Form 10-Q
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2012

OR

 

¨ 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 001-13615

 

 

Spectrum Brands, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-2423556

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

601 Rayovac Drive

Madison, Wisconsin

  53711
(Address of principal executive offices)   (Zip Code)

(608) 275-3340

(Registrant’s telephone number, including area code)

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  x    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  x    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):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    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  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

 

 

 


Table of Contents

SPECTRUM BRANDS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED January 1, 2012

INDEX

 

     Page  
Part I—Financial Information   
Item 1.  

Financial Statements

     3   
 

Condensed Consolidated Statements of Financial Position (Unaudited) as of January 1, 2012 and September 30, 2011

     3   
 

Condensed Consolidated Statements of Operations (Unaudited) for the three month periods ended January 1, 2012 and January 2, 2011

     4   
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the three month periods ended January 1, 2012 and January 2, 2011      5   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      41   

Item 4.

  Controls and Procedures      42   
Part II—Other Information   

Item 1.

  Legal Proceedings      43   

Item 1A.

  Risk Factors      44   

Item 6.

  Exhibits      44   

Signatures

     45   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SPECTRUM BRANDS, INC.

Consolidated Statements of Financial Position

January 1, 2012 and September 30, 2011

(Unaudited)

(Amounts in thousands)

 

     Successor Company  
     2012     2011  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 55,592      $ 142,414   

Receivables:

    

Trade accounts receivable, net of allowances of $16,302 and $14,128, respectively

     362,253        356,605   

Other

     47,007        33,235   

Inventories

     482,292        434,630   

Deferred income taxes

     24,490        28,170   

Prepaid expenses and other

     54,796        48,792   
  

 

 

   

 

 

 

Total current assets

     1,026,430        1,043,846   

Property, plant and equipment, net of accumulated depreciation of $112,761 and $107,357, respectively

     204,001        206,389   

Deferred charges and other

     37,955        36,824   

Goodwill

     690,283        610,338   

Intangible assets, net

     1,759,216        1,683,909   

Debt issuance costs

     43,291        40,957   
  

 

 

   

 

 

 

Total assets

   $ 3,761,176      $ 3,622,263   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Current maturities of long-term debt

   $ 23,356      $ 41,090   

Accounts payable

     293,204        323,171   

Accrued liabilities:

    

Wages and benefits

     42,972        70,945   

Income taxes payable

     27,741        31,606   

Accrued interest

     21,066        30,467   

Other

     128,632        134,565   
  

 

 

   

 

 

 

Total current liabilities

     536,971        631,844   

Long-term debt, net of current maturities

     1,756,103        1,535,522   

Employee benefit obligations, net of current portion

     80,680        83,802   

Deferred income taxes

     362,510        337,336   

Other

     34,742        44,637   
  

 

 

   

 

 

 

Total liabilities

     2,771,006        2,633,141   

Commitments and contingencies

    

Shareholders’ equity:

    

Other capital

     1,339,117        1,338,734   

Accumulated deficit

     (321,996     (335,166

Accumulated other comprehensive loss

     (26,951     (14,446
  

 

 

   

 

 

 

Total shareholders’ equity

     990,170        989,122   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,761,176      $ 3,622,263   
  

 

 

   

 

 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements

(Unaudited).

 

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Table of Contents

SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Operations

For the three month periods ended January 1, 2012 and January 2, 2011

(Unaudited)

(Amounts in thousands)

 

     THREE MONTHS ENDED  
     2012      2011  

Net sales

   $ 848,771       $ 861,067   

Cost of goods sold

     560,140         561,234   

Restructuring and related charges

     4,605         594   
  

 

 

    

 

 

 

Gross profit

     284,026         299,239   

Selling

     131,759         140,220   

General and administrative

     50,430         60,745   

Research and development

     7,235         7,567   

Acquisition and integration related charges

     7,600         16,455   

Restructuring and related charges

     3,120         4,971   
  

 

 

    

 

 

 

Total operating expenses

     200,144         229,958   
  

 

 

    

 

 

 

Operating income

     83,882         69,281   

Interest expense

     41,209         53,095   

Other expense, net

     2,193         889   
  

 

 

    

 

 

 

Income from continuing operations before income taxes

     40,480         15,297   

Income tax expense

     27,310         35,043   
  

 

 

    

 

 

 

Net income (loss)

   $ 13,170       $ (19,746
  

 

 

    

 

 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements

(Unaudited).

 

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Table of Contents

SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Cash Flows

For the three month periods ended January 1, 2012 and January 2, 2011

(Unaudited)

(Amounts in thousands)

 

     THREE MONTHS
ENDED
 
     2012     2011  

Cash flows from operating activities:

    

Net income (loss)

   $ 13,170      $ (19,746

Adjustments to reconcile net income (loss) to net cash used by operating activities:

    

Depreciation

     9,248        12,392   

Amortization of intangibles

     14,628        14,319   

Amortization of unearned restricted stock compensation

     4,307        5,554   

Amortization of debt issuance costs

     1,686        4,411   

Non-cash debt accretion

     179        2,330   

Other non-cash adjustments

     558        3,639   

Net changes in assets and liabilities, net of discontinued operations

     (138,703     (73,273
  

 

 

   

 

 

 

Net cash used by operating activities of continuing operations

     (94,927     (50,374

Net cash used by operating activities of discontinued operations

     —          (252
  

 

 

   

 

 

 

Net cash used by operating activities

     (94,927     (50,626

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (8,851     (8,142

Acquisition of Black Flag

     (43,750     —     

Acquisition of FURminator, net of cash acquired

     (139,390     —     

Acquisition of Seed Resources, net of cash acquired

     —          (10,278

Other investing activity

     (100     —     
  

 

 

   

 

 

 

Net cash used by investing activities

     (192,091     (18,420

Cash flows from financing activities:

    

Proceeds from new 9.5% Notes, including premium

     217,000        —     

Payment of senior credit facilities, excluding ABL revolving credit facility

     (1,363     (70,000

Debt issuance costs

     (4,020     —     

Proceeds from other debt financing

     1,361        13,044   

Reduction of other debt

     (25,809     (224

ABL Revolving Credit Facility, net

     11,400        43,500   

Treasury stock purchases

     —          (3,241
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     198,569        (16,921

Effect of exchange rate changes on cash and cash equivalents

     1,627        (1,596
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (86,822     (87,563

Cash and cash equivalents, beginning of period

     142,414        170,614   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 55,592      $ 83,051   
  

 

 

   

 

 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements

(Unaudited).

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Amounts in thousands, except per share figures)

1 DESCRIPTION OF BUSINESS

Spectrum Brands, Inc., a Delaware corporation (“Spectrum Brands” or the “Company”), is a global branded consumer products company. Spectrum Brands Holdings, Inc. (“SB Holdings”) was created in connection with the combination of Spectrum Brands and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company, to form a new combined company (the “Merger”). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs are wholly-owned subsidiaries of SB Holdings and Russell Hobbs is a wholly-owned subsidiary of Spectrum Brands. SB Holdings trades on the New York Stock Exchange under the symbol “SPB.”

Unless the context indicates otherwise, the term “Company” is used to refer to both Spectrum Brands and its subsidiaries prior to the Merger and subsequent to the Merger.

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’s operations utilize manufacturing and product development facilities located in the U.S., Europe, Latin America and Asia.

The Company sells its products in approximately 130 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, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator and various other brands.

The Company’s global branded consumer products have positions in seven major product categories: consumer batteries; small appliances; pet supplies; electric shaving and grooming; electric personal care; portable lighting; and home and garden controls. The Company’s chief operating decision-maker manages the businesses of the Company in three 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, portable lighting 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”); and (iii) Home and Garden Business, which consists of the Company’s home and garden and insect control business (the “Home and Garden Business”). Management reviews the performance of the Company based on these segments. For information pertaining to our business segments, see Note 11, “Segment Information”.

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 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 January 1, 2012 and September 30, 2011, and the results of operations and the cash flows for the three month periods ended January 1, 2012 and January 2, 2011. Certain information and footnote 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, 2011.

Use of Estimates: The preparation of the 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.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

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 of approximately 4 to 20 years. Excess of cost over fair value of net assets acquired (goodwill) and trade name intangibles are not amortized. Goodwill is tested for impairment at least annually 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. 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. Accounting Standards Codification (“ASC”) Topic 350: “Intangibles-Goodwill and Other,” 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.

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 $50,319 and $51,270 for the three month periods ended January 1, 2012 and January 2, 2011, 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. Provision 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, one of which accounts for a significant percentage of its sales volume. This customer represented approximately 24% of the Company’s Net sales during both three month periods ended January 1, 2012 and January 2, 2011. This customer also represented approximately 13% and 16% of the Company’s Trade accounts receivable, net at January 1, 2012 and September 30, 2011, respectively.

Approximately 49% of the Company’s Net sales during both the three month periods ended January 1, 2012 and January 2, 2011 occurred outside the United States. 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 collectibility based on an assessment of the risks present.

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.

In September 2009, the Company’s board of directors (the “Board”) adopted the 2009 Spectrum Brands Inc. Incentive Plan (the “2009 Plan”). In conjunction with the Merger, the 2009 Plan was assumed by SB Holdings. Up to 3,333 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2009 Plan. After October 21, 2010, no further awards may be made under the 2009 Plan (as described in further detail below) as the Spectrum Brands Holdings, Inc. 2011 Omnibus Equity Award Plan (the “2011 Plan”) was approved by the shareholders of the Company on March 1, 2011.

In conjunction with the Merger, the Company assumed the Spectrum Brands Holdings, Inc. 2007 Omnibus Equity Award Plan (formerly known as the Russell Hobbs, Inc. 2007 Omnibus Equity Award Plan, as amended on June 24, 2008) (the “2007 RH Plan”). Up to 600 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2007 RH Plan. After October 21, 2010, no further awards may be made under the 2007 RH Plan (as described in further detail below) as the 2011 Plan was approved by the shareholders of the Company on March 1, 2011.

On October 21, 2010, the Board adopted the 2011 Plan, which received shareholder approval at the Annual Meeting of the shareholders of the Company held on March 1, 2011. After such shareholder approval, no further awards will be granted under the 2009 Plan and the 2007 RH Plan. Up to 4,626 shares of common stock of the Company, net of cancellations, may be issued under the 2011 Plan.

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

Total stock compensation expense associated with restricted stock awards recognized by the Company during the three month periods ended January 1, 2012 and January 2, 2011 was $4,307, or $2,800 net of taxes, and $5,554, or $3,610 net of taxes, respectively.

The Company granted approximately 687 restricted stock units during the three month period ended January 1, 2012 all of which are performance and time-based and vest over a two year period. The total market value of the restricted stock units on the dates of the grants was approximately $18,457.

The Company granted approximately 1,408 shares of restricted stock units during the three month period ended January 2, 2011. Of these grants, 18 restricted stock units are time-based and vest over a three year period. The remaining 1,390 shares are restricted stock units and are performance and time-based with 640 shares vesting over a one year period and 750 shares vesting over a three year period. The total market value of the restricted shares on the date of the grant was approximately $40,549.

