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 April 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 April 1, 2012

INDEX

 

     Page  
  Part I—Financial Information   

Item 1.

  Financial Statements      3   
 

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

     3   
 

Condensed Consolidated Statements of Operations (Unaudited) for the three and six month periods ended April 1, 2012 and April 3, 2011

     4   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six month periods ended April 1, 2012 and April 3, 2011

     5   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      46   

Item 4.

  Controls and Procedures      47   
  Part II—Other Information   

Item 1.

  Legal Proceedings      48   

Item 1A.

  Risk Factors      49   

Item 6.

  Exhibits      50   

Signatures

     51   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Financial Position

April 1, 2012 and September 30, 2011

(Unaudited)

(Amounts in thousands, except per share figures)

 

     April 1, 2012     September 30,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 51,688      $ 142,414   

Receivables:

    

Trade accounts receivable, net of allowances of $13,774 and $14,128, respectively

     370,240        356,605   

Other

     46,735        33,235   

Inventories

     551,033        434,630   

Deferred income taxes

     25,796        28,170   

Prepaid expenses and other

     60,291        48,792   
  

 

 

   

 

 

 

Total current assets

     1,105,783        1,043,846   

Property, plant and equipment, net of accumulated depreciation of $123,824 and $107,357, respectively

     207,844        206,389   

Deferred charges and other

     40,079        36,824   

Goodwill

     696,770        610,338   

Intangible assets, net

     1,755,004        1,683,909   

Debt issuance costs

     44,901        40,957   
  

 

 

   

 

 

 

Total assets

   $ 3,850,381      $ 3,622,263   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Current maturities of long-term debt

   $ 33,906      $ 41,090   

Accounts payable

     260,481        323,171   

Accrued liabilities:

    

Wages and benefits

     55,401        70,945   

Income taxes payable

     28,186        31,606   

Accrued interest

     33,025        30,467   

Other

     110,472        134,565   
  

 

 

   

 

 

 

Total current liabilities

     521,471        631,844   

Long-term debt, net of current maturities

     1,848,165        1,535,522   

Employee benefit obligations, net of current portion

     79,993        83,802   

Deferred income taxes

     377,354        337,336   

Other

     37,441        44,637   
  

 

 

   

 

 

 

Total liabilities

     2,864,424        2,633,141   

Commitments and contingencies

    

Shareholders’ equity:

    

Other capital

     1,345,843        1,338,734   

Accumulated deficit

     (350,447     (335,166

Accumulated other comprehensive loss

     (9,439     (14,446
  

 

 

   

 

 

 

Total shareholders’ equity

     985,957        989,122   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,850,381      $ 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 and six month periods ended April 1, 2012 and April 3, 2011

(Unaudited)

(Amounts in thousands, except per share figures)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED  
     2012     2011     2012     2011  

Net sales

   $ 746,285      $ 693,885      $ 1,595,056      $ 1,554,952   

Cost of goods sold

     484,594        436,393        1,044,734        997,627   

Restructuring and related charges

     1,660        2,053        6,265        2,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     260,031        255,439        544,057        554,678   

Selling

     129,912        130,361        261,671        270,581   

General and administrative

     56,338        58,348        106,767        119,093   

Research and development

     7,958        8,798        15,193        16,365   

Acquisition and integration related charges

     7,751        7,588        15,351        24,043   

Restructuring and related charges

     2,609        3,094        5,729        8,065   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     204,568        208,189        404,711        438,147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     55,463        47,250        139,346        116,531   

Interest expense

     69,273        72,431        110,483        125,525   

Other (income) expense, net

     (2,192     (287     1        602   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (11,618     (24,894     28,862        (9,596

Income tax expense

     16,833        25,131        44,143        60,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (28,451   $ (50,025   $ (15,281   $ (69,770
  

 

 

   

 

 

   

 

 

   

 

 

 

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

(Unaudited).

 

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SPECTRUM BRANDS, INC.

