatory restrictions. At the same time, HGIs subsidiaries may require additional capital to grow their businesses.
Such capital could come from HGI, retained earnings at the relevant subsidiary or from third-party sources. For example, Front Street will
require additional capital in order to engage in reinsurance transactions, including any possible transaction with FGL. We do not
expect to receive any dividends from Spectrum Brands through 2011. However, we do expect to receive future dividends from
FGL sufficient to fund the interest payments on the 10.625% Notes.
We
expect our cash, cash equivalents and investments ($140 million as of
September 30, 2010) to continue to be a
source of liquidity except to the extent they may be used to fund investments in operating businesses or assets.
Based on current levels of operations, HGI does not have any significant
capital expenditure commitments and management believes that its consolidated cash, cash equivalents and investments on hand will be
adequate to fund its operational and capital requirements for at least the next twelve months. Depending on the size and terms of future
acquisitions of operating businesses or assets, HGI may raise additional capital through the issuance of equity, debt, or both. There
is no assurance, however, that such capital will be available at the time, in the amounts necessary or with terms satisfactory to HGI.
Spectrum Brands
Spectrum Brands expects to fund its cash requirements, including
capital expenditures, interest and principal payments due in Fiscal 2011 through a combination of cash on hand ($171 million as of September 30, 2010)
and cash flows from
operations and available borrowings under its $300 million revolving credit facility (the ABL Revolving Credit Facility).
Going forward, its ability to satisfy financial and other covenants in its senior credit agreements and senior subordinated indenture
and to make scheduled payments or prepayments on its debt and other financial obligations will depend on its future financial and
operating performance. There can be no assurances that its business will generate sufficient cash flows from operations or that future
borrowings under the ABL Revolving Credit Facility will be available in an amount sufficient to satisfy its debt maturities or to
fund its other liquidity needs. In addition, the current economic crisis could have a further negative impact on its financial position,
results of operations or cash flows. Accordingly, Spectrum Brands has and expects it will continue to use a portion of available cash
to repay debt prior to expected maturity, for the purpose of improving its capital structure.
Discussion of Consolidated Cash Flows
Operating Activities. Net cash provided by operating activities was $51 million during Fiscal
2010 compared to $77 million during Fiscal 2009. Cash provided by operating activities from
continuing operations was $62 million during Fiscal 2010
compared to $98 million during Fiscal
2009. The $26 million decrease in cash provided by operating activities was primarily due to
payments of $47 million related to professional fees from Spectrum Brands Bankruptcy Filing and
$25 million of payments related to the SB/RH Merger. This was partially offset by an increase in
income from continuing operations after adjusting for non-cash items of $34 million in Fiscal 2010
compared to Fiscal 2009. Cash used by operating activities from discontinued operations was $11
million in Fiscal 2010 compared to a use of $22 million in Fiscal 2009. The operating activities of
discontinued operations were related to the growing products line. See Discontinued Operations,
above, as well as Note 9, Discontinued Operations, of our Consolidated Financial Statements
for further details on the disposal of the growing products line.
Investing Activities. Net cash provided by investing activities was $49 million for Fiscal 2010.
For Fiscal 2009 investing activities used cash of $20 million.
The $49 million of cash provided in
Fiscal 2010 was primarily due to $66 million of HGI cash added
to the consolidated balance sheet as of June 16, 2010 in
connection with the common control accounting for the Spectrum Brands
Acquisition and $26 million from the net maturities of certain
of HGIs investments. This has been
partially offset by $40 million in capital expenditures and $3 million of payments related to the
SB/RH Merger, net of cash acquired from Russell Hobbs. Net cash used in investing
activities in Fiscal 2009 relate to $9 million of cash paid in Fiscal 2009 related to performance
fees from the Microlite acquisition and $11 million of capital expenditures.
18
Financing
Activities.
In connection with the SB/RH Merger, on June 16, 2010 Spectrum Brands (i) entered into a $750
million Term Loan pursuant to a senior credit agreement (the Senior Credit Agreement), (ii)
issued $750 million in aggregate principal amount of 9.5% Senior Secured Notes (the 9.5% Notes)
and (iii) entered into the $300 million ABL Revolving Credit Facility. The proceeds from such
financing were used to repay its then-existing senior term credit facility (the Prior Term
Facility) and its then-existing asset based revolving loan facility, to pay fees and expenses in
connection with the refinancing and for general corporate purposes.