The fair value of restricted stock awards and 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 status of the Company’s non-vested restricted stock awards and restricted stock units as of January 1, 2012 is as follows:

 

Restricted Stock Awards

   Shares     Weighted
Average
Grant Date
Fair Value
     Fair Value at
Grant Date
 

Restricted stock awards at September 30, 2011

     123      $ 24.20       $ 2,977   

Vested

     (97     23.19         (2,249
  

 

 

      

 

 

 

Restricted stock awards at January 1, 2012

     26      $ 28.00       $ 728   
  

 

 

      

 

 

 

 

Restricted Stock Units

   Shares     Weighted
Average
Grant Date
Fair Value
     Fair Value at
Grant Date
 

Restricted stock units at September 30, 2011

     1,629      $ 28.97       $ 47,236   

Granted

     687        26.87         18,457   

Forfeited

     (4     28.25         (113

Vested

     (373     28.82         (10,749
  

 

 

      

 

 

 

Restricted stock units at January 1, 2012

     1,939      $ 28.25       $ 54,831   
  

 

 

      

 

 

 

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 month periods ended January 1, 2012 and January 2, 2011 associated with the Merger:

 

     2012      2011  

Integration costs

   $ 2,408       $ 10,130   

Legal and professional fees

     612         2,395   

Employee termination charges

     609         3,752   
  

 

 

    

 

 

 

Total

   $ 3,629       $ 16,277   
  

 

 

    

 

 

 

Additionally, the Company incurred $1,285 and $2,485 of legal, professional and integration costs associated with the acquisitions of the Black Flag and TAT trade names from Homax Group, Inc (“Black Flag”) and FURminator, Inc. (“FURminator”), respectively and $201 of other acquisition and integration related costs during the three month period ended January 1, 2012. The Company incurred $178 of legal and professional fees associated with the acquisition of Seed Resources, LLC during the three month period ended January 2, 2011. (See Note 14, Acquisitions, for information on the Black Flag and FURminator acquisitions.)

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

3 COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) and the components of other comprehensive income (loss), net of tax, for the three month periods ended January 1, 2012 and January 2, 2011 are as follows:

 

     Three Months  
     2012     2011  

Net income (loss)

   $ 13,170      $ (19,746

Other comprehensive income (loss):

    

Foreign currency translation

     (14,929     (4,074

Pension liability adjustments

     303        —     

Valuation allowance adjustments

     303        643   

Net unrealized gain on derivative instruments

     1,818        4,179   
  

 

 

   

 

 

 

Net change to derive comprehensive income (loss) for the period

     (12,505     748   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 665      $ (18,998
  

 

 

   

 

 

 

Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated in the Accumulated other comprehensive income (“AOCI”) section of Shareholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as hedges of net foreign investments.

The changes in accumulated foreign currency translation for the three month periods ended January 1, 2012 and January 2, 2011 were primarily 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.

4 INVENTORIES

Inventories for the Company, which are stated at the lower of cost or market, consist of the following:

 

     January 1,
2012
     September 30,
2011
 

Raw materials

   $ 73,224       $ 59,928   

Work-in-process

     25,336         25,465   

Finished goods

     383,732         349,237   
  

 

 

    

 

 

 
   $ 482,292       $ 434,630   
  

 

 

    

 

 

 

5 GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets of the Company consist of the following:

 

     Global Batteries &
Appliances
    Global Pet
Supplies
    Home and
Garden
Business
     Total  

Goodwill:

         

Balance at September 30, 2011

   $ 268,148      $ 170,285      $ 171,905       $ 610,338   

Additions

     —          68,531        15,852         84,383   

Effect of translation

     (2,224     (2,214     —           (4,438
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at January 1, 2012

   $ 265,924      $ 236,602      $ 187,757       $ 690,283   
  

 

 

   

 

 

   

 

 

    

 

 

 

Intangible Assets:

         

Trade names Not Subject to Amortization

         

Balance at September 30, 2011

   $ 545,804      $ 205,491      $ 75,500       $ 826,795   

Additions

     —          14,000        8,000         22,000   

Effect of translation

     (3,792     (4,481     —           (8,273
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at January 1, 2012

   $ 542,012      $ 215,010      $ 83,500       $ 840,522   
  

 

 

   

 

 

   

 

 

    

 

 

 

Intangible Assets Subject to Amortization

         

Balance at September 30, 2011, net

   $ 481,473      $ 219,243      $ 156,398       $ 857,114   

 

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

     Global Batteries &
Appliances
    Global Pet
Supplies
    Home and
Garden
Business
    Total  

Additions

           65,118        17,000        82,118   

Amortization during period

     (8,223     (4,071     (2,334     (14,628

Effect of translation

     (3,352     (2,558     —          (5,910
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012, net

   $ 469,898      $ 277,732      $ 171,064      $ 918,694   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intangible Assets, net at January 1, 2012

   $ 1,011,910      $ 492,742      $ 254,564      $ 1,759,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which were recognized as a result of fresh-start reporting upon the Company’s emergence from bankruptcy during the fiscal year ended September 30, 2009, the Merger and other acquisitions. The useful life of the Company’s intangible assets subject to amortization are 4-9 years for technology assets related to the Global Pet Supplies segment, 9 to 17 years for technology assets associated with the Global Batteries & Appliances segment, 15 to 20 years for customer relationships of the Global Batteries & Appliances segment, 20 years for customer relationships of the Home and Garden Business and Global Pet Supplies segments, 12 years for a trade name within the Global Batteries & Appliances segment and 4 years for a trade name within the Home and Garden Business segment.

The carrying value and accumulated amortization for intangible assets subject to amortization are as follows:

 

     January 1,
2012
    September 30,
2011
 

Technology Assets Subject to Amortization:

    

Gross balance

   $ 90,923      $ 71,805   

Accumulated amortization

     (15,532     (13,635
  

 

 

   

 

 

 

Carrying value, net

   $ 75,391      $ 58,170   
  

 

 

   

 

 

 

Trade Names Subject to Amortization:

    

Gross balance

   $ 149,700      $ 149,700   

Accumulated amortization

     (19,460     (16,320
  

 

 

   

 

 

 

Carrying value, net

   $ 130,240      $ 133,380   
  

 

 

   

 

 

 

Customer Relationships Subject to Amortization:

    

Gross balance

   $ 795,292      $ 738,937   

Accumulated amortization

     (82,229     (73,373
  

 

 

   

 

 

 

Carrying value, net

   $ 713,063      $ 665,564   
  

 

 

   

 

 

 

Amortization expense for the three month periods ended January 1, 2012 and January 2, 2011 is as follows:

 

 

     Three Months  
     2012      2011  

Proprietary technology amortization

   $ 1,897       $ 1,649   

Customer relationships amortization

     9,591         9,530   

Trade names amortization

     3,140         3,140   
  

 

 

    

 

 

 
   $ 14,628       $ 14,319   
  

 

 

    

 

 

 

The Company estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $62,700 per year.

 

10


Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

6 DEBT

Debt consists of the following:

 

     January 1, 2012     September 30, 2011  
     Amount      Rate     Amount     Rate  

Term Loan, U.S. Dollar, due June 17, 2016

   $ 523,873         5.1   $ 525,237        5.1

9.5% Notes, due June 15, 2018

     950,000         9.5     750,000        9.5

12% Notes, due August 28, 2019

     245,031         12.0     245,031        12.0

ABL Revolving Credit Facility, expiring April 21, 2016

     11,400         4.5     —          2.5

Other notes and obligations

     20,377         11.0     44,333        6.5

Capitalized lease obligations

     24,469         6.2     24,911        6.2
  

 

 

      

 

 

   
   $ 1,775,150         $ 1,589,512     

Original issuance premiums (discounts) on debt

     4,309           (12,900  

Less: current maturities

     23,356           41,090     
  

 

 

      

 

 

   

Long-term debt

   $ 1,756,103         $ 1,535,522     
  

 

 

      

 

 

   

In connection with the Merger, the Company (i) entered into a new senior secured term loan pursuant to a new senior credit agreement (the “Senior Credit Agreement”) consisting of a $750,000 term loan facility; (ii) issued $750,000 in aggregate principal amount of 9.5% Notes; and (iii) entered into a $300,000 ABL Revolving Credit Facility (the “Senior Secured Facilities”).

Senior Term Credit Facility

On December 15, 2011, the Company amended its Term Loan. The aggregate incremental amount by which the Company, subject to compliance with financial covenants and certain other conditions, may increase the amount of the commitment under the Term Loan has been increased from $100,000 to $250,000. Certain covenants in respect to indebtedness and liens were amended to provide for dollar limits more favorable to the Company and, subject to compliance with financial covenants and certain other conditions, to allow for the incurrence of incremental unsecured indebtedness.

The Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on the Company’s ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. Pursuant to a guarantee and collateral agreement, the Company and its domestic subsidiaries have guaranteed the respective obligations under the Term Loan and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

In connection with the amendment, the Company recorded $557 of fees in connection with the Term loan during the three month period ended January 1, 2012. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the Term Loan. In connection with the amendment, the Company also recorded cash charges of $501 as an increase to interest expense during the three month period ended January 1, 2012.

9.5% Notes

On November 2, 2011, the Company offered $200,000 aggregate principal amount of 9.5% Notes at a price of 108.50% of the par value; these notes are in addition to the $750,000 aggregate principal amount of 9.5% Notes that were already outstanding. The additional notes are guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries and secured by liens on substantially all of the Company’s and the guarantors assets. The additional notes will vote together with the existing 9.5% Notes.

The indenture governing the 9.5% Notes (the “2018 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 transactions with affiliates.

In addition, the 2018 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 2018 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other event of default under the 2018 Indenture occurs and is continuing, the trustee for the 2018 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the amounts due under those notes.

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

The Company recorded $3,463 of fees in connection with the offering of the 9.5% Notes during the three month period ended January 1, 2012. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the 9.5% Notes.

12% Notes

The indenture governing the 12% Notes (the “2019 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 transactions with affiliates.

In addition, the 2019 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 2019 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 12% Notes. If any other event of default under the 2019 Indenture occurs and is continuing, the trustee for the indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 12% Notes may declare the acceleration of the amounts due under those notes.

ABL Revolving Credit Facility

The ABL Revolving Credit Facility is governed by a credit agreement (the “ABL Credit Agreement”) with Bank of America as administrative agent. The ABL Revolving Credit Facility consists of revolving loans (the “Revolving Loans”), with a portion available for letters of credit and a portion available as swing line loans, in each case subject to the terms and limits described therein.

The Revolving Loans may be drawn, repaid and reborrowed without premium or penalty. The proceeds of borrowings under the ABL Revolving Credit Facility are to be used for costs, expenses and fees in connection with the ABL Revolving Credit Facility, for our working capital requirements, restructuring costs, and other general corporate purposes.

The ABL Revolving Credit Facility carries an interest rate, at our option, which is subject to change based on availability under the facility, of either: (a) the base rate plus currently 1.25% per annum or (b) the reserve-adjusted LIBOR rate plus currently 2.25% per annum. No principal amortizations are required with respect to the ABL Revolving Credit Facility. The ABL Revolving Credit Facility will mature on June 16, 2014. Pursuant to the credit and security agreement, the obligations under the ABL credit agreement are secured by certain current assets of the guarantors, including, but not limited to, deposit accounts, trade receivables and inventory.

The ABL Credit Agreement contains various representations and warranties and covenants, including, without limitation, enhanced collateral reporting and a maximum fixed charge coverage ratio. The ABL Credit Agreement also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

As a result of borrowings and payments under the ABL Revolving Credit Facility, at January 1, 2012, the Company had aggregate borrowing availability of approximately $133,412, net of lender reserves of $38,934 and outstanding letters of credit of $28,804.

