SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 29,December 28, 2014
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34757
_________________________________________
Spectrum Brands Holdings, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
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Delaware | 27-2166630 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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3001 Deming Way Middleton, Wisconsin |
53562 |
(Address of principal executive offices) | (Zip Code) |
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(608) 275-3340 |
(Registrant’s telephone number, including area code) |
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N/A |
(Former name, former address and former fiscal year, if changed since last report.) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the Registrant’s common stock, $.01 par value, as of August 4, 2014,February 3, 2015, was 52,731,73453,247,073.
SPECTRUM BRANDS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED June 29,December 28, 2014
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3 | ||
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| 6 | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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12
PART I. FINANCIAL INFORMATION
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Financial Position
June 29,December 28, 2014 and September 30, 20132014
(Amounts in thousands,millions, except per share figures)
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| June 29, 2014 |
| September 30, 2013 |
| December 28, 2014 |
| September 30, 2014 | ||||
Assets |
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| (Unaudited) |
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| (Unaudited) |
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Current assets: |
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Cash and cash equivalents |
| $ | 85,142 |
| $ | 207,257 |
| $ | 408.4 |
| $ | 194.6 |
Receivables: |
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Trade accounts receivable, net of allowances $35,626 and $37,376, respectively |
| 523,628 |
| 481,313 | ||||||||
Trade accounts receivable, net of allowances $49.1 and $48.6, respectively |
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| 489.7 |
| 439.0 | |||||||
Other |
| 80,979 |
| 65,620 |
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| 87.1 |
| 76.3 | |||
Inventories |
| 734,823 |
| 632,923 |
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| 701.9 |
| 624.5 | |||
Deferred income taxes |
| 39,133 |
| 32,959 |
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| 31.7 |
| 36.7 | |||
Prepaid expenses and other |
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| 87,588 |
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| 62,833 |
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| 69.4 |
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| 63.5 |
Total current assets |
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| 1,551,293 |
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| 1,482,905 |
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| 1,788.2 |
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| 1,434.6 |
Property, plant and equipment, net of accumulated depreciation of $253,343 and $203,897, respectively |
| 440,398 |
| 412,551 | ||||||||
Property, plant and equipment, net of accumulated depreciation of $276.6 and $264.5, respectively |
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| 419.8 |
| 428.9 | |||||||
Deferred charges and other |
| 28,764 |
| 26,050 |
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| 37.4 |
| 37.3 | |||
Goodwill |
| 1,484,436 |
| 1,476,672 |
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| 1,464.9 |
| 1,469.6 | |||
Intangible assets, net |
| 2,136,166 |
| 2,163,166 |
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| 2,066.7 |
| 2,091.5 | |||
Debt issuance costs |
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| 56,085 |
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| 65,329 |
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| 55.0 |
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| 51.1 |
Total assets |
| $ | 5,697,142 |
| $ | 5,626,673 |
| $ | 5,832.0 |
| $ | 5,513.0 |
Liabilities and Shareholders' Equity |
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Current liabilities: |
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Current maturities of long-term debt |
| $ | 121,509 |
| $ | 102,921 |
| $ | 105.3 |
| $ | 96.7 |
Accounts payable |
| 419,551 |
| 525,519 |
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| 447.7 |
| 519.7 | |||
Accrued liabilities: |
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Wages and benefits |
| 74,322 |
| 82,056 |
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| 65.4 |
| 88.1 | |||
Income taxes payable |
| 16,702 |
| 32,613 |
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| 21.7 |
| 18.5 | |||
Accrued interest |
| 21,553 |
| 36,731 |
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| 21.3 |
| 35.4 | |||
Other |
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| 148,530 |
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| 172,530 |
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| 160.8 |
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| 157.3 |
Total current liabilities |
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| 802,167 |
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| 952,370 |
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| 822.2 |
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| 915.7 |
Long-term debt, net of current maturities |
| 3,215,100 |
| 3,115,942 |
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| 3,310.2 |
| 2,894.1 | |||
Employee benefit obligations, net of current portion |
| 84,859 |
| 96,612 |
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| 78.3 |
| 82.0 | |||
Deferred income taxes |
| 506,694 |
| 492,774 |
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| 507.4 |
| 513.2 | |||
Other |
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| 28,505 |
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| 28,879 |
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| 20.2 |
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| 21.2 |
Total liabilities |
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| 4,637,325 |
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| 4,686,577 |
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| 4,738.3 |
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| 4,426.2 |
Commitments and contingencies |
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Shareholders' equity: |
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Common stock, $.01 par value, authorized 200,000 shares; issued 54,151 and 53,579 shares, respectively; outstanding 52,710 and 52,210 shares |
| 542 |
| 535 | ||||||||
Common stock, $.01 par value, authorized 200.0 shares; issued 54.7 and 54.1 shares, respectively; outstanding 53.2 and 52.7 shares |
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| 0.5 |
| 0.5 | |||||||
Additional paid-in capital |
| 1,409,422 |
| 1,410,738 |
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| 1,446.3 |
| 1,433.4 | |||
Accumulated deficit |
| (315,068) |
| (435,911) |
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| (249.4) |
| (283.1) | |||
Accumulated other comprehensive loss |
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| (33,997) |
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| (38,521) |
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| (94.6) |
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| (63.1) |
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| 1,060,899 |
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| 936,841 |
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| 1,102.8 |
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| 1,087.7 |
Less treasury stock, at cost, 1,441 and 1,369 shares, respectively |
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| (44,339) |
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| (39,820) | ||||||
Less treasury stock, at cost, 1.5 and 1.4 shares, respectively |
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| (52.7) |
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| (44.3) | ||||||
Total shareholders' equity |
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| 1,016,560 |
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| 897,021 |
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| 1,050.1 |
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| 1,043.4 |
Noncontrolling interest |
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| 43,257 |
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| 43,075 |
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| 43.6 |
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| 43.4 |
Total equity |
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| 1,059,817 |
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| 940,096 |
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| 1,093.7 |
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| 1,086.8 |
Total liabilities and equity |
| $ | 5,697,142 |
| $ | 5,626,673 |
| $ | 5,832.0 |
| $ | 5,513.0 |
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
2
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Operations
For the three and nine month periods ended June 29, 2014 and June 30, 2013
(Unaudited)
(Amounts in thousands, except per share figures)
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| THREE MONTHS ENDED |
| NINE MONTHS ENDED | ||||||||
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| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||
Net sales |
| $ | 1,128,509 |
| $ | 1,089,825 |
| $ | 3,250,797 |
| $ | 2,947,849 |
Cost of goods sold |
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| 710,918 |
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| 706,053 |
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| 2,089,601 |
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| 1,949,332 |
Restructuring and related charges |
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| 554 |
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| 1,013 |
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| 3,328 |
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| 4,698 |
Gross profit |
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| 417,037 |
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| 382,759 |
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| 1,157,868 |
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| 993,819 |
Selling |
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| 171,841 |
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| 165,178 |
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| 501,759 |
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| 464,961 |
General and administrative |
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| 78,472 |
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| 70,429 |
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| 227,380 |
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| 197,587 |
Research and development |
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| 12,163 |
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| 11,486 |
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| 35,258 |
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| 31,517 |
Acquisition and integration related charges |
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| 2,671 |
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| 7,747 |
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| 14,455 |
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| 40,558 |
Restructuring and related charges |
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| 3,138 |
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| 12,232 |
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| 12,665 |
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| 23,038 |
Total operating expenses |
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| 268,285 |
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| 267,072 |
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| 791,517 |
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| 757,661 |
Operating income |
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| 148,752 |
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| 115,687 |
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| 366,351 |
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| 236,158 |
Interest expense |
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| 47,344 |
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| 61,516 |
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| 151,724 |
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| 191,758 |
Other expense, net |
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| 2,760 |
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| 2,613 |
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| 4,390 |
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| 7,941 |
Income from continuing operations before income taxes |
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| 98,648 |
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| 51,558 |
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| 210,237 |
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| 36,459 |
Income tax expense |
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| 20,554 |
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| 15,169 |
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| 43,841 |
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| 54,928 |
Net income (loss) |
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| 78,094 |
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| 36,389 |
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| 166,396 |
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| (18,469) |
Less: Net income attributable to non-controlling interest |
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| 39 |
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| 259 |
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| 242 |
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| 72 |
Net income (loss) attributable to controlling interest |
| $ | 78,055 |
| $ | 36,130 |
| $ | 166,154 |
| $ | (18,541) |
Basic earnings (loss) per share: |
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Weighted average shares of common stock outstanding |
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| 52,710 |
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| 52,136 |
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| 52,608 |
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| 51,992 |
Net income (loss) per share attributable to controlling interest |
| $ | 1.48 |
| $ | 0.69 |
| $ | 3.16 |
| $ | (0.36) |
Diluted earnings (loss) per share: |
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Weighted average shares and equivalents outstanding |
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| 53,010 |
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| 52,701 |
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| 52,908 |
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| 51,992 |
Net income (loss) per share attributable to controlling interest |
| $ | 1.47 |
| $ | 0.69 |
| $ | 3.14 |
| $ | (0.36) |
Cash dividends declared per common share |
| $ | 0.30 |
| $ | 0.25 |
| $ | 0.85 |
| $ | 0.50 |
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
3
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)Operations
For the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013
(Unaudited)
(Amounts in thousands)millions, except per share figures)
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| THREE MONTHS ENDED |
| NINE MONTHS ENDED | ||||||||
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| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||
Net income (loss) |
| $ | 78,094 |
| $ | 36,389 |
| $ | 166,396 |
| $ | (18,469) |
Other comprehensive income (loss), net of tax: |
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Foreign currency translation gain (loss) |
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| 8,444 |
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| (7,830) |
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| 5,594 |
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| (25,385) |
Unrealized gain (loss) on derivative hedging instruments |
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| (1,485) |
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| 1,780 |
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| (1,595) |
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| 2,858 |
Defined benefit pension gain (loss) |
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| 416 |
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| (52) |
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| 525 |
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| (348) |
Other comprehensive income (loss), net of tax |
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| 7,375 |
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| (6,102) |
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| 4,524 |
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| (22,875) |
Comprehensive income (loss) |
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| 85,469 |
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| 30,287 |
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| 170,920 |
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| (41,344) |
Less: Comprehensive income attributable to non-controlling interest |
|
| 47 |
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| 259 |
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| 478 |
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| 72 |
Comprehensive income (loss) attributable to controlling interest |
| $ | 85,422 |
| $ | 30,028 |
| $ | 170,442 |
| $ | (41,416) |
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| THREE MONTHS ENDED | ||||
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| 2015 |
| 2014 | ||
Net sales |
| $ | 1,067.8 |
| $ | 1,100.6 |
Cost of goods sold |
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| 697.4 |
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| 717.7 |
Restructuring and related charges |
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| 0.2 |
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| 1.7 |
Gross profit |
|
| 370.2 |
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| 381.2 |
Selling |
|
| 159.8 |
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| 164.2 |
General and administrative |
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| 68.3 |
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| 73.0 |
Research and development |
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| 11.2 |
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| 10.8 |
Acquisition and integration related charges |
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| 8.1 |
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| 5.5 |
Restructuring and related charges |
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| 7.2 |
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| 2.8 |
Total operating expenses |
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| 254.6 |
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| 256.3 |
Operating income |
|
| 115.6 |
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| 124.9 |
Interest expense |
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| 44.4 |
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| 57.0 |
Other expense, net |
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| 0.7 |
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| 0.8 |
Income from continuing operations before income taxes |
|
| 70.5 |
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| 67.1 |
Income tax expense |
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| 20.5 |
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| 12.7 |
Net income |
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| 50.0 |
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| 54.4 |
Less: Net income attributable to non-controlling interest |
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| 0.2 |
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| 0.1 |
Net income attributable to controlling interest |
| $ | 49.8 |
| $ | 54.3 |
Basic earnings per share: |
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Weighted average shares of common stock outstanding |
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| 52.8 |
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| 52.4 |
Net income per share attributable to controlling interest |
| $ | 0.94 |
| $ | 1.04 |
Diluted earnings per share: |
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Weighted average shares and equivalents outstanding |
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| 53.1 |
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| 52.7 |
Net income per share attributable to controlling interest |
| $ | 0.94 |
| $ | 1.03 |
Cash dividends declared per common share |
| $ | 0.30 |
| $ | 0.25 |
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
4
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Cash FlowsComprehensive Income (Loss)
For the nine three month periods ended June 29,December 28, 2014 and June 30,December 29, 2013
(Unaudited)
(Amounts in thousands)millions)
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| NINE MONTHS ENDED | ||||
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| 2014 |
| 2013 | ||
Cash flows from operating activities: |
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Net income (loss) |
| $ | 166,396 |
| $ | (18,469) |
Adjustments to reconcile net income (loss) to net cash used by operating activities, net of effects of acquisitions: |
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Depreciation |
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| 56,375 |
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| 42,618 |
Amortization of intangibles |
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| 61,233 |
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| 57,502 |
Amortization of unearned restricted stock compensation |
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| 27,543 |
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| 32,566 |
Amortization of debt issuance costs |
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| 8,184 |
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| 7,210 |
Non-cash increase to cost of goods sold due to HHI acquisition inventory step up |
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| — |
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| 31,000 |
Write off unamortized discount on retired debt |
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| 2,821 |
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| 885 |
Write off of debt issuance costs |
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| 6,395 |
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| 4,600 |
Other non-cash adjustments |
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| 3,952 |
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| 19,518 |
Net changes in assets and liabilities |
|
| (382,076) |
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| (253,069) |
Net cash used by operating activities |
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| (49,177) |
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| (75,639) |
Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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| (50,938) |
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| (45,236) |
Acquisition of Liquid Fence, net of cash acquired |
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| (25,254) |
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| — |
Acquisition of Shaser, net of cash acquired |
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| — |
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| (48,707) |
Acquisition of the HHI Business, net of cash acquired |
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| — |
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| (1,351,008) |
Proceeds from sales of property, plant and equipment |
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| 9,096 |
|
| 160 |
Other investing activities |
|
| (239) |
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| (1,308) |
Net cash used by investing activities |
|
| (67,335) |
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| (1,446,099) |
Cash flows from financing activities: |
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Proceeds from issuance of Term Loan, net of discount |
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| 523,658 |
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| 792,000 |
Proceeds from issuance of 6.375% Notes |
|
| — |
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| 520,000 |
Proceeds from issuance of 6.625% Notes |
|
| — |
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| 570,000 |
Payment of senior credit facilities, excluding ABL revolving credit facility |
|
| (567,459) |
|
| (406,904) |
Debt issuance costs |
|
| (5,419) |
|
| (44,469) |
Other debt financing, net |
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| 13,897 |
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| 17,080 |
Reduction of other debt |
|
| (4,415) |
|
| (1,970) |
ABL revolving credit facility, net |
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| 110,000 |
|
| 69,500 |
Cash dividends paid |
|
| (44,805) |
|
| (27,075) |
Treasury stock purchases |
|
| (4,518) |
|
| (200) |
Share based payment tax withholding payments |
|
| (26,548) |
|
| (20,141) |
Net cash provided (used) by financing activities |
|
| (5,609) |
|
| 1,467,821 |
Effect of exchange rate changes on cash and cash equivalents due to Venezuela devaluation |
|
| — |
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| (1,870) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 6 |
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| (3,181) |
Net decrease in cash and cash equivalents |
|
| (122,115) |
|
| (58,968) |
Cash and cash equivalents, beginning of period |
|
| 207,257 |
|
| 157,961 |
Cash and cash equivalents, end of period |
| $ | 85,142 |
| $ | 98,993 |
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| THREE MONTHS ENDED | ||||
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| 2015 |
| 2014 | ||
Net income |
| $ | 50.0 |
| $ | 54.4 |
Other comprehensive income (loss), net of tax: |
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Foreign currency translation loss |
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| (34.5) |
|
| (0.2) |
Unrealized gain on derivative hedging instruments |
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| 1.9 |
|
| 1.4 |
Defined benefit pension gain (loss) |
|
| 1.1 |
|
| — |
Other comprehensive income (loss), net of tax |
|
| (31.5) |
|
| 1.2 |
Comprehensive income |
|
| 18.5 |
|
| 55.6 |
Less: Comprehensive income attributable to non-controlling interest |
|
| 0.2 |
|
| 0.2 |
Comprehensive income attributable to controlling interest |
| $ | 18.3 |
| $ | 55.4 |
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
5
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
For the three month periods ended December 28, 2014 and December 29, 2013
(Unaudited)
(Amounts in millions)
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| THREE MONTHS ENDED | ||||
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| 2015 |
| 2014 | ||
Cash flows from operating activities: |
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|
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Net income |
| $ | 50.0 |
| $ | 54.4 |
Adjustments to reconcile net income to net cash used by operating activities, net of effects of acquisitions: |
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|
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Depreciation |
|
| 18.4 |
|
| 17.9 |
Amortization of intangibles |
|
| 20.5 |
|
| 20.2 |
Amortization of unearned restricted stock compensation |
|
| 5.6 |
|
| 6.6 |
Amortization of debt issuance costs |
|
| 2.5 |
|
| 2.6 |
Non-cash increase to cost of goods sold due to Tell acquisition inventory step up |
|
| 0.8 |
|
| — |
Write off unamortized discount on retired debt |
|
| — |
|
| 2.8 |
Write off of debt issuance costs |
|
| — |
|
| 6.4 |
Other non-cash adjustments |
|
| 4.2 |
|
| 1.4 |
Net changes in operating assets and liabilities |
|
| (248.6) |
|
| (248.3) |
Net cash used by operating activities |
|
| (146.6) |
|
| (136.0) |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (14.2) |
|
| (15.9) |
Acquisition of Tell Manufacturing, net of cash acquired |
|
| (29.2) |
|
| — |
Proceeds from sales of property, plant and equipment |
|
| 1.1 |
|
| — |
Other investing activities |
|
| (0.9) |
|
| — |
Net cash used by investing activities |
|
| (43.2) |
|
| (15.9) |
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from issuance of Term Loan, net of discount |
|
| — |
|
| 523.7 |
Proceeds from issuance of 6.125% Notes |
|
| 250.0 |
|
| — |
Proceeds from Euro Term Loan Tranche B |
|
| 185.4 |
|
| — |
Payment of senior credit facilities, excluding ABL revolving credit facility |
|
| — |
|
| (513.3) |
Debt issuance costs |
|
| (6.1) |
|
| (4.7) |
Other debt financing, net |
|
| 8.5 |
|
| 4.1 |
Reduction of other debt |
|
| (1.8) |
|
| (0.5) |
ABL revolving credit facility, net |
|
| — |
|
| 110.0 |
Cash dividends paid |
|
| (15.9) |
|
| (13.2) |
Treasury stock purchases |
|
| (8.5) |
|
| (4.5) |
Share based tax withholding payments, net of proceeds upon vesting |
|
| (1.7) |
|
| (24.7) |
Net cash provided by financing activities |
|
| 409.9 |
|
| 76.9 |
Effect of exchange rate changes on cash and cash equivalents |
|
| (6.3) |
|
| (0.5) |
Net increase (decrease) in cash and cash equivalents |
|
| 213.8 |
|
| (75.5) |
Cash and cash equivalents, beginning of period |
|
| 194.6 |
|
| 207.3 |
Cash and cash equivalents, end of period |
| $ | 408.4 |
| $ | 131.8 |
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
56
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
Spectrum Brands Holdings, Inc., a Delaware corporation (“SB Holdings” or the “Company”), is a diversified global branded consumer products company. SB Holdings' common stock trades on the New York Stock Exchange (the “NYSE”) under the symbol “SPB.”
The Company’s operations include the worldwide manufacturing and marketing of alkaline, zinc carbon and hearing aid batteries, as well as aquariums and aquatic health supplies and the designing and marketing of rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. The Company’s operations also include the manufacturing and marketing of specialty pet supplies. The Company also manufactures and markets herbicides, insecticides and insect repellents in North America. The Company also designs, markets and distributes a broad range of branded small appliances and personal care products. The Company also designs, markets, distributes and sells certain hardware, home improvement and plumbing products. The Company’s operations utilize manufacturing and product development facilities located in the United States ("(“U.S."”), Europe, Latin America and Asia.
The Company sells its products in approximately 140160 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers and enjoys name recognition in its 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, Dingo, Nature's Miracle, Spectracide, Cutter, Hot Shot, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator, Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister brands.
The Company'sCompany’s global branded consumer products have positions in sevensix major product categories: consumer batteries, small appliances, personal care, hardware and home improvement, pet supplies electric shaving and grooming, electric personal care, home and garden controls, and hardware and home improvement.controls.
The Company manages the businesses in four vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of the Company's worldwide battery, electric shaving and grooming, electric personal care and small appliances primarily in the kitchen and home product categories (“Global Batteries & Appliances”); (ii) Global Pet Supplies, which consists of the Company's worldwide pet supplies business (“Global Pet Supplies”); (iii) Home and Garden, which consists of the Company's home and garden and insect control business (“Home and Garden”); and (iv) Hardware & Home Improvement, which consists of the Company's worldwide hardware, home improvement and plumbing business (“Hardware & Home Improvement”); (iii) Global Pet Supplies, which consists of the Company's worldwide pet supplies business (“Global Pet Supplies”); and (iv) Home and Garden, which consists of the Company's home and garden and insect control business (“Home and Garden”). Management reviews the performance of the Company based on these segments, which also reflect the manner in which the Company's management monitors performance and allocates resources. For information pertaining to our business segments, see Note 12, “Segment Results.”
2 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The condensed consolidated financial statements include the accounts of SB Holdings and its subsidiaries and are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). All intercompany transactions have been eliminated.
These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"(“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position of the Company at June 29,December 28, 2014, the results of operations for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013, the comprehensive income (loss) for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 and the cash flows for the ninethree month periods ended June 29,December 28, 2014 and June 30,December 29, 2013. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.2014.
67
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Intangible Assets: Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination. Customer relationships and proprietary technology intangibles are amortized, using the straight-line method, over their estimated useful lives. Excess of cost over fair value of net assets acquired (goodwill) and indefinite lived trade name intangibles are not amortized. Accounting Standards Codification (“ASC”) Topic 350: “Intangibles-Goodwill and Other,”GAAP requires that goodwill and indefinite-lived intangible assets be tested for impairment annually or more often if an event or circumstance indicates that an impairment loss may have been incurred. Goodwill is tested for impairment at the reporting unit level, with such groupings being consistent with the Company’s reportable segments. If an impairment is indicated, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Indefinite lived trade name intangibles are tested for impairment at least annually by comparing the fair value with the carrying value. Any excess of carrying value over fair value is recognized as an impairment loss in income from operations.