Senior Term Credit Facility
The
Term Loan had a maturity date of June 16, 2016. Subject to certain mandatory prepayment events,
the Term Loan is subject to repayment according to a scheduled amortization, with the final payment
of all amounts outstanding, plus accrued and unpaid interest, due at maturity. Among other things,
the Term Loan provides for a minimum Eurodollar interest rate floor of 1.5% and interest spreads
over market rates of 6.5%.
The Senior Credit Agreement contains financial covenants with respect to debt, including, but not
limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants,
pursuant to their terms, become more restrictive over time. In addition, the Senior Credit
Agreement contains customary restrictive covenants, including, but not limited to, restrictions on
our ability to incur additional indebtedness, create liens, make investments or specified payments,
give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets.
Pursuant to a guarantee and collateral agreement, Spectrum Brands and its domestic subsidiaries
have guaranteed their respective obligations under the Senior Credit Agreement and related loan
documents and have pledged substantially all of their respective assets to secure such obligations.
The Senior Credit Agreement also provides for customary events of default, including payment
defaults and cross-defaults on other material indebtedness.
The Term Loan was issued at a 2.00% discount and was recorded net of the $15 million amount
incurred. The discount is being amortized as an adjustment to the carrying value of principal with a
corresponding charge to interest expense over the remaining term of the Senior Credit Agreement.
During Fiscal 2010, Spectrum Brands recorded $26 million of fees in connection with the Senior
Credit Agreement. The fees are classified as Deferred charges and
other assets and are being amortized as an adjustment to interest
expense over the remaining term of the Senior Credit
Agreement.
At September 30, 2010, the aggregate amount outstanding under the Term Loan totaled $750 million.
At September 30, 2009, the aggregate amount outstanding under the Prior Term Facility totaled a
U.S. Dollar equivalent of $1,391 million, consisting of principal amounts of $973 million under the
U.S. Dollar Term B Loan, 255 million under the Euro Facility ($372 million at September 30, 2009)
as well as letters of credit outstanding under the L/C Facility totaling $46 million.
At September 30, 2010, Spectrum Brands was in compliance with all covenants under the Senior Credit
Agreement.
On February 1, 2011, Spectrum Brands completed the refinancing of our Term Loan, which had an
aggregate amount then outstanding of $680,000, with a new Senior Secured Term Loan facility (the New
Term Loan) at a lower interest rate. The New Term Loan, issued at par and with a maturity date of
June 17, 2016, includes an interest rate of LIBOR plus 4%, with a LIBOR minimum of 1%.
9.5% Notes
At September 30, 2010, Spectrum Brands had outstanding principal of $750 million under the 9.5%
Notes maturing June 15, 2018.
Spectrum Brands may redeem all or a part of the 9.5% Notes, upon not less than 30 or more than 60
days notice at specified redemption prices. Further, the indenture governing the 9.5% Notes (the
2018 Indenture) requires Spectrum Brands to make an offer, in cash, to repurchase all or a
portion of the applicable outstanding notes for a specified redemption price, including a
redemption premium, upon the occurrence of a change of control, as defined in such indenture.
The 2018 Indenture contains customary covenants that limit, among other things, the incurrence of
additional indebtedness, payment of dividends on or redemption or repurchase of equity interests,
the making of certain investments, expansion into unrelated businesses, creation of liens on
assets, merger or consolidation with another company, transfer or sale of all or substantially all
assets, and transactions with affiliates.
In addition, the 2018 Indenture provides for customary events of default, including failure to make
required payments, failure to comply with certain agreements or covenants, failure to make payments
on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency.
Events of default under the 2018 Indenture arising from certain events of bankruptcy or insolvency
will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other
event of default under the 2018 Indenture occurs and is continuing,
19
the trustee for the 2018 Indenture or the registered holders of at least 25% in the then
aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the
amounts due under those notes.
At September 30, 2010, Spectrum Brands was in compliance with all covenants under the 2018
Indenture.
The 9.5% Notes were issued at a 1.37% discount and were recorded net of the $10 million amount
incurred. The discount is being amortized as an adjustment to the carrying value of principal with a
corresponding charge to interest expense over the remaining term of the 9.5% Notes. During Fiscal
2010, Spectrum Brands recorded $21 million of fees in connection with the issuance of the 9.5%
Notes. The fees are classified as Deferred charges and other assets
and are being amortized as an
adjustment to interest expense over the remaining term of the 9.5% Notes.