7 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 immediately recognized in earnings. 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 immediately recognized in earnings.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

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) were as follows:

 

Asset Derivatives

        January 1,
2012
     September 30,
2011
 

Derivatives designated as hedging instruments under ASC 815:

        

Commodity contracts

   Receivables—Other    $ 9       $ 274   

Foreign exchange contracts

   Receivables—Other      5,231         3,189   

Foreign exchange contracts

   Deferred charges and other      205         —     
     

 

 

    

 

 

 

Total asset derivatives designated as hedging instruments under ASC 815

      $ 5,445       $ 3,463   
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

        

Foreign exchange contracts

   Receivables—Other      174         —     
     

 

 

    

 

 

 

Total asset derivatives

      $ 5,619       $ 3,463   
     

 

 

    

 

 

 

The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) were as follows:

 

Liability Derivatives

        January 1,
2012
     September 30,
2011
 

Derivatives designated as hedging instruments under ASC 815:

        

Interest rate contracts

   Accounts payable    $ 331       $ 1,246   

Interest rate contracts

   Accrued interest      662         708   

Commodity contracts

   Accounts payable      1,353         1,228   

Commodity contracts

   Other long term liabilities      13         4   

Foreign exchange contracts

   Accounts payable      2,389         2,698   
     

 

 

    

 

 

 

Total liability derivatives designated as hedging instruments under ASC 815

      $ 4,748       $ 5,884   
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

        

Foreign exchange contracts

   Accounts payable      5,416         10,945   

Foreign exchange contracts

   Other long term liabilities      6,950         12,036   
     

 

 

    

 

 

 

Total liability derivatives

      $ 17,114       $ 28,865   
     

 

 

    

 

 

 

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 AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended January 1, 2012:

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

  Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
    Amount of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
    Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Commodity contracts

  $ (745     Cost of goods sold      $ (366     Cost of goods sold      $ (19

Interest rate contracts

    (21     Interest expense        (659     Interest expense        —     

Foreign exchange contracts

    (129     Net sales        (122     Net sales        —     

Foreign exchange contracts

    1,308        Cost of goods sold        (1,255     Cost of goods sold        —     
 

 

 

     

 

 

     

 

 

 

Total

  $ 413        $ (2,402     $ (19
 

 

 

     

 

 

     

 

 

 

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended January 2, 2011, pretax:

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

   Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
     Amount of
Gain (Loss)
Reclassified from
AOCI into
Income
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
     Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Commodity contracts

   $ 2,023        Cost of goods sold       $ 550        Cost of goods sold       $ 1   

Interest rate contracts

     7        Interest expense         (849     Interest expense         (101

Foreign exchange contracts

     (389     Net sales         (119     Net sales         —     

Foreign exchange contracts

     1,942        Cost of goods sold         (2,125     Cost of goods sold         —     
  

 

 

      

 

 

      

 

 

 

Total

   $ 3,583         $ (2,543      $ (100
  

 

 

      

 

 

      

 

 

 

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, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three month periods ended January 1, 2012 and January 2, 2011, the Company recognized the following gains on these derivative contracts:

 

Derivatives Not Designated as

Hedging Instruments Under ASC 815

   Amount of Gain (Loss)
Recognized in
Income on Derivatives
     Location of Gain or (Loss)
Recognized in
Income on Derivatives
   2012      2011     

Foreign exchange contracts

     7,245         9,058       Other expense, net
  

 

 

    

 

 

    

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

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 primarily concentrated with a foreign financial institution counterparty. The Company considers these exposures when measuring its credit reserve on its derivative assets, which was $95 and $18 at January 1, 2012 and September 30, 2011, 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 January 1, 2012 and September 30, 2011, the Company had posted cash collateral of $1,692 and $418, respectively, related to such liability positions. In addition, at both January 1, 2012 and September 30, 2011, the Company had posted standby letters of credit of $2,000 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 both January 1, 2012 and September 30, 2011, the Company had a portfolio of U.S. dollar-denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads as follows: 2.25% for a notional principal amount of $200,000 to January 9, 2012 and 2.29% for a notional principal amount of $300,000 to February 9, 2012. The derivative net loss on these contracts recorded in AOCI by the Company at January 1, 2012 was $(149), net of tax benefit of $92. The derivative net loss on these contracts recorded in AOCI by the Company at September 30, 2011 was $(545), net of tax benefit of $334. At January 1, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $(149), net of tax.

The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign 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, 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 January 1, 2012 the Company had a series of foreign exchange derivative contracts outstanding through March 2013 with a contract value of $191,266. At September 30, 2011 the Company had a series of foreign exchange derivative contracts outstanding through September 2012 with a contract value of $223,417. The derivative net gain on these contracts recorded in AOCI by the Company at January 1, 2012 was $2,247, net of tax expense of $800. The derivative gain on these contracts recorded in AOCI by the Company at September 30, 2011 was $343, net of tax expense of $148. At January 1, 2012, the portion of derivative net gains estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $2,099, net of tax.

The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. The Company hedges a portion of the risk associated with 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 January 1, 2012 the Company had a series of such swap contracts outstanding through March 2013 for 7 tons with a contract value of $14,761. At September 30, 2011 the Company had a series of such swap contracts outstanding through December 2012 for 9 tons with a contract value of $18,858. The derivative net loss on these contracts recorded in AOCI by the Company at January 1, 2012 was $(848), net of tax benefit of $442. The derivative net loss on these contracts recorded in AOCI by the Company at September 30, 2011 was $(599), net of tax benefit of $312. At January 1, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $(840), net of tax.

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

Derivative Contracts

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, Euros or Australian Dollars. These foreign exchange contracts 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 January 1, 2012 and September 30, 2011, the Company had $179,324 and $265,974, respectively, of notional value for such foreign exchange derivative contracts outstanding.

8 FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 820: “Fair Value Measurements and Disclosures,” (“ASC 820”) establishes a framework for measuring fair value that requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 establishes market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

The valuation techniques required by ASC 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:

  Level 1 Unadjusted quoted prices for identical instruments in active markets.

 

  Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

  Level 3 Significant inputs to the valuation model are unobservable.

The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the periods presented.

The Company’s net derivative portfolio as of January 1, 2012, contains Level 2 instruments and consists of commodity, interest rate and foreign exchange contracts. The fair values of these instruments as of January 1, 2012 were as follows:

 

     Level 1      Level 2     Level 3      Total  

Assets:

          

Commodity contracts, net

   $ —         $ —        $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Assets

   $ —         $ —        $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Interest rate contracts

   $ —         $ (993   $ —         $ (993

Commodity contracts, net

     —           (1,357     —           (1,357

Foreign exchange contracts, net

     —           (9,145     —           (9,145
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Liabilities

   $ —         $ (11,495   $ —         $ (11,495
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s net derivative portfolio as of September 30, 2011, contains Level 2 instruments and consists of commodity, interest rate and foreign exchange contracts. The fair values of these instruments as of September 30, 2011 were as follows:

 

     Level 1      Level 2     Level 3      Total  

Total Assets

   $ —         $ —        $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Interest rate contracts

   $ —         $ (1,954   $ —         $ (1,954

Commodity contracts

     —           (958     —           (958

Foreign exchange contracts, net

     —           (22,490     —           (22,490
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Liabilities

   $      $ (25,402   $      $ (25,402
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term debt approximate fair value. The fair values of long-term debt and derivative financial instruments are generally based on quoted or observed market prices.

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).

The carrying amounts and fair values of the Company’s financial instruments are summarized as follows ((liability)/asset):

 

     January 1, 2012     September 30, 2011  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Total debt

   $ (1,779,459   $ (1,856,672   $ (1,576,612   $ (1,660,528

Interest rate swap agreements

     (993     (993     (1,954     (1,954

Commodity swap and option agreements

     (1,357     (1,357     (958     (958

Foreign exchange forward agreements

     (9,145     (9,145     (22,490     (22,490

9 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, primarily the United Kingdom and Germany. These pension plans generally provide benefits of stated amounts for each year of service. The Company also sponsors or participates in a number of other non-U.S. pension arrangements, including various retirement and termination benefit plans, some of which are covered by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and therefore are not included in the information presented below.

The Company also has various nonqualified deferred compensation agreements with certain of its employees. Under certain of these agreements, the Company has agreed to pay certain amounts annually for the first 15 years subsequent to retirement or to a designated beneficiary upon death. It is management’s intent that life insurance contracts owned by the Company will fund these agreements. Under the remaining agreements, the Company has agreed to pay such deferred amounts in up to 15 annual installments beginning on a date specified by the employee, subsequent to retirement or disability, or to a designated beneficiary upon death.

Other Benefits

Under the Rayovac postretirement plan, the Company provides certain health care and life insurance benefits to eligible retired employees. Participants earn retiree health care benefits over the next 10 succeeding years of service after reaching age 45 and remain eligible until reaching age 65. The plan is contributory and, accordingly, retiree contributions have been established as a flat dollar amount with contribution rates expected to increase at the active medical trend rate. This plan is unfunded.

Under the Tetra U.S. postretirement plan, the Company provides postretirement medical benefits to full-time employees who meet minimum age and service requirements. The plan is contributory with retiree contributions adjusted annually and contains other cost-sharing features such as deductibles, coinsurance and copayments.

The Company’s results of operations for the three month periods ended January 1, 2012 and January 2, 2011 reflect the following pension and deferred compensation benefit costs:

 

 

Components of net periodic pension and other deferred

compensation benefit costs

   Three Months  
   2012     2011  

Service cost

   $ 543      $ 781   

Interest cost

     1,926        2,557   

Expected return on assets

     (1,276     (1,965

Recognized net actuarial loss

     23        97   

Employee contributions

     (46     (129
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,170      $ 1,341   
  

 

 

   

 

 

 

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

The Company funds its U.S. pension plans in accordance with the Internal Revenue Service (“IRS”) 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 month periods ended January 1, 2012 and January 2, 2011 were as follows:

 

     Three Months  

Pension and deferred compensation contributions

   2012      2011  

Contributions made during period

   $ 824       $ 914   

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 month periods ended January 1, 2012 and January 2, 2011were $576 and $1,411, respectively.

10 INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Company’s major taxing jurisdictions are the U.S., United Kingdom and Germany. In the U.S., federal tax filings for years prior to and including the Company’s fiscal years ended September 30, 2007 are closed. However, the federal net operating loss carryforwards from the Company’s fiscal years ended September 30, 2007 and prior are subject to IRS examination until the year that such net operating loss carryforwards are utilized and that year is closed for audit. The Company’s fiscal years ended September 30, 2008, 2009, 2010 and 2011 remain open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.

11 SEGMENT RESULTS

The Company manages its business in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; and (iii) the Home and Garden Business.

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 to 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.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

Segment information for the three month periods ended January 1, 2012 and January 2, 2011 is as follows:

 

     Three Months  
     2012      2011  

Net sales to external customers

     

Global Batteries & Appliances

   $ 689,181       $ 696,572   

Global Pet Supplies

     134,938         137,045   

Home and Garden Business

     24,652         27,450   
  

 

 

    

 

 

 

Total segments

   $ 848,771       $ 861,067   
  

 

 

    

 

 

 

 

     Three Months  
     2012     2011  

Segment profit (loss)

    

Global Batteries & Appliances

   $ 98,206      $ 93,299   

Global Pet Supplies

     16,060        16,239   

Home and Garden Business

     (5,919     (6,831
  

 

 

   

 

 

 

Total segments

     108,347        102,707   

Corporate expense

     9,140        11,406   

Acquisition and integration related charges

     7,600        16,455   

Restructuring and related charges

     7,725        5,565   

Interest expense

     41,209        53,095   

Other expense, net

     2,193        889   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 40,480      $ 15,297   
  

 

 

   

 

 

 

 

     January 1,
2012
     September 30,
2011
 

Segment total assets

     

Global Batteries & Appliances

   $ 2,204,544       $ 2,275,076   

Global Pet Supplies

     976,281         828,202   

Home and Garden Business

     529,480         476,381   
  

 

 

    

 

 

 

Total segments

     3,710,305         3,579,659   

Corporate

     50,871         42,604   
  

 

 

    

 

 

 

Total assets at period end

   $ 3,761,176       $ 3,622,263   
  

 

 

    

 

 

 

12 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 related 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.