Condensed Consolidated Statements of Cash Flows

For the six month periods ended April 1, 2012 and April 3, 2011

(Unaudited)

(Amounts in thousands)

 

     SIX MONTHS ENDED  
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (15,281   $ (69,770

Adjustments to reconcile net loss to net cash used by operating activities:

    

Depreciation

     18,896        23,315   

Amortization of intangibles

     30,449        28,634   

Amortization of unearned restricted stock compensation

     11,076        14,107   

Amortization of debt issuance costs

     3,446        6,557   

Non-cash debt accretion

     146        3,001   

Write off of unamortized (discount) / premium on retired debt

     (466     8,950   

Write off of debt issuance costs

     2,563        15,420   

Other non-cash adjustments

     1,340        5,630   

Net changes in assets and liabilities

     (206,973     (158,119
  

 

 

   

 

 

 

Net cash used by operating activities

     (154,804     (122,275

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (18,590     (18,712

Acquisition of Black Flag

     (43,750     —     

Acquisition of FURminator, net of cash acquired

     (139,390     —     

Acquisition Seed Resources, net of cash acquired

     —          (10,278

Proceeds from sale of property, plant and equipment

     82        131   

Proceeds from sale of assets previously held for sale

     —          6,997   

Other investing activities

     (2,045     (1,530
  

 

 

   

 

 

 

Net cash used by investing activities

     (203,693     (23,392

Cash flows from financing activities:

    

Proceeds from 6.75% Notes

     300,000        —     

Payment of 12% Notes, including tender and call premium

     (270,431     —     

Proceeds from 9.5% Notes, including premium

     217,000        —     

Payment of senior credit facilities, excluding ABL revolving credit facility

     (2,727     (71,700

Prepayment penalty of term loan facility

     —          (7,500

Debt issuance costs

     (9,941     (8,648

Proceeds from other debt financing

     11,866        22,496   

Reduction of other debt

     (26,371     (367

ABL revolving credit facility, net

     50,000        118,000   

Other financing activities

     (954     —     

Treasury stock purchases

     —          (3,241
  

 

 

   

 

 

 

Net cash provided by financing activities

     268,442        49,040   

Effect of exchange rate changes on cash and cash equivalents

     (671     (896
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (90,726     (97,523

Cash and cash equivalents, beginning of period

     142,414        170,614   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 51,688      $ 73,091   
  

 

 

   

 

 

 

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

(Unaudited).

 

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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 became wholly-owned subsidiaries of SB Holdings. Russell Hobbs was subsequently merged into 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 United States (“U.S.”), Europe, Latin America and Asia.

The Company sells its products in approximately 120 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 Results”.

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 April 1, 2012, the results of operations for the three and six month periods ended April 1, 2012 and April 3, 2011 and the cash flows for the six month periods ended April 1, 2012 and April 3, 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 $49,266 and $99,586 for the three and six month periods ended April 1, 2012, respectively, and $47,698 and $98,968 for the three and six month periods ended April 3, 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 21% and 23% of the Company’s Net sales during the three and six month periods ended April 1, 2012, respectively. This customer represented approximately 22% and 23% of the Company’s Net sales during the three and six month periods ended April 3, 2011, respectively. This customer also represented approximately 14% and 16% of the Company’s Trade accounts receivable, net at April 1, 2012 and September 30, 2011, respectively.

Approximately 42% and 46% of the Company’s Net sales during the three and six month periods ended April 1, 2012, respectively, and 44% and 47% of the Company’s Net sales during the three and six month periods ended April 3, 2011, respectively, 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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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 and restricted stock units recognized by the Company during the three and six month periods ended April 1, 2012 was $6,768, or $4,399, net of taxes, and $11,076, or $7,199, net of taxes, respectively. Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three and six month periods ended April 3, 2011 was $8,554, or $5,560, net of taxes, and $14,107, or $9,170, net of taxes, respectively.

The Company granted approximately 13 and 699 restricted stock units during the three and six month periods ended April 1, 2012, respectively. Of these grants, 699 restricted stock units 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 $18,816.

The Company granted approximately 157 and 1,565 restricted stock units during the three and six month periods ended April 3, 2011. Of these grants, 18 restricted stock units are time-based and vest over a three year period. The remaining 1,547 restricted stock units are performance and time-based with 665 units vesting over a two year period and 882 units vesting over a three year period. The total market value of the restricted stock units on the dates of the grants was approximately $45,614.