12% Notes
On August 28, 2009, in connection with emergence from the voluntary reorganization under Chapter 11
and pursuant to the Plan, Spectrum Brands issued $218 million in aggregate principal amount of 12%
Notes maturing August 28, 2019. Semiannually, at Spectrum Brands option, it may elect to pay
interest on the 12% Notes in cash or as payment in kind, or PIK. PIK interest would be added to
principal upon the relevant semi-annual interest payment date. Under the Prior Term Facility,
Spectrum Brands agreed to make interest payments on the 12% Notes through PIK for the first three
semi-annual interest payment periods. As a result of the refinancing of the Prior Term Facility
Spectrum Brands is no longer required to make interest payments as payment in kind after the
semi-annual interest payment date of August 28, 2010. Effective with the payment date of August 28,
2010 Spectrum Brands gave notice to the trustee that the interest payment due February 28, 2011
would be made in cash. During Fiscal 2010, Spectrum Brands reclassified $27 million of accrued
interest from Other liabilities to principal in connection with the PIK provision of the
12% Notes.
Spectrum Brands may redeem all or a part of the 12% Notes, upon not less than 30 or more than 60
days notice, beginning August 28, 2012 at specified redemption prices. Further, the indenture
governing the 12% Notes requires Spectrum Brands to make an offer, in cash, to repurchase all or a portion of
the applicable outstanding notes for a specified redemption price, including a redemption premium,
upon the occurrence of a change of control, as defined in such indenture.
At September 30, 2010 and September 30, 2009, Spectrum Brands had outstanding principal of $245
million and $218 million, respectively, under the 12% Notes.
The indenture governing the 12% Notes (the 2019 Indenture), contains customary covenants that
limit, among other things, the incurrence of additional indebtedness, payment of dividends on or
redemption or repurchase of equity interests, the making of certain investments, expansion into
unrelated businesses, creation of liens on assets, merger or consolidation with another company,
transfer or sale of all or substantially all assets, and transactions with affiliates.
In addition, the 2019 Indenture provides for customary events of default, including failure to make
required payments, failure to comply with certain agreements or covenants, failure to make payments
on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency.
Events of default under the indenture arising from certain events of bankruptcy or insolvency will
automatically cause the acceleration of the amounts due under the 12% Notes. If any other event of
default under the 2019 Indenture occurs and is continuing, the trustee for the indenture or the
registered holders of at least 25% in the then aggregate outstanding principal amount of the 12%
Notes may declare the acceleration of the amounts due under those notes.
At September 30, 2010, Spectrum Brands was in compliance with all covenants under the 12% Notes.
Spectrum Brands, however, is subject to certain limitations as a result of its Fixed Charge
Coverage Ratio under the 2019 Indenture being below 2:1. Until the test is satisfied, Spectrum
Brands and certain of its subsidiaries are limited in their ability to make significant acquisitions
or incur significant additional senior credit facility debt beyond the Senior Credit Facilities.
Spectrum Brands does not expect its inability to satisfy the Fixed Charge Coverage Ratio test to
impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity
requirements of its existing businesses, although no assurance can be given in this regard.
In connection with the SB/RH Merger, Spectrum Brands obtained the consent of the note holders to certain
amendments to the 2019 Indenture (collectively, the Supplemental Indenture). The Supplemental
Indenture became effective upon the closing of the Merger. Among other things, the Supplemental
Indenture amended the definition of change in control to exclude the Principal Stockholders and their affiliates, including
HGI, and increased Spectrum Brands ability to incur indebtedness up to $1,850 million.
20
During Fiscal 2010 Spectrum Brands recorded $3 million of fees in connection with the consent. The
fees are classified as Deferred costs and other assets and are being amortized as an adjustment to interest
expense over the remaining term of the 12% Notes effective with the closing of the SB/RH Merger.
ABL Revolving Credit Facility
The ABL Revolving Credit Facility is governed by a credit agreement (the ABL Credit Agreement)
with Bank of America as administrative agent (the Agent). The ABL Revolving Credit Facility
consists of revolving loans (the Revolving Loans), with a portion available for letters of credit
and a portion available as swing line loans, in each case subject to the terms and limits described
therein.
The Revolving Loans may be drawn, repaid and reborrowed without premium or penalty. The proceeds of
borrowings under the ABL Revolving Credit Facility are to be used for costs, expenses and fees in
connection with the ABL Revolving Credit Facility, for working capital requirements of Spectrum Brands and
its subsidiaries, restructuring costs, and other general corporate purposes.