The following table summarizes restructuring and related charges (credits) incurred by segment for the three month periods ended January 1, 2012 and January 2, 2011:

 

     Three Months  
     2012      2011  

Cost of goods sold:

     

Global Batteries & Appliances

   $ 3,020       $ (150

Global Pet Supplies

     1,585         744   
  

 

 

    

 

 

 

Total restructuring and related charges in cost of goods sold

     4,605         594   

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

     Three Months  
     2012      2011  

Operating expense:

     

Global Batteries & Appliances

     877         25   

Home and Garden Business

     344         650   

Global Pet Supplies

     1,290         2,302   

Corporate

     609         1,994   
  

 

 

    

 

 

 

Total restructuring and related charges in operating expense

     3,120         4,971   
  

 

 

    

 

 

 

Total restructuring and related charges

   $ 7,725       $ 5,565   
  

 

 

    

 

 

 

Global Cost Reduction Initiatives Summary

In the fiscal year ended September 30, 2009, Company implemented a series of initiatives within the Global Batteries & Appliances segment, the Global Pet Supplies segment and the Home and Garden Business 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 the Company’s segments. These initiatives also included consultation, legal and accounting fees related to the evaluation of the Company’s capital structure prior to its bankruptcy filing. Costs associated with these initiatives, which are expected to be incurred through January 31, 2015, are projected to total approximately $86,000.

The Company recorded $7,129 and $3,729 of pretax restructuring and related charges during the three month periods ended January 1, 2012 and January 2, 2011, respectively, related to the Global Cost Reduction Initiatives.

The following table summarizes the remaining accrual balance associated with the 2009 initiatives and the activity during the three month period ended January 1, 2012:

 

 

     Termination
Benefits
    Other
Costs
    Total  

Accrual balance at September 30, 2011

   $ 8,795      $ 3,021      $ 11,816   

Provisions

     192        195        387   

Cash expenditures

     (3,667     (480     (4,147

Non-cash items

     128        (387     (259
  

 

 

   

 

 

   

 

 

 

Accrual balance at January 1, 2012

   $ 5,448      $ 2,349      $ 7,797   
  

 

 

   

 

 

   

 

 

 

Expensed as incurred (A)

   $ 3,359      $ 3,383      $ 6,742   

 

(A) 

Consists of amounts not impacting the accrual for restructuring and related charges.

The following table summarizes the expenses incurred during the three month period ended January 1, 2012, the cumulative amount incurred to date and the total future expected costs to be incurred associated with the Global Cost Reduction Initiatives by operating segment:

 

 

     Global
Batteries &
Appliances
     Global Pet
Supplies
     Home and
Garden
Business
     Corporate      Total  

Restructuring and related charges during the three month period ended January 1, 2012

   $ 3,910       $ 2,875       $ 344       $ —         $ 7,129   

Restructuring and related charges since initiative inception

   $ 17,077       $ 29,737       $ 17,052       $ 7,591       $ 71,457   

Total future restructuring and related charges expected

   $ 38       $ 11,600       $ 2,537       $ —         $ 14,175   

In connection with other restructuring efforts, the Company recorded $596 and $1,836 of pretax restructuring and related charges during the three month periods ended January 1, 2012 and January 2, 2011, respectively.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

13 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 in excess of the amounts provided of

approximately $8,011, which may result from resolution of these matters, 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 other matters of litigation generally arising out of the ordinary course of business.

The Company does not believe that any other matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.

14 ACQUISITIONS

Black Flag

On October 31, 2011, the Company completed the $43,750 cash acquisition of Black Flag from The Homax Group, Inc., a portfolio company of Olympus Partners. The Black Flag and TAT product lines consist of liquids, aerosols, baits and traps that control ants, spiders, wasps, bedbugs, fleas, flies, roaches, yellow jackets and other insects. This acquisition was not significant individually. In accordance with ASC Topic 805, “Business Combinations” (“ASC 805”), the Company accounted for the acquisition by applying the acquisition method of accounting. The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition.

The results of Black Flag’s operations since October 31, 2011 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Home and Garden Business segment.

Purchase Price Allocation

The total purchase price for Black Flag was allocated to the net tangible and identifiable intangible assets based upon their fair values at October 31, 2011 as set forth below. The excess of the purchase price over the net tangible assets and identifiable intangible assets was recorded as goodwill. The preliminary purchase price allocation for Black Flag is as follows:

 

Inventory

   $ 2,509   

Property, plant and equipment

     301   

Intangible assets

     25,000   

Goodwill

     15,852   

Other assets

     88   
  

 

 

 

Total assets acquired

   $ 43,750   
  

 

 

 

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Accordingly, the Company performed a valuation of the acquired assets of Black Flag at October 31, 2011. Significant adjustments as a result of the purchase price allocation are summarized as follows:

 

   

Certain indefinite-lived intangible assets were valued using a relief from royalty methodology. Customer relationships and certain definite-lived intangible assets were valued using a multi-period excess earnings method. The total fair value of indefinite and definite lived intangibles was $25,000 as of October 31, 2011. A summary of the significant key inputs is as follows:

 

   

The Company valued customer relationships using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the customer relationship, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used, which included an expected growth rate of 3%. The Company assumed a customer retention rate of approximately 95%, which was supported by historical retention rates. Income taxes were estimated at 40% and amounts were discounted using a rate of 13.5%. The customer relationships were valued at $17,000 under this approach and will be amortized over 20 years.

 

   

The Company valued trade names 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 other similar trademark licensing and transaction agreements and the relative profitability and perceived

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

 

contribution of the trademarks and trade names. Royalty rates used in the determination of the fair values of trade names were in the range of 2-4% of expected net sales related to the respective trade name. The Company anticipates using the trade names for an indefinite period as demonstrated by the sustained use of each subject trademark. In estimating the fair value of the trade names, Net sales for the trade names were estimated to grow at a rate of (15)%-8% annually with a terminal year growth rate of 3%. Income taxes were estimated at 40% and amounts were discounted using a rate of 13.5%. Trade names were valued at $8,000 under this approach.

The Company’s estimates and assumptions for Black Flag are subject to change as the Company obtains additional information for its estimates during the measurement period. The primary areas of the purchase price allocation that are not yet finalized relate to certain legal matters and residual goodwill.

FURminator

On December 22, 2011, the Company completed the $141,745 cash acquisition of FURminator from HKW Capital Partners III, L.P. FURminator is a leading worldwide provider of branded and patented pet deshedding products. This acquisition was not significant individually. In accordance with ASC 805, the Company accounted for the acquisition by applying the acquisition method of accounting.

The results of FURminator operations since December 22, 2011 are included in the Company’s Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Global Pet Supplies business segment.

Purchase Price Allocation

The total purchase price for FURminator was allocated to the net tangible and identifiable intangible assets based upon their fair values at December 22, 2011 as set forth below. The excess of the purchase price over the net tangible assets and identifiable intangible assets was recorded as goodwill. The preliminary purchase price allocation for FURminator is as follows:

 

Current assets

   $ 9,240   

Property, plant and equipment

     648   

Intangible assets

     79,000   

Goodwill

     68,531   
  

 

 

 

Total assets acquired

   $ 157,419   

Current liabilities

     758   

Long-term liabilities

     14,916   
  

 

 

 

Total liabilities assumed

   $ 15,674   
  

 

 

 

Net assets acquired

   $ 141,745   
  

 

 

 

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Accordingly, the Company performed a valuation of the assets and liabilities of FURminator at December 22, 2011. Significant adjustments as a result of the purchase price allocation are summarized as follows:

 

   

Certain indefinite-lived intangible assets were valued using a relief from royalty methodology. Customer relationships and certain definite-lived intangible assets were valued using a multi-period excess earnings method. The total fair value of indefinite and definite lived intangibles was $79,000 as of December 22, 2011. A summary of the significant key inputs is as follows:

 

   

The Company valued customer relationships using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the customer relationship, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used, which included an expected growth rate of 3%. The Company assumed a customer retention rate of approximately 95%, which was supported by historical retention rates. Income taxes were estimated at 40% and amounts were discounted using a rate of 14%. The customer relationships were valued at $46,000 under this approach and will be amortized over 20 years.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

   

The Company valued trade names 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 other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. Royalty rates used in the determination of the fair values of trade names were in the range of 4-5% of expected net sales related to the respective trade name. The Company anticipates using the trade names for an indefinite period as demonstrated by the sustained use of each subject trade name. In estimating the fair value of the trade names, Net sales for the trade names were estimated to grow at a rate of 2%-12% annually with a terminal year growth rate of 3%. Income taxes were estimated at 40% and amounts were discounted using a rate of 14%. Trade names were valued at $14,000 under this approach.

 

   

The Company valued technology 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 technology was not owned. Royalty rates used in the determination of the fair values of technologies were 10-12% of expected net sales related to the respective technology. The Company anticipates using these technologies through the legal life of the underlying patent and therefore the expected life of these technologies was equal to the remaining legal life of the underlying patents, which is approximately 9 years. In estimating the fair value of the technologies, net sales were estimated to grow at a rate of 2%-12% annually. Income taxes were estimated at 40% and amounts were discounted using the rate of 14%. The technology assets were valued at $19,000 under this approach.

The Company’s estimates and assumptions for FURminator are subject to change as the Company obtains additional information for its estimates during the measurement period. The primary areas of the purchase price allocation that are not yet finalized relate to certain legal matters, income and non-income based taxes and residual goodwill.

15 NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Measurement

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued amended accounting guidance to achieve a consistent definition of and common requirements for measurement of and disclosure concerning fair value between GAAP and International Financial Reporting Standards. This amended guidance is effective for the Company beginning in the second quarter of its fiscal year ending September 30, 2012. The Company is currently evaluating the impact of this new accounting guidance on its Consolidated Financial Statements.

Presentation of Comprehensive Income

In June 2011, the FASB issued new accounting guidance which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. This accounting guidance is effective for the Company for the fiscal year beginning October 1, 2012. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its Consolidated Financial Statements.

Testing for Goodwill Impairment

During September 2011, the FASB issued new accounting guidance intended to simplify how an entity tests goodwill for impairment. The guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting guidance is effective for the Company for the annual and any interim goodwill impairment tests performed for the fiscal year beginning October 1, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements.

 

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SPECTRUM BRANDS, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)

(Amounts in thousands, except per share figures)

 

16 CONSOLIDATING FINANCIAL STATEMENTS

On August 28, 2009, Spectrum Brands, with its domestic subsidiaries as guarantors, issued the 12% Notes under the 2019 Indenture for the benefit of holders of allowed claims with respect to the Predecessor Company’s then-existing senior subordinated notes. In connection with the combination with Russell Hobbs, Spectrum Brands, with its domestic subsidiaries and SB/RH Holdings, LLC as guarantors, issued the 9.5% Notes under the 2018 Indenture. (See Note 6, Debt, for further information on the 12% Notes and the 2019 Indenture and the 9.5% Notes under the 2018 Indenture.)

The following consolidating financial statements illustrate the components of the consolidated financial statements of the Successor Company and the Predecessor Company. Investments in subsidiaries are accounted for using the equity method for purposes of illustrating the consolidating presentation. Earnings of subsidiaries are therefore reflected in the Company’s and Guarantor Subsidiaries’ investment accounts and earnings. The elimination entries presented herein eliminate investments in subsidiaries and intercompany balances and transactions. Separate consolidated financial statements of the Guarantor Subsidiaries are not presented because management has determined that such financial statements would not be material to investors.