The Company’s annual impairment testing is completed at the August financial period end. Management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts may signal that an asset has become impaired.
Shipping and Handling Costs: The Company incurred shipping and handling costs of $66,195$64.7 and $194,530$64.6 for the three and nine month periods ended JuneDecember 28, 2014 and December 29, 2014,2013, respectively and $67,023 and $183,050 for the three and nine month periods ended June 30, 2013, respectively.. These costs are included in Selling expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited). Shipping and handling costs include costs incurred with third-party carriers to transport products to customers as well as salaries and overhead costs related to activities to prepare the Company’s products for shipment from its distribution facilities.
Concentrations of Credit Risk: Trade receivables subject the Company to credit risk. Trade accounts receivable are carried at net realizable value. The Company extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history, and generally does not require collateral. The Company monitors its customers’ credit and financial condition based on changing economic conditions and makes adjustments to credit policies as required. Provisions for losses on uncollectible trade receivables are determined based on ongoing evaluations of the Company’s receivables, principally on the basis of historical collection experience and evaluations of the risks of nonpayment for a given customer.
The Company has a broad range of customers including many large retail outlet chains, twoone of which accountaccounts for a significant percentage of its sales volume. The firstThis customer represented approximately 15% and 16%17% of the Company’s Net sales during the three and nine month periods ended June 29,December 28, 2014 and 17% and 18% of the Company’s Net sales during the three and nine month periods ended June 30,December 29, 2013, respectively. The secondThis customer also represented approximately 10% and 9% of the Company’s Net sales during the three and nine month periods ended June 29, 2014, and 10% and 7% of the Company’s Net sales during the three and nine month periods ended June 30, 2013, respectively. The first customer represented approximately 11% of the Company’s Trade accounts receivable, net at both June 29, 2014 and September 30, 2013, respectively. The second customer represented 15% and 14% of the Company’s Trade accounts receivable, net at June 29,December 28, 2014 and September 30, 2013,2014, respectively.
Approximately 37%45% and 41%46% of the Company’s Net sales during the three and nine month periods ended JuneDecember 28, 2014 and December 29, 2014, respectively, and 37% and 41% of the Company’s Net sales during the three and nine month periods ended June 30, 2013, respectively, occurred outside the U.S. These sales and related receivables are subject to varying degrees of credit, currency, political and economic risk. The Company monitors these risks and makes appropriate provisions for collectabilityability to collect based on an assessment of the risks present.
7
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
Stock-Based Compensation: The Company measures the cost of its stock-based compensation plans based on the fair value of its employee stock awards and recognizes these costs over the requisite service period of the awards.
Total stock compensation expense associated with restricted stock units recognized by the Company during the three and nine month periods ended JuneDecember 28, 2014 and December 29, 20142013 was $9,612 and $27,543,$5.6 and $6.6, respectively. Total stockThe remaining unrecognized pre-tax compensation expense associated withcost related to restricted stock units recognized by the Company during the three and nine month periods ended June 30, 2013at December 28, 2014 was $17,807 and $32,566, respectively.$17.1.
The Company granted approximately 6 and 4420.2 million restricted stock units during the three and nine month periodsperiod ended June 29, 2014, respectively.December 28, 2014. The 4420.2 million restricted stock units granted during the ninethree months ended June 29,December 28, 2014 include 91 0.1 million
8
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in millions of dollars, except per share figures or as otherwise specified)
restricted stock units that vested immediately and 580.1 million time-based restricted stock units that vest over a period ranging from one year period.to three years. The total market value of the restricted stock units on the dates of the grants was approximately $21.1.
The Company granted approximately 0.4 million restricted stock units during the three month period ended December 29, 2013. Of these grants, 0.1 million restricted stock units vested immediately. The remaining 2930.3 million restricted stock units are performance and time-based thatand vest over a two year period. The total market value of the restricted stock units on the dates of the grants was approximately $30,593.
The Company granted approximately 30 and 666 restricted stock units during the three and nine month periods ended June 30, 2013, respectively. The 666 restricted stock units granted during the nine months ended June 30, 2013 include 22 time-based restricted stock units that vest over a one year period. Of the remaining 644 restricted stock units, 90 are performance-based that vest over a one year period and 554 restricted stock units are performance and time-based that vest over a two year period. The total market value of the restricted stock units on the dates of the grants was approximately $30,189.$29.0.
The fair value of restricted stock units is determined based on the market price of the Company’s shares of common stock on the grant date. A summary of the activity in the Company’s non-vested restricted stock units during the ninethree months ended June 29,December 28, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
| Weighted |
|
|
|
|
| Weighted |
|
| ||||
|
|
|
| Average |
| Fair Value |
|
|
| Average |
| Fair Value | ||||
|
|
|
| Grant Date |
| at Grant |
| Shares |
| Share Price at |
| at Grant | ||||
Restricted Stock Units |
| Shares |
| Fair Value |
| Date |
| (in millions) |
| Grant Date |
| Date | ||||
Non-vested restricted stock units at September 30, 2013 |
| 1,118 |
| $ | 39.11 |
| $ | 43,723 | ||||||||
Non-vested restricted stock units at September 30, 2014 |
| 0.8 |
| $ | 67.66 |
| $ | 56.0 | ||||||||
Granted |
| 442 |
|
| 69.21 |
|
| 30,593 |
| 0.2 |
|
| 90.40 |
|
| 21.1 |
Vested |
| (949) |
|
| 39.65 |
|
| (37,629) |
| (0.6) |
|
| 69.12 |
|
| (40.4) |
Non-vested restricted stock units at June 29, 2014 |
| 611 |
| $ | 60.04 |
| $ | 36,687 | ||||||||
Non-vested restricted stock units at December 28, 2014 |
| 0.4 |
| $ | 77.08 |
| $ | 36.7 |
8
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
Acquisition and Integration Related Charges: Acquisition and integration related charges reflected in Operating expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited) include, but are not limited to, transaction costs such as banking, legal, accounting and other professional fees directly related to acquisitions, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination expenses associated with mergers and acquisitions.
The following table summarizes acquisition and integration related charges incurred by the Company during the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| 2015 |
| 2014 | ||||
|
| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||||||||
Russell Hobbs |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Integration costs |
| $ | — |
| $ | 695 |
| $ | — |
| $ | 2,630 | ||||||
Employee termination charges |
| — |
|
| (35) |
|
| — |
|
| 224 | |||||||
Legal and professional fees |
|
| — |
|
| (78) |
|
| — |
|
| 12 | ||||||
Russell Hobbs Acquisition and integration related charges |
| $ | — |
| $ | 582 |
| $ | — |
| $ | 2,866 | ||||||
HHI Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Legal and professional fees |
| 222 |
|
| 4,663 |
|
| 1,912 |
|
| 25,650 |
| $ | 0.2 |
| $ | 0.8 | |
Integration costs |
| 3,105 |
|
| 1,615 |
|
| 9,283 |
|
| 5,292 |
| 2.5 |
|
| 3.1 | ||
Employee termination charges (credits) |
|
| — |
|
| 13 |
|
| (19) |
|
| 103 | ||||||
Employee termination charges |
|
| 0.4 |
|
| 0.2 | ||||||||||||
HHI Business Acquisition and integration related charges |
| $ | 3,327 |
| $ | 6,291 |
| $ | 11,176 |
| $ | 31,045 |
| $ | 3.1 |
| $ | 4.1 |
|
|
|
|
|
| |||||||||||||
Liquid Fence |
| 692 |
|
| — |
|
| 2,397 |
|
| — |
| 0.9 |
|
| — | ||
Shaser |
| 224 |
|
| 161 |
|
| 801 |
|
| 4,534 | |||||||
FURminator |
| 1 |
|
| 372 |
|
| 53 |
|
| 1,605 | |||||||
Black Flag |
| — |
|
| 52 |
|
| — |
|
| 90 | |||||||
(Credits) Other |
|
| (1,573) |
|
| 289 |
|
| 28 |
|
| 418 | ||||||
Tell |
| 0.5 |
|
| — | |||||||||||||
Other |
|
| 3.6 |
|
| 1.4 | ||||||||||||
Total Acquisition and integration related charges |
| $ | 2,671 |
| $ | 7,747 |
| $ | 14,455 |
| $ | 40,558 |
| $ | 8.1 |
| $ | 5.5 |
9
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
3 COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation gains and losses on assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as a hedge of a net investment in a foreign subsidiary, deferred gains and losses on derivative financial instruments designated as cash flow hedges and amortization of deferred gains and losses associated with the Company’s pension plans. The foreign currency translation gains and losses for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 were principally attributable to the impact of translation of the net assets of the Company’s European and Latin American operations, which primarily have functional currencies in Euros, Pounds Sterling and Brazilian Real.
For information pertaining to the reclassification of unrealized gains and losses on derivative instruments, see Note 8, “Derivative Financial Instruments.”
The components of Other comprehensive income (loss), net of tax, for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 are as follows:
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended |
| Nine Months Ended |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2015 |
| 2014 | ||||||
Foreign Currency Translation Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change after reclassification adjustment |
| $ | 8,444 |
| $ | (7,830) |
| $ | 5,594 |
| $ | (25,385) |
| $ | (34.5) |
| $ | (0.2) |
Deferred tax effect |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Deferred tax valuation allowance |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Other Comprehensive Income (Loss) |
|
| 8,444 |
|
| (7,830) |
|
| 5,594 |
|
| (25,385) |
| $ | (34.5) |
| $ | (0.2) |
Noncontrolling interest |
|
| 8 |
|
| — |
|
| 236 |
|
| — |
|
| — |
|
| — |
Comprehensive income (loss) attributable to controlling interest |
| $ | 8,436 |
| $ | (7,830) |
| $ | 5,358 |
| $ | (25,385) |
| $ | (34.5) |
| $ | (0.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross change before reclassification adjustment |
| $ | (3,002) |
| $ | 3,193 |
| $ | (3,919) |
| $ | 4,595 |
| $ | 7.7 |
| $ | 0.9 |
Net reclassification adjustment for (gains) losses included in earnings |
|
| 1,273 |
|
| (507) |
|
| 2,156 |
|
| (80) |
|
| (4.8) |
|
| 0.9 |
Gross change after reclassification adjustment |
|
| (1,729) |
|
| 2,686 |
|
| (1,763) |
|
| 4,515 |
| $ | 2.9 |
| $ | 1.8 |
Deferred tax effect |
| 332 |
| (450) |
| 220 |
| (1,566) |
| — |
| (0.5) | ||||||
Deferred tax valuation allowance |
|
| (88) |
|
| (456) |
|
| (52) |
|
| (91) |
|
| (1.0) |
|
| 0.1 |
Other Comprehensive Income (Loss) |
| $ | (1,485) |
| $ | 1,780 |
| $ | (1,595) |
| $ | 2,858 |
| $ | 1.9 |
| $ | 1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Defined Benefit Pension Plans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross change before reclassification adjustment |
| $ | 175 |
| $ | (575) |
| $ | (416) |
| $ | (2,164) |
| $ | 1.0 |
| $ | (0.4) |
Net reclassification adjustment for losses included in Cost of goods sold |
| 153 |
| 326 |
| 460 |
| 979 |
| 0.2 |
| 0.2 | ||||||
Net reclassification adjustment for losses included in Selling expenses |
| 78 |
| 41 |
| 234 |
| 122 |
| 0.1 |
| 0.1 | ||||||
Net reclassification adjustment for losses included in General and administrative expenses |
|
| 156 |
|
| 152 |
|
| 467 |
|
| 456 |
|
| 0.1 |
|
| 0.1 |
Gross change after reclassification adjustment |
|
| 562 |
|
| (56) |
|
| 745 |
|
| (607) |
| $ | 1.4 |
| $ | — |
Deferred tax effect |
| (146) |
| (38) |
| (220) |
| 205 |
| (0.3) |
| — | ||||||
Deferred tax valuation allowance |
|
| — |
|
| 42 |
|
| — |
|
| 54 |
|
| — |
|
| — |
Other Comprehensive Income (Loss) |
| $ | 416 |
| $ | (52) |
| $ | 525 |
| $ | (348) |
| $ | 1.1 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income (Loss), net of tax |
| $ | 7,367 |
| $ | (6,102) |
| $ | 4,288 |
| $ | (22,875) |
| $ | (31.5) |
| $ | 1.2 |
|
|
|
|
|
|
|
10
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
4 NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share of the Company for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 is calculated based upon the following number of shares:
|
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|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||
|
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2015 |
| 2014 |
Basic |
| 52,710 |
| 52,136 |
| 52,608 |
| 51,992 |
| 52.8 |
| 52.4 |
Effect of common stock equivalents |
| 300 |
| 565 |
| 300 |
| — |
| 0.3 |
| 0.3 |
Diluted |
| 53,010 |
| 52,701 |
| 52,908 |
| 51,992 |
| 53.1 |
| 52.7 |
For the nine month period ended June 30, 2013, the Company has not assumed any dilution associated with outstanding common stock equivalents as the impact would be antidilutive due to the loss reported. The dilutive impact of common stock equivalents would have been 556 shares for the nine month period ended June 30, 2013, if not for the GAAP loss reported.
5 INVENTORIES
Inventories for the Company, which are stated at the lower of cost or market, consist of the following:
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| June 29, 2014 |
| September 30, 2013 |
| December 28, 2014 |
| September 30, 2014 | ||||
Raw materials |
| $ | 123,790 |
| $ | 97,290 |
| $ | 130.2 |
| $ | 104.1 |
Work-in-process |
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| 45,613 |
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| 40,626 |
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| 41.5 |
|
| 35.3 |
Finished goods |
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| 565,420 |
|
| 495,007 |
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| 530.2 |
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| 485.1 |
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| $ | 734,823 |
| $ | 632,923 |
| $ | 701.9 |
| $ | 624.5 |
6 GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets of the Company consist of the following:
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| Global |
| Hardware & |
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| Global |
| Hardware & |
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| Batteries & |
| Home |
| Global Pet |
| Home and |
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| Batteries & |
| Home |
| Global Pet |
| Home and |
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| Appliances |
| Improvement |
| Supplies |
| Garden |
| Total |
| Appliances |
| Improvement |
| Supplies |
| Garden |
| Total | ||||||||||
Goodwill: |
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Balance at September 30, 2013 |
| $ | 333,500 |
| $ | 714,724 |
| $ | 239,077 |
| $ | 189,371 |
| $ | 1,476,672 | |||||||||||||||
Balance at September 30, 2014 |
| $ | 327.4 |
| $ | 709.8 |
| $ | 235.9 |
| $ | 196.5 |
| $ | 1,469.6 | |||||||||||||||
Additions |
| — |
|
| 3,460 |
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| — |
|
| 7,088 |
|
| 10,548 |
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| — |
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| 7.1 |
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| — |
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| — |
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| 7.1 | |
Effect of translation |
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| 1,520 |
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| (4,488) |
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| 184 |
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| — |
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| (2,784) |
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| (6.4) |
|
| (3.5) |
|
| (1.9) |
|
| — |
|
| (11.8) |
Balance at June 29, 2014 |
| $ | 335,020 |
| $ | 713,696 |
| $ | 239,261 |
| $ | 196,459 |
| $ | 1,484,436 | |||||||||||||||
Balance at December 28, 2014 |
| $ | 321.0 |
| $ | 713.4 |
| $ | 234.0 |
| $ | 196.5 |
| $ | 1,464.9 | |||||||||||||||
Intangible Assets: |
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Trade Names Not Subject to Amortization | Trade Names Not Subject to Amortization | Trade Names Not Subject to Amortization | ||||||||||||||||||||||||||||
Balance at September 30, 2013 |
| $ | 547,353 |
| $ | 330,771 |
| $ | 216,426 |
| $ | 83,500 |
| $ | 1,178,050 | |||||||||||||||
Balance at September 30, 2014 |
| $ | 544.6 |
| $ | 330.6 |
| $ | 210.5 |
| $ | 88.6 |
| $ | 1,174.3 | |||||||||||||||
Additions |
| — |
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| — |
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| — |
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| 5,100 |
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| 5,100 |
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| — |
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| 4.0 |
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| — |
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| — |
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| 4.0 | |
Effect of translation |
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| 5,259 |
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| 74 |
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| 626 |
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| — |
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| 5,959 |
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| (5.8) |
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| (0.6) |
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| (3.2) |
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| — |
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| (9.6) |
Balance at June 29, 2014 |
| $ | 552,612 |
| $ | 330,845 |
| $ | 217,052 |
| $ | 88,600 |
| $ | 1,189,109 | |||||||||||||||
Balance at December 28, 2014 |
| $ | 538.8 |
| $ | 334.0 |
| $ | 207.3 |
| $ | 88.6 |
| $ | 1,168.7 | |||||||||||||||
Intangible Assets Subject to Amortization | Intangible Assets Subject to Amortization | Intangible Assets Subject to Amortization | ||||||||||||||||||||||||||||
Balance at September 30, 2013, net |
| $ | 440,776 |
|
| 146,461 |
| $ | 245,227 |
| $ | 152,652 |
| $ | 985,116 | |||||||||||||||
Balance at September 30, 2014, net |
| $ | 400.3 |
| $ | 130.5 |
| $ | 222.3 |
| $ | 164.1 |
| $ | 917.2 | |||||||||||||||
Additions |
| — |
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| — |
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| 238 |
|
| 21,800 |
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| 22,038 |
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| 0.9 |
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| 8.5 |
|
| — |
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| — |
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| 9.4 | |
Amortization during period |
| (26,262) |
|
| (11,069) |
|
| (16,183) |
|
| (7,719) |
|
| (61,233) |
|
| (8.6) |
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| (3.8) |
|
| (5.4) |
|
| (2.7) |
|
| (20.5) | |
Effect of translation |
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| 1,440 |
|
| (505) |
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| 201 |
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| — |
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| 1,136 |
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| (5.2) |
|
| (1.1) |
|
| (1.8) |
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| — |
|
| (8.1) |
Balance at June 29, 2014, net |
| $ | 415,954 |
| $ | 134,887 |
| $ | 229,483 |
| $ | 166,733 |
| $ | 947,057 | |||||||||||||||
Total Intangible Assets, net at June 29, 2014 |
| $ | 968,566 |
| $ | 465,732 |
| $ | 446,535 |
| $ | 255,333 |
| $ | 2,136,166 | |||||||||||||||
Balance at December 28, 2014, net |
| $ | 387.4 |
| $ | 134.1 |
| $ | 215.1 |
| $ | 161.4 |
| $ | 898.0 | |||||||||||||||
Total Intangible Assets, net at December 28, 2014 |
| $ | 926.2 |
| $ | 468.1 |
| $ | 422.4 |
| $ | 250.0 |
| $ | 2,066.7 |
11
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
During the ninethree month period ended June 29, 2014, the Company recorded an adjustment of $3,460 to goodwill to finalize the purchase accounting for the acquisition of the residential hardware and home improvement business (the "HHI Business") from Stanley Black & Decker, Inc. ("Stanley Black & Decker"). The adjustment related to changes in the valuation of working capital accounts and deferred taxes based on the final determination of fair value. These adjustments were not retrospectively applied to the opening balance sheet as the amounts were deemed immaterial.
During the nine month period ended June 29,December 28, 2014, the Company recorded additions to goodwill and intangible assets related to the acquisition of Liquid Fence.Tell Manufacturing, Inc. (“Tell”), which is included in the Hardware and Home Improvement segment. See Note 15 "Acquisitions,"14 “Acquisitions,” for further information.
Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which were recognized in connection with acquisitions and from the application of fresh-start reporting during fiscal 2009.names. The useful lives of the Company’s intangible assets subject to amortization are 9 to 17 years for proprietary technology assets associated with the Global Batteries & Appliances segment; 8 to 9 years for technology assets related tosegment, the Hardware & Home Improvement segment;segment and the Global Pet Supplies segment are from 9 to 17 years, 8 to 9 years and 4 to 9 years, for technology assets related to the Global Pet Supplies segment; 17 years for technology assets related to the Home and Garden segment;respectively. The useful lives of customer relationships are from 15 to 20 years for customer relationships ofwithin the Global Batteries & Appliances segment and Home and Garden segments; 20 years for customer relationshipsin each of the Hardware & Home Improvement, Home and Garden and Global Pet Supplies segments;segments. The useful lives for trade names are from 1 to 12 years for trade names within the Global Batteries & Appliances segment;segment, 5 to 8 years for trade names within the Hardware & Home Improvement segment and 3 years for a trade name within the Global Pet Supplies segment.
The carrying value and accumulated amortization for intangible assets subject to amortization are as follows:
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| June 29, 2014 |
| September 30, 2013 |
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| December 28, 2014 |
| September 30, 2014 | ||||
Technology Assets Subject to Amortization: |
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Gross balance |
| $ | 192,180 |
| $ | 172,105 |
| $ | 192.2 |
| $ | 192.2 |
Accumulated amortization |
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| (52,866) |
|
| (39,028) |
|
| (62.3) |
|
| (57.6) |
Carrying value, net |
| $ | 139,314 |
| $ | 133,077 |
| $ | 129.9 |
| $ | 134.6 |
Trade Names Subject to Amortization: |
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Gross balance |
| $ | 171,404 |
| $ | 171,572 |
| $ | 170.7 |
| $ | 171.0 |
Accumulated amortization |
|
| (56,966) |
|
| (44,660) |
|
| (65.0) |
|
| (61.0) |
Carrying value, net |
| $ | 114,438 |
| $ | 126,912 |
| $ | 105.7 |
| $ | 110.0 |
Customer Relationships Subject to Amortization: |
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Gross balance |
| $ | 889,624 |
| $ | 885,895 |
| $ | 876.3 |
| $ | 877.2 |
Accumulated amortization |
|
| (196,319) |
|
| (160,768) |
|
| (213.9) |
|
| (204.6) |
Carrying value, net |
| $ | 693,305 |
| $ | 725,127 |
| $ | 662.4 |
| $ | 672.6 |
Total Intangible Assets, net Subject to Amortization |
| $ | 947,057 |
| $ | 985,116 |
| $ | 898.0 |
| $ | 917.2 |
Amortization expense for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 is as follows:
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| Three Months Ended |
| Nine Months Ended |
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| Three Months Ended | ||||||
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| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2015 |
| 2014 | ||||||
Proprietary technology amortization |
| $ | 4,707 |
| $ | 4,470 |
| $ | 13,850 |
| $ | 12,009 |
| $ | 4.7 |
| $ | 4.4 |
Trade names amortization |
| 4,112 |
|
| 4,264 |
|
| 12,336 |
|
| 12,162 |
| 4.1 |
|
| 4.1 | ||
Customer relationships amortization |
|
| 11,713 |
|
| 11,611 |
|
| 35,047 |
|
| 33,331 |
|
| 11.7 |
|
| 11.7 |
|
| $ | 20,532 |
| $ | 20,345 |
| $ | 61,233 |
| $ | 57,502 |
| $ | 20.5 |
| $ | 20.2 |
The Company estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $77,500$77.5 per year.