The ABL
Revolving Credit Facility carries an interest rate, at Spectrum Brands option, which is subject to
change based on availability under the facility, of either: (a) the base rate plus currently 2.75%
per annum or (b) the reserve-adjusted LIBOR rate (the Eurodollar Rate) plus currently 3.75% per
annum. No amortization will be required with respect to the ABL Revolving Credit Facility.
The ABL Credit Agreement contains various representations and warranties and covenants, including,
without limitation, enhanced collateral reporting, and a maximum fixed charge coverage ratio. The
ABL Credit Agreement also provides for customary events of default, including payment defaults and
cross-defaults on other material indebtedness.
At September 30, 2010, Spectrum Brands was in compliance with all covenants under the ABL Credit
Agreement.
During Fiscal 2010 Spectrum Brands recorded $10 million of fees in connection with the ABL
Revolving Credit Facility. The fees are classified as Deferred costs and other assets and are being amortized as
an adjustment to interest expense over the remaining life of the ABL Revolving Credit Facility.
As a result of borrowings and payments under the ABL Revolving Credit Facility at September
30, 2010, Spectrum Brands had aggregate borrowing availability of approximately $225 million, net
of lender reserves of $29 million.
At September 30, 2010, Spectrum Brands had outstanding letters of credit of $37 million under the ABL Revolving
Credit Facility.
Effective as of April 21, 2011, Spectrum Brands amended its
ABL Credit Agreement to include, without limitation, the following:
| The maturity date was extended to April 21, 2016 from June 16, 2014; | ||
| The interest margins were reduced to, depending on the average availability, either (i) base rate plus a margin equal to 1.00%, 1.25% or 1.50% per annum (previously 2.50%, 2.75% or 3.00%), as applicable, or (ii) LIBOR plus a margin equal to 2.00%, 2.25% or 2.50% per annum (previously 3.50%, 3.75% or 4.00%), as applicable; | ||
| The unused commitment fees payable by Spectrum Brands were reduced to (i) a rate per annum equal to 0.375% (previously 0.50%) when utilization equals or exceeds 50% of the aggregate commitments under the ABL Revolving Credit Facility and (ii) a rate per annum equal to 0.50% (previously 0.75%) when utilization is less than 50% of such commitments; | ||
| The covenants in respect of the administrative agents inspection rights and certain restrictions on liens, debt, acquisitions, accounts receivable dispositions, restricted payments and prepayments of subordinated debt were amended to be more favorable to, and generally allow greater operational flexibility for, Spectrum Brands; and | ||
| Amendments to allow for certain internal corporate restructuring transactions to be undertaken by Spectrum Brands. |
Interest Payments and Fees
In addition to principal payments on its Senior Credit Facilities, Spectrum Brands has annual
interest payment obligations of approximately $71 million in the aggregate under its 9.5% Notes and
annual interest payment obligations of approximately $29 million in the aggregate under its 12%
Notes. Spectrum Brands also incurs interest on its borrowings under the Senior Credit Facilities
and such interest would increase borrowings under the ABL Revolving Credit Facility if cash were
not otherwise available for such payments. Interest on the 9.5% Notes and interest on the 12% Notes
is payable semi-annually in arrears and interest under the Senior Credit Facilities is payable on
various interest payment dates as provided in the Senior Credit Agreement and the ABL Credit
Agreement. Interest is payable in cash, except that interest under the 12% Notes is required to be
paid by increasing the aggregate principal amount due under the subject notes unless Spectrum
Brands elects to make such payments in cash. Effective with the payment date of August 28, 2010,
Spectrum Brands elected to make the semi-annual interest payment scheduled for February 28, 2011 in
cash. Thereafter, Spectrum Brands may make semi-annual interest payments for the 12% Notes either
in cash or by further increasing the aggregate principal amount due under the notes subject to
certain conditions. Based on amounts currently outstanding under the Senior Credit Facilities, and
using market interest rates and foreign exchange rates in effect at September 30, 2010, Spectrum
Brands estimates annual interest payments of approximately $61 million in the aggregate under its
Senior Credit Facilities would be
21
required assuming no further principal payments were to occur and excluding any payments associated
with outstanding interest rate swaps. Spectrum Brands is required to pay certain fees in connection
with the Senior Credit Facilities. Such fees include a quarterly commitment fee of up to 0.75% on
the unused portion of the ABL Revolving Credit Facility and certain additional fees with respect to
the letter of credit subfacility under the ABL Revolving Credit Facility.