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 April 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 April 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

     699        26.92         18,816   

Forfeited

     (45     28.27         (1,272

Vested

     (378     28.79         (10,881
  

 

 

   

 

 

    

 

 

 

Restricted stock units at April 1, 2012

     1,905      $ 28.29       $ 53,899   
  

 

 

   

 

 

    

 

 

 

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 and six month periods ended April 1, 2012 and April 3, 2011 associated with the Merger:

 

 

     Three Months      Six Months  
     2012      2011      2012      2011  

Integration costs

   $ 2,785       $ 5,241       $ 5,193       $ 15,370   

Employee termination charges

     1,907         1,144         2,516         4,896   

Legal and professional fees

     309         1,193         921         3,589   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Acquisition and integration related charges

   $ 5,001       $ 7,578       $ 8,630       $ 23,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

Additionally, the Company incurred $532 and $1,817 of legal, professional and integration costs associated with the acquisition of the Black Flag and TAT trade names from Homax Group, Inc. (“Black Flag”) during the three and six month periods ended April 1, 2012, respectively, and $2,114 and $4,599 of legal, professional and integration costs associated with the acquisition of FURminator, Inc. (“FURminator”), during the three and six month periods ended April 1, 2012, respectively. The Company also incurred $104 and $305 of other acquisition and integration related costs during the three and six month periods ended April 1, 2012, respectively. The Company incurred $10 and $188 of legal and professional fees associated with the acquisition of Seed Resources, LLC during the three and six month periods ended April 3, 2011, respectively. (See Note 14, “Acquisitions,” for information on the Black Flag and FURminator acquisitions.)

3 COMPREHENSIVE LOSS

Comprehensive loss and the components of other comprehensive income (loss), net of tax, for the three and six month periods ended April 1, 2012 and April 3, 2011 are as follows:

 

 

     Three Months     Six Months  
     2012     2011     2012     2011  

Net loss

   $ (28,451   $ (50,025   $ (15,281   $ (69,770

Other comprehensive income (loss):

        

Foreign currency translation

     18,539        23,944        3,610        19,870   

Valuation allowance adjustments

     (554     433        (251     1,076   

Pension liability adjustments

     228        —          531        —     

Net unrealized (loss) gain on derivative instruments

     (701     (7,244     1,117        (3,065
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change to derive comprehensive loss for the period

     17,512        17,133        5,007        17,881   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (10,939   $ (32,892   $ (10,274   $ (51,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Net 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.

The changes in accumulated foreign currency translation for the three and six month periods ended April 1, 2012 and April 3, 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:

 

 

     April 1,
2012
     September 30,
2011
 

Raw materials

   $ 76,350       $ 59,928   

Work-in-process

     28,222         25,465   

Finished goods

     446,461         349,237   
  

 

 

    

 

 

 
   $ 551,033       $ 434,630   
  

 

 

    

 

 

 

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

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

     —          70,023        15,852        85,875   

Effect of translation

     1,869        (1,312     —          557   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

   $ 270,017      $ 238,996      $ 187,757      $ 696,770   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     610        (2,082     —          (1,472
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012

   $ 546,414      $ 217,409      $ 83,500      $ 847,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets Subject to Amortization

        

Balance at September 30, 2011, net

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

Additions

     —          65,118        17,000        82,118   

Amortization during period

     (16,437     (9,207     (4,805     (30,449

Effect of translation

     402        (1,504     —          (1,102
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at April 1, 2012, net

   $ 465,438      $ 273,650      $ 168,593      $ 907,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intangible Assets, net at April 1, 2012

   $ 1,011,852      $ 491,059      $ 252,093      $ 1,755,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

     April 1,
2012
    September 30,
2011
 

Technology Assets Subject to Amortization:

    

Gross balance

   $ 90,924      $ 71,805   

Accumulated amortization

     (17,945     (13,635
  

 

 

   

 

 

 

Carrying value, net

   $ 72,979      $ 58,170   
  

 

 

   

 

 

 

Trade Names Subject to Amortization:

    

Gross balance

   $ 149,700      $ 149,700   

Accumulated amortization

     (22,599     (16,320
  

 

 

   

 

 

 

Carrying value, net

   $ 127,101      $ 133,380   
  

 

 

   

 

 

 

Customer Relationships Subject to Amortization:

    

Gross balance

   $ 800,612      $ 738,937   

Accumulated amortization

     (93,011     (73,373
  

 

 

   

 

 

 

Carrying value, net

   $ 707,601      $ 665,564   
  

 

 

   

 

 

 

Amortization expense for the three and six month periods ended April 1, 2012 and April 3, 2011 is as follows:

 

     Three Months      Six Months  
     2012      2011      2012      2011  

Proprietary technology amortization

   $ 2,412       $ 1,649       $ 4,310       $ 3,297   

Customer relationships amortization

     10,269         9,526         19,860         19,058   

Trade names amortization

     3,140         3,140         6,279         6,279   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,821       $ 14,315       $ 30,449       $ 28,634   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $63,000 per year.