 

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SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Financial Position

January 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

ASSETS

  

Current assets:

          

Cash and cash equivalents

   $ 549      $ 5,940      $ 49,103      $ —        $ 55,592   

Receivables:

          

Trade accounts receivables, net of allowances

     40,441        76,336        245,476        —          362,253   

Intercompany receivables

     802,432        948,528        400,309        (2,149,796     1,473   

Other

     3,843        5,097        36,594        —          45,534   

Inventories

     74,083        226,913        185,958        (4,662     482,292   

Deferred income taxes

     (7,909     23,680        7,976        743        24,490   

Prepaid expenses and other

     20,362        10,019        24,415        —          54,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     933,801        1,296,513        949,831        (2,153,715     1,026,430   

Property, plant and equipment, net

     57,452        45,310        101,239        —          204,001   

Long term intercompany receivables

     139,077        129,970        110,651        (379,698     —     

Deferred charges and other

     12,886        5,192        19,877        —          37,955   

Goodwill

     67,722        438,864        183,697        —          690,283   

Intangible assets, net

     522,799        809,744        426,673        —          1,759,216   

Debt issuance costs

     43,291        —          —          —          43,291   

Investments in subsidiaries

     2,218,106        1,067,292        —          (3,285,398     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,995,134      $ 3,792,885      $ 1,791,968      $ (5,818,811   $ 3,761,176   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

          

Current maturities of long-term debt

   $ 5,585      $ 1,667      $ 16,104      $ —        $ 23,356   

Accounts payable

     1,410,529        534,268        245,315        (1,896,908     293,204   

Accrued liabilities:

          

Wages and benefits

     8,550        5,894        28,528        —          42,972   

Income taxes payable

     386        (27     27,382        —          27,741   

Accrued interest

     21,018        —          48        —          21,066   

Other

     20,174        40,195        68,263        —          128,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,466,242        581,997        385,640        (1,896,908     536,971   

Long-term debt, net of current maturities

     1,731,008        473,132        184,543        (632,580     1,756,103   

Employee benefit obligations, net of current portion

     17,485        7,187        56,008        —          80,680   

Deferred income taxes

     98,109        184,251        80,150        —          362,510   

Other

     15,995        412        18,335        —          34,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     3,328,839        1,246,979        724,676        (2,529,488     2,771,006   

Shareholders’ equity:

          

Other equity

     1,339,119        1,834,602        980,167        (2,814,771     1,339,117   

Accumulated deficit (retained earnings)

     (559,943     813,116        94,701        (669,870     (321,996

Accumulated other comprehensive income (deficit)

     (112,881     (101,812     (7,576     195,318        (26,951
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     666,295        2,545,906        1,067,292        (3,289,323     990,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,995,134      $ 3,792,885      $ 1,791,968      $ (5,818,811   $ 3,761,176   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Financial Position

September 30, 2011

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 

ASSETS

  

Current assets:

           

Cash and cash equivalents

   $ 49      $ 8,789      $ 133,576       $ —        $ 142,414   

Receivables:

           

Trade accounts receivables, net of allowances

     64,832        115,440        176,333         —          356,605   

Intercompany receivables

     550,640        907,730        392,044         (1,854,857     (4,443

Other

     2,144        5,527        30,007         —          37,678   

Inventories

     75,652        179,506        183,640         (4,168     434,630   

Deferred income taxes

     (7,285     26,436        8,037         982        28,170   

Prepaid expenses and other

     18,286        4,538        25,968         —          48,792   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     704,318        1,247,966        949,605         (1,858,043     1,043,846   

Property, plant and equipment, net

     57,669        43,808        104,912         —          206,389   

Long term intercompany receivables

     136,709        134,313        127,175         (398,197     —     

Deferred charges and other

     11,364        4,725        20,735         —          36,824   

Goodwill

     67,722        354,481        188,135         —          610,338   

Intangible assets, net

     525,409        714,710        443,790         —          1,683,909   

Debt issuance costs

     40,957        —          —           —          40,957   

Investments in subsidiaries

     2,330,632        1,022,634        —           (3,353,266     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,874,780      $ 3,522,637      $ 1,834,352       $ (5,609,506   $ 3,622,263   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

           

Current maturities of long-term debt

   $ 30,585      $ 1,036      $ 9,469       $ —        $ 41,090   

Accounts payable

     1,338,536        455,696        283,669         (1,754,730     323,171   

Accrued liabilities:

           

Wages and benefits

     20,377        13,396        37,172         —          70,945   

Income taxes payable

     366        (21     31,261         —          31,606   

Accrued interest

     30,361        —          106         —          30,467   

Other

     20,661        45,827        68,077         —          134,565   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,440,886        515,934        429,754         (1,754,730     631,844   

Long-term debt, net of current maturities

     1,503,990        307,087        222,753         (498,308     1,535,522   

Employee benefit obligations, net of current portion

     17,408        7,301        59,093         —          83,802   

Deferred income taxes

     86,248        169,838        81,250         —          337,336   

Other

     22,205        3,564        18,868         —          44,637   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     3,070,737        1,003,724        811,718         (2,253,038     2,633,141   

Shareholders’ equity:

           

Other equity

     1,338,735        1,693,632        980,167         (2,673,800     1,338,734   

Accumulated deficit (retained earnings)

     (426,165     922,638        37,719         (869,358     (335,166

Accumulated other comprehensive income (deficit)

     (108,527     (97,357     4,748         186,690        (14,446
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     804,043        2,518,913        1,022,634         (3,356,468     989,122   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,874,780      $ 3,522,637      $ 1,834,352       $ (5,609,506   $ 3,622,263   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

26


Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

Three Month Period Ended January 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 

Net sales

   $ 201,998      $ 255,544      $ 430,978       $ (39,749   $ 848,771   

Cost of goods sold

     143,039        191,008        265,072         (38,979     560,140   

Restructuring and related charges

     —          1,585        3,020         —          4,605   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     58,959        62,951        162,886         (770     284,026   

Operating expenses:

           

Selling

     20,080        34,344        77,568         (233     131,759   

General and administrative

     14,440        16,087        19,903         —          50,430   

Research and development

     3,991        2,260        984         —          7,235   

Acquisition and integration related charges

     5,322        1,652        626         —          7,600   

Restructuring and related charges

     796        1,444        880         —          3,120   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     44,629        55,787        99,961         (233     200,144   

Operating income (loss)

     14,330        7,164        62,925         (537     83,882   

Interest expense

     36,471        1,195        3,545         (2     41,209   

Other (income) expense, net

     (47,521     (37,816     1,231         86,299        2,193   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     25,380        43,785        58,149         (86,834     40,480   

Income tax expense (benefit)

     11,491        2,738        12,842         239        27,310   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 13,889      $ 41,047      $ 45,307       $ (87,073   $ 13,170   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

Three Month Period Ended January 2, 2011

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Net sales

   $ 118,928      $ 339,776      $ 473,036      $ (70,673   $ 861,067   

Cost of goods sold

     62,134        267,748        301,055        (69,703     561,234   

Restructuring and related charges

     —          744        (150     —          594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56,794        71,284        172,131        (970     299,239   

Operating expenses:

          

Selling

     20,472        40,577        79,292        (121     140,220   

General and administrative

     16,478        20,030        24,237        —          60,745   

Research and development

     3,977        2,764        826        —          7,567   

Acquisition and integration related charges

     2,381        10,062        4,012        —          16,455   

Restructuring and related charges

     1,994        2,952        25        —          4,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     45,302        76,385        108,392        (121     229,958   

Operating income (loss)

     11,492        (5,101     63,739        (849     69,281   

Interest expense

     46,556        367        6,157        15        53,095   

Other (income) expense, net

     (66,028     (31,641     (143     98,701        889   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     30,964        26,173        57,725        (99,565     15,297   

Income tax expense (benefit)

     18,148        (918     17,840        (27     35,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,816      $ 27,091      $ 39,885      $ (99,538   $ (19,746
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows

Three Month Period Ended January 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor 
Subsidiaries
    Eliminations     Consolidated 
Total
 

Net cash (used) provided by operating activities

     (11,717     205,319       43,220        (331,749     (94,927

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     (3,017     (2,825 )     (3,009     —          (8,851

Acquisition of Black Flag

     —          (43,750 )     —          —          (43,750

Acquisition of FURminator, net of cash

     —          (139,390 )     —          —          (139,390

Other investing activity

     —          (114 )     14        —          (100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (3,017     (186,079 )     (2,995     —          (192,091

Cash flows from financing activities:

          

Proceeds from new 9.5% Notes, net of premium

     217,000        —          —          —          217,000   

Payment of Senior Credit Facilities

     (1,363     —          —          —          (1,363

Debt issuance costs

     (4,020     —          —          —          (4,020

ABL Revolving Credit Facility, net

     11,400        —          —          —          11,400   

Reduction of other debt

     (25,000     —          (809     —          (25,809

Proceeds from debt financing

     —          —          1,361        —          1,361   

Proceeds from (advances related to) intercompany transactions

     (182,783     (22,089 )     (126,877     331,749        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     15,234        (22,089 )     (126,325     331,749        198,569   

Effect of exchange rate changes on cash and cash equivalents

     —          —          1,627        —          1,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     500        (2,849 )     (84,473     —          (86,822

Cash and cash equivalents, beginning of period

     49        8,789       133,576        —          142,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 549      $ 5,940     $ 49,103      $ —        $ 55,592   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows

Three Month Period Ended January 2, 2011

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor 
Subsidiaries
    Eliminations     Consolidated 
Total
 

Net cash (used) provided by operating activities of continuing operations

   $ 37,205      $ (32,261 )   $ (406,483   $ 351,165      $ (50,374

Net cash used by operating activities of continuing operations

     —          (252 )     —          —          (252
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used) provided by operating activities

     37,205        (32,513 )     (406,483     351,165        (50,626

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     (3,884     (2,866 )     (1,392     —          (8,142

Acquisition, net of cash

     —          (10,278 )     —          —          (10,278
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (3,884     (13,144 )     (1,392     —          (18,420

Cash flows from financing activities:

          

Payment of Senior Credit Facilities

     (70,000     —          —          —          (70,000

ABL Revolving Credit Facility, net

     43,500        —          —          —          43,500   

Reduction of other debt

     —          —          (224     —          (224

Proceeds from debt financing

     —          (417 )     13,461        —          13,044   

Treasury stock purchases

     (3,241     —          —          —          (3,241

Proceeds from (advances related to) intercompany transactions

     (55,272     48,890       357,547        (351,165     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     (85,013     48,473       370,784        (351,165     (16,921

Effect of exchange rate changes on cash and cash equivalents

     —          —          (1,596     —          (1,596
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     (51,692     2,816       (38,687     —          (87,563

Cash and cash equivalents, beginning of period

     52,580        2,723       115,311        —          170,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 888      $ 5,539     $ 76,624      $ —        $ 83,051   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Spectrum Brands, Inc., a Delaware corporation (“Spectrum Brands” or the “Company”), is a global branded consumer products company. Spectrum Brands Holdings, Inc. (“SB Holdings”) was created in connection with the combination of Spectrum Brands and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company, to form a new combined company (the “Merger”). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs are wholly-owned subsidiaries of SB Holdings and Russell Hobbs is a wholly-owned subsidiary of Spectrum Brands. SB Holdings trades on the New York Stock Exchange under the symbol “SPB.”

Unless the context indicates otherwise, the terms the “Company,” “Spectrum,” “we,” “our” or “us” are used to refer Spectrum Brands and its subsidiaries subsequent to the Merger and prior to the Merger.

