Business Context and Reporting Period
This Form 10-Q is for HRG Group, Inc., not a standalone filing of Spectrum Brands Holdings, Inc. Spectrum Brands represented HRG’s Consumer Products segment, in which HRG held a 57.8% controlling interest. The report covers the three and six months ended March 31, 2016, with comparisons to March 31, 2015. HRG operated through Consumer Products, Insurance, Energy and Asset Management segments.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2016 | Six Months Ended March 31, 2016 |
|---|---|---|
| Total revenue | $1,269.5 million | $2,503.0 million |
| Operating income | $115.8 million | $151.1 million |
| Income from continuing operations | $11.6 million | $54.2 million |
| Net loss attributable to controlling interest | $34.8 million | $68.7 million |
| Basic and diluted loss per share | $0.18 | $0.35 |
| Cash used in continuing operating activities | Not separately provided for the quarter | $185.0 million |
| Capital expenditures | Not separately provided for the quarter | $42.3 million |
| Cash and cash equivalents | $465.6 million at March 31, 2016 | |
| Total debt | $6,232.0 million at March 31, 2016 |
Consumer Products sales were $1,209.6 million for the quarter and $2,428.4 million for the six months. Consumer Products operating income was $148.5 million and $291.0 million, respectively. The segment’s gross margin was 38.3% for the quarter and 37.2% for the six months. Adjusted EBITDA was $229.6 million for the quarter and $436.7 million for the six months, representing margins of 19.0% and 18.0%, respectively.
At March 31, 2016, total assets were $35,455.1 million and total equity was $1,507.9 million. Assets of businesses held for sale were $25,544.0 million, principally related to FGL.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 11.0% for the quarter and 9.4% for the six months, primarily from Consumer Products acquisitions and organic growth, partly offset by foreign exchange and lower Energy revenue.
- Operating income improved from a $177.1 million loss to $115.8 million of income for the quarter, and from a $392.1 million loss to $151.1 million of income for the six months.
- Consumer Products sales increased 13.4% for the quarter and 13.8% for the six months. Growth reflected the Armored AutoGroup acquisition and the European IAMS and Eukanuba and Salix acquisitions, while foreign exchange reduced six-month sales by $93.5 million.
- Consumer Products operating income increased $60.1 million for the quarter and $87.0 million for the six months. Higher margins reflected acquired businesses, product mix and cost improvements.
- Energy revenue declined 63.5% for the quarter and 56.4% for the six months because of lower commodity prices, production declines and the Compass asset sale. Energy recorded oil and gas impairments of $21.2 million for the quarter and $75.6 million for the six months, versus $146.6 million and $336.6 million in the prior-year periods.
- Compass sold certain oil and gas assets for approximately $152.0 million and reduced borrowings under its credit agreement from $327.0 million to $160.0 million. HRG recorded a $105.6 million gain on the sale.
- Asset Management operating losses improved to $9.2 million for the quarter and $18.3 million for the six months, principally because the prior-year periods included larger RadioShack-related impairments and bad debt expense.
- Interest expense increased to $95.8 million for the quarter and $193.3 million for the six months, primarily due to higher debt levels.
- FGL was classified as held for sale and discontinued operations. HRG recorded a $23.5 million write-down of the assets held for sale and discontinued-operation losses of $13.1 million for the quarter and $48.7 million for the six months.
- Six-month continuing operating cash use improved from $301.5 million to $185.0 million. Continuing investing activities generated $236.5 million, while continuing financing activities used $280.8 million.
Guidance, Outlook, Risks and Unusual Items
- HRG expected approximately $60.0 million of subsidiary dividends during fiscal 2016, including $30.9 million received during the first six months. Corporate cash, cash equivalents and investments were approximately $237.4 million, and management expected liquidity to cover corporate requirements for at least the next twelve months.
- Spectrum Brands expected fiscal 2016 capital expenditures of approximately $110.0 million to $120.0 million and identified $133.3 million of cash and approximately $325.0 million of available revolving-credit borrowings at March 31, 2016.
- Compass had $160.0 million of debt, $8.1 million of cash and a $175.0 million borrowing base, leaving $14.0 million of unused borrowing capacity before cash. Its borrowing base was scheduled for redetermination around May 16, 2016.
- Compass’s auditors included a going-concern qualification in the fiscal 2015 audit. Lenders granted a limited waiver, but further borrowing-base reductions could require additional capital, debt repayment or other financing and could create a default if Compass cannot reduce debt accordingly.
- Management expects additional Energy impairments in fiscal 2016 if oil and natural gas prices do not improve. At March 31, 2016, the ceiling-test reference prices were $46.26 per barrel for oil and $2.40 per MMBtu for natural gas.
- The proposed FGL merger with Anbang contemplated cash consideration of $26.80 per FGL share. Closing remained subject to regulatory and other conditions; termination under specified circumstances could require a $51.5 million fee.
- FGL’s classification as held for sale generated a $328.6 million deferred tax liability, partially offset by a $237.7 million reduction in valuation allowance. The six-month discontinued-operations result included $90.9 million of related income tax expense.
- Salus was focused primarily on servicing and collecting existing loans rather than originating new loans. Its asset-based loan portfolio had $184.6 million of gross loans and $136.8 million net loans at March 31, 2016; approximately $115.2 million was described as non-performing in management’s discussion.
- Other significant exposures included interest-rate and credit-spread movements affecting insurance assets and liabilities, foreign exchange and commodity prices affecting Spectrum Brands, and litigation, regulatory, environmental and counterparty risks.
Most Important Facts to Verify
- Confirm that the intended filing is HRG Group’s 2016 second-quarter Form 10-Q rather than Spectrum Brands Holdings’ separate filing.
- Verify completion status and final proceeds of the proposed FGL merger, including regulatory approvals, tax effects and any termination-fee exposure.
- Monitor Compass’s May 2016 borrowing-base redetermination, covenant compliance, liquidity and potential need for HRG support.
- Assess whether continued oil and gas price weakness could produce further non-reversible ceiling-test impairments.
- Reconcile consolidated debt, subsidiary-level debt and debt attributable to businesses held for sale, including the availability and restrictions under Spectrum Brands’ revolving facility.
- Evaluate the sustainability of Consumer Products’ acquisition-driven growth, margin gains and cash generation after considering foreign exchange, commodity costs, retailer concentration and integration costs.
- Review the collectability of Salus’s non-performing and RadioShack-related loans and the adequacy of the $47.8 million allowance for credit losses.