6 DEBT

Debt consists of the following:

 

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

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

   $ 522,510         5.1   $ 525,237        5.1

9.5% Notes, due June 15, 2018

     950,000         9.5     750,000        9.5

6.75% Notes, due March 15, 2020

     300,000         6.75     —       

12% Notes, due August 28, 2019

     —             245,031        12.0

ABL Revolving Credit Facility, expiring April 21, 2016

     50,000         2.7     —          2.5

Other notes and obligations

     30,340         10.3     44,333        6.5

Capitalized lease obligations

     25,427         6.6     24,911        6.2
  

 

 

      

 

 

   
   $ 1,878,277         $ 1,589,512     

Original issuance premiums (discounts) on debt

     3,794           (12,900  

Less: current maturities

     33,906           41,090     
  

 

 

      

 

 

   

Long-term debt

   $ 1,848,165         $ 1,535,522     
  

 

 

      

 

 

   

The Company has the following debt instruments outstanding at April 1, 2012: (i) a senior secured term loan (the “Term Loan”) pursuant to a senior credit agreement (the “Senior Credit Agreement”) ; (ii) 9.5% secured notes (the “9.5% Notes”); (iii) 6.75% unsecured notes (the “6.75% Notes”); and (iv) a $300,000 ABL revolving credit facility (the “ABL Revolving Credit Facility”).

Term Loan

On December 15, 2011, the Company amended its Term Loan. As a result, 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 also 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 six month period ended April 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 six month period ended April 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.

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

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.

The Company recorded $106 and $3,570 of fees in connection with the offering of the 9.5% Notes during the three and six month periods ended April 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.

6.75% Notes

On March 15, 2012, the Company offered $300,000 aggregate principal amount of 6.75% Notes (the “6.75% Notes”) at a price of 100% of the par value. The 6.75% Notes are unsecured and guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries.

The indenture governing the 6.75% Notes (the “2020 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 2020 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 2020 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 6.75% Notes. If any other event of default under the 2020 Indenture occurs and is continuing, the trustee for the 2020 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 6.75% Notes may declare the acceleration of the amounts due under those notes.

The Company recorded $5,814 of fees in connection with the offering of the 6.75% Notes during the three and six month periods ended April 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 6.75% Notes.

12% Notes

On March 1, 2012, the Company launched a cash tender offer (the “Tender Offer”) and consent solicitation (the “Consent Solicitation”) with respect to any and all of its outstanding 12% Senior Subordinated Toggle Notes due 2019 (the “12% Notes”). Pursuant to the Consent Solicitation, the Company received consents to the adoption of certain amendments to the indenture governing the 12% Notes to, among other things, eliminate substantially all of the restrictive covenants, certain events of default and other related provisions. The terms of the Tender Offer provided that holders of the 12% Notes who tendered their 12% Notes prior to the expiration of a consent solicitation period, which ended March 14, 2012, would receive tender offer consideration and a consent payment. Holders tendering their 12% Notes subsequent to expiration of the consent solicitation period, but prior to the March 28, 2012 expiration of the Tender Offer period, would receive only tender offer consideration. As of the expiration of the consent solicitation period, holders of the 12% Notes had tendered approximately $231,421 of the 12% Notes. Following the expiration of the consent solicitation period and as of the expiration of the Tender Offer period, an additional $88 of the 12% Notes were tendered. Following expiration of the Tender Offer period, the Company paid the trustee principal, prepaid interest and a prepaid call premium sufficient to obtain a notice of satisfaction and discharge (“Satisfaction and Discharge”) from the trustee for the remaining approximately $13,522 of the 12% Notes not tendered. The Company delivered funds sufficient to redeem the 12% Notes on the first redemption date, August 28, 2012 (the “Redemption Date”), and has irrevocably taken all steps on its part necessary to effect such redemption, The trustee under the indenture governing the 12% Notes (the “12% Trustee”) has accepted those funds in trust for the benefit of the holders of the 12% Notes and has acknowledged the Satisfaction and Discharge of the 12% Notes and the indenture governing the 12% Notes.