Off-Balance Sheet Arrangements
Throughout our history, we have entered into indemnifications in the
ordinary course of business with our customers, suppliers, service providers, business partners and in certain instances, when we
sold businesses. Additionally, we have indemnified our directors and officers who are, or were, serving at our request in such
capacities. Although the specific terms or number of such arrangements is not precisely known due to the extensive history of our
past operations, costs incurred to settle claims related to these indemnifications have not been material to our financial statements.
We have no reason to believe that future costs to settle claims related to our former operations will have a material impact on our
financial position, results of operations or cash flows.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2010 and the effect
such obligations are expected to have on our liquidity and cash flow
in future periods (in millions). The table
excludes other obligations that have been reflected on our Consolidated Balance Sheet as of September
30, 2010 included in this Report, such as pension obligations.
Payments Due by Period | ||||||||||||||||||||
2012 to | 2014 to | |||||||||||||||||||
Total | 2011 | 2013 | 2015 | After 2015 | ||||||||||||||||
Operating lease obligations (1) |
$ | 178 | $ | 35 | $ | 60 | $ | 34 | $ | 49 | ||||||||||
Debt, excluding capital lease obligations (2) |
1,759 | 20 | 74 | 78 | 1,587 | |||||||||||||||
Interest payments, excluding capital lease obligations |
1,132 | 163 | 320 | 307 | 342 | |||||||||||||||
Capital lease obligations (3) |
12 | 1 | 2 | 2 | 7 | |||||||||||||||
Letters of credit (4) |
53 | 48 | 2 | | 3 | |||||||||||||||
Total contractual obligations |
$ | 3,134 | $ | 267 | $ | 458 | $ | 421 | $ | 1,988 | ||||||||||
(1) | For more information concerning operating leases, see Note 12 to our Consolidated Financial Statements. | |
(2) | For more information concerning debt, see Note 7 to our Consolidated Financial Statements. | |
(3) | Capital lease payments due by fiscal year include executory costs and imputed interest. | |
(4) | Consists entirely of standby letters of credit that back the performance of certain entities under various credit facilities, insurance policies and lease arrangements. |
22
Seasonality
On a consolidated basis our financial results are approximately equally weighted
between quarters, however, sales of certain product categories tend to be seasonal. Sales in the
consumer battery, electric shaving and grooming and electric personal care product categories,
particularly in North America, tend to be concentrated in the December holiday season (our
first fiscal quarter). Demand for pet supplies products remains fairly constant throughout the
year. Demand for home and garden control products typically peaks during the first six months of
the calendar year (our second and third fiscal quarters). Small Appliances peaks from July
through December primarily due to the increased demand by customers in the late summer for
back-to-school sales and in the fall for the holiday season.
The seasonality of our sales during the last three fiscal years is as follows:
Percentage of Annual Sales
Fiscal Year Ended | ||||||||||||
September 30, | ||||||||||||
Fiscal Quarter Ended | 2010 | 2009 | 2008 | |||||||||
December |
23 | % | 25 | % | 24 | % | ||||||
March |
21 | % | 23 | % | 22 | % | ||||||
June |
25 | % | 26 | % | 26 | % | ||||||
September |
31 | % | 26 | % | 28 | % |
Critical Accounting Policies
Our Consolidated Financial Statements have been prepared in accordance with
GAAP and fairly present our financial position and results of operations. We believe the following
accounting policies are critical to an understanding of our financial statements. The application
of these policies requires managements judgment and estimates in areas that are inherently
uncertain.
Litigation
and Environmental Reserves
The establishment of litigation and environmental reserves requires judgments concerning the
ultimate outcome of pending claims against the Company and our subsidiaries. In applying judgment,
management utilizes opinions and estimates obtained from outside legal counsel to apply the
appropriate accounting for contingencies. Accordingly, estimated amounts relating to certain claims
have met the criteria for the recognition of a liability. Other claims for which a liability has
not been recognized are reviewed on an ongoing basis in accordance with accounting guidance. A
liability is recognized for all associated legal costs as incurred. Liabilities for litigation
settlements, environmental settlements, legal fees and changes in these estimated amounts may have
a material impact on our financial position, results of operations or cash flows.
If the actual cost of settling these matters, whether resulting from adverse judgments or
otherwise, differs from the reserves totaling $9.9 million we have accrued as of September 30,
2010, that difference will be reflected in our results of operations when the matter is resolved or
when our estimate of the cost changes.
