HRG Group, Inc. Form 10-Q Summary — Quarter Ended June 30, 2017
Scope clarification: The filing is for HRG Group, Inc., not Spectrum Brands Holdings, Inc. Spectrum Brands represents HRG’s Consumer Products segment and approximately 58.9% controlling interest. Results are presented for the three and nine months ended June 30, 2017, compared with the corresponding 2016 periods.
Business Context and Reporting Period
HRG is a holding company with continuing operations primarily consisting of Spectrum Brands’ branded consumer products business and Corporate and Other activities, including the wind-down of Salus Capital Partners. FGL and Front Street insurance operations are classified as held for sale and reported as discontinued operations. Compass oil and gas operations were sold in fiscal 2016 and are also reported as discontinued operations.
During the quarter, Spectrum Brands acquired PetMatrix for $255.2 million, GloFish operations for $53.9 million and the remaining 44.0% interest in Shaser for $12.6 million.
Key Financial Metrics
| Metric | Three Months 2017 | Three Months 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Total revenues | $1,304.0 million | $1,362.8 million | $3,686.7 million | $3,798.8 million |
| Operating income | $148.2 million | $188.1 million | $413.1 million | $438.0 million |
| Operating margin | 11.4% | 13.8% | 11.2% | 11.5% |
| Interest expense | $89.3 million | $98.0 million | $269.6 million | $289.8 million |
| Income from continuing operations | $32.1 million | $92.5 million | $53.8 million | $152.5 million |
| Net income attributable to controlling interest | $2.1 million | $(132.9) million | $132.2 million | $(191.5) million |
| Basic EPS from continuing operations | $(0.01) | $0.27 | $(0.16) | $0.22 |
| Net cash from continuing operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $48.1 million | $5.3 million |
Discontinued operations contributed income of $7.7 million for the quarter and $195.4 million for the nine months, compared with losses of $185.5 million and $222.6 million, respectively, in the prior-year periods. The 2017 nine-month result included a $35.6 million write-up of held-for-sale assets, compared with a $240.7 million write-down in 2016.
Spectrum Brands’ third-quarter net sales were $1,303.9 million, down 4.2%. Consumer Products operating income was $157.8 million, down 23.7%, and Adjusted EBITDA was $263.8 million, down 5.5%. Adjusted EBITDA margin was 20.2%, compared with 20.5%.
Spectrum Brands’ gross margin declined to 36.3% for the quarter from 39.0% and to 37.4% for the nine months from 37.8%. Nine-month Adjusted EBITDA was $698.2 million, with an 18.9% margin, unchanged from the prior-year period.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $266.2 million at June 30, 2017, down from $465.2 million at September 30, 2016.
- Corporate cash, cash equivalents and investments were approximately $148.3 million.
- Total consolidated debt was $6,032.5 million, compared with $5,525.8 million at September 30, 2016; the fair value of debt was $6,191.3 million.
- Current maturities and short-term debt were $125.9 million; non-current debt was $5,906.6 million.
- Spectrum Brands had $385.4 million of revolver availability, $20.1 million of outstanding letters of credit and a $1.5 million foreign-subsidiary allocation.
- HRG had drawn $50.0 million under its $150.0 million 2017 Loan, leaving $100.0 million of stated availability.
- Management stated that expected subsidiary dividends, cash on hand and investments should cover HRG’s expected cash requirements, interest obligations and general administrative expenses for at least the next twelve months.
Continuing operating activities generated $48.1 million during the nine months. Continuing investing activities used $349.9 million, primarily for the PetMatrix and GloFish acquisitions and $78.1 million of capital expenditures. Continuing financing activities provided $104.3 million, primarily from new borrowings, partially offset by debt repayments, share repurchases and other equity-related payments.
Material Changes Versus the Prior Comparable Period
- Revenue declined 4.3% for the quarter and 3.0% for the nine months, primarily due to lower Consumer Products sales, unfavorable foreign exchange and reduced Salus revenue.
- Consumer Products performance was pressured by lower volumes, unfavorable product mix, foreign exchange, weaker global pet supplies and home and garden sales, and seasonal and retailer inventory-management factors.
- Consumer Products operating income declined $49.0 million for the quarter, including $24.9 million of rawhide recall-related costs and $15.8 million of additional restructuring costs.
- Interest expense declined $8.7 million for the quarter and $20.2 million for the nine months, primarily due to refinancing and lower interest rates, despite higher overall debt.
- Corporate and Other operating loss improved to $9.6 million from $18.7 million for the quarter and to $39.9 million from $59.8 million for the nine months, primarily due to lower stock compensation, payroll, bonus, impairment and asset-management expenses.
- HRG’s CEO changed during the period: Joseph S. Steinberg became CEO effective April 14, 2017, following Omar Asali’s departure.
Guidance, Outlook, Risks and Unusual Items
- Spectrum Brands expected fiscal 2017 capital expenditures of approximately $100 million to $110 million.
- Spectrum Brands implemented pet-supply rightsizing and hardware and home-improvement distribution-center consolidation initiatives. Total expected costs were approximately $9.0 million and $23.0 million, respectively; $2.8 million and $9.1 million had been incurred by June 30, 2017.
- A voluntary recall of rawhide dog chews due to possible chemical contamination resulted in $11.9 million of estimated customer and direct costs and $13.0 million of inventory write-offs. The estimates were provisional, production was suspended at affected facilities and production was expected to recommence during the fourth quarter.
- FGL agreed to be acquired by CF Corporation for $31.10 per share. Front Street agreed to be sold for $65.0 million, subject to customary adjustments and closing conditions, including regulatory approvals and consummation of the FGL transaction.
- The proposed FGL and Front Street transactions remained subject to regulatory and other closing conditions and could be delayed or not completed. HRG’s strategic-alternatives review also remained ongoing, with no assurance of a transaction.
- Potential risks include substantial indebtedness, refinancing and covenant compliance, dependence on subsidiary dividends, foreign exchange and commodity prices, seasonal demand, retailer concentration, product recalls and liability claims, acquisition integration, regulatory requirements for insurance operations, litigation and strategic-transaction execution.
- HRG and its subsidiaries reported compliance with applicable debt covenants at June 30, 2017. Spectrum Brands’ maximum total leverage covenant was 6.0 to 1.0.
Important Facts for Investors to Verify
- Confirm that the relevant issuer is HRG Group, Inc.; Spectrum Brands is a consolidated operating segment rather than the filing registrant.
- Assess the sustainability of earnings excluding the large, potentially non-recurring benefit from discontinued operations and held-for-sale valuation adjustments.
- Review the effect of the rawhide recall, customer returns, production restart and any subsequent revisions to recall estimates.
- Verify completion status, regulatory approvals, consideration and tax consequences of the FGL Merger and Front Street Sale.
- Evaluate debt maturity dates, variable-rate exposure, revolver availability, covenant headroom and the increase in consolidated debt.
- Monitor Consumer Products sales trends, particularly global pet supplies, home and garden, foreign exchange effects and the ability of restructuring programs to restore margins.
- Review the potential Section 338(h)(10) election payment of $30.0 million plus or minus specified tax-related amounts; the filing states that its financial impact could not be reasonably estimated at June 30, 2017.