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

In connection with the Tender Offer, the Company recorded $23,777 of fees and expenses as a cash charge to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the three and six month periods ended April 1, 2012. In connection with the Satisfaction and Discharge process, the Company recorded cash charges of $1,623 to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the three and six month periods ended April 1, 2012. In addition, $2,097 of debt issuance costs and unamortized premium related to the 12% Notes were written off as a non-cash charge to Interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the three and six month periods ended April 1, 2012.

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 re-borrowed 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 April 1, 2012, the Company had aggregate borrowing availability of approximately $125,337, net of lender reserves of $27,471 and outstanding letters of credit of $28,488.

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.

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:

 

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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)

 

 

Asset Derivatives

        April 1,
2012
     September 30,
2011
 

Derivatives designated as hedging instruments under ASC 815:

        

Commodity contracts

   Receivables—Other    $ 356       $ 274   

Commodity contracts

   Deferred charges and other      52         —     

Foreign exchange contracts

   Receivables—Other      2,131         3,189   

Foreign exchange contracts

   Deferred charges and other      48         —     
     

 

 

    

 

 

 

Total asset derivatives designated as hedging instruments under ASC 815

      $ 2,587       $ 3,463   
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

        

Foreign exchange contracts

   Receivables—Other      329         —     
     

 

 

    

 

 

 

Total asset derivatives

      $ 2,916       $ 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

        April 1,
2012
     September 30,
2011
 

Derivatives designated as hedging instruments under ASC 815:

        

Interest rate contracts

   Accounts payable    $ —         $ 1,246   

Interest rate contracts

   Accrued interest      —           708   

Commodity contracts

   Accounts payable      414         1,228   

Commodity contracts

   Other long term liabilities      6         4   

Foreign exchange contracts

   Accounts payable      2,747         2,698   

Foreign exchange contracts

   Other long term liabilities      50         —     
     

 

 

    

 

 

 

Total liability derivatives designated as hedging instruments under ASC 815

      $ 3,217       $ 5,884   
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

        

Foreign exchange contracts

   Accounts payable      6,648         10,945   

Foreign exchange contracts

   Other long term liabilities      7,445         12,036   
     

 

 

    

 

 

 

Total liability derivatives

      $ 17,310       $ 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.

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

 

14


Table of Contents

SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

 

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

   $ 1,124      Cost of goods sold    $ (189   Cost of goods sold    $ 33   

Interest rate contracts

     36      Interest expense      (205   Interest expense      —     

Foreign exchange contracts

     463      Net sales      (88   Net sales      —     

Foreign exchange contracts

     (4,855   Cost of goods sold      (639   Cost of goods sold      —     
  

 

 

      

 

 

      

 

 

 

Total

   $ (3,232      $ (1,121      $ 33   
  

 

 

      

 

 

      

 

 

 

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the six month period ended April 1, 2012, 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

   $ 379      Cost of goods sold    $ (555   Cost of goods sold    $ 14   

Interest rate contracts

     15      Interest expense      (864   Interest expense      —     

Foreign exchange contracts

     334      Net sales      (210   Net sales      —     

Foreign exchange contracts

     (3,547   Cost of goods sold      (1,894   Cost of goods sold      —     
  

 

 

      

 

 

      

 

 

 

Total

   $ (2,819      $ (3,523      $ 14   
  

 

 

      

 

 

      

 

 

 

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended April 3, 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

   $ (150   Cost of goods sold    $ 784      Cost of goods sold    $ (6

Interest rate contracts

     (67   Interest expense      (839   Interest expense      (148

Foreign exchange contracts

     616      Net sales      (88   Net sales      —     

Foreign exchange contracts

     (12,732   Cost of goods sold      (1,967   Cost of goods sold      —    
  

 

 

      

 

 

      

 

 

 

Total

   $ (12,333      $ (2,110      $ (154
  

 

 

      

 

 

      

 

 

 

 

15


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 impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the six month period ended April 3, 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

