Business Context and Reporting Period
This Form 10-Q was filed by HRG Group, Inc., not Spectrum Brands Holdings, Inc., for the quarter and six months ended March 31, 2015. HRG is a diversified holding company whose principal businesses include Spectrum Brands (Consumer Products), Fidelity & Guaranty Life and Front Street (Insurance), Compass (Energy), and Salus and other asset managers. Spectrum Brands is consolidated within HRG’s results and represents the primary consumer-products business.
The financial statements are unaudited, prepared under U.S. GAAP, and should be read with HRG’s fiscal 2014 Form 10-K. HRG’s fiscal year ends September 30.
Key Financial Metrics
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Total revenue | $1,371.5 million | $1,341.2 million | $2,809.9 million | $2,851.2 million |
| Operating income (loss) | $(174.0) million | $16.2 million | $(357.0) million | $195.5 million |
| Net loss | $(237.5) million | $(55.8) million | $(343.9) million | $(57.4) million |
| Net loss attributable to controlling interest | $(228.3) million | $(75.5) million | $(338.1) million | $(102.3) million |
| Net loss per common share | $(1.16) | $(0.63) | $(1.71) | $(0.91) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(274.4) million | $(81.9) million |
At March 31, 2015, total assets were $31.5 billion, cash and cash equivalents were $1.28 billion, total investments were $19.75 billion, total debt was $5.62 billion, and total permanent equity was $1.86 billion. HRG stockholders’ equity was $1.07 billion, down from $1.44 billion at September 30, 2014.
- Consumer Products: six-month sales were $2.13 billion, up 0.6%; operating income was $204.0 million, down from $217.6 million. Second-quarter sales increased 4.4% to $1.07 billion, while operating income declined 4.4% to $88.4 million. Adjusted EBITDA was $159.1 million, with a 14.9% margin, compared with a 15.3% margin in the prior-year quarter.
- Insurance: six-month revenue was $471.8 million, down from $647.2 million, and operating loss was $37.2 million versus operating income of $111.6 million. Net investment income increased to $451.5 million, but net investment losses, reserve changes, and the RadioShack-related impairment weighed on results. Insurance AOI was $47.3 million versus $84.7 million.
- Energy: six-month revenue declined to $60.3 million from $74.7 million, and operating loss increased to $356.3 million from $65.8 million. Adjusted EBITDA declined to $18.4 million from $34.4 million.
- Asset Management: six-month revenue was $13.1 million versus $14.3 million, while operating loss was $68.5 million versus operating income of $0.1 million, primarily due to the RadioShack loan impairment.
Material Changes Versus the Prior Comparable Period
- Consolidated six-month revenue decreased $41.3 million, or 1.4%, while operating results shifted from $195.5 million of income to a $357.0 million loss.
- The principal unusual charges included $336.6 million of oil and gas property impairments, $60.2 million of goodwill and intangible impairments related to Frederick’s of Hollywood, and approximately $102.9 million of RadioShack-related bad debt expense.
- Energy impairments increased because of lower oil and natural gas prices and the higher full-cost pool created when HRG acquired the remaining interest in Compass.
- Consumer Products sales benefited from the Tell, European IAMS and Eukanuba, and Salix acquisitions, but foreign-exchange effects reduced sales by approximately $91.7 million in the six-month period. Consumer battery sales also declined.
- Interest expense increased to $166.1 million from $161.2 million, reflecting higher overall debt levels partially offset by refinancing activity.
- Cash used in operations increased to $274.4 million from $81.9 million. Financing activities provided $1.07 billion, including debt issuance and net contractholder deposits, while investing activities used $823.9 million, including $421.5 million for acquisitions.
- Debt increased by approximately $465.9 million from September 30, 2014. Spectrum Brands issued $250.0 million of 6.125% notes, entered into a €150.0 million term loan, and drew $42.0 million under its ABL facility.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- HRG reported corporate cash, cash equivalents, and investments of approximately $252.6 million and expected these resources plus subsidiary dividends to cover corporate interest and general expenses for at least the next twelve months. Management expected approximately $76.8 million of subsidiary dividends for fiscal 2015, but noted that lower commodity prices could reduce Compass distributions.
- Spectrum Brands expected fiscal 2015 capital expenditures of approximately $75.0 million to $85.0 million and expected full-year operating cash flow to be positive despite negative operating cash flow in the first six months.
- On April 28, 2015, Spectrum Brands agreed to acquire Armored AutoGroup for approximately $1.4 billion, subject to customary conditions. The transaction was expected to be funded with new debt and approximately $500.0 million of Spectrum Brands equity, with HRG approving participation in the equity issuance. Closing was expected in the third fiscal quarter, but was not assured.
- Compass breached its leverage covenant at March 31, 2015, and its borrowing base was reduced from $400.0 million to $340.0 million. On May 7, 2015, the credit agreement was amended; HGI Funding provided a limited guarantee and committed to potential debt or equity contributions of up to $80.0 million following the October 2015 borrowing-base redetermination. Compass returned to compliance under the amended agreement.
- FOHG, including Frederick’s of Hollywood, commenced Chapter 11 proceedings on April 19, 2015. HRG expected to deconsolidate FOHG in the third fiscal quarter and was evaluating potential impairments of subsidiary-held loans totaling $59.6 million at March 31, 2015.
- HRG announced a strategic review of FGL. The filing states that there was no assurance a transaction would result or be consummated.
- FGL’s statutory capital position relies on permitted practices for Raven Re. Without those practices, Raven Re’s statutory capital and surplus would have been negative $62.8 million at March 31, 2015, and its risk-based capital would have fallen below minimum regulatory requirements.
- Material financial risks include commodity-price declines, additional oil and gas ceiling-test impairments, interest-rate and foreign-exchange exposure, insurance investment and policyholder-liability volatility, credit losses in the Salus loan portfolio, acquisition execution and integration risk, and substantial leverage.
- Legal and regulatory reserves totaled approximately $22.4 million. Significant matters included FGL litigation and regulatory inquiries, the RadioShack bankruptcy and related lien litigation, and environmental and other ordinary-course claims.
Most Important Facts for Investors to Verify
- Confirm that the requested issuer is HRG Group, Inc.; the supplied filing is not a standalone Spectrum Brands Holdings Form 10-Q.
- Reconcile reported losses to the major non-recurring items, particularly Compass impairments, FOH impairments, and RadioShack-related credit losses.
- Assess Compass’s amended covenant terms, borrowing-base availability, the October 2015 redetermination, and HRG’s potential $80.0 million support obligation.
- Evaluate the financing, equity issuance, closing conditions, and integration risks associated with the proposed $1.4 billion Armored AutoGroup acquisition.
- Review the impact of FOHG’s bankruptcy and expected deconsolidation on future revenue, assets, debt, and potential loan impairments.
- Assess whether subsidiary cash distributions can support HRG’s approximately $109.3 million annual interest burden and other corporate obligations.
- Monitor FGL’s strategic review, regulatory capital position, permitted statutory accounting practices, investment portfolio credit quality, and ability to upstream dividends.
- Consider the sensitivity of results to oil and gas prices, interest rates, foreign exchange, equity markets, and Salus borrower recoveries.