12
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
7 DEBT
Debt consists of the following:
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| June 29, 2014 |
| September 30, 2013 |
| December 28, 2014 |
| September 30, 2014 | ||||||||||||||||
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| Amount |
| Rate |
| Amount |
| Rate |
| Amount |
| Rate |
| Amount |
| Rate | ||||||||
Term Loan, due September 4, 2017 (Tranche A) |
| $ | 818,125 |
| 3.0 | % |
| $ | 850,000 |
| 3.0 | % |
| $ | 648.4 |
| 3.0 | % |
| $ | 648.4 |
| 3.0 | % |
Term Loan, due September 4, 2019 (Tranche C) |
| 512,425 |
| 3.6 | % |
| 300,000 |
| 3.6 | % |
| 509.9 |
| 3.6 | % |
| 509.9 |
| 3.6 | % | ||||
CAD Term Loan, due December 17, 2019 |
| 59,361 |
| 5.1 | % |
| 81,397 |
| 5.1 | % |
| 32.9 |
| 5.1 | % |
| 34.2 |
| 5.1 | % | ||||
Term Loan, due December 17, 2019 (Tranche B) |
| — |
| — | % |
| 513,312 |
| 4.6 | % | ||||||||||||||
Euro Term Loan, due September 4, 2019 |
| 305,482 |
| 3.8 | % |
| — |
| — | % |
| 272.9 |
| 3.8 | % |
| 283.3 |
| 3.8 | % | ||||
Euro Term Loan, due December 19, 2021 |
| 183.3 |
| 3.8 | % |
| — |
| — | % | ||||||||||||||
6.375% Notes, due November 15, 2020 |
| 520,000 |
| 6.4 | % |
| 520,000 |
| 6.4 | % |
| 520.0 |
| 6.4 | % |
| 520.0 |
| 6.4 | % | ||||
6.625% Notes, due November 15, 2022 |
| 570,000 |
| 6.6 | % |
| 570,000 |
| 6.6 | % |
| 570.0 |
| 6.6 | % |
| 570.0 |
| 6.6 | % | ||||
6.75% Notes, due March 15, 2020 |
| 300,000 |
| 6.8 | % |
| 300,000 |
| 6.8 | % |
| 300.0 |
| 6.8 | % |
| 300.0 |
| 6.8 | % | ||||
6.125% Notes, due December 15, 2024 |
| 250.0 |
| 6.1 | % |
| — |
| — | % | ||||||||||||||
ABL Facility, expiring May 24, 2017 |
| 110,000 |
| 2.0 | % |
| — |
| 5.7 | % |
| — |
| 2.5 | % |
| — |
| 2.5 | % | ||||
Other notes and obligations |
| 52,112 |
| 8.3 | % |
| 28,468 |
| 8.5 | % |
| 42.3 |
| 10.3 | % |
| 36.6 |
| 8.8 | % | ||||
Capitalized lease obligations |
|
| 96,579 |
| 6.1 | % |
|
| 67,402 |
| 6.2 | % |
|
| 92.0 |
| 6.1 | % |
|
| 94.7 |
| 6.1 | % |
|
| $ | 3,344,084 |
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| $ | 3,230,579 |
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| $ | 3,421.7 |
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| $ | 2,997.1 |
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|
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Original issuance discounts on debt |
| (7,475) |
|
|
|
| (11,716) |
|
|
|
| (6.2) |
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| (6.3) |
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Less: current maturities |
|
| (121,509) |
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|
| (102,921) |
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| (105.3) |
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| (96.7) |
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Long-term debt |
| $ | 3,215,100 |
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| $ | 3,115,942 |
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| $ | 3,310.2 |
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| $ | 2,894.1 |
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The Company has the following debt instruments outstanding at June 29,December 28, 2014: (i) a senior secured term loan (the “Term Loan”) pursuant to a senior credit agreement (the “Senior Credit Agreement”) which consists of $818,125$648.4 principal due September 4, 2017 (“Tranche A”), $512,425$509.9 principal due September 4, 2019 (“Tranche C”), $59,361$32.9 Canadian dollar denominated principal due December 17, 2019 ("(“CAD Term Loan"Loan”) and $305,482, $272.9 Euro denominated principal due September 4, 2019 ("(“Euro Term Loan"Loan Tranche A”) and $183.3 Euro denominated principal due December 19, 2021 (“Euro Term Loan Tranche B”) (together, the “Term Loan”); (ii) $300,000$300.0 6.75% unsecured notes (the “6.75% Notes”); (iii) $520,000$520.0 6.375% unsecured notes (the “6.375% Notes”); (iv) $570,000$570.0 6.625% unsecured notes (the “ 6.625% Notes”); (v) $250.0 6.125% unsecured notes (the “6.125% Notes” and (v)(vi) a $400,000$400.0 asset based lending revolving credit facility (the “ABL Facility”).
Term Loan
On December 18, 2013,19, 2014 the Company amended the Term Loan, issuing two tranchesa tranche maturing September 4, 2019December 19, 2021, which provideprovides for borrowings in an aggregate principal amountsamount of $215,000€150.0 (the “Euro Term Loan Tranche B”). The Euro Term Loan Tranche B is guaranteed by the Company’s wholly owned subsidiary, SB/RH Holdings, LLC, as well as by existing and €225,000.future domestic subsidiaries. The net proceeds from the amendment, weretogether with the net proceeds of the 6.125% Notes, will be used to refinancerepay certain amounts drawn under the revolving credit facility, to fund a portion of the Term Loan (formerly Tranche B)planned acquisition and for general corporate purposes, which was scheduled to mature December 17, 2019, in an amount outstanding of $513,312 prior to refinancing. The $215,000 additional U.S. dollar denominated portion was combined with the existing Tranche C maturing September 4, 2019. The Company recorded accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs related tomay include, among other things, working capital needs, the refinancing of the Term Loan totaling $9,216 as an adjustment to interest expense during the nine month period ended June 29, 2014. existing indebtedness, business expansion and possible future acquisitions.
The additional Tranche C and Euro Term Loan debt wereTranche B was issued at a .125%.25% discount and recorded net of the discount incurred. Of thisThe €0.4 discount $510 is reflected as an adjustment to the carrying value of principal, and is being amortized with a corresponding charge to interest expense over the remaining life of the debt, and the remainder of $146 is reflected as an increase to interest expense during the nine month period ended June 29, 2014.debt. In connection with the refinancing of a portion of theEuro Term Loan Tranche B, the Company recorded $162 and $7,236$2.1 of fees during the three and nine month periodsperiod ended June 29, 2014, respectively, of which $5,150 isDecember 28, 2014. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and isare being amortized as an adjustment to interest expense over the remaining life of the Term Loan, withloan.
6.125% Notes
On December 4, 2014, Spectrum Brands issued $250.0 aggregate principal amount of 6.125% Notes at par value, due December 15, 2024 (the “6.125% Notes”). The 6.125% Notes are guaranteed by the remainder of $2,086 reflectedCompany’s wholly owned subsidiary, SB/RH Holdings, LLC, as an increase to interest expense during the nine month period ended June 29, 2014.well as by existing and future domestic subsidiaries.
13
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
6.375%The Company may redeem all or a part of the 6.125% Notes, upon not less than 30 or more than a 60 day notice, at specified redemption prices. Further, the indenture governing the 6.125% Notes (the “2024 Indenture”) requires the Company 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 of the Company, as defined in such indenture.
The 2024 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 6.625% Notestransactions with affiliates.
In addition, the 2024 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 when due or on acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2024 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 6.125% Notes. If any other event of default under the 2024 Indenture occurs and is continuing, the trustee for the 2024 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 6.125% Notes, may declare the acceleration of the amounts due under those notes.
The Company recorded $4.0 of fees in connection with the registrationoffering of the 6.375%6.125% Notes and the 6.625% Notes that were assumed on December 17, 2012 to finance the acquisition of the HHI Business, the Company recorded $9 and $261 of fees during the three and nine month periodsperiod ended June 29, 2014, respectively.December 28, 2014. The $261 wasfees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and is beingare amortized as an adjustment to interest expense over the remaining life of the 6.375% Notes and the 6.625%6.125% Notes.
ABL Facility
In connection with the December 18, 2013 amendment of the Term Loan, the Company amended the ABL Facility to obtain certain consents to the amendment of the Senior Credit Agreement. In connection with the amendment, the Company incurred fees and expenses that are included in the amounts recorded above related to the amendment of the Term Loan.
As a result of borrowings and payments under the ABL Facility, at June 29,December 28, 2014, the Company had aggregate borrowing availability of approximately $193,759,$236.2, net of lender reserves of $6,398$6.4 and outstanding letters of credit of $54,132.$50.3.
8 DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency exchange rate and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. Derivative instruments are reported at fair value in the Condensed Consolidated Statements of Financial Position (Unaudited). When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is recognized in earnings in the period incurred. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also recognized in earnings in the period incurred.
Fair Value of Derivative Instruments
The Company discloses its derivative instruments and hedging activities in accordance with ASC Topic 815: “Derivatives and Hedging” (“ASC 815”).
The fair value of the Company’s outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
14
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
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|
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|
|
|
|
|
|
Asset Derivatives |
|
| June 29, 2014 |
| September 30, 2013 | ||
Derivatives designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Commodity contracts | Receivables—Other |
| $ | 1,350 |
| $ | 416 |
Commodity contracts | Deferred charges and other |
|
| — |
|
| 3 |
Foreign exchange contracts | Receivables—Other |
|
| 656 |
|
| 1,719 |
Foreign exchange contracts | Deferred charges and other |
|
| 95 |
|
| — |
Total asset derivatives designated as hedging instruments under ASC 815 |
|
|
| 2,101 |
|
| 2,138 |
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Commodity contracts | Receivables—Other |
|
| 54 |
|
| — |
Foreign exchange contracts | Receivables—Other |
|
| 167 |
|
| 143 |
Total asset derivatives |
|
| $ | 2,322 |
| $ | 2,281 |
The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
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|
|
|
|
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|
|
|
|
|
|
Liability Derivatives |
|
| June 29, 2014 |
| September 30, 2013 | ||
Derivatives designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Interest rate contracts | Other current liabilities |
| $ | 1,416 |
| $ | — |
Interest rate contracts | Accrued interest |
|
| 430 |
|
| — |
Interest rate contracts | Other long-term liabilities |
|
| 57 |
|
| — |
Commodity contracts | Accounts payable |
|
| 5 |
|
| 450 |
Foreign exchange contracts | Accounts payable |
|
| 4,964 |
|
| 4,577 |
Foreign exchange contracts | Other long-term liabilities |
|
| 341 |
|
| 65 |
Total liability derivatives designated as hedging instruments under ASC 815 |
|
| $ | 7,213 |
| $ | 5,092 |
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Commodity contract | Accounts payable |
| $ | — |
| $ | 55 |
Foreign exchange contracts | Accounts payable |
|
| 303 |
|
| 5,323 |
Total liability derivatives |
|
| $ | 7,516 |
| $ | 10,470 |
Changes in AOCI from Derivative Instruments
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income ("AOCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 3, "Comprehensive Income (Loss)" for further information.
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended June 29, 2014, pretax:
15
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
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| Location of |
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| Gain (Loss) |
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| Recognized in |
| Amount of | |
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|
|
|
|
|
| Income on |
| Gain (Loss) | |
|
|
|
|
|
|
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| Derivatives |
| Recognized in | |
|
| Amount of |
| Location of |
|
|
| (Ineffective |
| Income on | |||
|
| Gain (Loss) |
| Gain (Loss) |
| Amount of |
| Portion and |
| Derivatives | |||
|
| Recognized in |
| Reclassified from |
| Gain (Loss) |
| Amount |
| (Ineffective Portion | |||
|
| AOCI on |
| AOCI into |
| Reclassified from |
| Excluded from |
| and Amount | |||
Derivatives in ASC 815 Cash Flow |
| Derivatives |
| Income |
| AOCI into Income |
| Effectiveness |
| Excluded from | |||
Hedging Relationships |
| (Effective Portion) |
| (Effective Portion) |
| (Effective Portion) |
| Testing) |
| Effectiveness Testing) | |||
Commodity contracts |
| $ | 1,342 |
| Cost of goods sold |
| $ | 120 |
| Cost of goods sold |
| $ | 35 |
Interest rate contracts |
|
| (1,903) |
| Interest expense |
|
| (430) |
| Interest expense |
|
| — |
Foreign exchange contracts |
|
| (9) |
| Net sales |
|
| 58 |
| Net sales |
|
| — |
Foreign exchange contracts |
|
| (2,432) |
| Cost of goods sold |
|
| (1,021) |
| Cost of goods sold |
|
| — |
Total |
| $ | (3,002) |
|
|
| $ | (1,273) |
|
|
| $ | 35 |
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended June 29, 2014, pretax:
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|
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|
|
|
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|
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| Location of |
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|
|
|
|
|
|
|
|
| Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| Recognized in |
| Amount of | |
|
|
|
|
|
|
|
|
|
| Income on |
| Gain (Loss) | |
|
|
|
|
|
|
|
|
|
| Derivatives |
| Recognized in | |
|
| Amount of |
| Location of |
|
|
| (Ineffective |
| Income on | |||
|
| Gain (Loss) |
| Gain (Loss) |
| Amount of |
| Portion and |
| Derivatives | |||
|
| Recognized in |
| Reclassified from |
| Gain (Loss) |
| Amount |
| (Ineffective Portion | |||
|
| AOCI on |
| AOCI into |
| Reclassified from |
| Excluded from |
| and Amount | |||
Derivatives in ASC 815 Cash Flow |
| Derivatives |
| Income |
| AOCI into Income |
| Effectiveness |
| Excluded from | |||
Hedging Relationships |
| (Effective Portion) |
| (Effective Portion) |
| (Effective Portion) |
| Testing) |
| Effectiveness Testing) | |||
Commodity contracts |
| $ | 1,411 |
| Cost of goods sold |
| $ | 72 |
| Cost of goods sold |
| $ | 35 |
Interest rate contracts |
|
| (1,903) |
| Interest expense |
|
| (430) |
| Interest expense |
|
| — |
Foreign exchange contracts |
|
| 138 |
| Net sales |
|
| 179 |
| Net sales |
|
| — |
Foreign exchange contracts |
|
| (3,565) |
| Cost of goods sold |
|
| (1,977) |
| Cost of goods sold |
|
| — |
Total |
| $ | (3,919) |
|
|
| $ | (2,156) |
|
|
| $ | 35 |
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended June 30, 2013, pretax:
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| Location of |
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|
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| Gain (Loss) |
|
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|
|
|
| Recognized in |
| Amount of | |
|
|
|
|
|
|
|
|
|
| Income on |
| Gain (Loss) | |
|
|
|
|
|
|
|
|
|
| Derivatives |
| Recognized in | |
|
| Amount of |
| Location of |
|
|
| (Ineffective |
| Income on | |||
|
| Gain (Loss) |
| Gain (Loss) |
| Amount of |
| Portion and |
| Derivatives | |||
|
| Recognized in |
| Reclassified from |
| Gain (Loss) |
| Amount |
| (Ineffective Portion | |||
|
| AOCI on |
| AOCI into |
| Reclassified from |
| Excluded from |
| and Amount | |||
Derivatives in ASC 815 Cash Flow |
| Derivatives |
| Income |
| AOCI into Income |
| Effectiveness |
| Excluded from | |||
Hedging Relationships |
| (Effective Portion) |
| (Effective Portion) |
| (Effective Portion) |
| Testing) |
| Effectiveness Testing) | |||
Commodity contracts |
| $ | (930) |
| Cost of goods sold |
| $ | (321) |
| Cost of goods sold |
| $ | 11 |
Foreign exchange contracts |
|
| 89 |
| Net sales |
|
| 313 |
| Net sales |
|
| — |
Foreign exchange contracts |
|
| 4,034 |
| Cost of goods sold |
|
| 515 |
| Cost of goods sold |
|
| — |
Total |
| $ | 3,193 |
|
|
| $ | 507 |
|
|
| $ | 11 |
16
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended June 30, 2013, pretax:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Location of |
|
|
|
|
|
|
|
|
|
|
|
|
| Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| Recognized in |
| Amount of | |
|
|
|
|
|
|
|
|
|
| Income on |
| Gain (Loss) | |
|
|
|
|
|
|
|
|
|
| Derivatives |
| Recognized in | |
|
| Amount of |
| Location of |
|
|
| (Ineffective |
| Income on | |||
|
| Gain (Loss) |
| Gain (Loss) |
| Amount of |
| Portion and |
| Derivatives | |||
|
| Recognized in |
| Reclassified from |
| Gain (Loss) |
| Amount |
| (Ineffective Portion | |||
|
| AOCI on |
| AOCI into |
| Reclassified from |
| Excluded from |
| and Amount | |||
Derivatives in ASC 815 Cash Flow |
| Derivatives |
| Income |
| AOCI into Income |
| Effectiveness |
| Excluded from | |||
Hedging Relationships |
| (Effective Portion) |
| (Effective Portion) |
| (Effective Portion) |
| Testing) |
| Effectiveness Testing) | |||
Commodity contracts |
| $ | (3,361) |
| Cost of goods sold |
| $ | (223) |
| Cost of goods sold |
| $ | (71) |
Foreign exchange contracts |
|
| 755 |
| Net sales |
|
| 653 |
| Net sales |
|
| — |
Foreign exchange contracts |
|
| 7,201 |
| Cost of goods sold |
|
| (350) |
| Cost of goods sold |
|
| — |
Total |
| $ | 4,595 |
|
|
| $ | 80 |
|
|
| $ | (71) |
Other Changes in Fair Value of Derivative Contracts
For derivative instruments that are used to economically hedge the fair value of the Company’s third party and intercompany foreign currency payments, commodity purchases and interest rate payments, but are not designated as hedging instruments under ASC 815, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three month periods ended June 29, 2014 and June 30, 2013, the Company recognized the following gains (losses) on these derivative contracts:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) |
|
| ||||
|
| Recognized in |
| Location of Gain (Loss) | ||||
Derivatives Not Designated as |
| Income on Derivatives |
| Recognized in | ||||
|
|
|
|
|
|
|
|
|
Hedging Instruments Under ASC 815 |
| 2014 |
| 2013 |
| Income on Derivatives | ||
Commodity contracts |
| $ | 53 |
| $ | (197) |
| Cost of goods sold |
Foreign exchange contracts |
|
| (243) |
|
| 477 |
| Other expense, net |
Total |
| $ | (190) |
| $ | 280 |
|
|
During the nine month periods ended June 29, 2014 and June 30, 2013, the Company recognized the following gains (losses) on these derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) |
|
| ||||
|
| Recognized in |
| Location of Gain (Loss) | ||||
Derivatives Not Designated as |
| Income on Derivatives |
| Recognized in | ||||
|
|
|
|
|
|
|
|
|
Hedging Instruments Under ASC 815 |
| 2014 |
| 2013 |
| Income on Derivatives | ||
Commodity contracts |
| $ | (8) |
| $ | (197) |
| Cost of goods sold |
Foreign exchange contracts |
|
| 405 |
|
| (1,834) |
| Other expense, net |
Total |
| $ | 397 |
| $ | (2,031) |
|
|
Credit Risk
The Company is exposed to the risk of default by the counterparties with which it transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. The Company monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are concentrated with certain domestic and foreign financial
17
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
institution counterparties. The Company considers these exposures when measuring its credit reserve on its derivative assets, which was $3 and $5 at June 29, 2014 and September 30, 2013, respectively.
The Company’s standard contracts do not contain credit risk related contingent features whereby the Company would be required to post additional cash collateral as a result of a credit event. However, the Company is typically required to post collateral in the normal course of business to offset its liability positions. At June 29, 2014 and September 30, 2013, the Company had posted cash collateral of $0 and $450, respectively, related to such liability positions. In addition, at June 29, 2014 and September 30, 2013, the Company had no posted standby letters of credit related to such liability positions. The cash collateral is included in Current Assets—Receivables-Other within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited).
Derivative Financial Instruments
Cash Flow Hedges
The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to Interest expense from the underlying debt to which the swap is designated. At June 29,both December 28, 2014 and September 30, 2014, the Company had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at 1.36% for a notional principal amount of $300,000$300.0 through April 2017. At September 30, 2013, the Company did not have any interest rate swaps outstanding. The derivative
14
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in millions of dollars, except per share figures or as otherwise specified)
net loss on these contracts recorded in AOCI by the Company at June 29,December 28, 2014 was $1,473,$0.9, net of tax benefit of $0.$0.0. At June 29,December 28, 2014, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,416,$1.5, net of tax.
The Company’s interest rate swap derivative financial instruments at December 28, 2014 and September 30, 2014 are summarized as follows:
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|
|
| December 28, 2014 |
| September 30, 2014 | ||||||
|
| Notional Amount |
| Remaining Years |
| Notional Amount |
| Remaining Years | ||
Interest rate swaps - fixed |
| $ | 300.0 |
| 2.3 |
| $ | 300.0 |
| 2.5 |
The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Mexican Pesos, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to Net sales or purchase price variance in Cost of goods sold. At June 29,December 28, 2014, the Company had a series of foreign exchange derivative contracts outstanding through September 2015March 2016 with a contract value of $221,513.$157.0. The derivative net lossgain on these contracts recorded in AOCI by the Company at June 29,December 28, 2014 was $3,524,$12.4, net of tax benefitexpense of $1,029.$4.6. At June 29,December 28, 2014, the portion of derivative net lossgains estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $3,331,$12.4, net of tax.