Valuation of Assets and Asset Impairment
We evaluate certain long-lived assets to be held and used, such as property, plant and equipment
and definite-lived intangible assets for impairment based on the expected future cash flows or
earnings projections associated with such assets. Impairment reviews are conducted at the judgment
of management when it believes that a change in circumstances in the business or external factors
warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden
or consistent decline in the sales forecast for a product, changes in technology or in the way an
asset is being used, a history of operating or cash flow losses or an adverse change in legal
factors or in the business climate, among others, may trigger an impairment review. An assets
value is deemed impaired if the discounted cash flows or earnings projections generated do not
substantiate the carrying value of the asset. The estimation of such amounts requires managements
judgment with respect to revenue and expense growth rates, changes in working capital and selection
of an appropriate discount rate, as applicable. The use of different
23
assumptions would increase or decrease discounted future operating cash flows or earnings
projections and could, therefore, change impairment determinations.
ASC 350 requires companies to test goodwill and indefinite-lived intangible assets for impairment
annually, or more often if an event or circumstance indicates that an impairment loss may have been
incurred. In Fiscal 2010, Fiscal 2009 and Fiscal 2008, we tested our goodwill and indefinite-lived
intangible assets. As a result of this testing, Spectrum Brands recorded no impairment charges in
Fiscal 2010 and non-cash pretax impairment charges of $34 million and $861 million in Fiscal 2009
and Fiscal 2008, respectively.
We used a discounted estimated future cash flows methodology, third party valuations and negotiated
sales prices to determine the fair value of our reporting units (goodwill). Fair value of
indefinite-lived intangible assets, which represent trade names, was determined using a relief from
royalty methodology. Assumptions critical to our fair value estimates were: (i) the present value
factors used in determining the fair value of the reporting units and trade names or third party
indicated fair values for assets expected to be disposed; (ii) royalty rates used in our trade name
valuations; (iii) projected average revenue growth rates used in the reporting unit and trade name
models; and (iv) projected long-term growth rates used in the derivation of terminal year values.
We also tested fair value for reasonableness by comparison to our total market capitalization,
which includes both our equity and debt securities. These and other assumptions are impacted by
economic conditions and expectations of management and will change in the future based on period
specific facts and circumstances. In light of a sustained decline in market capitalization coupled
with the decline of the fair value of our debt securities, we also considered these factors in the
Fiscal 2008 annual impairment testing.
The fair value of the global batteries & personal care, global pet supplies, small appliances and
home and garden reporting units exceeded their carry values by 52%, 49%, 13% and 10%, respectively,
as of the date of the latest annual impairment testing.
See Note 3, Significant Accounting Policies and Practices, Note 4, Balance Sheet Detail -
Properties, Note 6, Goodwill and Intangibles, and Note 9, Discontinued
Operations, of our Consolidated Financial Statements for more information about these assets.
Revenue Recognition and Concentration of Credit Risk
We recognize revenue from product sales generally upon delivery to the customer or the shipping
point in situations where the customer picks up the product or where delivery terms so stipulate.
This represents the point at which title and all risks and rewards of ownership of the product are
passed, provided that: there are no uncertainties regarding customer acceptance; there is
persuasive evidence that an arrangement exists; the price to the buyer is fixed or determinable;
and collectability is deemed reasonably assured. We are generally not obligated to allow for, and
our general policy is not to accept, product returns for battery sales. We do accept returns in
specific instances related to our electric shaving and grooming, electric personal care, home and
garden, small appliances and pet supply products. The provision for customer returns is based on
historical sales and returns and other relevant information. We estimate and accrue the cost of
returns, which are treated as a reduction of net sales.
We enter into various promotional arrangements, primarily with retail customers, including
arrangements entitling such retailers to cash rebates from us based on the level of their
purchases, which require us to estimate and accrue the costs of the promotional programs. These
costs are generally treated as a reduction of net sales.
24
We also enter into promotional arrangements that target the ultimate consumer. Such arrangements
are treated as either a reduction of net sales or an increase in cost of sales, based on the type
of promotional program. The income statement presentation of our promotional arrangements complies
with ASC Topic 605: Revenue Recognition. Cash consideration, or an equivalent thereto, given to a
customer is generally classified as a reduction of net sales. If we provide a customer anything
other than cash, the cost of the consideration is classified as an expense and included in cost of
sales.
For all types of promotional arrangements and programs, we monitor our commitments and use
statistical measures and past experience to determine the amounts to be recorded for the estimate
of the earned, but unpaid, promotional costs. The terms of our customer-related promotional
arrangements and programs are tailored to each customer and are generally documented through
written contracts, correspondence or other communications with the individual customers.