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. With the addition of Russell Hobbs we design, market and distribute a broad range of branded small household appliances and personal care products. Our manufacturing and product development facilities are located in the United States, Europe, Latin America and Asia. Substantially all of our rechargeable batteries and chargers, shaving and grooming products, small household appliances, personal care products and portable lighting products are manufactured by third-party suppliers, primarily located in Asia.

We sell our products in approximately 130 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, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator and various other brands.

Our diversified global branded consumer products have positions in seven major product categories: consumer batteries; pet supplies; home and garden control products; electric shaving and grooming products; small appliances; electric personal care products; and portable lighting. Our chief operating decision-maker manages the businesses in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of our worldwide battery, electric shaving and grooming, electric personal care, portable lighting 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”); and (iii) Home and Garden Business, which consists of our home and garden and insect control business (the “Home and Garden Business”). Management reviews our performance based on these segments. For information pertaining to our business segments, see Note 11, “Segment Information” of Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q (Unaudited).

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.

Results of Operations

Fiscal Quarter Ended January 1, 2012 Compared to Fiscal Quarter Ended January 2, 2011

In this Quarterly Report on Form 10-Q we refer to the three months ended January 1, 2012 as the “Fiscal 2012 Quarter,” and the three month period ended January 2, 2011 as the “Fiscal 2011 Quarter.”

 

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Table of Contents

Net Sales. Net sales for the Fiscal 2012 Quarter decreased to $849 million from $861 million in the Fiscal 2011 Quarter, a 1% decrease. The following table details the principal components of the change in net sales from the Fiscal 2011 Quarter to the Fiscal 2012 Quarter (in millions):

 

     Net Sales  

Fiscal 2011 Quarter Net Sales

   $ 861   

Increase in small appliances

     2   

Increase in electric personal care products

     1   

Decrease in electric shaving and grooming products

     (1

Decrease in consumer batteries

     (1

Decrease in portable lighting products

     (2

Decrease in pet supplies

     (2

Decrease in home and garden control products

     (3

Foreign currency impact, net

     (6
  

 

 

 

Fiscal 2012 Quarter Net Sales

   $ 849   
  

 

 

 

Consolidated net sales by product line for the Fiscal 2012 Quarter and the Fiscal 2011 Quarter are as follows (in millions):

 

     Fiscal Quarter  
     2012      2011  

Product line net sales

     

Consumer batteries

     244         248   

Small appliances

     243         243   

Pet supplies

     135         137   

Electric shaving and grooming products

     96         98   

Electric personal care products

     82         82   

Home and garden control products

     25         27   

Portable lighting products

     24         26   
  

 

 

    

 

 

 

Total net sales to external customers

   $ 849       $ 861   
  

 

 

    

 

 

 

Global consumer battery sales decreased $4 million, or 2%, during the Fiscal 2012 Quarter primarily driven by decreases in North America and Latin America sales of $3 million and $6 million, respectively, which were tempered by increased European sales of $8 million. Foreign exchange negatively impacted consumer battery sales by $3 million. The decreases within North America were driven by timing of holiday shipments which resulted in higher sales recognized during the fourth quarter of our fiscal year ended September 30, 2011 (“Fiscal 2011”), which was slightly offset by sales gains due to expanded product offerings in our specialty batteries category. Declines within Latin America were attributable to the non-recurrence of promotions which occurred in the Fiscal 2011 Quarter, while the strong European sales resulted from continued customer gains in the region.

Small appliances sales were flat during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter. We did experience a $2 million increase in sales in both North America and Latin America driven by the successful introduction of new products at a major customer. These increases were offset by decreased European sales of $2 million and negative foreign exchange impacts of $2 million. European sales decreased as a result of our efforts to exit lower margin brands.

Pet supply sales decreased $2 million, or 1%, during the Fiscal 2012 Quarter resulting from lower European aquatics and companion animal sales, which were partially offset by increases within North American aquatics sales.

During the Fiscal 2012 Quarter, electric shaving and grooming product sales decreased $2 million, or 2%. Although successful new product launches increased sales in North America and Europe, overall we experienced declines due to the elimination of lower margin North American promotions.

Electric personal care sales were flat for the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter; however, North American and Latin American sales increased by $3 million and $2 million, respectively. These increases were offset by decreased European sales of $4 million and unfavorable foreign exchange impacts of $1 million. The increases in North America and Latin America were driven by successful new product launches and distribution gains whereas the decreases in Europe were a result of declines within the women’s hair care category.

Home and garden control product sales decreased $2 million, or 7%, during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter. The decrease in sales was driven by our retail customers’ inventory management.

 

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Portable lighting sales decreased $2 million during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter, which was driven by decreased European sales of $1 million resulting from the non-recurrence of successful promotions during the Fiscal 2011 Quarter, coupled with a slight decrease in Latin American sales.

Gross Profit. Gross profit for the Fiscal 2012 Quarter was $284 million versus $299 million for the Fiscal 2011 Quarter. Our gross profit margin for the Fiscal 2012 Quarter decreased to 33.5% from 34.8% in the Fiscal 2011 Quarter. The decrease in gross profit is due to a $12 million decrease in sales coupled with a $4 million increase in restructuring and related charges included in cost of goods sold due to our announced closure of a zinc carbon battery manufacturing facility in Colombia.

Operating Expense. Operating expenses for the Fiscal 2012 Quarter totaled $200 million versus $230 million for the Fiscal 2011 Quarter representing a decrease of $30 million. The decrease in operating expenses during the Fiscal 2012 Quarter is primarily attributable to synergies being recognized subsequent to the Merger and savings from our global cost reduction initiatives coupled with decreases in Acquisition and integration related charges and Restructuring and related charges of $9 million and $2 million, respectively.

Segment Results. As discussed above, we manage our business in three reportable segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; and (iii) our Home and Garden Business.

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 operating segments or corporate expense. Costs are allocated 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.

Financial information pertaining to our reportable segments is contained in Note 11, Segment Results, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.

Adjusted 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.

 

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Below is a reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA by segment for the Fiscal 2012 Quarter and the Fiscal 2011 Quarter:

 

Fiscal 2012 Quarter

                                
     Global
Batteries &
Appliances
     Global Pet
Supplies
     Home and
Garden
Business
    Corporate /
Unallocated
Items(a)
    Spectrum Brands  
     (in millions)  

Net income (loss)

   $ 90       $ 13       $ (6   $ (84   $ 13   

Income tax expense

     —           —           —          27        27   

Interest expense

     —           —           —          41        41   

Restructuring and related charges

     4         3         —          1        8   

Acquisition and integration related charges

     3         —           —          5        8   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBIT

   $ 97       $ 16       $ (6   $ (10   $ 97   

Depreciation and amortization

     15         6         3        4        28   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 112       $ 22       $ (3   $ (6   $ 125   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

Fiscal 2011 Quarter

                                
     Global
Batteries &
Appliances
     Global Pet
Supplies
     Home and
Garden
Business
    Corporate /
Unallocated
Items(a)
    Spectrum Brands  
     (in millions)  

Net income (loss)

   $ 79       $ 13       $ (7   $ (105   $ (20

Income tax expense

     —           —           —          35        35   

Interest expense

     —           —           —          53        53   

Restructuring and related charges

     —           3         1        2        6   

Acquisition and integration related charges

     14         —           —          2        16   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBIT

   $ 93       $ 16       $ (6   $ (13   $ 90   

Depreciation and amortization

     18         6         3        6        33   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 111       $ 22       $ (3   $ (7   $ 123   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) 

It is our policy to record Income tax expense and Interest expense on a consolidated basis. Accordingly, such amounts are not reflected in the operating results of the operating segments.

Global Batteries & Appliances

 

     2012     2011  
     (in millions)  

Net sales to external customers

   $ 689      $ 697   

Segment profit

   $ 98      $ 93   

Segment profit as a % of net sales

     14.3     13.4

Segment Adjusted EBITDA

   $ 112      $ 111   

Assets at January 1, 2012 and September 30, 2011

   $ 2,205      $ 2,275   

Segment net sales to external customers in the Fiscal 2012 Quarter decreased $8 million to $689 million from $697 million during the Fiscal 2011 Quarter, a 1% decrease. Unfavorable foreign currency exchange translation impacted net sales in the Fiscal 2011 Quarter by approximately $7 million.

Global consumer battery sales decreased $4 million, or 2%, during the Fiscal 2012 Quarter primarily driven by decreases in North America and Latin America sales of $3 million and $6 million, respectively, which were tempered by increased European sales of $8 million. Foreign exchange negatively impacted consumer battery sales by $3 million. The decreases within North America were a result of the timing of holiday shipments which increased sales recognized during the fourth quarter of Fiscal 2011, and were slightly offset by sales gains due to expanded product offerings in our specialty batteries category. The Latin American battery sales decline was attributable to the non-recurrence of promotions which occurred in the Fiscal 2011 Quarter. Strong European sales were driven by continued customer gains in the region. Both small appliances and electric personal care sales were flat during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter. Electric shaving and grooming product sales decreased $2 million, or 2%, driven by the timing of customer orders which resulted in higher sales being recognized in the fourth quarter of Fiscal 2011 and tempered the positive sales impacts of successful new product launches. Portable lighting sales decreased $2 million during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter, which was driven by decreased European sales of $1 million resulting from the non-recurrence of successful promotions during the Fiscal 2011 Quarter, coupled with a slight decrease in Latin American sales.

 

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Segment profitability in the Fiscal 2012 Quarter increased to $98 million from $93 million in the Fiscal 2011 Quarter. Segment profitability as a percentage of net sales increased to 14.3% in the Fiscal 2012 Quarter compared to 13.4% in the Fiscal 2011 Quarter. The increase is primarily attributable to synergies being recognized following the Merger tempered by decreased sales and increased commodity prices. Furthermore, segment profit has increased as a result of our cost reduction initiatives announced in February 2009. See “Restructuring and Related Charges below, as well as Note 12, 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 Adjusted EBITDA in the Fiscal 2012 Quarter increased to $112 million compared to $111 million in the Fiscal 2011 Quarter. The increase in Adjusted EBITDA is mainly driven by the factors discussed above for the increase in segment profit.

Segment assets at January 1, 2012 decreased to $2,205 million from $2,275 million at September 30, 2011. The decrease is primarily due to the impact of unfavorable foreign currency translation and amortization of intangible assets. Goodwill and intangible assets, which are directly a result of the revaluation impacts of fresh-start reporting and the Merger decreased slightly to $1,278 million at January 1, 2012 from $1,295 million at September 30, 2011.

Global Pet Supplies

 

     2012     2011  
     (in millions)  

Net sales to external customers

   $ 135      $ 137   

Segment profit

   $ 16      $ 16   

Segment profit as a % of net sales

     11.9     11.8

Segment Adjusted EBITDA

   $ 22      $ 22   

Assets at January 1, 2012 and September 30, 2011

   $ 976      $ 828   

Segment net sales to external customers in the Fiscal 2012 Quarter decreased slightly to $135 million compared to $137 million in the Fiscal 2011 Quarter due to declines in European aquatics and companion animal sales which were tempered by increased North American aquatics sales.

Segment profitability remained flat in the Fiscal 2012 Quarter at $16 million compared to the Fiscal 2011 Quarter. Segment profitability as a percentage of sales in the Fiscal 2012 Quarter increased slightly to 11.9% from 11.8% in the same period last year. The increase in segment profitability as a percentage of sales for the Fiscal 2012 Quarter was mainly attributable to overall expense management, which was slightly offset by increased cost of goods sold.

Segment Adjusted EBITDA in the Fiscal 2012 Quarter was constant at $22 million. The slight decrease in sales was offset by the expense management discussed above.