The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. The Company hedges a portion of the risk associated with the purchase of these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At June 29,December 28, 2014, the Company had a series of zinc swap contracts outstanding through June 2015March 2016 for 56.7 thousand tons with a contract value of $9,851.$14.7. At June 29,December 28, 2014, the Company had a series of brass swap contracts outstanding through June 2015March 2016 for 1 ton1.2 thousand metric tons with a contract value of $3,853.$6.3. The derivative net gainloss on these contracts recorded in AOCI by the Company at June 29,December 28, 2014 was $1,154,$0.4, net of tax expensebenefit of $149.$0.0. At June 29,December 28, 2014, the portion of derivative net gainloss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,154,$0.3, net of tax.
Derivative Contracts Not Designated as Hedge Accounting
The Company periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Canadian Dollars, Euros or Australian Dollars. These foreign exchange contracts
18
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited). The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At June 29,December 28, 2014 and September 30, 2013,2014, the Company had $154,263$313.7 and $108,480,$108.9, respectively, of notional value of such foreign exchange derivative contracts outstanding.
The Company periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in fair value of the hedge contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the hedges. The swaps effectively fix the floating price on a specified quantity of silver through a specified date. At June 29,December 28, 2014, the Company had a series of such swap contracts outstanding through September 2015 for 3520 thousand troy ounces with a contract value of $741.$0.3. At September 30, 2013,2014, the Company had a series of such swap contracts outstanding through April 2014September 30, 2015 for 4525 thousand troy ounces with a contract value of $980.$0.4.
15
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in millions of dollars, except per share figures or as otherwise specified)
Fair Value of Derivative Instruments
The Company discloses its derivative instruments and hedging activities in accordance with ASC Topic 815: “Derivatives and Hedging” (“ASC 815”).
The fair value of the Company’s outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
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|
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|
|
|
|
|
Asset Derivatives |
|
| December 28, 2014 |
| September 30, 2014 | ||
Derivatives designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Interest rate contracts | Deferred charges and other |
| $ | 0.6 |
| $ | 0.6 |
Commodity contracts | Receivables—Other |
|
| 0.4 |
|
| 1.3 |
Foreign exchange contracts | Receivables—Other |
|
| 16.9 |
|
| 12.0 |
Foreign exchange contracts | Deferred charges and other |
|
| 0.1 |
|
| 0.3 |
Total asset derivatives designated as hedging instruments under ASC 815 |
|
|
| 18.0 |
|
| 14.2 |
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Foreign exchange contracts | Receivables—Other |
|
| 0.3 |
|
| 0.5 |
Total asset derivatives |
|
| $ | 18.3 |
| $ | 14.7 |
The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
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|
|
|
|
|
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|
|
Liability Derivatives |
|
| December 28, 2014 |
| September 30, 2014 | ||
Derivatives designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Interest rate contracts | Other current liabilities |
| $ | 1.5 |
| $ | 1.3 |
Interest rate contracts | Accrued interest |
|
| 0.4 |
|
| 0.4 |
Commodity contracts | Accounts payable |
|
| 0.8 |
|
| 0.2 |
Total liability derivatives designated as hedging instruments under ASC 815 |
|
| $ | 2.7 |
| $ | 1.9 |
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
Commodity contract | Accounts payable |
| $ | 0.1 |
| $ | 0.1 |
Foreign exchange contracts | Accounts payable |
|
| 2.6 |
|
| 0.1 |
Total liability derivatives |
|
| $ | 5.4 |
| $ | 2.1 |
Changes in AOCI from Derivative Instruments
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 3, “Comprehensive Income (Loss)” for further information.
16
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in millions of dollars, except per share figures or as otherwise specified)
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended December 28, 2014, pretax:
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| Location of |
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|
|
|
|
|
|
|
| Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| Recognized in |
| Amount of | |
|
|
|
|
|
|
|
|
|
| Income on |
| Gain (Loss) | |
|
|
|
|
|
|
|
|
|
| Derivatives |
| Recognized in | |
|
| Amount of |
| Location of |
|
|
| (Ineffective |
| Income on | |||
|
| Gain (Loss) |
| Gain (Loss) |
| Amount of |
| Portion and |
| Derivatives | |||
|
| Recognized in |
| Reclassified from |
| Gain (Loss) |
| Amount |
| (Ineffective Portion | |||
|
| AOCI on |
| AOCI into |
| Reclassified from |
| Excluded from |
| and Amount | |||
Derivatives in ASC 815 Cash Flow |
| Derivatives |
| Income |
| AOCI into Income |
| Effectiveness |
| Excluded from | |||
Hedging Relationships |
| (Effective Portion) |
| (Effective Portion) |
| (Effective Portion) |
| Testing) |
| Effectiveness Testing) | |||
Interest rate contracts |
| $ | (0.6) |
| Interest expense |
| $ | (0.5) |
| Interest expense |
| $ | — |
Commodity contracts |
|
| (1.2) |
| Cost of goods sold |
|
| 0.4 |
| Cost of goods sold |
|
| — |
Foreign exchange contracts |
|
| 0.1 |
| Net sales |
|
| — |
| Net sales |
|
| — |
Foreign exchange contracts |
|
| 9.4 |
| Cost of goods sold |
|
| 4.9 |
| Cost of goods sold |
|
| — |
Total |
| $ | 7.7 |
|
|
| $ | 4.8 |
|
|
| $ | — |
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended December 29, 2013, pretax:
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| Location of |
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|
|
| Gain (Loss) |
|
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|
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|
|
|
|
| Recognized in |
| Amount of | |
|
|
|
|
|
|
|
|
|
| Income on |
| Gain (Loss) | |
|
|
|
|
|
|
|
|
|
| Derivatives |
| Recognized in | |
|
| Amount of |
| Location of |
|
|
| (Ineffective |
| Income on | |||
|
| Gain (Loss) |
| Gain (Loss) |
| Amount of |
| Portion and |
| Derivatives | |||
|
| Recognized in |
| Reclassified from |
| Gain (Loss) |
| Amount |
| (Ineffective Portion | |||
|
| AOCI on |
| AOCI into |
| Reclassified from |
| Excluded from |
| and Amount | |||
Derivatives in ASC 815 Cash Flow |
| Derivatives |
| Income |
| AOCI into Income |
| Effectiveness |
| Excluded from | |||
Hedging Relationships |
| (Effective Portion) |
| (Effective Portion) |
| (Effective Portion) |
| Testing) |
| Effectiveness Testing) | |||
Commodity contracts |
| $ | 1.1 |
| Cost of goods sold |
| $ | (0.3) |
| Cost of goods sold |
| $ | 0.2 |
Foreign exchange contracts |
|
| 0.2 |
| Net sales |
|
| 0.1 |
| Net sales |
|
| — |
Foreign exchange contracts |
|
| (0.4) |
| Cost of goods sold |
|
| (0.7) |
| Cost of goods sold |
|
| — |
Total |
| $ | 0.9 |
|
|
| $ | (0.9) |
|
|
| $ | 0.2 |
Other Changes in Fair Value of Derivative Contracts
For derivative instruments that are used to economically hedge the fair value of the Company’s third party and intercompany foreign currency payments, commodity purchases and interest rate payments, but are not designated as hedging instruments under ASC 815, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three month periods ended December 28, 2014 and December 29, 2013, the Company recognized the following gains (losses) on these derivative contracts:
17
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in millions of dollars, except per share figures or as otherwise specified)
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|
|
|
|
|
|
| Amount of Gain (Loss) |
|
| ||||
|
| Recognized in |
| Location of Gain (Loss) | ||||
Derivatives Not Designated as |
| Income on Derivatives |
| Recognized in | ||||
Hedging Instruments Under ASC 815 |
| 2015 |
| 2014 |
| Income on Derivatives | ||
Commodity contracts |
| $ | — |
| $ | (0.1) |
| Cost of goods sold |
Foreign exchange contracts |
|
| (1.7) |
|
| 0.8 |
| Other expense, net |
Total |
| $ | (1.7) |
| $ | 0.7 |
|
|
9 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s net derivative portfolio as of June 29,December 28, 2014, contains Level 2 instruments and consists of commodity, interest rate and foreign exchange contracts. The fair values of these instruments as of June 29,December 28, 2014 were as follows ((liability)/asset):
|
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|
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|
|
|
| ||||||||
|
|
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|
|
|
|
|
| ||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| $ | — |
| $ | 0.6 |
| $ | — |
| $ | 0.6 | ||||||||||||
Commodity contracts |
| $ | — |
| $ | 1,404 |
| $ | — |
| $ | 1,404 |
|
| — |
| 0.4 |
| — |
| 0.4 | |||
Foreign exchange contracts |
|
| — |
|
| 918 |
|
| — |
|
| 918 |
|
| — |
|
| 17.3 |
|
| — |
|
| 17.3 |
Total Assets |
| $ | — |
| $ | 2,322 |
| $ | — |
| $ | 2,322 |
| $ | — |
| $ | 18.3 |
| $ | — |
| $ | 18.3 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| $ | — |
| $ | (1.9) |
| $ | — |
| $ | (1.9) | ||||||||||||
Commodity contracts |
| $ | — |
| $ | (5) |
| $ | — |
| $ | (5) |
|
| — |
| (0.9) |
| $ | — |
| (0.9) | ||
Interest rate contracts |
|
| — |
| (1,903) |
| — |
| (1,903) | |||||||||||||||
Foreign exchange contracts |
|
| — |
|
| (5,608) |
|
| — |
|
| (5,608) |
|
| — |
|
| (2.6) |
|
| — |
|
| (2.6) |
Total Liabilities |
| $ | — |
| $ | (7,516) |
| $ | — |
| $ | (7,516) |
| $ | — |
| $ | (5.4) |
| $ | — |
| $ | (5.4) |
The Company’s net derivative portfolio as of September 30, 2013,2014, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of September 30, 20132014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| $ | — |
| $ | 0.6 |
| $ | — |
| $ | 0.6 | ||||||||||||
Commodity contracts |
| $ | — |
| $ | 419 |
| $ | — |
| $ | 419 |
|
| — |
| 1.3 |
| — |
| 1.3 | |||
Foreign exchange contracts |
|
| — |
|
| 1,862 |
|
| — |
|
| 1,862 |
|
| — |
|
| 12.8 |
|
| — |
|
| 12.8 |
Total Assets |
| $ | — |
| $ | 2,281 |
| $ | — |
| $ | 2,281 |
| $ | — |
| $ | 14.7 |
| $ | — |
| $ | 14.7 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| $ | — |
| $ | (1.7) |
| $ | — |
| $ | (1.7) | ||||||||||||
Commodity contracts |
| $ | — |
| $ | (505) |
| $ | — |
| $ | (505) |
|
| — |
| (0.3) |
| — |
| (0.3) | |||
Foreign exchange contracts |
|
| — |
|
| (9,965) |
|
| — |
|
| (9,965) |
|
| — |
|
| (0.1) |
|
| — |
|
| (0.1) |
Total Liabilities |
| $ | — |
| $ | (10,470) |
| $ | — |
| $ | (10,470) |
| $ | — |
| $ | (2.1) |
| $ | — |
| $ | (2.1) |
The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and non-publicly traded debt approximate fair value. The fair values of long-term publicly traded debt are based on unadjusted quoted market prices (Level 1) and derivative financial instruments are generally based on quoted or observed market prices (Level 2).
The carrying values of goodwill, intangible assets and other long-lived assets are tested annually, or more frequently if an event occurs that indicates an impairment loss may have been incurred, using fair value measurements with unobservable inputs (Level 3).
1918
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
The carrying amounts and fair values of the Company’s financial instruments are summarized as follows ((liability)/asset):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| June 29, 2014 |
| September 30, 2013 |
| December 28, 2014 |
| September 30, 2014 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Carrying |
|
|
| Carrying |
|
|
| Carrying |
|
|
| Carrying |
|
|
| |||||||
|
| Amount |
| Fair Value |
| Amount |
| Fair Value |
| Amount |
| Fair Value |
| Amount |
| Fair Value | ||||||||
Total debt |
| $ | (3,336,608) |
| $ | (3,463,788) |
| $ | (3,218,863) |
| $ | (3,297,411) |
| $ | (3,415.5) |
| $ | (3,496.5) |
| $ | (2,990.8) |
| $ | (3,061.5) |
Interest swap agreements |
| (1.3) |
| (1.3) |
| (1.1) |
|
| (1.1) | |||||||||||||||
Commodity swap and option agreements |
| 1,399 |
| 1,399 |
| (86) |
| (86) |
| (0.5) |
| (0.5) |
| 1.1 |
|
| 1.1 | |||||||
Interest swap agreements |
| (1,903) |
| (1,903) |
| — |
| — | ||||||||||||||||
Foreign exchange forward agreements |
| (4,690) |
| (4,690) |
| (8,103) |
| (8,103) |
| 14.7 |
| 14.7 |
| 12.7 |
|
| 12.7 |
10 EMPLOYEE BENEFIT PLANS
Pension Benefits
The Company has various defined benefit pension plans covering some of its employees in the U.S. and certain employees in other countries, including the United Kingdom, the Netherlands, Germany, Guatemala, Brazil, Mexico and Taiwan. These pension plans generally provide benefits of stated amounts for each year of service.
The Company’s results of operations for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 reflect the following pension and deferred compensation benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||
Components of net periodic pension benefit |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
and deferred compensation benefit cost |
| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||||||||
Components of net periodic benefit and deferred compensation benefit cost |
| 2015 |
| 2014 | ||||||||||||||
Service cost |
| $ | 852 |
| $ | 867 |
| $ | 2,555 |
| $ | 2,416 |
| $ | 0.8 |
| $ | 0.9 |
Interest cost |
| 2,612 |
| 2,498 |
| 7,835 |
| 7,326 |
| 2.4 |
| 2.6 | ||||||
Expected return on assets |
| (2,456) |
| (2,196) |
| (7,368) |
| (6,589) |
| (2.5) |
| (2.5) | ||||||
Amortization of prior year service cost |
| 16 |
| — |
| 48 |
| — | ||||||||||
Recognized net actuarial loss |
| 371 |
| 519 |
| 1,113 |
| 1,557 |
|
| 0.4 |
|
| 0.4 | ||||
Employee contributions |
|
| (16) |
|
| (46) |
|
| (46) |
|
| (137) | ||||||
Net periodic benefit cost |
| $ | 1,379 |
| $ | 1,642 |
| $ | 4,137 |
| $ | 4,573 |
| $ | 1.1 |
| $ | 1.4 |
The Company funds its U.S. pension plans in accordance with the Internal Revenue Service defined guidelines and, where applicable, in amounts sufficient to satisfy the minimum funding requirements of applicable laws. Additionally, in compliance with the Company’s funding policy, annual contributions to non-U.S. defined benefit plans are equal to the actuarial recommendations or statutory requirements in the respective countries. The Company’s contributions to its pension and deferred compensation plans for the three and nine month periods ended June 29,December 28, 2014 and June 30,December 29, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Pension and deferred compensation contributions |
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2015 |
| 2014 | ||||||
Contributions made during period |
| $ | 3,693 |
| $ | 1,188 |
| $ | 9,133 |
| $ | 2,890 |
| $ | 2.2 |
| $ | 3.3 |
The Company sponsors a defined contribution pension plan for its domestic salaried employees, which allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company also sponsors defined contribution pension plans for employees of certain foreign subsidiaries. Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended JuneDecember 28, 2014 and December 29, 2014 were $3,433 and $10,706, respectively. Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended June 30, 2013 were $2,851$3.5 and $5,665, respectively.
11 INCOME TAXES
The Company's effective tax rate for both the three and nine month periods ended June 29, 2014 was 21%. The Company's effective tax rates for the three and nine month periods ended June 30, 2013 were 29% and 151%$4.1, respectively. For the three and nine month periods ended June 29, 2014, the Company's effective tax rate differs from the U.S. federal statutory
2019
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
11 INCOME TAXES
The Company's effective tax rates for the three months ended December 28, 2014 and December 29, 2013 were 29% and 19%, respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 35% principally due to income earned outside the U.S. that is subject to statutory rates lower than 35%. Additionally, for the nine month period ended June 29, 2014, our effective tax rate differs from the U.S. federal statutory rate due to a tax benefit recognized as a result of a Mexican tax law change. For both the three and nine month periods ended June 30, 2013, the Company's effective tax rate differs from the U.S. statutory rate due to (i) losses in the U.S. and certain foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances that have been provided on the Company's net operating loss carryforward tax benefits and (ii) other deferred tax assets and deferred income tax expense related to the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes. Additionally, for the nine month period ended June 30, 2013, the Company’s effective tax rate is higher than the U.S. statutory rate due to the reversal of U.S. valuation allowances of $49,291 as a result of the HHI Business acquisition, coupled with the fact that pretax consolidated income was close to break even, resulting in a higher effective tax rate.
During the nine month period ended June 29, 2014, the Company recorded a one-time reduction of $178,716 to its U.S. net operating loss carryforwards from actual and deemed repatriation of foreign earnings resulting from internal restructuring and external debt refinancing activities. The Company has a full valuation allowance on its U.S. net operating loss carryforwards; therefore there was no material impact on the Company’s quarterly or projected annual income tax expense.
The Company records the impact of a tax position if it concludes that the position is more likely than not sustainable upon audit, based on the technical merits of the position. At June 29,December 28, 2014 and September 30, 2013,2014, the Company had $13,004$11.2 and $13,807,$11.3, respectively, of unrecognized tax benefits related to uncertain tax positions. TheAt both December 28, 2014 and September 30, 2014, the Company also had approximately $3,706 and $3,671, respectively,$3.5 of accrued interest and penalties related to the uncertain tax positions at those dates.positions. Interest and penalties related to uncertain tax positions are reported as Income tax expense.
As of June 29,December 28, 2014, certain of the Company's legal entities in various jurisdictions are undergoing income tax audits. The Company cannot predict the ultimate outcome of the examinations; however, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized.
12 SEGMENT RESULTS
The Company manages its business in four vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances; (ii) Hardware & Home Improvement; (iii) Global Pet Supplies; (iii)and (iv) Home and Garden; and (iv) Hardware & Home Improvement.
The results of the HHI Business operations, excluding certain assets of Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation (the "TLM Business"), which was acquired on April 8, 2013, are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) since December 17, 2012. The results of the TLM Business operations are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) since April 8, 2013. The financial results related to the HHI Business are reported as a separate business segment, Hardware & Home Improvement.
The results of The Liquid Fence Company, Inc. ("Liquid Fence") since January 2, 2014 are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Home and Garden segment.Garden.
Global strategic initiatives and financial objectives for each reportable segment are determined at the corporate level. Each reportable segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for the sales and marketing initiatives and financial results for product lines within that segment.
Net sales and Cost of goods sold from transactions with other business segments have been eliminated. The gross contribution of intersegment sales is included in the segment selling the product to the external customer. Segment net sales are based upon the segment from which the product is shipped.
The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, interest expense, interest income and income tax expense. Corporate expenses primarily include general and administrative expenses and global long-term incentive compensation plan costs which are evaluated on a consolidated basis and not allocated to the Company’s operating segments. All depreciation and amortization included in income from operations is related to operating segments or corporate expense. Costs are identified to operating segments or corporate expense according to the function of each cost center.
All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.
Segment information for the three month periods ended December 28, 2014 and December 29, 2013 is as follows:
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| 2015 |
| 2014 | ||
Net sales to external customers |
|
|
|
|
|
|
Consumer batteries |
| $ | 240.2 |
| $ | 264.5 |
Small appliances |
|
| 223.8 |
|
| 216.8 |
Personal care |
|
| 172.5 |
|
| 178.0 |
Global Batteries & Appliances |
|
| 636.5 |
|
| 659.3 |
Hardware & Home Improvement |
|
| 271.2 |
|
| 278.4 |
Global Pet Supplies |
|
| 120.6 |
|
| 129.1 |
Home and Garden |
|
| 39.5 |
|
| 33.8 |
Total segments |
| $ | 1,067.8 |
| $ | 1,100.6 |
2120
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.
Segment information for the three and nine month periods ended June 29, 2014 and June 30, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||
Net sales to external customers |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer batteries |
| $ | 213,348 |
| $ | 207,339 |
| $ | 689,186 |
| $ | 678,067 |
Small appliances |
|
| 163,893 |
|
| 168,744 |
|
| 533,161 |
|
| 543,451 |
Electric shaving and grooming |
|
| 63,307 |
|
| 61,742 |
|
| 208,914 |
|
| 207,978 |
Electric personal care |
|
| 54,255 |
|
| 53,776 |
|
| 203,743 |
|
| 196,747 |
Global Batteries & Appliances |
|
| 494,803 |
|
| 491,601 |
|
| 1,635,004 |
|
| 1,626,243 |
Hardware & Home Improvement |
|
| 306,905 |
|
| 285,216 |
|
| 852,214 |
|
| 575,876 |
Global Pet Supplies |
|
| 152,158 |
|
| 156,440 |
|
| 440,691 |
|
| 456,639 |
Home and Garden |
|
| 174,643 |
|
| 156,568 |
|
| 322,888 |
|
| 289,091 |
Total segments |
| $ | 1,128,509 |
| $ | 1,089,825 |
| $ | 3,250,797 |
| $ | 2,947,849 |
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2015 |
| 2014 | ||||||
Segment profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Batteries & Appliances |
| $ | 49,117 |
| $ | 44,904 |
| $ | 190,559 |
| $ | 181,696 |
| $ | 96.6 |
| $ | 97.2 |
Hardware & Home Improvement |
| 50,672 |
| 42,963 |
| 125,489 |
| 46,483 |
| 38.9 |
| 40.0 | ||||||
Global Pet Supplies |
| 22,942 |
| 26,560 |
| 56,531 |
| 62,833 |
| 5.6 |
| 13.0 | ||||||
Home and Garden |
|
| 48,372 |
|
| 43,117 |
|
| 70,221 |
|
| 59,648 |
|
| 2.8 |
|
| (1.2) |
Total segments |
|
| 171,103 |
|
| 157,544 |
|
| 442,800 |
|
| 350,660 |
|
| 143.9 |
|
| 149.0 |
Corporate expense |
| 15,988 |
| 20,865 |
| 46,001 |
| 46,208 |
| 12.8 |
| 14.1 | ||||||
Acquisition and integration related charges |
| 2,671 |
| 7,747 |
| 14,455 |
| 40,558 |
| 8.1 |
| 5.5 | ||||||
Restructuring and related charges |
| 3,692 |
| 13,245 |
| 15,993 |
| 27,736 |
| 7.4 |
| 4.5 | ||||||
Interest expense |
| 47,344 |
| 61,516 |
| 151,724 |
| 191,758 |
| 44.4 |
| 57.0 | ||||||
Other expense, net |
|
| 2,760 |
|
| 2,613 |
|
| 4,390 |
|
| 7,941 |
|
| 0.7 |
|
| 0.8 |
Income from continuing operations before income taxes |
| $ | 98,648 |
| $ | 51,558 |
| $ | 210,237 |
| $ | 36,459 |
| $ | 70.5 |
| $ | 67.1 |
On February 8, 2013, the Venezuelan government announced the formal devaluation of its currency, the Bolivar fuerte, relative to the U.S. dollar. As Venezuela continues to be considered a highly inflationary economy, the functional currency of the Company's Venezuelan subsidiary is the U.S. dollar. Therefore, the Company remeasured the local statement of financial position of its Venezuela entity as of February 8, 2013 to reflect the impact of the devaluation to the official exchange rate from 4.3 to 6.3 Bolivar fuerte per U.S. dollar. The effect of the devaluation of the Bolivar fuerte was recorded in other expense, net and resulted in a $1,953 reduction to the Company's pretax income during the three and nine month periods ended June 30, 2013.