We also enter into various arrangements, primarily with retail customers, which require us to make
an upfront cash, or slotting payment, to secure the right to distribute through such customer. We
capitalize slotting payments, provided the payments are supported by a time or volume based
arrangement with the retailer, and amortize the associated payment over the appropriate time or
volume based term of the arrangement. The amortization of slotting payments is treated as a
reduction in net sales and a corresponding asset is reported in Deferred charges and other assets
in our Consolidated Balance Sheets included in this Report.
Our trade receivables subject us to credit risk which is evaluated based on changing
economic, political and specific customer conditions. We assess these risks and make provisions for
collectability based on our best estimate of the risks presented and information available at the
date of the financial statements. The use of different assumptions may change our estimate of
collectability. We extend credit to our customers based upon an evaluation of the customers
financial condition and credit history and generally do not require collateral. Our credit terms
generally range between 30 and 90 days from invoice date, depending upon the evaluation of the
customers financial condition and history. We monitor our customers credit and financial
condition in order to assess whether the economic conditions have changed and adjust our credit
policies with respect to any individual customer as we determine appropriate. These adjustments may
include, but are not limited to, restricting shipments to customers, reducing credit limits,
shortening credit terms, requiring cash payments in advance of shipment or securing credit
insurance.
See Note 3, Significant Accounting Policies and Practices, of our Consolidated Financial Statements
for more information about our revenue recognition and credit policies.
Defined
Benefit Plan Assumptions
Our accounting for pension benefits is primarily based on a discount rate, expected and actual
return on plan assets and other assumptions made by management, and is impacted by outside factors
such as equity and fixed income market performance. Pension liability is principally the estimated
present value of future benefits, net of plan assets. In calculating the estimated present value of
future benefits, net of plan assets, we used discount rates of 3.8% to 13.6% in Fiscal
2010 and 5.0% to 11.8% in Fiscal 2009. These rates are based on market interest rates, and
therefore fluctuations in market interest rates could impact the amount of pension income or
expense recorded for these plans. Despite our belief that the estimates are reasonable for these
key actuarial assumptions, future actual results may differ from estimates, and these
differences could be material to future financial statements.
The discount rate enables a company to state expected future cash flows at a present value on the
measurement date. We have little latitude in selecting this rate as it is based on a review of
projected cash flows and on high-quality fixed income investments at the measurement date. A lower
discount rate increases the present value of benefit obligations and generally increases pension
expense. The expected long-term rate of return reflects the average rate of earnings expected on
funds invested or to be invested in the pension plans to provide for the benefits included in the
pension liability. We believe the discount rates used are reflective of the rates at which the
pension benefits could be effectively settled.
Pension expense is principally the sum of interest and service cost of the plan, less the expected
return on plan assets and the amortization of the difference between our assumptions and actual
experience. The expected return on plan
25
assets is calculated by applying an assumed rate of return to the fair value of plan assets. We
used expected returns on plan assets of 4.5% to 8.8% in Fiscal 2010 and 4.5% to 8.0% in Fiscal
2009. Based on the advice of our independent actuaries, we believe the expected rates of return are
reflective of the long-term average rate of earnings expected on the funds invested. If such
expected returns were overstated, it would ultimately increase future pension expense. Similarly,
an understatement of the expected return would ultimately decrease future pension expense. If plan
assets decline due to poor performance by the markets and/or interest rate declines our pension
liability will increase, ultimately increasing future pension expense.
Differences in actual experience or changes in the assumptions may materially affect our financial
position or results of operations. Actual results that differ from the actuarial assumptions are
accumulated and amortized over future periods and, therefore, generally affect recognized expense
and the recorded obligation in future periods.
See Note 10, Employee Benefit Plans, of our Consolidated Financial Statements for a more complete
discussion of employee benefit plans.
Restructuring and Related Charges
Restructuring charges are recognized and measured according to the provisions of ASC Topic 420:
Exit or Disposal Cost Obligations, (ASC 420). Under ASC 420, restructuring charges include, but
are not limited to, termination and related costs consisting primarily of severance costs and
retention bonuses, and contract termination costs consisting primarily of lease termination costs.
Related charges, as defined by us, include, but are not limited to, other costs directly associated
with exit and integration activities, including impairment of property and other assets,
departmental costs of full-time incremental integration employees, and any other items related to
the exit or integration activities. Costs for such activities are estimated by us after evaluating
detailed analyses of the cost to be incurred. We present restructuring and related charges on a
combined basis.