Segment assets at January 1, 2012 increased to $976 million from $828 million at September 30, 2011. The increase is primarily due to the acquisition of FURminator, Inc. during the Fiscal 2012 Quarter partially offset by the impact of foreign currency translation. Goodwill and intangible assets, which are substantially the result of the revaluation impacts of fresh-start reporting and acquisitions increased to $729 million at January 1, 2012 from $595 million at September 30, 2011.

Home and Garden Business

 

     2012     2011  
     (in millions)  

Net sales to external customers

   $ 25      $ 27   

Segment loss

   $ (6   $ (7

Segment loss as a % of net sales

     (24.0 )%      (24.9 )% 

Segment Adjusted EBITDA

   $ (3   $ (3

Assets at January 1, 2012 and September 30, 2011

   $ 529      $ 476   

Segment net sales to external customers in the Fiscal 2012 Quarter decreased to $25 million from $27 million in the Fiscal 2011 Quarter due to our customers’ inventory management in the off peak season.

 

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The first quarter of our fiscal year is generally a period of internal inventory building in advance of the Home and Garden Business segment’s major selling season, typically in the spring and summer months. First quarter net sales for the Home and Garden Business segment are typically less than 9-percent of full-year net sales.

Segment profitability in the Fiscal 2012 Quarter improved to a loss of $(6) million from a loss of $(7) million in the Fiscal 2011 Quarter. Segment profitability as a percentage of sales in the Fiscal 2012 Quarter improved to (24.0)% from (24.9)% in the same period last year. This improvement in segment profitability was attributable to savings from our global cost reduction initiatives announced in Fiscal 2009 in addition to lower spending on operating expenses.

Segment Adjusted EBITDA was $(3) million for both the Fiscal 2012 Quarter and the Fiscal 2011 Quarter.

Segment assets at January 1, 2012 increased to $529 million from $476 million at September 30, 2011. Goodwill and intangible assets, which are substantially a result of the revaluation impacts of fresh-start reporting and acquisitions, increased to $442 million at January 1, 2012, from $404 million at September 30, 2011, driven by the Black Flag acquisition. The remaining increase in segment assets was a result of the previously mentioned inventory build in anticipation of the major selling season.

Corporate Expense. Our corporate expense in the Fiscal 2012 Quarter was $9 million compared to $11 million during the Fiscal 2011 Quarter. Corporate expense as a percentage of consolidated net sales for the Fiscal 2012 Quarter was 1.1% and 1.3% for the Fiscal 2011 Quarter. The decrease is primarily due to decreased stock compensation expense of $1 million in the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter, coupled with savings from our cost reduction initiatives.

Acquisition and Integration and Related Charges. Acquisition and integration related charges reflected in Operating expenses include, but are not limited to, transaction costs such as banking, legal and accounting professional fees directly related to the acquisition, 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.

We incurred $8 million of Acquisition and integration related charges during the Fiscal 2012 Quarter in connection with the Merger and the acquisitions of Black Flag and FURminator, which consisted of the following: (i) $4 million of legal and professional fees; (ii) $1 million of employee termination charges; and (iii) $3 million of integration costs. We incurred $16 million of Acquisition and integration related charges during the Fiscal 2011 Quarter in connection with the Merger which consisted of the following: (i) $2 million of legal and professional fees; (ii) $4 million of employee termination charges; and (iii) $10 million of integration costs. The Company incurred di minimis acquisition and integration related charges associated with the acquisition of Seed Resources, LLC during the Fiscal 2011 Quarter.

Restructuring and Related Charges. See Note 12, 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.

The following table summarizes all restructuring and related charges (credits) we incurred in the Fiscal 2012 Quarter and the Fiscal 2011 Quarter (in millions):

 

     2012      2011  

Costs included in cost of goods sold:

     

Global Cost Reduction Initiatives:

     

Termination benefits

   $ 2.6       $ 0.1   

Other associated costs

     2.0         0.6   

Other Restructuring Initiatives:

     

Other associated costs

     —           (0.1
  

 

 

    

 

 

 

Total included in cost of goods sold

   $ 4.6       $ 0.6   

Costs included in operating expenses:

     

Global Cost Reduction Initiatives:

     

Termination benefits

     1.0         2.2   

Other associated costs

     1.5         0.8   

Other Restructuring Initiatives:

     

Termination benefits

     —           1.1   

Other associated costs

     0.6         0.9   
  

 

 

    

 

 

 

Total included in operating expenses

   $ 3.1       $ 5.0   
  

 

 

    

 

 

 

Total restructuring and related charges

   $ 7.7       $ 5.6   
  

 

 

    

 

 

 

 

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During Fiscal 2009, we implemented a series of initiatives within the Global Batteries & Appliances segment, the Global Pet Supplies segment, and the Home and Garden Business segment to reduce operating costs, and to evaluate opportunities to improve the our capital structure (the “Global Cost Reduction Initiatives”). These initiatives included headcount reductions within all our segments and the exit of certain facilities in the U.S. related to the Global Pet Supplies and the Home and Garden Business segments. These initiatives also included consultation, legal and accounting fees related to the evaluation of our capital structure. We recorded $7 million and $4 million of pretax restructuring and related charges during the Fiscal 2012 Quarter and the Fiscal 2011 Quarter, respectively, related to the Global Cost Reduction Initiatives. Costs associated with these initiatives, which are expected to be incurred through January 31, 2015, are projected to approximate $86 million.

Interest Expense. Interest expense in the Fiscal 2012 Quarter decreased to $41 million from $53 million in the Fiscal 2011 Quarter. The decrease in interest expense in the Fiscal 2012 Quarter is primarily related to lower principal and rates on our Term Loan and less non-cash amortization of deferred original issue discount and financing fees. See Note 6, 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 rate on income from continuing operations is approximately 67% for the Fiscal 2012 Quarter. Our effective tax rate on the loss from continuing operations was approximately 229% for the Fiscal 2011 Quarter. There are four significant factors impacting our book income tax rate. First, we are very profitable in our foreign jurisdictions and therefore must provide foreign income taxes even while we have a book loss in the United States. Our book loss in the U.S. is the result of substantially all of our debt and restructuring costs being incurred in our U.S. entities. Second, since there is a valuation allowance against US deferred tax assets, we are unable to book any financial statement benefit related to our U.S. domestic losses. This impact is further exacerbated by the tax amortization of certain domestic indefinite lived intangible assets. The deferred tax liabilities created by the tax amortization of these intangibles cannot be used to offset corresponding increases in net operating loss deferred tax assets in determining the Company’s domestic valuation allowance. This results in additional net domestic tax expense despite the US domestic book losses. Third, in the Fiscal 2012 Quarter, we recognized a $14 million tax benefit from the release of a portion of our U.S. valuation allowance, as discussed below, in connection with the purchase of FURminator. Finally, in Fiscal 2011, our income was close to break even, which created a high tax rate as the effective tax rate is calculated by dividing tax expense into pre-tax income (loss) from operations.

In light of our plans to voluntarily pay down our U.S. debt, repurchase shares, fund U.S. acquisitions and our ongoing U.S. operational cash flow requirements, we are not treating Fiscal 2012 and future earnings as permanently reinvested, except for locations precluded by local legal restrictions from repatriating earnings. 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 U.S. tax on foreign earnings not permanently reinvested might have a material effect on our effective tax rate. For Fiscal 2012, we project slightly more than $2 million of additional tax expense from non-U.S. withholding and other taxes expected to be incurred on repatriation of current earnings.

We have had changes of ownership, as defined under Internal Revenue Code (“IRC”) Section 382, that continue to subject a significant amount of our U.S. federal and state net operating losses and other tax attributes to certain limitations. At January 1, 2012, we are estimating that at September 30, 2012 we will have U.S. federal and state net operating loss carryforwards of approximately $1,224 million and $1,258 million, respectively, which will expire through years ending in 2033, and we will have foreign net operating loss carryforwards of approximately $127 million, which will expire beginning in 2013. Certain of the foreign net operating losses have indefinite carryforward periods. Limitations apply to a substantial portion of the U.S. federal and state net operating loss carryforwards in accordance with IRC Section 382. As such, we estimate that approximately $302 million of our federal and $385 million of our state net operating losses will expire unused.

The ultimate realization of our deferred tax assets depends on our ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized. We base these estimates on projections of future income, including tax planning strategies, in certain jurisdictions. Changes in industry conditions and other economic conditions may impact our ability to project future income. Accounting Standards Codification (“ASC”) 740 requires the establishment of a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In accordance with ASC 740, we periodically assess the likelihood that our deferred tax assets will be realized and determine if adjustments to the valuation allowance are appropriate. As a result of this assessment, we determined that a full valuation allowance is required against the tax benefit of our net deferred tax assets in the U.S., excluding certain indefinite lived intangibles. In addition, certain other subsidiaries are subject to valuation allowances with respect to certain deferred tax assets, including the net operating losses of one of our Brazilian subsidiaries. During the Fiscal 2012 Quarter, we decreased our valuation allowance against net deferred tax assets by approximately $13 million, including the $14 million tax adjustment discussed above.

 

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Our total valuation allowance, established for the tax benefit of deferred tax assets that may not be realized, was approximately $361 million and $374 million at January 1, 2012 and September 30, 2011, respectively. Of this amount, approximately $327 million and $339 million relates to U.S. net deferred tax assets at January 1, 2012 and September 30, 2011, respectively and approximately $34 million and $35 million relates to foreign net deferred tax assets at January 1, 2012 and September 30, 2011, respectively.

As a result of the purchase of FURminator, we were able to release $14 million of U.S. valuation allowance during the Fiscal 2012 Quarter. The release was attributable to $14 million of net deferred tax liabilities recorded on the FURminator opening balance sheet that offset other U.S. net deferred tax assets.

ASC 740, which clarifies the accounting for uncertainty in tax positions, requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. As of January 1, 2012 and September 30, 2011, the total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods was $8 million and $9 million, respectively. At both January 1, 2012 and September 30, 2011, we had approximately $5 million of accrued interest and penalties related to uncertain tax positions.

Liquidity and Capital Resources

Operating Activities

Operating Activities. For the Fiscal 2012 Quarter, cash used by operating activities totaled $95 million compared to $51 million during the Fiscal 2011 Quarter. The $44 million increase in cash used by operating activities from continuing operations was primarily due to:

 

  A $40 million use of cash for working capital and other items driven by higher inventories partially offset by higher accounts payable;

 

  Higher cash payments for income taxes of $6 million;

 

  Higher cash acquisition and restructuring costs of $5 million including payments related to the acquisitions of the FURminator and Black Flag businesses; partially offset by

 

  Higher income before income tax expense and interest expense and non-cash impairments of $13 million;

 

  Lower cash payments for interest of $5 million; and

 

  Other items totaling a use of $7 million.

There was no cash used by operating activities from discontinued operations in the Fiscal 2012 Quarter and cash used by operating activities from discontinued operations was de minimis in the Fiscal 2011 Quarter.

We expect to fund our cash requirements, including capital expenditures, interest and principal payments due in Fiscal 2012 through a combination of cash on hand and cash flows from operations and available borrowings under our ABL Revolving Credit Facility. Going forward, our ability to satisfy financial and other covenants in our senior credit agreements and senior subordinated indenture 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 Fiscal 2012 and future earnings as permanently reinvested. At January 1, 2012, there are no significant foreign cash balances available for repatriation. For the remainder of Fiscal 2012, we expect to generate between $50 million and $75 million of foreign cash that will 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, 2011, for further discussion of the risks associated with our ability to service all of our existing indebtedness, our ability to maintain compliance with financial and other covenants related to our indebtedness and the impact of the current economic crisis.