Segment assets for the Company’s product-focused reporting segments and its Corporate function are as follows:
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| ||||
|
| June 29, 2014 |
| September 30, 2013 |
| December 28, 2014 |
| September 30, 2014 | ||||
Segment total assets |
|
| (Unaudited) |
|
|
|
|
| (Unaudited) |
|
|
|
Global Batteries & Appliances |
| $ | 2,327,575 |
| $ | 2,360,733 |
| $ | 2,167.8 |
| $ | 2,152.0 |
Hardware & Home Improvement |
| 1,740,967 |
| 1,735,629 |
| 1,675.4 |
| 1,629.0 | ||||
Global Pet Supplies |
| 974,548 |
| 948,832 |
| 894.6 |
| 890.4 | ||||
Home and Garden |
|
| 590,875 |
|
| 500,559 |
|
| 570.6 |
|
| 526.6 |
Total segment assets |
|
| 5,633,965 |
|
| 5,545,753 |
|
| 5,308.4 |
|
| 5,198.0 |
Corporate |
|
| 63,177 |
|
| 80,920 |
|
| 523.6 |
|
| 315.0 |
Total assets at period end |
| $ | 5,697,142 |
| $ | 5,626,673 |
| $ | 5,832.0 |
| $ | 5,513.0 |
22
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
13 RESTRUCTURING AND RELATED CHARGES
The Company reports 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, compensation and related costs associated with manufacturing employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring or integration initiatives implemented.
The Company reports restructuring and related charges relating to administrative functions in Operating expenses, such as initiatives impacting sales, marketing, distribution or other non-manufacturing functions. Restructuring and related charges reflected in Operating expenses include, but are not limited to, termination and related costs, any asset impairments relating to the functional areas described above and other costs directly related to the initiatives.
21
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in millions of dollars, except per share figures or as otherwise specified)
The following table summarizes restructuring and related charges incurred by segment for the three and nine month periods ended JuneDecember 28, 2014 and December 29, 2014 and June 30, 2013:
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
| ||||||||||
|
| THREE MONTHS ENDED |
| NINE MONTHS ENDED |
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2015 |
| 2014 | ||||||
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Batteries & Appliances |
| $ | 18 |
| $ | 93 |
| $ | 513 |
| $ | 907 |
| $ | 0.2 |
| $ | 0.5 |
Hardware & Home Improvement |
| 319 |
| 644 |
| 2,570 |
| 1,772 |
| — |
| 1.2 | ||||||
Global Pet Supplies |
| 217 |
| 276 |
| 245 |
| 2,019 | ||||||||||
Total restructuring and related charges in cost of goods sold |
|
| 554 |
|
| 1,013 |
|
| 3,328 |
|
| 4,698 |
| $ | 0.2 |
| $ | 1.7 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Global Batteries & Appliances |
| 2,608 |
| 8,201 |
| 9,330 |
| 10,556 |
| $ | 4.6 |
| $ | 1.8 | ||||
Hardware & Home Improvement |
| 252 |
| 1,698 |
| 1,095 |
| 3,251 |
| 0.1 |
| — | ||||||
Global Pet Supplies |
| 271 |
| 1,165 |
| 1,561 |
| 7,501 |
| 2.1 |
| 0.3 | ||||||
Home and Garden |
| — |
| 151 |
| — |
| 518 |
| 0.1 |
| — | ||||||
Corporate |
|
| 7 |
|
| 1,017 |
|
| 679 |
|
| 1,212 |
|
| 0.3 |
|
| 0.7 |
Total restructuring and related charges in operating expenses |
|
| 3,138 |
|
| 12,232 |
|
| 12,665 |
|
| 23,038 |
| $ | 7.2 |
| $ | 2.8 |
Total restructuring and related charges |
| $ | 3,692 |
| $ | 13,245 |
| $ | 15,993 |
| $ | 27,736 |
| $ | 7.4 |
| $ | 4.5 |
HHI Business Rationalization Initiatives
During the fourth quarter of the fiscal year ended September 30, 2014, the Company implemented a series of initiatives throughout the Hardware & Home Improvement business segment to reduce operating costs and exit low margin business outside the U.S. (the “HHI Business Rationalization Initiatives”). These initiatives include headcount reductions, the exit of certain facilities and the sale of a portion of the Hardware & Home Improvement operations in Canada. Costs associated with these initiatives, which are expected to be incurred through September 30, 2016, are projected to total approximately $9.5.
The Company recorded $0.2 of pretax restructuring and related charges during the three month period ended December 30, 2014, and no pretax restructuring and related charges during the three month period ended December 29, 2013, related to the HHI Business Rationalization Initiatives.
Global Expense Rationalization Initiatives Summary
During the third quarter of the fiscal year ended September 30, 2013, the Company implemented a series of initiatives throughout the Company to reduce operating costs (the “Global Expense Rationalization Initiatives”). These initiatives consist of headcount reductions primarily in the Global Batteries & Appliances segment, the Global Pet Supplies segment, the Home and Garden segment and within Corporate. Costs associated with these initiatives, which are expected to be incurred through December 31, 2014,September 30, 2015, are currently projected to approximate $28,000.approximately $37.0.
The Company recorded $2,924$7.2 and $11,645$3.0 of pretax restructuring and related charges during the three and nine month periods ended JuneDecember 28, 2014 and December 29, 2014,2013, respectively, and $7,876 of pretax restructuring and related charges during the three and nine month periods ended June 30, 2013, related to the Global Expense Rationalization Initiatives.
The following table summarizes the remaining accrual balance associated with the Global Expense Rationalization Initiatives and the activity during the ninethree month period ended June 29,December 28, 2014:
23
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Termination |
| Other |
|
| |||
|
| Benefits |
| Costs |
| Total | |||
Accrual balance at September 30, 2013 |
| $ | 7,320 |
| $ | (35) |
| $ | 7,285 |
Provisions |
|
| 1,592 |
|
| 1,117 |
|
| 2,709 |
Cash expenditures |
|
| (5,911) |
|
| — |
|
| (5,911) |
Non-cash items |
|
| 309 |
|
| 4 |
|
| 313 |
Accrual balance at June 29, 2014 |
| $ | 3,310 |
| $ | 1,086 |
| $ | 4,396 |
Expensed as incurred (A) |
| $ | 2,219 |
| $ | 6,717 |
| $ | 8,936 |
______________________________
|
|
The following table summarizes the expenses incurred during the nine month period ended June 29, 2014, the cumulative amount incurred to date and the total future costs expected to be incurred associated with the Global Expense Rationalization Initiatives by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Global |
|
|
|
|
|
|
|
|
| |
|
| Batteries & |
| Global Pet |
|
|
|
|
|
| ||
|
| Appliances |
| Supplies |
| Corporate |
| Total | ||||
Restructuring and related charges during the nine month period ended June 29, 2014 |
| $ | 9,855 |
| $ | 1,111 |
| $ | 679 |
| $ | 11,645 |
Restructuring and related charges since initiative inception |
| $ | 19,925 |
| $ | 1,111 |
| $ | 1,926 |
| $ | 22,962 |
Total future restructuring and related charges expected |
| $ | 3,902 |
| $ | 896 |
| $ | 127 |
| $ | 4,925 |
Global Cost Reduction Initiatives Summary
During the fiscal year ended September 30, 2009, the Company implemented a series of initiatives within the Global Batteries & Appliances segment, the Global Pet Supplies segment and the Home and Garden segment to reduce operating costs, and to evaluate opportunities to improve the Company’s capital structure (the “Global Cost Reduction Initiatives”). These initiatives included headcount reductions and the exit of certain facilities within each of these segments. These initiatives also included consultation, legal and accounting fees related to the evaluation of the Company’s capital structure. Costs associated with these initiatives, which are expected to be incurred through January 31, 2015, are currently projected to approximate $103,000.
The Company recorded $213 and $733 of pretax restructuring and related charges during the three and nine month periods ended June 29, 2014, respectively, and $2,981 and $14,627 of pretax restructuring and related charges during the three and nine month periods ended June 30, 2013, respectively, related to the Global Cost Reduction Initiatives.
The following table summarizes the remaining accrual balance associated with the Global Cost Reduction Initiatives and the activity during the nine month period ended June 29, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Termination |
| Other |
|
|
| Termination |
| Other |
|
| ||||||
|
| Benefits |
| Costs |
| Total |
| Benefits |
| Costs |
| Total | ||||||
Accrual balance at September 30, 2013 |
| $ | 4,927 |
| $ | 424 |
| $ | 5,351 | |||||||||
Accrual balance at September 30, 2014 |
| $ | 4.1 |
| $ | 1.4 |
| $ | 5.5 | |||||||||
Provisions |
| 233 |
| (108) |
| 125 |
| 3.3 |
| — |
| 3.3 | ||||||
Cash expenditures |
| (3,052) |
| (599) |
| (3,651) |
| (2.2) |
| (0.2) |
| (2.4) | ||||||
Non-cash items |
|
| 11 |
|
| 5 |
|
| 16 |
|
| (0.1) |
|
| — |
|
| (0.1) |
Accrual balance at June 29, 2014 |
| $ | 2,119 |
| $ | (278) |
| $ | 1,841 | |||||||||
Accrual balance at December 28, 2014 |
| $ | 5.1 |
| $ | 1.2 |
| $ | 6.3 | |||||||||
Expensed as incurred (A) |
| $ | 64 |
| $ | 544 |
| $ | 608 |
| $ | 1.4 |
| $ | 2.5 |
| $ | 3.9 |
______________________________
(A) | Consists of amounts not impacting the accrual for restructuring and related charges. |
2422
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
The following table summarizes the expenses incurred during the ninethree month period ended June 29,December 28, 2014, the cumulative amount incurred to date and the total future costs expected to be incurred associated with the Global Cost ReductionExpense Rationalization Initiatives by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Global |
|
|
|
|
|
|
|
|
| Global |
|
|
|
|
|
| |||||||||
|
| Batteries & |
| Global Pet |
| Home and |
|
|
|
|
| Batteries & |
| Global Pet |
|
|
|
| |||||||||
|
| Appliances |
| Supplies |
| Garden |
| Corporate |
| Total |
| Appliances |
| Supplies |
| Corporate |
| Total | |||||||||
Restructuring and related charges during the nine month period ended June 29, 2014 |
| $ | 38 |
| $ | 695 |
| $ | — |
| $ | — |
| $ | 733 | ||||||||||||
Restructuring and related charges during the three month period ended December 28, 2014 |
| $ | 4.8 |
| $ | 2.0 |
| $ | 0.4 |
| $ | 7.2 | |||||||||||||||
Restructuring and related charges since initiative inception |
| $ | 25,451 |
| $ | 48,844 |
| $ | 18,219 |
| $ | 7,591 |
| $ | 100,105 |
| $ | 26.0 |
| $ | 3.8 |
| $ | 2.1 |
| $ | 31.9 |
Total future restructuring and related charges expected |
| $ | 450 |
| $ | 2,015 |
| $ | — |
| $ | — |
| $ | 2,465 |
| $ | 1.8 |
| $ | 3.1 |
| $ | 0.2 |
| $ | 5.1 |
The Company recorded $571$0.0 and $3,665$1.2 of restructuring and related charges during the three and nine month periods ended JuneDecember 28, 2014 and December 29, 2014, respectively, and $2,342 and $5,023 of restructuring and related charges during the three and nine month periods ended June 30, 2013, respectively, related to initiatives implemented by the HHI Business prior to the Company's acquisition on December 17, 2012.
In connection with other restructuring efforts, the Company recorded $(17) and $(50) ofno pretax restructuring and related creditscharges during the three month period ended December 28, 2014 and nine month periods ended June 29, 2014, respectively, and $46 and $210$0.5 of pretax restructuring and related charges during the three and nine month periodsperiod ended June 30, 2013, respectively.December 29, 2013.
14 COMMITMENTS AND CONTINGENCIES
The Company has provided for the estimated costs associated with environmental remediation activities at some of its current and former manufacturing sites. The Company believes that any additional liability which may result from resolution of these matters in excess of the amounts provided of approximately $4,675 will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
The Company is a defendant in various matters of litigation generally arising out of the ordinary course of business. The Company does not believe that the resolution of any such matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.
15 ACQUISITIONS
In accordance with ASC Topic 805, “Business“Business Combinations” (“ASC 805”), the Company accounts for acquisitions by applying the acquisition method of accounting. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition.
HHI Business
On December 17, 2012, the Company completed the cash acquisition of the HHI Business from Stanley Black & Decker. A portion of the HHI Business, consisting of the purchase of the TLM Business, closed on April 8, 2013.
Supplemental Pro Forma Information
The following reflects the Company's pro forma results had the results of the HHI Business been included for all periods presented.
25
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Reported Net sales |
| $ | 1,128,509 |
| $ | 1,089,825 |
| $ | 3,250,797 |
| $ | 2,947,849 |
HHI Business adjustment (1) |
|
| — |
|
| — |
|
| — |
|
| 191,777 |
Pro forma Net sales |
| $ | 1,128,509 |
| $ | 1,089,825 |
| $ | 3,250,797 |
| $ | 3,139,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Reported Net income (loss) (2) (3) |
| $ | 78,094 |
| $ | 36,389 |
| $ | 166,396 |
| $ | (18,469) |
HHI Business adjustment (1) |
|
| — |
|
| — |
|
| — |
|
| 4,942 |
Pro forma Net income (loss) |
| $ | 78,094 |
| $ | 36,389 |
| $ | 166,396 |
| $ | (13,527) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Reported Basic income (loss) per share |
| $ | 1.48 |
| $ | 0.69 |
| $ | 3.16 |
| $ | (0.36) |
HHI Business adjustment (1) |
|
| — |
|
| — |
|
| — |
|
| 0.10 |
Pro forma Basic income (loss) per share |
| $ | 1.48 |
| $ | 0.69 |
| $ | 3.16 |
| $ | (0.26) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share (4): |
|
|
|
|
|
|
|
|
|
|
|
|
Reported Diluted income (loss) per share |
| $ | 1.47 |
| $ | 0.69 |
| $ | 3.14 |
| $ | (0.36) |
HHI Business adjustment (1) |
|
| — |
|
| — |
|
| — |
|
| 0.10 |
Pro forma Diluted income (loss) per share |
| $ | 1.47 |
| $ | 0.69 |
| $ | 3.14 |
| $ | (0.26) |
|
|
|
|
|
|
|
|
Liquid FenceTell Manufacturing
On January 2,October 1, 2014, the Company completed the acquisition of Liquid Fence,Tell, a producerleading manufacturer and distributor of animal repellents.commercial doors, locks and hardware. The preliminary value of the consideration given in this acquisition, net of working capital adjustments, was $35,845$30.3 and is not significant individually.
The following table summarizes the consideration paid for Liquid Fence:
|
| ||
| |||
| |||
| |||
|
|
The promissory note will be paid in four semi-annual installments over 24 months from the close of the transaction.
26
SPECTRUM BRANDS HOLDINGS, INC.Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)(Amounts in thousands, except per share figures)
The results of Liquid Fence'sTell's operations since January 2,October 1, 2014 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Hardware & Home and GardenImprovement segment.
Preliminary Valuation of Assets and Liabilities
The assets acquired and liabilities assumed in the Liquid FenceTell acquisition have been measured at their fair values at January 2,October 1, 2014 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce including an experienced research team, and is expected to be deductible for income tax purposes. The preliminary fair values recorded were determined based upon a valuation and the estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of acquisition accounting that are not yet finalized relate to amounts for intangible assets, contingent liabilities and residual goodwill.
The preliminary fair values recorded for the assets acquired and liabilities assumed for Liquid Fence are as follows:
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Preliminary Pre-Acquisition Contingencies Assumed
The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to Liquid Fence that existed as of the acquisition date. Based on the evaluation to date, the Company has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, the Company has preliminarily recorded its best estimates for these contingencies as part of the preliminary purchase accounting for Liquid Fence. The Company continues to gather information relating to all pre-acquisition contingencies that it has assumed from Liquid Fence. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of the measurement period, any adjustments to pre-acquisition contingency amounts will be reflected in the Company's results of operations.
Preliminary Valuation Adjustments
The Company performed a preliminary valuation of the acquired trade names, proprietary technology assets, customer relationships and a contingent earn-out liability at January 2, 2014. A summary of the significant key inputs is as follows:
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2723
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
The preliminary fair values recorded for the assets acquired and liabilities assumed for Tell are as follows:
Cash | $ | 1.1 | |
Accounts receivable | 5.4 | ||
Inventories | 7.2 | ||
Prepaid expense | 0.6 | ||
Property, plant and equipment, net | 1.5 | ||
Intangible assets | 12.5 | ||
Total assets acquired | $ | 28.3 | |
Total liabilities assumed | 5.1 | ||
Total identifiable net assets less goodwill | 23.2 | ||
Goodwill | 7.1 | ||
Total identifiable net assets | $ | 30.3 |
Preliminary Valuation Adjustments
The Company performed a preliminary valuation of the acquired inventories, property, plant and equipment, trade name and customer relationships at October 1, 2014. A summary of the significant inputs to the valuation is as follows:
· | Inventories – Replacement cost approach was applied to estimate the fair value of the raw materials inventory. Finished goods were valued at estimated selling price less the sum of costs of disposal and reasonable profit on the value added in the completion and disposal effort. |
· | Property, plant and equipment –The cost approach was utilized to estimate the fair value of approximately 97.0% of the property, plant and equipment. The sales comparison approach was utilized to estimate the fair value of the remaining 3.0% of the property, plant and equipment. |
· | The Company valued an indefinite-lived trade name using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of |
· | The Company valued customer relationships using the |
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2824
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands,millions of dollars, except per share figures)figures or as otherwise specified)
15 SUBSEQUENT EVENTS
16 NEW ACCOUNTING PRONOUNCEMENTS
Revenue recognition
In May 2014,ASC 855, “Subsequent Events” (“ASC 855”), establishes general standards of accounting and disclosure of events that occur after the Financial Accounting Standards Boardbalance sheet date but before financial statements are issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expectsavailable to be entitled in exchange for those goods or services. The new revenue recognition modelissued. ASC 855 requires identifying the contract, identifyingCompany to evaluate events that occur after the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. This ASU can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized atbalance date through the date of the initial application along withCompany’s financial statements are issued, and to determine whether adjustments to or additional disclosures. This ASU will become effective for the Company beginningdisclosures in the first quarter of its fiscal year ending September 30, 2018.financial statements are necessary. The Company has not selectedevaluated subsequent events through the date these financial statements were issued.
On December 31, 2014, the Company completed a method$120.0 cash acquisition, excluding working capital adjustments, of Procter & Gamble’s European pet food business, consisting of premium brands for adoption nor determined the potential effects on our consolidated financial statements.
Presentation of Unrecognized Tax Benefit
In July 2013, the Financial Accounting Standards Board issued new accounting guidance which requires entities to present unrecognized tax benefits as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent the net operating loss carryforwards or tax credit carryforwards are not available to be used at the reporting date to settle additional income taxes,dogs and the entity does not intend to use themcats. The Company will account for this purpose.acquisition in accordance with ASC 805. The new accounting guidanceCompany is consistent with howin the process of completing the preliminary purchase accounting.
On January 16, 2015, the Company has historically presented unrecognized tax benefitscompleted a $150.5 cash acquisition, excluding working capital adjustments, of Salix Animal Health LLC, which provides premium pet food products. The Company will account for this acquisition in its Consolidated Statementsaccordance with ASC 805. The Company is in the process of Financial Position, and therefore,completing the Company does not expect this guidance to have a significant impact on its consolidated financial statementspreliminary purchase accounting.
2925
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Spectrum Brands Holdings, Inc., a Delaware corporation (“SB Holdings”), is a diversified global branded consumer products company. SB Holdings' common stock trades on the New York Stock Exchange (the “NYSE”) under the symbol “SPB.”
Unless the context indicates otherwise, the terms the “Company,” “Spectrum,” “we,” “our” or “us” are used to refer to SB Holdings and its subsidiaries.
Business Overview
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. We also design, market and distribute a broad range of branded small household appliances and personal care products. We also design, manufacture, market, distribute and sell certain hardware, home improvement and plumbing products, and are a leading United States (“U.S.”) provider of residential locksets and builders' hardware and a leading provider of faucets. Our manufacturing and product development facilities are located in the United States (“U.S.”), Europe, Latin America and Asia. Substantially all of our rechargeable batteries, chargers and portable lighting products, shaving and grooming products, small household appliances and personal care products are manufactured by third-party suppliers, primarily located in Asia.
We sell our products in approximately 140160 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, Dingo, Nature's Miracle, Spectracide, Cutter, Hot Shot, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator, Kwikset, Weiser, Baldwin, National Hardware, Stanley FANAL,and Pfister brands. We also have patented technologies such as Smartkey, a rekeyable lockset technology, and various other brands.Smart Code Home Connect.
Our diversified global branded consumer products have positions in sevensix major product categories: consumer batteries, small appliances, personal care, hardware and home improvement, pet supplies electric shaving and grooming, electric personal care, home and garden controls, and hardware and home improvement.controls.