Liabilities from restructuring and related charges are recorded for estimated costs
of facility closures, significant organizational adjustment and measures undertaken by management
to exit certain activities. Costs for such activities are estimated by management after evaluating
detailed analyses of the cost to be incurred. Such liabilities could include amounts for items such
as severance costs and related benefits (including settlements of pension plans), impairment of
property and equipment and other current or long term assets, lease termination payments and any
other items directly related to the exit activities. While the actions are carried out as
expeditiously as possible, restructuring and related charges are estimates. Changes in estimates
resulting in an increase to or a reversal of a previously recorded liability may be required as
management executes a restructuring plan.
We report restructuring and related charges associated with manufacturing and related initiatives
in Cost of goods sold. Restructuring and related charges reflected in Cost of goods sold
include, but are not limited to, termination and related costs associated with manufacturing
employees, asset impairments relating to manufacturing initiatives and other costs directly related
to the restructuring initiatives implemented.
We report restructuring and related charges associated with administrative functions in
Restructuring and related charges, such as initiatives impacting sales, marketing, distribution
or other non-manufacturing related functions. Restructuring and related charges reflected in
Restructuring and related charges include, but are not limited to, termination and related costs,
any asset impairments relating to the administrative functions and other costs directly related to
the initiatives implemented.
The costs of plans to (i) exit an activity of an acquired company, (ii) involuntarily terminate
employees of an acquired company or (iii) relocate employees of an acquired company are measured
and recorded in accordance with the provisions of the ASC 805. Under ASC 805, if certain conditions
are met, such costs are recognized as a liability assumed as of the consummation date of the
purchase business combination and included in the allocation of the acquisition cost. Costs related
to terminated activities or employees of the acquired company that do not meet the conditions
prescribed in ASC 805 are treated as restructuring and related charges and expensed as incurred.
See Note 14, Restructuring and Related Charges, of our Consolidated Financial Statements for a more
complete discussion of our restructuring initiatives and related costs.
26
Loss Contingencies
Loss contingencies are recorded as liabilities when it is probable that a loss has been incurred
and the amount of the loss can be reasonably estimated. The outcome of existing litigation, the
impact of environmental matters and pending or potential examinations by various taxing authorities
are examples of situations evaluated as loss contingencies. Estimating the probability and
magnitude of losses is often dependent upon managements judgment of potential actions by third
parties and regulators. It is possible that changes in estimates or an increased probability of an
unfavorable outcome could materially affect our business, financial condition or results of
operations.
See further discussion in Note 12, Commitments and Contingencies, of
our Consolidated Financial Statements.
Deferred
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in the tax rates is recognized in earnings in the period that includes the enactment date.
Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain
items, and some historical transactions have income tax effects going forward. Accounting guidance
requires these future effects to be evaluated using current laws, rules and regulations, each of
which can change at any time and in an unpredictable manner.
In accordance with ASC 740, we establish valuation allowances for deferred tax assets when we
estimate it is more likely than not that the tax assets will not be realized. We base these
estimates on projections of future income, including tax-planning strategies, by individual tax
jurisdictions. Changes in industry and economic conditions and the competitive environment may
impact the accuracy of our projections. In accordance with ASC 740, during each reporting period we
assess the likelihood that our deferred tax assets will be realized and determine if adjustments to
the valuation allowance are appropriate. As a result of this assessment, during Fiscal 2009
Spectrum Brands recorded a reduction in the valuation allowance of approximately $363 million. Of
the $363 million total, $314 million was recorded as a non-cash deferred income tax benefit and $49
million as a reduction to goodwill. During Fiscal 2008 Spectrum Brands recorded a non-cash deferred
income tax charge of approximately $200 million related to increasing the valuation allowance
against our net deferred tax assets. As of September 30, 2010, our consolidated valuation allowance was $340 million.
We also apply the accounting guidance for uncertain tax positions which prescribes a minimum
recognition threshold a tax position is required to meet before being recognized in the financial
statements. It also provides information on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition. Accrued interest expense
and penalties related to uncertain tax positions are recorded in Benefit from (provision for)
income taxes. Our reserve for uncertain tax positions totaled $13.2 million as of September 30,
2010.
See
further discussion in Note 8, Income Taxes, of our Consolidated
Financial Statements.
We continually update and assess the facts and circumstances regarding these critical accounting
matters and other significant accounting matters affecting estimates in our financial statements.
27