Business Context and Reporting Period
This filing is a Form 10-Q for Harbinger Group Inc. (HGI), not a standalone Spectrum Brands Holdings filing. Spectrum Brands is reported as HGI’s Consumer Products subsidiary. The report covers the three and six months ended March 31, 2014, HGI’s fiscal second quarter and first six months of fiscal 2014. HGI operates through Consumer Products, Insurance, Energy and Asset Management segments.
Key Financial Metrics
| Metric | Q2 FY2014 | Q2 FY2013 | Six Months FY2014 | Six Months FY2013 |
|---|---|---|---|---|
| Total revenue | $1,341.2 million | $1,411.1 million | $2,851.2 million | $2,633.4 million |
| Operating income | $16.2 million | $134.0 million | $195.5 million | $349.4 million |
| Net income (loss) | $(55.8) million | $(50.5) million | $(57.4) million | $17.6 million |
| Net loss attributable to common and participating preferred stockholders | $(87.6) million | $(45.5) million | $(126.6) million | $16.5 million |
| Basic diluted EPS | $(0.63) | $(0.33) | $(0.91) | $0.08 basic; $0.06 diluted |
| Net cash used in operating activities | Not separately reported for the quarter | $(81.9) million | $(67.2) million |
At March 31, 2014, total assets were $29.3 billion, investments were $18.3 billion, cash and cash equivalents were $1.32 billion, total debt was $5.40 billion and total liabilities were $27.6 billion. HGI reported corporate cash, cash equivalents and investments of approximately $454.3 million.
Segment Performance and Material Changes
- Consumer Products: Revenue increased 3.4% in the quarter to $1,021.7 million and 14.2% for six months to $2,122.3 million. Operating income increased 77.2% in the quarter to $92.5 million and 80.7% for six months to $217.6 million. Gross margin improved to 35.2% from 32.7% in the quarter and to 34.9% from 32.9% for six months. Spectrum Brands’ adjusted EBITDA was $156.5 million in the quarter and $335.2 million for six months.
- Insurance: Quarterly operating income declined to $26.3 million from $108.0 million, and six-month operating income declined to $111.6 million from $271.6 million, primarily because prior-year results included substantial portfolio-repositioning investment gains. Net investment income increased to $200.2 million in the quarter and $400.6 million for six months. Net investment spread improved to 1.8% from 1.2% in the quarter and to 1.8% from 1.1% for six months.
- Energy: Revenue increased to $39.2 million in the quarter and $74.7 million for six months. The segment recorded an $81.0 million oil and natural gas property impairment after expiration of an SEC ceiling-test exemption, producing operating losses of $71.8 million and $65.8 million, respectively. Adjusted EBITDA-Energy was $16.4 million for the quarter and $34.4 million for six months.
- Asset Management: Quarterly revenue increased to $9.8 million and operating income to $4.0 million. For six months, revenue was $14.3 million but operating income fell to $0.1 million, primarily because of higher staffing and operating costs and the nonrecurrence of a prior-year success fee.
- Acquisition and financing activity: Spectrum Brands acquired Liquid Fence for $35.8 million in January 2014. HGI issued $200.0 million of 7.75% senior unsecured notes due 2022. Spectrum Brands refinanced portions of its term loan and had $123.9 million of ABL borrowing availability, net of reserves and letters of credit, at March 31, 2014.
Cash Flow, Debt and Liquidity
- Six-month cash flow included $1.38 billion used in investing activities, $883.2 million provided by financing activities and a $579.9 million decrease in cash, leaving $1.32 billion of cash and cash equivalents.
- HGI received $65.2 million of subsidiary dividends during the first six months, including a $43.0 million special dividend from FGL. Management expected approximately $117.0 million of fiscal 2014 subsidiary dividends in total and stated that available liquidity should cover corporate requirements for at least the next twelve months, subject to subsidiary distribution restrictions.
- Consolidated debt increased from $4.90 billion at September 30, 2013 to $5.40 billion at March 31, 2014. HGI’s corporate debt included $925.0 million of 7.875% senior secured notes and the newly issued $200.0 million of 7.75% notes.
- Spectrum Brands had $1.73 billion of term loans, $1.39 billion of senior notes and $167.5 million drawn under its ABL facility. Spectrum Brands estimated fiscal 2014 capital expenditures of $70 million to $75 million.
- The EXCO/HGI joint venture had $337.0 million of borrowings against a $400.0 million borrowing base; HGI’s proportionate debt was $250.6 million. The borrowing base was subject to future redeterminations.
Guidance, Outlook, Risks and Unusual Items
- Management expected Spectrum Brands to repatriate $50 million to $75 million of foreign cash during fiscal 2014 and expected less than $2.0 million of related additional foreign withholding and other taxes.
- Management identified a reasonable possibility that Spectrum Brands could release part of its $346.0 million U.S. valuation allowance within 12 to 24 months if domestic profitability continued.
- Key risks include substantial indebtedness, covenant compliance, dependence on subsidiary dividends, insurance regulatory capital and dividend restrictions, interest-rate and equity-market volatility, credit losses, commodity prices, foreign exchange, consumer demand, integration of acquired businesses and access to financing.
- Insurance results remain sensitive to investment spreads, policyholder withdrawals, fixed-income credit performance, equity-indexed annuity hedging and counterparty performance. FGL’s one-percentage-point increase in interest rates was estimated to reduce stockholders’ equity by approximately $202.4 million.
- FGL had agreed to a proposed $5.3 million settlement of the Cressy indexed-universal-life class action, with total estimated settlement, legal and related costs of $9.2 million and a $7.1 million liability recorded. The settlement remained subject to court approval and opt-out conditions.
- HGI had approximately $24.2 million of aggregate legal, environmental and regulatory reserves. Salus had $207.4 million of unfunded legally binding lending commitments.
- Subsequent to quarter-end, HGI elected to convert substantially all outstanding preferred stock into common stock, expected to become effective May 15, 2014. This will materially affect future share count, preferred dividends and dilution.
Most Important Facts to Verify
- Confirm that the intended issuer is Harbinger Group Inc.; the supplied filing is not Spectrum Brands Holdings’ standalone Form 10-Q.
- Reconcile the effect of the $81.0 million Energy impairment and determine whether further ceiling-test impairments could arise from commodity prices or reserve estimates.
- Assess HGI’s ability to receive projected subsidiary dividends given insurance regulatory restrictions, subsidiary covenants and capital requirements.
- Review consolidated and subsidiary debt maturities, variable-rate exposure, ABL availability and covenant headroom.
- Evaluate the quality and concentration of FGL’s $16.6 billion fixed-maturity portfolio, including non-agency mortgage-backed securities and below-investment-grade exposures.
- Assess the effect of the May 2014 preferred-stock conversion on common shares outstanding, dilution, dividends and the fair-value derivative liability.
- Verify the status and final cost of the Cressy litigation settlement and related indemnification recovery from OMGUK.