Our chief operating decision-maker manages the businesses in four vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of our worldwide battery, electric shaving and grooming, electric personal care and small appliances, primarily in the kitchen and home product categories (“Global Batteries & Appliances”); (ii) Global Pet Supplies, which consists of our worldwide pet supplies business (“Global Pet Supplies”); (iii) Home and Garden, which consists of our home and garden and insect control business (“Home and Garden”); and (iv) Hardware & Home Improvement, which consists of our worldwideresidential locksets and builders hardware home improvement and plumbing businessproducts (“Hardware & Home Improvement”). Management reviews our performance based on these segments. For information pertaining to our business segments, see Note 12, “Segment Results” of Notes to Condensed Consolidated Financial Statements (Unaudited), included in this Quarterly Report on Form 10-Q.
Global and geographic strategic initiatives and financial objectives are determined at the corporate level. Each business segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for sales and marketing initiatives and the financial results for all product lines within that business segment.
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.
3026
Results of Operations
Fiscal Quarter and Fiscal Nine Months Ended June 29,December 28, 2014 Compared to Fiscal Quarter and Fiscal Nine Months Ended June 30,December 29, 2013
In this Quarterly Report on Form 10-Q we refer to the three month period ended June 29,December 28, 2014 as the “Fiscal 2014“Fiscal 2015 Quarter,” the nine month period ended June 29, 2014 as the “Fiscal 2014 Nine Months,”and the three month period ended June 30,December 29, 2013 as the “Fiscal 2013“Fiscal 2014 Quarter.” and the nine month period ended June 30, 2013 as the “Fiscal 2013 Nine Months.”
Net Sales. Net sales for the Fiscal 2015 Quarterdecreased $32.8 million to $1,067.8 million from $1,100.6 million in the Fiscal 2014 Quarter increased $39 million to $1,129 million from $1,090 million in the Fiscal 2013 Quarter,, a 4% increase.3% decrease. The following table details the principal components of the change in net sales from the Fiscal 20132014 Quarter to the Fiscal 20142015 Quarter (in millions):
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Fiscal |
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Increase in personal care | 6.1 | ||
Increase in home and garden controls | 5.7 | ||
Decrease in pet supplies |
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Decrease in hardware and home improvement | (7.2) | ||
Decrease in consumer batteries | (10.3) | ||
Foreign currency impact, net |
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Net sales for the Fiscal 2014 Nine Months increased $303 million to $3,251 million from $2,948 million in the Fiscal 2013 Nine Months, a 10% increase. The following table details the principal components of the change in net sales from the Fiscal 2013 Nine Months to the Fiscal 2014 Nine Months (in millions):
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Consolidated net sales by product line for the Fiscal 2015 Quarter and the Fiscal 2014 Quarter the Fiscal 2013 Quarter, the Fiscal 2014 Nine Months and the Fiscal 2013 Nine Months are as follows (in millions):
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Consumer batteries |
| $ | 213 |
| $ | 207 |
| $ | 689 |
| $ | 678 |
Hardware and home improvement products |
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| 307 |
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| 285 |
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| 852 |
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| 576 |
Small appliances |
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| 164 |
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| 169 |
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| 533 |
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| 543 |
Pet supplies |
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| 152 |
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| 156 |
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| 441 |
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| 457 |
Home and garden control products |
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| 175 |
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| 157 |
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| 323 |
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| 289 |
Electric personal care products |
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| 54 |
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| 54 |
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| 204 |
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| 197 |
Electric shaving and grooming products |
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| 64 |
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| 62 |
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| 209 |
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| 208 |
Total net sales to external customers |
| $ | 1,129 |
| $ | 1,090 |
| $ | 3,251 |
| $ | 2,948 |
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Consumer batteries |
| $ | 240.2 |
| $ | 264.5 |
Small appliances |
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| 223.8 |
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| 216.8 |
Personal care |
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| 172.5 |
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| 178.0 |
Total Global batteries and appliances |
| $ | 636.5 |
| $ | 659.3 |
Hardware and home improvement |
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| 271.2 |
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| 278.4 |
Global pet supplies |
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| 120.6 |
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Home and garden |
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Total net sales to external customers |
| $ | 1,067.8 |
| $ | 1,100.6 |
Global consumer battery sales decreased $24.3 million, or 9%, during the Fiscal 2015 Quarter versus the Fiscal 2014 Quarter. Excluding the impact of negative foreign exchange of $14.0 million, global consumer battery sales decreased $10.3 million. The constant currency decrease in global consumer battery sales was attributable to a decrease in North American sales of $23.5 million, which was partially offset by increases in European and Latin American consumer battery sales of $10.8 million and $2.4 million, respectively. The decrease in North America was due to promotions and discounts by our competitors coupled with customer inventory reduction initiatives and timing of holiday shipments. On a constant currency basis, the European sales increase was due to a $9.0 million increase in alkaline batteries and a $2.3 million increase in specialty batteries. The increase in European alkaline and specialty batteries were driven by customer gains, increased volume and promotional activities. The Latin American sales increase was primarily attributable to $1.6 million in our lighting category as a result of continuing geographic expansion coupled with the effective launch of our compact fluorescent light bulbs in Brazil, the Caribbean and Chile.
Small appliance sales increased $7.0 million, or 3%, during the Fiscal 2015 Quarter compared to the Fiscal 2014 Quarter, which included $8.7 million of negative foreign exchange impact. Excluding foreign exchange, North American and European sales increased $7.3 million and $8.6 million, respectively. The North American sales increase was attributable to promotions and timing of shipments coupled with new products. The European sales increase was attributable to new products and customer gains.
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Global consumer battery
Personal care sales increased $6decreased $5.5 million, or 3%, during the Fiscal 20142015 Quarter versus the Fiscal 2013 Quarter. All geographic regions contributed to the growth in global consumer battery sales. Excluding de minimis2014 Quarter, which included $11.6 million of negative foreign exchange impacts,impact. Excluding foreign exchange, European and Latin American consumer battery sales increased $4$8.2 million whileand $1.4 million, respectively, which was partially offset by a North American andsales decrease of $3.5 million. The European sales each increased by $1 million.increase was primarily due to new product releases related to male grooming coupled with geographic expansion into Eastern Europe. The Latin American sales increase was driven by lighting category growthattributable to new customers coupled with new product launches in BrazilArgentina and distribution gains throughout Central America.Chile. The North American and European increases were a result of retailer distribution gains and successful promotional activity. Global consumer battery sales increased $11 million, or 2%, during the Fiscal 2014 Nine Months compareddecrease was due to the Fiscal 2013 Nine Months. Excluding the impacttransition of negative foreign exchange of $1 million, global consumer battery sales increased $12 million. The constant currency increase in global consumer battery sales was attributableour new shaving and grooming product categories, which we expect to the increaseslaunch during the Fiscal 2014 Quarter discussed above coupled with strongour second quarter sales during the fiscal year ending September 30, 2014 (“Fiscal 2014”) in which global battery sales increased due to new customers, new products, geographic expansion and effective promotions. These increases were partially offset by the non-recurrence in the first quarter of Fiscal 20142015, coupled with timing of approximately $10 million of flashlight sales in North America related to storm activity in the first quarter of the fiscal year ended September 30, 2013 ("Fiscal 2013").holiday shipments.
Hardware and home improvement sales increased $22 million, or 8%, during the Fiscal 2014 Quarter to $307 million, compared to $285 million in the Fiscal 2013 Quarter. The increase was attributable to the residential security category which accounted for $15 million of the increase due to strong retail positioning in North America coupled with a continued strong housing market in non-retail channels. Also contributing to the sales growth were increases in plumbing and hardware products of $5 million and $2 million, respectively. Hardware and home improvement sales were $852 million in the Fiscal 2014 Nine Months, versus $576 million in the Fiscal 2013 Nine Months. On a proforma basis, as if the acquisition of the residential hardware and home improvement business (the “HHI Business”) had occurred at the beginning of the Fiscal 2013 Nine Months, hardware and home improvement sales increased $84 million to $852 million in the Fiscal 2014 Nine Months, versus $768 million in the Fiscal 2013 Nine Months. This increase was attributable to growth in the Fiscal 2014 Quarter as discussed above along with sales increases in the first quarter of Fiscal 2014. Fiscal 2014 first quarter sales growth was primarily attributable to the recovery of the U.S. housing market and international growth in hardware, which drove a $20 million increase in security product sales, a $7 million increase in hardware product sales and a $7 million increase in plumbing product sales. Also contributing to the Fiscal 2014 Nine Months sales increase were sales related to the Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation (the “TLM Business”) during the Fiscal 2014 Nine Months, as prior year results did not include the TLM Business until April 8, 2013.
Small appliance sales decreased $5$7.2 million, or 3%, during the Fiscal 20142015 Quarter compared to the Fiscal 20132014 Quarter. Excluding de minimis foreign exchange impacts,The port delays had a $12.3 million negative impact on sales during the Fiscal 2015 Quarter, which was partially offset by an increase of $9.8 million due to the acquisition of Tell Manufacturing, Inc. (“Tell”) during the Fiscal 2015 Quarter. During the Fiscal 2015 Quarter the hardware product category and security product category declined $9.2 million and $0.9 million, respectively. These sales declines were partially offset by an increase in the plumbing category of $3.0 million. In addition to the effect of the port delays, the decrease in small appliances was attributable to decreases in North America and Latin America of $5 million and $2 million, respectively, partially offset with sales growth in Europe of $3 million. The decrease in North America and Latin Americathe hardware product category was due to distributor transition for our exit of low-margin promotions during the Fiscal 2014 Quarter.Asia supplier. The increase in Europethe plumbing category was driven by promotions within existing retailers coupled with innovative new products. Small appliancemainly due to strong performance in both the retail and wholesale channels.
Global pet supplies sales decreased $10$8.5 million, or 2%7%, during the Fiscal 2014 Nine Months versus2015 Quarter compared to the Fiscal 2013 Nine Months. Excluding the2014 Quarter, which included negative foreign exchange impact of $5 million, small appliances decreased $5$3.1 million. Excluding foreign exchange impacts, North American sales declined $15 million, which was tempered by gains within Europe and Latin America. The North American sales declines and European sales gains are attributable to the factors discussed above for the Fiscal 2014 Quarter. The Latin American sales increase during the Fiscal 2014 Nine Months was due to new product launches in the first half of Fiscal 2014, which was partially offset by declines in the Fiscal 2014 Quarter.
Pet supply sales decreased $4 million, or 3%, during the Fiscal 2014 Quarter compared to the Fiscal 2013 Quarter, which includedOn a positive foreign exchange impact of $1 million. Excluding foreign exchange, aquatic sales decreased $6 million which was tempered by an increase in companion animal sales of $1 million. The decline in aquatic sales was driven by lower kit and equipment sales in North America and lower aquatic food sales internationally coupled with a one-time negative impact from product registration issues in Russia. The $1 million increase in companion animal sales was attributable to increases in our grooming products and chicken jerky. Pet supply sales decreased $16 million, or 4%, during the Fiscal 2014 Nine Months versus the Fiscal 2013 Nine Months, which included a positive foreignconstant currency exchange impact of $1 million. Excluding foreign exchange impacts,basis, aquatic sales and companion animal sales decreased $13$4.9 million and $4$0.5 million, respectively. The declines inaquatic sales are primarily due to the factors discussed above for the Fiscal 2014 Quarter coupled with retailer inventory reductionsdecline was driven by continued weakness in the first quarter of Fiscal 2014, adverse weatheraquatic product category in North America which negatively affected retail store traffic during the second quarter of Fiscal 2014 and the non-recurrence of companion animal promotions that took place during the first quarter of Fiscal 2013.coupled with lower European sales due to an import ban in Russia.
Home and garden control product sales increased $18$5.7 million, or 11%17%, during the Fiscal 20142015 Quarter compared to the Fiscal 2013 Quarter,2014 Quarter. The sales gain was attributable to a $15increases in repellent product sales and household insect control sales of $4.8 million and $2.3 million, respectively. These increases were tempered with decreased sales in lawn and garden control products of $1.4 million. The increase in repellantrepellent product sales driven by market share gains and favorable weather. Also contributing to the increase in repellant product sales was a $6 million increase due to the acquisition of The Liquid Fence Company, Inc. ("(“Liquid Fence"Fence”). Household, which occurred during the second quarter of our fiscal year ended September 30, 2014 (“Fiscal 2014”), coupled with a strong demand for personal repellent products in Puerto Rico. The increase in household insect control product sales increased $3 million due to distribution
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gains at key retailers. Home and garden product sales increased $34 million, or 12%, in the Fiscal 2014 Nine Months versus the Fiscal 2013 Nine Months, driven by the factors discussed above for the Fiscal 2014 Quarter.
Electric personal care sales were flat during the Fiscal 2014 Quarter at $54 million compared to the Fiscal 2013 Quarter. Excluding foreign exchange impacts, electronic personal care sales increased $1 million. This increase was in Latin America and was attributable to volume expansion in Colombia and successful hair care accessories product launches throughout Central America. Electric personal care sales increased $7 million, or 4%, in the Fiscal 2014 Nine Months versus the Fiscal 2013 Nine Months. Geographically, excluding foreign exchange impacts, sales increased $4 million in Latin America, $2 million in North America and $1 million in Europe. Latin American sales gains were attributable to distribution gains in Brazilat retailers coupled with the factors discussed above for the Fiscal 2014 Quarter. Increased North American sales were a result of distribution gainsan extended peak seasonal selling season. The decrease in lawn and successful promotions. The increase in Europeangarden control sales was driven by innovative new products and promotions.
Electric shaving and grooming product sales increased $2 million, or 3%, during the Fiscal 2014 Quarter compared to the Fiscal 2013 Quarter. Excluding foreign exchange impacts, North American and Latin American sales increased $2 million and $1 million, respectively, due to new distribution gains and promotional activity tempered by a slight decrease in European sales. Electric shaving and grooming product sales, excluding exchange, increased $1 million during the Fiscal 2014 Nine Months compared to the Fiscal 2013 Nine Months. This increase was attributable to sales increases within Europe and Latin America of $4 million and $2 million, respectively, offset by a $5 million decline in North American sales. The gains in Latin America and Europe were attributable to expansion into new channels while the decrease in North America wasprimarily due to the non-recurrencetiming of promotions from the first quarter of Fiscal 2013 andretail customer inventory management.orders.
Gross Profit. Gross profit and gross profit margin for the Fiscal 20142015 Quarter was $417$370.2 million and 37.0%34.7% versus $383$381.2 million and 35.1% for the Fiscal 2013 Quarter. The increase in gross profit and improvement in gross profit margin was primarily attributable to an increase in sales, particularly the shift towards higher margin sales and continuing cost improvements. Gross profit margins improved in all four operating segments.
Gross profit34.6% for the Fiscal 2014 Nine MonthsQuarter. Gross profit margin percentage was $1,158 million versus $994 million for the Fiscal 2013 Nine Months, driven by the acquisition of the HHI Business which accounted for an increase of $141 million in Gross profitup slightly in the Fiscal 2014 Nine Months. Our gross profit margin for2015 Quarter compared to the Fiscal 2014 Nine Months increased to 35.6% from 33.7% in the Fiscal 2013 Nine Months. The increase in gross profit margin wasQuarter, primarily driven by the non-recurrence of a $31 million increase to cost of goods sold due to the sale of inventory during the Fiscal 2013 Nine Months that was revalued in connection with the acquisition of the HHI Business. mix.
Operating Expenses. Operating expenses for the Fiscal 20142015 Quarter totaled $268$254.6 million compared to $267$256.3 million for the Fiscal 20132014 Quarter. The slight increasedecrease in operating expenses during the Fiscal 20142015 Quarter is attributable to increasesa $9.1 million decrease within Sellingselling and Generalgeneral and administrative expenses as a result of increased costsexpense reductions in all four segments related to facilitate the increasedecline in Net sales coupled with timing of incentive compensation accruals.volume. These increasesdecreases were partially offset by a $9$4.4 million decreaseincrease in Restructuring and related charges and a $5$2.6 million decreaseincrease within Acquisition and integration related charges.
Operating expenses for the Fiscal 2014 Nine Months totaled $792 million compared to $758 million for the Fiscal 2013 Nine Months. The $34 million increase in operating expenses during the Fiscal 2014 Nine Months is primarily attributable to the acquisition of the HHI Business which accounted for an increase of $60 million in operating expenses, partially offset by a $26 million decrease in Acquisition and integration related charges.
See “Acquisition and Integration Related Charges” below, as well as Note 2, "Significant Accounting Policies—Acquisition and Integration Related Charges,"” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our Acquisition and integration related charges.
See Note 13, "Restructuring and Related Charges,” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our Restructuring and related charges.
Segment Results. As discussed above, we manage our business in four reportable segments: (i) Global Batteries & Appliances; (ii) Hardware & Home Improvement; (iii) Global Pet Supplies; (iii)and (vi) Home and Garden; and (iv) Hardware & Home Improvement.Garden.
The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, interest expense, interest income and income tax expense. Corporate expenses primarily include general and administrative expenses and global long-term incentive compensation plans which are evaluated on a consolidated basis and not allocated to our operating segments. All depreciation and amortization included in income from operations is related to
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operating segments or corporate expense. Costs are allocated to operating segments or corporate expense according to the function of each cost center.
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All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.
Financial information pertaining to our reportable segments is contained in Note 12, “Segment Results,” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("(“Adjusted EBITDA"EBITDA”) is a metric used by management and frequently used by the financial community which provides insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company’s ability to service debt and is one of the measures used for determining our debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. While we believe that Adjusted EBITDA is useful supplemental information, such adjusted results are not intended to replace our Generally Accepted Accounting Principles’ (“GAAP”) financial results and should be read in conjunction with those GAAP results.
Below are reconciliations of GAAP Net income (loss), as adjusted, to Adjusted Earnings Before Interest and Taxes ("EBIT") and to Adjusted EBITDA for each segment and for Consolidated SB Holdings for the Fiscal 2014 Quarter, the Fiscal 2014 Nine Months, the Fiscal 20132015 Quarter and the Fiscal 2013 Nine Months:
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Fiscal 2014 Quarter |
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Net income (loss), as adjusted (a) |
| $ | 44 |
| $ | 22 |
| $ | 48 |
| $ | 48 |
| $ | (84) |
| $ | 78 |
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
| 20 |
Interest expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 47 |
|
| 47 |
Acquisition and integration related charges |
|
| 1 |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
|
| 3 |
Restructuring and related charges |
|
| 3 |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| 4 |
Adjusted EBIT |
| $ | 48 |
| $ | 23 |
| $ | 49 |
| $ | 49 |
| $ | (17) |
| $ | 152 |
Depreciation and amortization (c) |
|
| 19 |
|
| 8 |
|
| 3 |
|
| 11 |
|
| 9 |
|
| 50 |
Adjusted EBITDA |
| $ | 67 |
| $ | 31 |
| $ | 52 |
| $ | 60 |
| $ | (8) |
| $ | 202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Global |
|
|
|
|
|
|
| Hardware & |
| Corporate / |
|
|
| |||
|
| Batteries & |
| Global Pet |
| Home and |
| Home |
| Unallocated |
| Consolidated | ||||||
Fiscal 2014 Nine Months |
| Appliances |
| Supplies |
| Garden |
| Improvement |
| Items(a) |
| SB Holdings | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
| (in millions) | ||||||||||||||||
Net income (loss), as adjusted (a) |
| $ | 173 |
| $ | 54 |
| $ | 69 |
| $ | 116 |
| $ | (246) |
| $ | 166 |
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 44 |
|
| 44 |
Interest expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 152 |
|
| 152 |
Acquisition and integration related charges |
|
| 6 |
|
| — |
|
| 1 |
|
| 4 |
|
| 3 |
|
| 14 |
Restructuring and related charges |
|
| 10 |
|
| 2 |
|
| — |
|
| 4 |
|
| — |
|
| 16 |
Adjusted EBIT |
| $ | 189 |
| $ | 56 |
| $ | 70 |
| $ | 124 |
| $ | (47) |
| $ | 392 |
Depreciation and amortization (c) |
|
| 53 |
|
| 24 |
|
| 10 |
|
| 31 |
|
| 28 |
|
| 146 |
Adjusted EBITDA |
| $ | 242 |
| $ | 80 |
| $ | 80 |
| $ | 155 |
| $ | (19) |
| $ | 538 |
2014 Quarter:
|
3429
|
| Global |
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|
| Hardware & |
| Corporate / |
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| |||
|
| Batteries & |
| Global Pet |
| Home and |
| Home |
| Unallocated |
| Consolidated | ||||||
Fiscal 2013 Quarter |
| Appliances |
| Supplies |
| Garden |
| Improvement |
| Items(a) |
| SB Holdings | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) | ||||||||||||||||
Net income (loss), as adjusted (a) |
| $ | 32 |
| $ | 24 |
| $ | 43 |
| $ | 40 |
| $ | (103) |
| $ | 36 |
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 15 |
|
| 15 |
Interest expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 62 |
|
| 62 |
Acquisition and integration related charges |
|
| 1 |
|
| 1 |
|
| — |
|
| 1 |
|
| 5 |
|
| 8 |
Restructuring and related charges |
|
| 9 |
|
| 1 |
|
| — |
|
| 2 |
|
| 1 |
|
| 13 |
Adjusted EBIT |
| $ | 42 |
| $ | 26 |
| $ | 43 |
| $ | 43 |
| $ | (20) |
| $ | 134 |
Depreciation and amortization (c) |
|
| 17 |
|
| 7 |
|
| 3 |
|
| 10 |
|
| 18 |
|
| 55 |
Adjusted EBITDA |
| $ | 59 |
| $ | 33 |
| $ | 46 |
| $ | 53 |
| $ | (2) |
| $ | 189 |
|
|
|
|
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| Global |
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| Hardware & |
| Corporate / |
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| |||
|
| Batteries & |
| Global Pet |
| Home and |
| Home |
| Unallocated |
| Consolidated | ||||||
Fiscal 2013 Nine Months |
| Appliances |
| Supplies |
| Garden |
| Improvement |
| Items(a) |
| SB Holdings | ||||||
|
|
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|
|
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|
| (in millions) | ||||||||||||||||
Net income (loss), as adjusted (a) |
| $ | 159 |
| $ | 51 |
| $ | 59 |
| $ | 37 |
| $ | (324) |
| $ | (18) |
Pre-acquisition earnings of HHI (b) |
|
| — |
|
| — |
|
| — |
|
| 30 |
|
| — |
|
| 30 |
Income tax expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 55 |
|
| 55 |
Interest expense |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 192 |
|
| 192 |
Acquisition and integration related charges |
|
| 4 |
|
| 2 |
|
| — |
|
| 4 |
|
| 30 |
|
| 40 |
Restructuring and related charges |
|
| 12 |
|
| 9 |
|
| — |
|
| 5 |
|
| 1 |
|
| 27 |
HHI Business inventory fair value adjustment |
|
| — |
|
| — |
|
| — |
|
| 31 |
|
| — |
|
| 31 |
Venezuela devaluation |
|
| 2 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2 |
Adjusted EBIT |
| $ | 177 |
| $ | 62 |
| $ | 59 |
| $ | 107 |
| $ | (46) |
| $ | 359 |
Depreciation and amortization (c) |
|
| 50 |
|
| 22 |
|
| 9 |
|
| 20 |
|
| 32 |
|
| 133 |
Adjusted EBITDA |
| $ | 227 |
| $ | 84 |
| $ | 68 |
| $ | 127 |
| $ | (14) |
| $ | 492 |
______________________________
(a) | It is |
(b) |
|
(c) | Included within depreciation and amortization is amortization of |
Global Batteries & Appliances
|
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| Fiscal Quarter |
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| Fiscal Nine Months |
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| 2014 |
| 2013 |
| 2014 |
| 2013 |
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| Fiscal Quarter |
| ||||||||||||
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| 2015 |
| 2014 | ||||
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| (in millions) |
| (in millions) | ||||||||||||||||||||
Net sales to external customers |
| $ | 495 |
|
| $ | 492 |
|
| $ | 1,635 |
|
| $ | 1,626 |
|
| $ | 636.5 |
|
| $ | 659.3 |
|
Segment profit |
| $ | 49 |
|
| $ | 45 |
|
| $ | 191 |
|
| $ | 182 |
|
| $ | 96.6 |
|
| $ | 97.2 |
|
Segment profit as a % of net sales |
| 9.9 | % |
|
| 9.1 | % |
|
| 11.7 | % |
| 11.2 | % |
|
| 15.2 | % |
|
| 14.7 | % | ||
Segment Adjusted EBITDA |
| $ | 67 |
|
| $ | 59 |
|
| $ | 242 |
|
| $ | 227 |
|
| $ | 112.1 |
|
| $ | 114.2 |
|
Assets as of June 29, 2014 and September 30, 2013 |
| $ | 2,328 |
|
| $ | 2,361 |
|
| $ | 2,328 |
|
| $ | 2,361 |
| ||||||||
Assets as of December 28, 2014 and September 30, 2014 |
| $ | 2,167.8 |
|
| $ | 2,152.0 |
|
Global Batteries & Appliances net sales to external customers are discussed within the “Product line net sales by segment” discussion above.