Investing Activities

Net cash used by investing activities was $192 million for the Fiscal 2012 Quarter. For the Fiscal 2011 Quarter net cash used by investing activities was $18 million. The $174 million increase in cash used by investing activities in the Fiscal 2012 Quarter is driven by an increase in cash used for acquisitions of $173 million, which related to the $139 million, net of cash acquired, purchase of FURminator, Inc and the $44 million acquisition of Black Flag, offset by the $10 million acquisition of Seed Resources, Inc, net of cash acquired, in the Fiscal 2011 Quarter, coupled with increased capital expenditures of $1 million.

 

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Financing Activities

Debt Financing

In connection with the Merger, we (i) entered into a new senior secured term loan pursuant to a new senior credit agreement (the “Senior Credit Agreement”) consisting of a $750 million term loan facility; (ii) issued $750 million in aggregate principal amount of 9.5% Notes; and (iii) entered into a $300 million ABL Revolving Credit Facility (the “Senior Secured Facilities”).

Senior Term Credit Facility

On December 15, 2011, we amended theTerm Loan. The aggregate incremental amount by which we, subject to compliance with financial covenants and certain other conditions may increase the amount of the commitment under the Term Loan has been increased from $100 million to $250 million. Certain covenants in respect of indebtedness and liens were amended to provide for dollar limits more favorable to us and, subject to compliance with financial covenants and certain other conditions, to allow for the incurrence of incremental unsecured indebtedness. Certain covenants with respect to investments, loans, advances, restricted payments, other indebtedness and capital expenditures were amended to provide greater flexibility for us in utilizing a certain portion of our excess cash flow (as defined in the Term Loan credit agreement that was amended and restated), subject to certain conditions.

The Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on our ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. Pursuant to a guarantee and collateral agreement, we and our domestic subsidiaries have guaranteed our respective obligations under the Term Loan and related loan documents and have pledged substantially all of our respective assets to secure such obligations. The Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

In connection with the amendment, we recorded approximately $1 million of fees in connection with the Term loan during the three month period ended January 1, 2012. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the Term Loan. In connection with the amendment, we also recorded cash charges of approximately $1 million as an increase to interest expense during the three month period ended January 1, 2012.

At January 1, 2012 and September 30, 2011, the aggregate amount outstanding under the Term Loan totaled $524 million and $525 million, respectively, maturing June 17, 2016.

At January 1, 2012, we were in compliance with all covenants under the Senior Credit Agreement.

9.5% Notes

On November 2, 2011, we offered $200,000 aggregate principal amount of 9.5% Notes at a price of 108.50% of the par value; these notes are in addition to the $750,000 aggregate principal amount of 9.5% Notes that were already outstanding. The additional notes are guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries and secured by liens on substantially all of our and the guarantor’s assets. The additional notes will vote together with the existing 9.5% Notes.

The indenture governing the 9.5% Notes (the “2018 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 transactions with affiliates.

In addition, the 2018 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 on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2018 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other event of default under the 2018 Indenture occurs and is continuing, the trustee for the 2018 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the amounts due under those notes.

We recorded $3 million of fees in connection with the 9.5% Notes during the three month period ended January 1, 2012. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the 9.5% Notes.

 

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At January 1, 2012 and September 30, 2011, we had outstanding principal of $950 million and $750 million, respectively, under the 9.5% Notes maturing June 15, 2018.

At January 1, 2012, we were in compliance with all covenants under the 9.5% Notes and the 2018 Indenture.

12% Notes

The indenture governing the 12% Notes (the “2019 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 transactions with affiliates.

In addition, the 2019 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 on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2019 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 12% Notes. If any other event of default under the 2019 Indenture occurs and is continuing, the trustee for the indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 12% Notes may declare the acceleration of the amounts due under those notes.

At both January 1, 2012 and September 30, 2011, we had outstanding principal of $245 million under the 12% Notes, maturing August 28, 2019.

At January 1, 2012, we were in compliance with all covenants under the 12% Notes and the 2019 Indenture.

ABL Revolving Credit Facility

The ABL Revolving Credit Facility is governed by a credit agreement (the “ABL Credit Agreement”) with Bank of America as administrative agent. The ABL Revolving Credit Facility consists of revolving loans (the “Revolving Loans”), with a portion available for letters of credit and a portion available as swing line loans, in each case subject to the terms and limits described therein.

The Revolving Loans may be drawn, repaid and reborrowed without premium or penalty. The proceeds of borrowings under the ABL Revolving Credit Facility are to be used for costs, expenses and fees in connection with the ABL Revolving Credit Facility, for our working capital requirements, restructuring costs, and other general corporate purposes.

The ABL Revolving Credit Facility carries an interest rate, at our option, which is subject to change based on availability under the facility, of either: (a) the base rate plus currently 1.25% per annum or (b) the reserve-adjusted LIBOR rate plus currently 2.25% per annum. No principal amortizations are required with respect to the ABL Revolving Credit Facility. The ABL Revolving Credit Facility will mature on June 16, 2014. Pursuant to the credit and security agreement, the obligations under the ABL credit agreement are secured by certain current assets of the guarantors, including, but not limited to, deposit accounts, trade receivables and inventory.

The ABL Credit Agreement contains various representations and warranties and covenants, including, without limitation, enhanced collateral reporting, and a maximum fixed charge coverage ratio. The ABL Credit Agreement also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

As a result of borrowings and payments under the ABL Revolving Credit Facility at January 1, 2012 we had aggregate borrowing availability of approximately $133 million, net of lender reserves of $39 million and outstanding letters of credit of $29 million under the ABL Revolving Credit Facility.

At January 1, 2012, we were in compliance with all covenants under the ABL Credit Agreement.

Interest Payments and Fees

In addition to principal payments on our Senior Credit Facilities, we have annual interest payment obligations of approximately $90 million in the aggregate under our 9.5% Notes and annual interest payment obligations of approximately $29 million in the aggregate under our 12% Notes. We also incur interest on our borrowings under the Senior Credit Facilities and such interest would increase borrowings under the ABL Revolving Credit Facility if cash were not otherwise available for such payments. Interest on the 9.5% Notes and interest on the 12% Notes is payable semi-annually in arrears and interest under the Senior Credit Facilities is payable on various interest payment dates as provided in the Senior Credit Agreement and the ABL Credit Agreement. Interest is payable in cash, except that interest under the 12% Notes is required to be paid by increasing the aggregate principal amount due under the subject notes unless we elect to make such payments in cash. Effective with the payment date of August 28, 2010, we elected to make the semi-annual interest payment scheduled for February 28, 2011 in cash. Thereafter, we may make the semi-annual interest

 

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payments for the 12% Notes either in cash or by further increasing the aggregate principal amount due under the notes subject to certain conditions. Based on amounts currently outstanding under the Senior Credit Facilities, and using market interest rates and foreign exchange rates in effect at January 1, 2012, we estimate annual interest payments of approximately $27 million in the aggregate under our Senior Credit Facilities would be required assuming no further principal payments were to occur and excluding any payments associated with outstanding interest rate swaps. We are required to pay certain fees in connection with the Senior Credit Facilities. Such fees include a quarterly commitment fee of up to 0.50% on the unused portion of the ABL Revolving Credit Facility and certain additional fees with respect to the letter of credit subfacility under the ABL Revolving Credit Facility.

Equity Financing Activities

During the Fiscal 2012 Quarter, we granted approximately 0.7 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 if the employee is terminated without cause. The total market value of the restricted shares on the date of grant was approximately $18 million which represented unearned restricted stock compensation. Unearned compensation is amortized to expense over the appropriate vesting period.

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 2011.

Critical Accounting Policies and Critical Accounting Estimates

Our Condensed Consolidated Financial Statements (Unaudited) 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 2011.

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 use derivative financial instruments for purposes other than trading to mitigate the risk from such exposures.

A discussion of our accounting policies for derivative financial instruments is included in Note 7, Derivative Financial Instruments, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.

Interest Rate Risk

We have bank lines of credit at variable interest rates. The general level of U.S. interest rates, LIBOR and Euro LIBOR affect interest expense. We 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 expense 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, respectively, denominated in foreign currencies. Foreign currency sales and purchases are made primarily in Euro, Pounds Sterling, 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 (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.

 

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Commodity Price Risk

We are exposed to fluctuations in market prices for purchases of zinc used in the manufacturing process. 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 are amortized over the life of the contracts and are 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 January 1, 2012, the potential change in fair value of outstanding interest rate derivative instruments, assuming a 1 percentage point unfavorable shift in the underlying interest rates would be immaterial. The net impact on reported earnings, after also including the reduction in one year’s interest expense on the related debt due to the same shift in interest rates, would be immaterial.

At January 1, 2012, 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 $35.0 million. The net impact on reported earnings, after also including the effect of the change in the underlying foreign currency-denominated exposures, would be a net gain of $17.3 million.

At January 1, 2012, 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 $1.3 million. The net impact on reported earnings, after also including 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 $0.9 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.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

We are a defendant in various matters of litigation generally arising out of the ordinary course of business.

We do not believe that any such matters or proceedings presently pending will have a material adverse effect on our 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 December 8, 2011 (our “Form 10-K”) as well as the risk factors below. 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. With the exception of the modifications to previously disclosed risk factors discussed below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Form 10-K.

Risks Related To Our Business

The sale or other disposition by Harbinger Group Inc., the holder of a majority of the outstanding shares of our common stock, to non-affiliates of a sufficient amount of the common stock of SB Holdings, or a change in control of Harbinger Group Inc., could constitute a change of control under the agreements governing Spectrum Brands’ debt.

Harbinger Group Inc. (“HRG”) owns a majority of the outstanding shares of the common stock of SB Holdings. The sale or other disposition by HRG to non-affiliates of a sufficient amount of the common stock of SB Holdings could constitute a change of control under the agreements governing Spectrum Brands’ debt, including any foreclosure on or sale of SB Holdings’ common stock pledged as collateral by HRG pursuant to the indenture governing HRG’s 10.625% Senior Secured Notes due 2015. A change in control under Spectrum Brands’ debt could also result from a change in control of HRG following the sale or other disposition by the Harbinger Parties to non-affiliates of a sufficient amount of the common stock of HRG. Such a disposition could include any foreclosure on or sale of HRG common stock pledged as collateral by the Harbinger Parties. One of the Harbinger Parties has pledged all of the shares of HRG common stock that it owns (representing a majority of the outstanding common stock of HRG), together with securities of other issuers, to secure portfolio financing. Under the Term Loan and the ABL Revolving Credit Facility, a change of control is an event of default and, if a change of control were to occur, Spectrum Brands would be required to get an amendment to these agreements to avoid a default. If Spectrum Brands was unable to get such an amendment, the lenders could accelerate the maturity of each of the Spectrum Brands Term Loan and the ABL Revolving Credit Facility. In addition, under the indentures governing the 9.5% Notes and the 12% Notes, upon a change of control of SB Holdings, Spectrum Brands is required to offer to repurchase such notes from the holders at a price equal to 101% of principal amount of the notes plus accrued interest or obtain a waiver of default from the holders of such notes. If Spectrum Brands was unable to make the change of control offer, or to obtain a waiver of default, it would be an event of default under the indentures that could allow holders of such notes to accelerate the maturity of the notes.

Item 6. Exhibits

Please refer to the Exhibit Index.

 

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SIGNATURES

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.

 

 

Date: February 3, 2012   SPECTRUM BRANDS, INC.
  By:   /S/ ANTHONY L. GENITO
    Anthony L. Genito
   

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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EXHIBIT INDEX