Segment profit in the Fiscal 2015 Quarter decreased to $96.6 million from $97.2 million in the Fiscal 2014 Quarter, driven by the previously discussed sales decrease which was partially tempered by operating cost savings from the Global Expense Rationalization Initiatives that were originally implemented in Fiscal 2013 and expanded in Fiscal 2014. Segment profitability as a percentage of net sales increased to 15.2% in the Fiscal 2015 Quarter compared to 14.7% in the Fiscal 2014 Quarter as a result of the cost savings discussed above.
Segment Adjusted EBITDA in the Fiscal 2015 Quarter decreased to $112.1 million from $114.2 million in the Fiscal 2014 Quarter. The decrease in segment Adjusted EBITDA was driven by the factors that drove the decrease in segment profit discussed above.
Segment assets at December 28, 2014 increased to $2,167.8 million from $2,152.0 million at September 30, 2014. The increase is primarily due seasonal increases in working capital of $44.1 million, partially offset by decreases in Goodwill and intangible assets as a result of amortization of definite lived intangible assets and foreign currency impacts.
Hardware & Home Improvement
|
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|
|
| Fiscal Quarter |
| ||||
|
| 2015 |
| 2014 | ||||
|
| (in millions) | ||||||
Net sales to external customers |
| $ | 271.2 |
|
| $ | 278.4 |
|
Segment profit |
| $ | 38.9 |
|
| $ | 40.0 |
|
Segment profit as a % of net sales |
|
| 14.3 | % |
|
| 14.4 | % |
Segment Adjusted EBITDA |
| $ | 51.9 |
|
| $ | 49.6 |
|
Assets as of December 28, 2014 and September 30, 2014 |
| $ | 1,675.4 |
|
| $ | 1,629.0 |
|
Hardware and home improvement net sales to external customers are discussed within the “Product line net sales by segment” discussion above.
Segment profit in the Fiscal 2015 Quarter decreased to $38.9 million from $40.0 million in the Fiscal 2014 Quarter. Segment profitability as a percentage of sales declined slightly to 14.3% in the Fiscal 2015 Quarter, versus 14.4% in the Fiscal 2014 Quarter. The slight decrease in segment profit was driven by the previously discussed sales decrease coupled with the one-time increase of $0.8 million related to the increase to cost of goods sold in the Fiscal 2015 Quarter due to the sale of inventory revalued in connection with the Tell acquisition. These items were partially offset by a decrease in operating expenses resulting from the HHI Business Rationalization Initiatives announced in Fiscal 2014. The slight decrease in segment
3530
profit as a percentage of sales was driven by the one-time increase to cost of goods sold, which was partially offset by cost savings from the HHI Business Rationalization Initiatives.
Global Batteries & Appliances segment sales increased $3Segment Adjusted EBITDA was $51.9 million or 1%, duringin the Fiscal 20142015 Quarter versus the Fiscal 2013 Quarter. The impact of foreign exchange was not significant to$49.6 million in the Fiscal 2014 Quarter. The growth in Global Batteries & Appliances segment sales was due to increase in global consumer battery sales and electric shaving and grooming product sales of $6 million and $2 million, respectively. This was partially offset by the decrease in small appliance sales of $5 million. All geographic regions contributed to the growth in global consumer battery sales. Excluding de minimis foreign exchange impacts, Latin American consumer battery sales increased $4 million, while North American and European sales each increased by $1 million. The Latin American sales increaseSegment Adjusted EBITDA was driven by lighting category growth in Brazilcost improvements and distribution gains throughout Central America. The North American and European sales increases were a result of retailer distribution gains and successful promotional activity. The increase in electric shaving and grooming product sales is primarily due to North American distribution gains and promotional activity. These increases were partially offset by a decrease of $5 million within small appliances during the Fiscal 2014 Quarterexpense controls as a result of decreases in North America and Latin America of $5 million and $2 million, respectively, due to exit of low-margin promotions, partially offset with sales growth in Europe.
Global Batteries & Appliances segment sales increased $9 million, or 1%, during the Fiscal 2014 Nine Months versus the Fiscal 2013 Nine Months. Excluding the negative foreign exchange impacts of $7 million, Global Batteries & Appliances segment sales increased $16 million, or 1%. The increase in Global Batteries & Appliance sales was driven by growth in global consumer battery, electric personal care and electric shaving and grooming sales of $12 million, $7 million, and $1 million, respectively. These gains were partially offset by a decline within small appliances of $4 million. The increase in global battery sales is attributable to the increases during the Fiscal 2014 Quarter discussed above coupled with strong second quarter sales during Fiscal 2014 in which global battery sales increased due to new customers, new products, geographic expansion and effective promotions. These increases were partially offset by the non-recurrence in the first quarter of Fiscal 2014 of approximately $10a $1.1 million of flashlight sales in North America related to storm activity in the first quarter of Fiscal 2013. The increase in electric personal care sales is due to gains in all geographic regions, most notably within Latin America, due to distribution gains in Brazil, volume expansion in Colombia and successful hair care accessories product launches throughout Central America. The increase in electric shaving and grooming sales is due to gains in Europe and Latin America of $4 million and $2 million, respectively, which was partially offset by declines in North America of $5 millionadjusted EBITDA due to the non-recurrence of promotions from the first quarter of Fiscal 2013 and customer inventory management. The decline in small appliance sales of $5 million was attributable to decreases of $15 million in North America tempered by increases within Europe and Latin America of $8 million and $2 million, respectively. The North American sales declines are attributable to the factors discussed above forTell acquisition during the Fiscal 20142015 Quarter. The European and Latin American sales growth were due to promotions and new product launches.
Segment profit in the Fiscal 2014 Quarter increased to $49 million from $45 million in the Fiscal 2013 Quarter, driven by the previously discussed sales increase and operating cost savings from the Global Expense Rationalization Initiatives that were implemented in Fiscal 2013. Segment profitability as a percentage of net sales increased to 9.9% in the Fiscal 2014 Quarter compared to 9.1% in the Fiscal 2013 Quarter as a result of the cost savings discussed above.
Segment profit in the Fiscal 2014 Nine Months increased to $191 million from $182 million in the Fiscal 2013 Nine Months, driven by increased sales and operating cost improvements tempered by unfavorable product mix and increased raw material and commodity costs. Segment profitability as a percentage of net sales increased to 11.7% in the Fiscal 2014 Nine Months versus 11.2% in the Fiscal 2013 Nine Months, due to the cost improvements discussed above.
Segment Adjusted EBITDA in the Fiscal 2014 Quarter increased to $67 million from $59 million in the Fiscal 2013 Quarter while segment Adjusted EBITDA in the Fiscal 2014 Nine Months increased to $242 million from $227 million in the Fiscal 2013 Nine Months. The increase in segment Adjusted EBITDA for both periods was driven by the factors that drove the increase in segment profit discussed above for each respective period.
Segment assets at June 29,December 28, 2014 decreased to $2,328 million from $2,361 million atand September 30, 2013. The decrease is primarily due seasonal decreases in working capital. Goodwill and intangible assets, which are a direct result of the revaluation impacts of fresh-start reporting which occurred during the year ended September 30, 2009 ("Fiscal 2009") and acquisitions, decreased to $1,303 million at June 29, 2014 from $1,322 million at September 30, 2013, due to intangible asset amortization.
36
Global Pet Supplies
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| Fiscal Quarter |
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| Fiscal Nine Months |
| ||||||||
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| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||||||
|
|
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|
|
|
|
|
|
|
|
|
| (in millions) | ||||||||||||||
Net sales to external customers |
| $ | 152 |
|
| $ | 156 |
|
| $ | 441 |
|
| $ | 457 |
|
Segment profit |
| $ | 23 |
|
| $ | 27 |
|
| $ | 57 |
|
| $ | 63 |
|
Segment profit as a % of net sales |
|
| 15.1 | % |
|
| 17.0 | % |
|
| 12.8 | % |
|
| 13.8 | % |
Segment Adjusted EBITDA |
| $ | 31 |
|
| $ | 33 |
|
| $ | 80 |
|
| $ | 84 |
|
Assets as of June 29, 2014 and September 30, 2013 |
| $ | 975 |
|
| $ | 949 |
|
| $ | 975 |
|
| $ | 949 |
|
Global Pet Supplies segment net sales to external customers in the Fiscal 2014 Quarter decreased $4 million to $152 million compared to $156 million in the Fiscal 2013 Quarter. Excluding the positive $1 million impact of foreign currency exchange, segment sales decreased $5 million. This decrease is a result of decreased aquatic sales of $6 million which was tempered by an increase in companion animal sales of $1 million. The decline in aquatic sales was driven by lower kit and equipment sales in North America and lower aquatic food sales internationally. The $1 million increase in companion animal sales was attributable to our grooming products and chicken jerky.
Segment net sales to external customers in the Fiscal 2014 Nine Months decreased $16 million to $441 million compared to $457 million in the Fiscal 2013 Nine Months. Excluding the positive $1 million impact of foreign currency exchange, segment sales decreased $17 million. The sales decline was due to $13were $1,675.4 million and $4$1,629.0 million, in aquatics and companion animal sales, respectively. The decreased sales discussed above for the Fiscal 2014 Quarter were due to retailer inventory reductions in the first quarter of Fiscal 2014, the non-recurrence of companion animal promotions during the first quarter of Fiscal 2013, coupled with adverse weather in North America, which negatively affected retail store traffic during the second quarter of Fiscal 2014.
Segment profit decreased to $23 million in the Fiscal 2014 Quarter compared to $27 million in the Fiscal 2013 Quarter and segment profitability as a percentage of sales in the Fiscal 2014 Quarter decreased to 15.1% from 17.0% in Fiscal 2013 Quarter. The decrease in segment profit was driven by decreased sales; whereas the decline in segment profitability as a percent of sales was due to unfavorable product mix in our international business. These negative impacts were partially offset by continued cost savings from the Global Expense Initiatives that were implemented in Fiscal 2013.
Segment profit decreased $6 million to $57 million in the Fiscal 2014 Nine Months compared to $63 million in the Fiscal 2013 Nine Months. Segment profitability as a percentage of sales in the Fiscal 2014 Nine Months decreased to 12.8%, compared to 13.8% in the same period last year. The decreases in segment profit and segment profitability were due to the factors discussed above for the Fiscal 2014 Quarter.
Segment Adjusted EBITDA in the Fiscal 2014 Quarter decreased $2 million to $31 million from $33 million in the Fiscal 2013 Quarter. Segment Adjusted EBITDA in the Fiscal 2014 Nine Months decreased $4 million to $80 million from $84 million in the Fiscal 2013 Nine Months. The change in Adjusted EBITDA for both the Fiscal 2014 Quarter and the Fiscal 2014 Nine Months was driven by decreased sales and unfavorable product mix in our international business.
Segment assets at June 29, 2014 increased to $975 million from $949 million at September 30, 2013. Goodwill and intangible assets, which are substantially the result of the revaluation impacts of fresh-start reporting during Fiscal 2009 and acquisitions, decreased to $686 million at June 29, 2014 from $701 million at September 30, 2013, due to intangible asset amortization.
37
Home and Garden
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| Fiscal Quarter |
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| Fiscal Nine Months |
| ||||||||
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| 2014 |
| 2013 |
| 2014 |
| 2013 | ||||||||
|
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|
|
|
|
|
| (in millions) | ||||||||||||||
Net sales to external customers |
| $ | 175 |
|
| $ | 157 |
|
| $ | 323 |
|
| $ | 289 |
|
Segment profit |
| $ | 48 |
|
| $ | 43 |
|
| $ | 70 |
|
| $ | 60 |
|
Segment profit as a % of net sales |
|
| 27.7 | % |
|
| 27.5 | % |
|
| 21.7 | % |
|
| 20.6 | % |
Segment Adjusted EBITDA |
| $ | 52 |
|
| $ | 46 |
|
| $ | 80 |
|
| $ | 68 |
|
Assets as of June 29, 2014 and September 30, 2013 |
| $ | 591 |
|
| $ | 501 |
|
| $ | 591 |
|
| $ | 501 |
|
Segment net sales to external customers increased $18 million, or 11%, during the Fiscal 2014 Quarter to $175 million, compared to $157 million in the Fiscal 2013 Quarter, attributable to a $15 million increase in repellant product sales driven by market share gains and favorable weather. Also contributing to the increase in repellant product sales was a $6 million increase due to the Liquid Fence acquisition. Household insect control product sales increased $3 million due to distribution gains at key retailers.
Segment net sales to external customers increased $34 million, or 12%, to $323 million during the Fiscal 2014 Nine Months, versus $289 million in the Fiscal 2013 Nine Months driven by the factors discussed above for the Fiscal 2014 Quarter.
Segment profitability in the Fiscal 2014 Quarter increased $5 million to $48 million from $43 million in the Fiscal 2013 Quarter, driven by the increase in sales for the Fiscal 2014 Quarter and the acquisition of Liquid Fence. Segment profitability as a percentage of sales in the Fiscal 2014 Quarter slightly increased to 27.7% from 27.5% last year.
Segment profitability in the Fiscal 2014 Nine Months increased $10 million to $70 million from $60 million in the Fiscal 2013 Nine Months, driven by increased sales in the Fiscal 2014 Nine Months as discussed above and improved product mix, coupled with continued strong operating expense management. Segment profitability as a percentage of sales in the Fiscal 2014 Nine Months improved to 21.7%, from 20.6% in the Fiscal 2013 Nine Months.
Segment Adjusted EBITDA in the Fiscal 2014 Quarter increased $6 million to $52 million from $46 million in the Fiscal 2013 Quarter, driven by the factors discussed above for the increase in segment profit.
Segment Adjusted EBITDA increased $12 million to $80 million in the Fiscal 2014 Nine Months compared to segment Adjusted EBITDA of $68 million in the Fiscal 2013 Nine Months, due to the factors discussed above for the improvement in segment profit.
Segment assets at June 29, 2014 increased to $591 million from $501 million at September 30, 2013. The increase in segment assets was primarily driven by normala seasonal increasesincrease in inventory and accounts receivable in conjunction with the start of our major selling season,$42.3 million coupled with the acquisition of Liquid Fence.an increase in Goodwill and intangible assets which are substantially aof $10.6 million as result of the revaluation impactsacquisition of fresh-start reporting during Fiscal 2009Tell. Goodwill and acquisitions, increased to $451intangible assets were $1,181.5 million at June 29,December 28, 2014 from $426compared to $1,170.9 million at September 30, 2013, driven by the acquisition of Liquid Fence.2014.
See Note 15,14, “Acquisitions” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding the Liquid FenceTell acquisition.
Global Pet Supplies
|
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|
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|
|
| Fiscal Quarter |
| ||||
|
| 2015 |
| 2014 | ||||
|
| (in millions) | ||||||
Net sales to external customers |
| $ | 120.6 |
|
| $ | 129.1 |
|
Segment profit |
| $ | 5.6 |
|
| $ | 13.0 |
|
Segment profit as a % of net sales |
|
| 4.6 | % |
|
| 10.1 | % |
Segment Adjusted EBITDA |
| $ | 13.0 |
|
| $ | 20.4 |
|
Assets as of December 28, 2014 and September 30, 2014 |
| $ | 894.6 |
|
| $ | 890.4 |
|
Global pet supply net sales to external customers are discussed within the “Product line net sales by segment” discussion above.
Segment profit decreased to $5.6 million in the Fiscal 2015 Quarter compared to $13.0 million in the Fiscal 2014 Quarter and segment profitability as a percentage of sales in the Fiscal 2015 Quarter decreased to 4.6% from 10.1% in Fiscal 2014 Quarter. The decrease in segment profit and segment profitability as a percent of sales were driven by decreased sales coupled with unfavorable product mix and increased trade promotions.
Segment Adjusted EBITDA in the Fiscal 2015 Quarter decreased $7.4 million to $13.0 million from $20.4 million in the Fiscal 2014 Quarter. The decrease in Adjusted EBITDA during the Fiscal 2015 Quarter compared to the Fiscal 2014 Quarter was driven by factors discussed above.
Segment assets at December 28, 2014 increased to $894.6 million from $890.4 million at September 30, 2014. Goodwill and intangible assets decreased to $656.4 million at December 28, 2014 from $668.7 million at September 30, 2014, due to amortization of definite lived intangible assets.
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Results of the HHI Business, reported in the Hardware & Home Improvement segment, relate to operations subsequent to the acquisition date of December 17, 2012. A portion of the HHI Business, consisting of the TLM Business, is included in the results of the Hardware and Home Improvement segment subsequent to its acquisition on April 8, 2013.
SegmentGarden net sales to external customers were $307 million duringare discussed within the “Product line net sales by segment” discussion above.
Segment profitability in the Fiscal 20142015 Quarter versus $285increased $4.0 million to $2.8 million from a loss of $(1.2) million in the Fiscal 2013 Quarter. The $22 million increase in Hardware & Home Improvement segment sales was primarily attributable to the residential security category which accounted for $15 million of the increase due a to strong retail position in North America coupled with a continued strong housing market in non-retail channels. Also contributing to the sales growth were increases in plumbing and hardware products of $5 million and $2 million, respectively.
Segment net sales to external customers were $852 million in the Fiscal 2014 Nine Months, versus $576 million in the Fiscal 2013 Nine Months. On a proforma basis, calculated as if the HHI Business acquisition had occurred at the beginning of the Fiscal 2013 Nine Months, hardware and home improvement sales increased $84 million to $852 million in the Fiscal 2014 Nine Months, versus $768 million in the Fiscal 2013 Nine Months. This increase was attributable to growth in the Fiscal 2014 Quarter, as discussed above, along with sales increases in the first quarter of Fiscal 2014. Fiscal 2014 first quarter sales growth was primarily attributable to the recovery of the U.S. housing market and international growth in hardware. Also contributing to the Fiscal 2014 Nine Months sales growth was increased sales related to the TLM Business, as prior year results only include the TLM Business subsequent to April 8, 2013.
Segment profit in the Fiscal 2014 Quarter was $51 million versus $43 million in the Fiscal 2013 Quarter. Segment profitability as a percentage of sales improved to 16.5% in the Fiscal 20142015 Quarter versus 15.1% in the Fiscal 2013 Quarter.increased to 7.1% from (3.6)% last year. The increase in segment profit and segment profitability as a percentage of sales was driven byis attributable to the increaseseasonal peak selling season extending into the Fiscal 2015 Quarter, the implementation of the Global Expense Rationalization Initiatives that were announced in salesFiscal 2013 and favorable product mix.
Segment profitexpanded in Fiscal 2014 and the Liquid Fence acquisition that closed in the second quarter of Fiscal 2014 Nine Months was $125 million compared to $46 million in the Fiscal 2013 Nine Months. Segment profitability as a percentage of sales was 14.7% in the Fiscal 2014 Nine Months and 8.1% in the Fiscal 2013 Nine Months. The increase in segment profit was primarily driven by the inclusion of the HHI Business for the entire period in the Fiscal 2014 Nine Months. Furthermore, the increase in segment profit and segment profitability as a percentage of sales was driven by the increase in sales and improved manufacturing productivity, coupled with the non-recurrence of a $31 million increase to cost of goods sold in the Fiscal 2013 Nine Months due to the sale of inventory which was revalued in connection with the acquisition.2014.
Segment Adjusted EBITDA was $60in the Fiscal 2015 Quarter increased $4.3 million to $6.0 million from $1.7 million in the Fiscal 2014 Quarter, versus $53 million in the Fiscal 2013 Quarter. Segment Adjusted EBITDA was $155 million in the Fiscal 2014 Nine Months versus $127 million in the Fiscal 2013 Nine Months. The increases in Segment Adjusted EBITDA were driven by the increased sales, cost improvements and the other factors discussed above.above for the increase in segment profit.
Segment assets at June 29,December 28, 2014 andincreased to $570.6 million from $526.6 million at September 30, 2013 were $1,741 million and $1,736 million, respectively.2014. The increase in segment assets was driven by normal seasonal increases in inventory and accounts receivable due to increased sales during the Fiscal 2014 Nine Months.in preparation of our major selling season. Goodwill and intangible assets decreased to $1,179$446.5 million at June 29,December 28, 2014 from $1,192$449.2 million at September 30, 2013, driven by2014, due to amortization of definite lived intangible asset amortization and foreign currency translation.assets.
See Note 15, “Acquisitions” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding the HHI Business acquisition.
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Corporate Expense. Our corporate expense was $16$12.8 million in the Fiscal 2015 Quarter compared to $14.1 million in the Fiscal 2014 Quarter, compared to $21 million inwith the Fiscal 2013 Quarter,decrease primarily attributable to savings from the Global Expense Rationalization Initiatives that were implemented in Fiscal 2013 and expanded in Fiscal 2014 coupled with lowerdecreased stock compensation expense. Corporate expense as a percentage of consolidated net sales for the Fiscal 2014 Quarter decreased to 1.4% versus 1.9% for the Fiscal 2013 Quarter.$1.0 million.
Our corporate expense was flat at $46 million in the Fiscal 2014 Nine Months compared to the Fiscal 2013 Nine Months. Corporate expense as a percentage of consolidated net sales for the Fiscal 2014 Nine Months decreased to 1.4% verses 1.6% for the Fiscal 2013 Nine Months due to the increase in sales.
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 acquisitions, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses associated with our acquisitions. See Note 2, "Significant Accounting Policies - Acquisition and Integration Related Charges"Charges” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for further detail regarding our Acquisition and integration related charges.
Restructuring and Related Charges. See Note 13, “Restructuring and Related Charges” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for information regarding our restructuring and related charges.
Interest Expense. Interest expense in the Fiscal 20142015 Quarter was $47$44.4 million compared to $62$57.0 million in the Fiscal 20132014 Quarter. The $15$12.6 million decrease in interest expense in the Fiscal 20142015 Quarter is driven primarily by the non-recurrence of $11.3 million in costs related to savings from the refinancing of our 9.5% Notes.
Interest expensethe Term Loan in the Fiscal 2014 Nine Months was $152 million compared to $192 million inQuarter, consisting of the Fiscal 2013 Nine Months. The $40 million decrease in interest expense in the Fiscal 2014 Nine Months is primarily related to savings from the refinancingwrite off of our 9.5% Notes of $42 million.unamortized deferred financing fees and original issue discount. See Note 7, “Debt,” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our outstanding debt.
Income Taxes. Our effective tax raterates for boththe Fiscal 2015 Quarter and the Fiscal 2014 Quarter and Fiscal 2014 Nine Months was 21%. Our effective tax rates for the Fiscal 2013 Quarter and Fiscal 2013 Nine Months were 29% and 151%19%, respectively. For boththe Fiscal 2015 Quarter and the Fiscal 2014 Quarter, and Fiscal 2014 Nine Months, our effective tax rate differsrates differ from the U.S. federal statutory rate of 35% principally due to income earned outside the U.S. that is subject to statutory rates lower than 35%. Additionally, for the Fiscal 2014 Nine Months our effective2015 Quarter, we recorded a $3.6 million tax rate differs from the U.S. federal statutory rate duecharge to record a tax benefit recognized as a result of a Mexican tax law change. For both the Fiscal 2013 Quarter and Fiscal 2013 Nine Months, our effective tax rate differs from the U.S. statutory rate due to (i) losses in the U.S. and certain foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances that have been provided on our net operating loss carryforward tax benefits and (ii) otherallowance against deferred tax assets and deferred income tax expense related to the change in book versusour Brazil operations, since it is more likely than not that we will not obtain tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes. Additionally, for the Fiscal 2013 Nine Months, our effective tax rate is higher than the U.S. statutory rate due to the reversal of U.S. valuation allowances of $49 million as a result of the HHI Business acquisition, coupled with the fact that the pretax consolidated income was close to break even, resulting in a higher effective tax rate.
benefits from these assets. For the Fiscal 2014 Nine Months, we generated domestic pretax profits and expectQuarter, the tax rate was reduced due to generate pretax domestic profits during the remainder of Fiscal 2014. Should we continue to generate domestic pretax profits for Fiscal 2014 and in subsequent periods, there is a reasonable possibility that some or most of the domestic valuation allowance of $316 million could be released at some future date, which could result in a material tax benefit.favorable Mexican law change.
Each reporting period, we evaluate the available earnings, permanent reinvestment classification, and availability and intent to use alternative mechanisms for repatriation of cash for each jurisdiction in which we do business. In light of our plans to voluntarily pay down our U.S. debt, fund distributions to shareholders, fund U.S. acquisitions and our ongoing U.S. operational cash flow requirements, weWe are not treating current and certain prior year earnings as permanently reinvested, except for jurisdictions where repatriation is either precluded or restricted by law. Due to the valuation allowance recorded against U.S. net deferred tax assets, including net operating loss carryforwards, we do not recognize any incremental U.S. tax expense on the expected future repatriation of foreign earnings. Should the U.S. valuation allowance be released at some future date, the recording of U.S. tax on foreign earnings not considered permanently reinvested might have a material effect on our effective tax rate. At the end of Fiscal 2014,For our fiscal year ending September 30, 2015, we expect to record approximately $2$2.6 million of additional tax expense from non-U.S. withholding and other taxes expected to be incurred on repatriation of current earnings.earnings, and also expect to record $15.2 million of US tax on future repatriation that would be offset by operating losses.
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During our fiscal year ending September 30, 2014, we earned domestic pretax book income after having generated significant domestic book and tax losses since Fiscal 1997. We generated a small domestic loss during the Fiscal 2014 Nine Months,2015 Quarter. Should we recordedgenerate domestic pretax profits in the near-term, there is a one-time reductionreasonable possibility that some or most of $179 million to our U.S. net operating loss carryforwards from actual and deemed repatriation of foreign earnings resulting from internal restructuring and external debt refinancing activities. We have a fullthe domestic valuation allowance on our U.S. net operating loss carryforwards; therefore, there was nocould be released, which could result in a material impact on our quarterly or projected annual income tax expense.
Asbenefit. We estimate that $123.4 million of June 29, 2014, certain of our legal entities in various jurisdictions are undergoing incomevaluation allowance related to domestic deferred tax audits. Weassets cannot predict the ultimate outcomebe released regardless of the examinations; however, it is reasonably possibleamount of domestic income generated due to prior period ownership changes that duringlimit the next 12 months some portionamount of previously unrecognized tax benefits could be recognized.NOLs we can use.
Liquidity and Capital Resources
Operating Activities
For the Fiscal 2014 Nine Months,2015 Quarter, cash used by operating activities totaled $49$146.6 million compared to cash used of $76$136.0 million during the Fiscal 2013 Nine Months.2014 Quarter. The $27 $10.6 million decrease increase in cash used by operating activities was primarily due to:
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We expect to fund our cash requirements, including capital expenditures, interest and principal payments due in Fiscal 2014,2015, through a combination of cash on hand, cash flow from operations and funds available for borrowings under our asset based lending revolving credit facility (the “ABL Facility”). Going forward, our ability to satisfy financial and other covenants in our senior credit agreements and senior unsecured indentures and to make scheduled payments or prepayments on our debt and other financial obligations will depend on our future financial and operating performance. There can be no assurances that our business will generate sufficient cash flows from operations or that future borrowings under our ABL Revolving Credit Facility will be available in an amount sufficient to satisfy our debt maturities or to fund our other liquidity needs.
We are not treating current and certain earnings from prior years as permanently reinvested, except for jurisdictions where repatriation is either precluded or restricted by law. At June 29,December 28, 2014, there are no significant foreign cash balances available for repatriation. During Fiscal 2014,2015, we expect to generate between $75 million and $100$125 million of foreign cash that we anticipate willmay be repatriated for general corporate purposes.
See Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013,2014, for further discussion of the risks associated with our ability to service all of our existing indebtedness and our ability to maintain compliance with financial and other covenants related to our indebtedness.
Investing Activities
Net cash used by investing activities was $67$43.2 million for the Fiscal 2015 Quarter compared to $15.9 million for the Fiscal 2014 Nine Months compared to $1,446Quarter. The $27.3 million for the Fiscal 2013 Nine Months. The $1,379 million decreaseincrease in cash used by investing activities in the Fiscal 2014 Nine Months2015 Quarter is primarily driven by a decrease inthe $29.2 million cash used for acquisitions of $1,375 million, which related to the $1,351 million purchase, net of cash acquired, of the HHI Business, and the $49 million cash paid, net of cash acquired, for Shaser in the Fiscal 2013 Nine Months,Tell acquisition, partially offset by the $25 million cash paid for the acquisition of Liquid Fence in the Fiscal 2014 Nine Months. The remaining $4 million change in net cash used by investing activities includes incremental cash proceeds of $9 million from sales of property, plant and equipment and a $5 million increase in cash used for capital expenditures.
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Table of Contents$1.1 million.
Financing Activities
Debt Financing
At June 29,December 28, 2014 we had the following debt instruments outstanding: (i) a senior secured term loan pursuant to a senior credit agreement (the “Senior Credit Agreement”) which consists of $818 million$648.4 principal due September 4, 2017 (“Tranche
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A”), $512 million$509.9 principal due September 4, 2019 (“Tranche C”), $59 million$32.9 Canadian dollar denominated principal due December 17, 2019 ("(“CAD Term Loan"Loan”) and $305 million, $272.9 Euro denominated principal due September 4, 2019 ("(“Euro Term Loan"Loan Tranche A”) and $183.3 Euro denominated principal due December 19, 2021 (“Euro Term Loan Tranche B”) (together, the “Term Loan”); (ii) $300 million$300.0 6.75% unsecured notes (the “6.75% Notes”); (iii) $520 million$520.0 6.375% unsecured notes (the “6.375% Notes”); (iv) $570 million$570.0 6.625% unsecured notes (the “6.625%“ 6.625% Notes”); (v) $250.0 6.125% unsecured notes (the “6.125% Notes”) and (v)(vi) a $400 million$400.0 asset based lending revolving credit facility (the “ABL Facility”).
At June 29,December 28, 2014, we were in compliance with all covenants under the Senior Credit Agreement, the indenture governing the 6.375% Notes and the 6.625% Notes, the indenture governing the 6.75% Notes, the indenture governing the 6.125% Notes and the credit agreement governing the ABL Facility (the "ABL Credit Agreement").
From time to time we may repurchase our existing indebtedness, including outstanding securities of SB/RH Holdings, LLC or its subsidiaries, in the open market or otherwise.
See Note 7, “Debt,” to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our outstanding debt.
Financing Cash Flows
The Fiscal 2014 Nine Months2015 Quarter net cash provided by financing activities of $6$409.9 million consisted of the following: (i) proceeds related to the issuance $524of $250.0 million of unsecured notes; (ii) proceeds related to the Euro Term Loan Tranche B of $185.4 million (iii) a use to pay share-based tax withholdings of employees for vested stock awards of $1.7 million, net of proceeds upon vesting; (iv) a use to pay $15.9 million of dividends; (v) a use to pay $6.1 million of debt issuance costs; (vi) a use of $8.5 million for treasury stock purchases; (vii) $8.5 million of proceeds from other financing activities; and (viii) a use for reduction of other debt of $1.8 million. The primary use of the proceeds from these activities was to fund working capital needs as discussed within “Liquidity and Capital Resources - Operating Activities” and to provide resources for future acquisitions.
The Fiscal 2014 Quarter net cash provided by financing activities of $76.9 million consisted of the following: (i) proceeds related to the issuance $523.7 million of Term Debt; (ii) a use of $567$513.3 million to repay debt under the Senior Credit Facilities; (iii) borrowings of $110$110.0 million on our ABL Facility; (iv) a use to pay share-based tax withholdings of employees for vested stock awards of $27 million;$24.7 million, net of proceeds upon vesting; (v) a use to pay $45$13.2 million of dividends; (vi) a use to pay $5$4.7 million of debt issuance costs; (vii) a use of $5$4.5 million for treasury stock purchases; and (viii) $9$4.1 million of proceeds from other financing activities.activities; and (ix) a use for reduction of other debt of $0.5 million. The primary use of the proceeds was to fund working capital needs as discussed within “Liquidity and Capital Resources - Operating Activities.”
The Fiscal 2013 Nine Months net cash provided by financing activities of $1,468 million consisted of the following: (i) proceeds relatedActivities” and to the issuance $792 of Term Debt; (ii) proceeds related to issuance of $570 million of 6.625% Notes and $520 million of 6.375% Notes; (iii) a use of $407 million to repay debt under the Senior Credit Facilities; (iv) a use to pay $44 million of debt issuance costs; (v) borrowings of $70 million on our ABL Facility; (vi) a use to pay share-based tax withholdings of employeesprovide resources for vested stock awards of $20 million; (vii) a use to pay $28 million of dividends and (viii) $15 million proceeds from other financing activities.future acquisitions.
Interest Payments and Fees
In addition to principal payments on our debt obligations as mentioned above, we have annual interest payment obligations of approximately $151$163.3 million in the aggregate. This includes interest under our 6.375% Notes of approximately $33$33.2 million, interest under our 6.625% Notes of approximately $38$37.8 million, interest under our 6.75% Notes of approximately $20$20.3 million, interest under our 6.125% Notes of approximately $15.3 million and interest under our Term Loan and ABL Facility of approximately $58 million and $2 million, respectively.$56.7 million. Interest on our debt is payable in cash. Interest on the 6.375% Notes, the 6.625% Notes, the 6.75% Notes and the 6.75%6.125% Notes is payable semi-annually in arrears and interest under the Term Loan and the ABL Facility is payable on various interest payment dates as provided in the Senior Credit Agreement and the ABL Credit Agreement. We are required to pay certain fees in connection with our outstanding debt obligations. Such fees include a quarterly commitment fee of up to 0.375% on the unused portion of the ABL Facility and certain additional fees with respect to the letter of credit sub-facility under the ABL Facility.
Equity Financing Activities
During the Fiscal 2014 Nine Months,2015 Quarter, we granted 442 thousand0.2 million shares of restricted stock to our employees and our directors. All vesting dates are subject to the recipient’s continued employment with us, except as otherwise permitted by our Board of Directors, or in certain cases where the employee is terminated without cause. The total market value of the restricted shares on the date of grant was approximately $31$21.1 million, which represented unearned restricted stock compensation. Unearned compensation is amortized to expense over the appropriate vesting period.
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From time to time we may repurchase our outstanding shares of Common Stock in the open market or otherwise.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations and Commercial Commitments
There have been no material changes to our contractual obligations and commercial commitments as discussed in our Annual Report on Form 10-K for Fiscal 2013.2014.
Critical Accounting Policies and Critical Accounting Estimates
Our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America and fairly present our financial position and results of operations. There have been no material changes to our critical accounting policies or critical accounting estimates as discussed in our Annual Report on Form 10-K for Fiscal 2013.2014.
New Accounting Pronouncements
Revenue recognition
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition model requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. This ASU can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. This ASU will become effective for us beginning in the first quarter of our fiscal year ending September 30, 2018. We have not selected a method for adoption nor determined the potential effects on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Factors
We have market risk exposure from changes in interest rates, foreign currency exchange rates and commodity prices. We, when appropriate, use derivative financial instruments to mitigate the risk from such exposures.
A discussion of our accounting policies for derivative financial instruments is included in Note 8, Derivative Financial Instruments, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.
Interest Rate Risk
A substantial portion ofThere have been no material changes to our debt bears interest at variable rates. If market risk exposures, including those from interest rates, increase, the interest rate on our variable rate debt will increaseforeign currency exchange rates and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. We also have bank lines of credit at variable interest rates. The general level of U.S. and Canadian interest rates, LIBOR, CDOR and Euro LIBOR affect interest expense. We periodically use interest rate swaps to manage such risk. The net amounts to be paid or received under interest rate swap agreements are accrued as interest rates change, and are recognized over the life of the swap agreements as an adjustment to interest expensecommodity prices, from the underlying debt to which the swap is designated. The related amounts payable to, or receivable from, the contract counter-parties are included in accrued liabilities or accounts receivable.
Foreign Exchange Risk
We are subject to risk from sales and loans to and from our subsidiaries as well as sales to, purchases from and bank lines of credit with third-party customers, suppliers and creditors that are denominated in foreign currencies. Foreign currency sales and purchases are made primarily in Euro, Pounds Sterling, Mexican Pesos, Canadian Dollars, Australian Dollars and Brazilian Reals. We manage our foreign exchange exposure from anticipated sales, accounts receivable, intercompany loans, firm purchase commitments, accounts payable and credit obligations through the use of naturally occurring offsetting positions (e.g., borrowing in local currency), forward foreign exchange contracts, foreign exchange rate swaps and foreign exchange options. The related amounts payable to, or receivable from, the contract counter-parties are included in accounts payable or accounts receivable.
Commodity Price Risk
We are exposed to fluctuations in market prices for purchases of zinc and brass usedthose discussed in our manufacturing processes. We use commodity swaps and calls to manage such risk. The maturity of, and the quantities covered by, the contracts are closely correlated to our anticipated purchases of the commodity. The cost of calls is amortized over the life of the contracts andAnnual Report on Form 10-K for Fiscal 2014.
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recorded in cost of goods sold, along with the effects of the swap and call contracts. The related amounts payable to, or receivable from, the counter-parties are included in accounts payable or accounts receivable.
Sensitivity Analysis
The analysis below is hypothetical and should not be considered a projection of future risks. Earnings projections are before tax.
At June 29,December 28, 2014, the potential change in fair value of our outstanding interest rate derivative instruments assuming a 1 percent unfavorable shift in interest rates would be a loss of $3$3.1 million. The net impact on reported earnings, after also including the effect of the change on one year’s underlying interest rate exposure on our variable rate Term Loan, would be a net loss of $3$3.1 million.
At June 29,December 28, 2014, the potential change in fair value of outstanding foreign exchange derivative instruments, assuming a 10% unfavorable change in the underlying exchange rates, would be a loss of $42 million.$50.5 million. The net impact on reported earnings, after also including the effect of the change on one year’s underlying foreign currency-denominated exposures, would be a net gain of $15 million.$19.3 million.
At June 29,December 28, 2014, the potential change in fair value of outstanding commodity price derivative instruments, assuming a 10% unfavorable change in the underlying commodity prices, would be a loss of $2 million.$2.1 million. The net impact on reported earnings, after also including the effect of the reduction in cost of one year’s purchases of the related commodities due to the same change in commodity prices, would be a net gain of $2 million.$2.0 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Litigation
See Note 14, “Commitments and Contingencies” toWe are a defendant in various matters of litigation generally arising out of the ordinary course of business.
We do not believe that any matters or proceedings presently pending will have a material adverse effect on our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our legal proceedings.results of operations, financial condition, liquidity or cash flows.
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Item 1A. Risk Factors
When considering an investment in the Company, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K filed with the SEC on November 27, 201321, 2014 (our “Form 10-K”), our Quarterly Report on Form 10-Q filed with the SEC on February 5, 2014 (our "Q1 Form 10-Q") and our Quarterly Report on Form 10-Q filed with the SEC on May 7, 2014 (our “Q2 Form 10-Q”). Any of these risk factors could materially and adversely affect our or our subsidiaries’ business, financial condition and results of operations and these risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties not presently known to us or our subsidiaries or that are not currently believed to be material also may adversely affect us or our subsidiaries. There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Form 10-K and Part II, Item 1A of our Q1 Form 10-Q or our Q2 Form 10-Q.10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the Fiscal 20142015 Quarter, we did not sell any equity securities that were not registered under the Securities Act. On August 6, 2013, the Board of Directors approved a $200 million common stock repurchase program. The authorization is effective for 24 months. During the Fiscal 2014 Quarter, we did not purchase anyThe following table reflects all shares underrepurchased inclusive of the common stock repurchase program.program discussed above.
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| Total Number of Shares |
| Approximate Dollar Value |
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| Total Number |
| Average |
| Purchased as Part of |
| of Shares that may | |
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| of Shares |
| Price Paid |
| Publicly Announced |
| Yet Be Purchased Under | |
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| Purchased |
| Per Share |
| Plans or Programs |
| the Plans or Programs | |
Period |
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Quarter Ended December 28, 2014 |
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October 1, 2014 - October 26, 2014 |
| 100,000 |
| $ | 84.27 |
| 221,752 | $ | 184,048,316 |
October 27, 2014 - November 23, 2014 |
| — |
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| — |
| 221,752 |
| 184,048,316 |
November 24, 2014 - December 28, 2014 |
| — |
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| — |
| 221,752 |
| 184,048,316 |
Total |
| 100,000 |
| $ | 84.27 |
| 221,752 | $ | 184,048,316 |
Please refer to the Exhibit Index.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: |
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| SPECTRUM BRANDS HOLDINGS, INC. | ||
| By: | /s/ | |
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| Executive Vice President and Chief Financial Officer | |
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| (Principal Financial Officer) |
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Exhibit 3.1 | Restated Certificate of Incorporation of Spectrum Brands Holdings, Inc., dated June 16, 2010 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8 filed with the SEC on June 16, 2010). |
Exhibit 3.2 | Amended and Restated Bylaws of Spectrum Brands Holdings, Inc., adopted as of June 16, 2010 (incorporated by reference to the Registration Statement on Form S-8 filed with the SEC on June 16, 2010). |
Exhibit |
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Exhibit |
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Exhibit 10.2 | Term Loan Commitment Agreement No. 2, dated December 19, 2014 relating to the Credit Agreement dated as of December 17, 2012, and as amended and restated on December 18, 2013, and as further amended, restated, supplemented or otherwise modified prior to the date hereof, among Spectrum Brands, Inc., as Lead Borrower, Spectrum Brands Canada, Inc., as Canadian Borrower, Spectrum Brands Europe, GmbH, as German Borrower, SB/RH Holdings, LLC, as Holdings, the lenders from time to time party thereto and Deutsche Bank AG New York Branch, as the Administrative Agent (incorporated by reference to Exhibit 10.1 to Spectrum Brands Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on December 19, 2014). |
Exhibit 10.3 | Transition employment agreement, effective as of January 8, 2015, between Spectrum Brands Holdings, Inc. and David R. Lumley.* |
Exhibit 31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
Exhibit 31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 the Sarbanes-Oxley Act of 2002.* |
Exhibit 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
Exhibit 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
101.INS | XBRL Instance Document** |
101.SCH | XBRL Taxonomy Extension Schema Document** |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** |
101.DEF | XBRL Taxonomy Extension Definition Document** |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
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* | Filed herewith |
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
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