   $ 1,873      Cost of goods sold    $ 1,334      Cost of goods sold    $ (5

Interest rate contracts

     (60   Interest expense      (1,688   Interest expense      (250

Foreign exchange contracts

     227      Net sales      (207   Net sales      —     

Foreign exchange contracts

     (10,790   Cost of goods sold      (4,092   Cost of goods sold      —     
  

 

 

      

 

 

      

 

 

 

Total

   $ (8,750      $ (4,653      $ (255
  

 

 

      

 

 

      

 

 

 

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 April 1, 2012 and April 3, 2011, the Company recognized the following gains (losses) 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

     (3,452     (18,948   Other expense, net
  

 

 

   

 

 

   

During the six month periods ended April 1, 2012 and April 3, 2011, the Company recognized the following gains (losses) 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

     3,793         (9,890   Other expense, net
  

 

 

    

 

 

   

 

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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 concentrated with certain domestic and foreign financial institution counterparties. The Company considers these exposures when measuring its credit reserve on its derivative assets, which was $11 and $18 at April 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 April 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 April 1, 2012 and September 30, 2011, the Company had posted standby letters of credit of $0 and $2,000, respectively, 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 April 1, 2012 the Company did not have any of such interest rate swaps outstanding.

The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency 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 April 1, 2012 the Company had a series of foreign exchange derivative contracts outstanding through June 2013 with a contract value of $174,255. The derivative net loss on these contracts recorded in AOCI by the Company at April 1, 2012 was $(453), net of tax benefit of $166. At April 1, 2012, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $(396), 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 April 1, 2012 the Company had a series of such swap contracts outstanding through July 2014 for 13 tons with a contract value of $26,039. The derivative net gain on these contracts recorded in AOCI by the Company at April 1, 2012 was $21, net of tax expense of $2. At April 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 $(17), net of tax.

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 April 1, 2012 and September 30, 2011, the Company had $194,490 and $265,974, respectively, of notional value for such foreign exchange derivative contracts outstanding.

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

The Company is exposed to economic risk from foreign currencies, including firm commitments for purchases of materials denominated in South African Rand. Periodically the Company economically hedges a portion of the risk associated with these purchases through forward and swap foreign exchange contracts. The contracts are designated as fair value hedges. The hedges effectively fix the foreign exchange in U.S. Dollars on a specified amount of Rand to a future payment date. The unrealized change in fair value of the hedge contracts is recorded in earnings and as a hedge asset or liability, as applicable. The unrealized gains or losses are reversed from earnings as the hedged purchases of materials affects earnings. At April 1, 2012 and September 30, 2011, the Company had $2,088 and $0 of 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 April 1, 2012, contains Level 2 instruments and consists of commodity, interest rate and foreign exchange contracts. The fair values of these instruments as of April 1, 2012 were as follows:

 

     Level 1      Level 2     Level 3      Total  

Total Assets

   $ —         $ —        $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Interest rate contracts

   $ —         $ —        $ —         $ —     

Commodity contracts, net

     —           (12     —           (12

Foreign exchange contracts, net

     —           (14,382     —           (14,382
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Liabilities, net

   $ —         $ (14,394   $ —         $ (14,394
  

 

 

    

 

 

   

 

 

    

 

 

 

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, net

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

 

 

    

 

 

   

 

 

    

 

 

 

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 are based off unadjusted quoted market prices (level 1) and derivative financial instruments are generally based on quoted or observed market prices (level 2).

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).

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

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

 

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

Total debt

   $ (1,882,071   $ (2,006,738   $ (1,576,612   $ (1,660,528

Interest rate swap agreements

     —          —          (1,954     (1,954

Commodity swap and option agreements

     (12     (12     (958     (958

Foreign exchange forward agreements

     (14,382     (14,382     (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 and six month periods ended April 1, 2012 and April 3, 2011 reflect the following pension and deferred compensation benefit costs:

 

     Three Months     Six Months  

Components of net periodic pension benefit and deferred compensation benefit cost

   2012     2011     2012     2011  

Service cost

   $ 578      $ 781      $ 1,122      $ 1,563   

Interest cost

     2,552        2,557        4,478        5,113   

Expected return on assets

     (2,051     (1,965     (3,327     (3,931

Recognized net actuarial loss

     242        97        265        194   

Employee contributions

     (46     (129     (92     (257
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,275      $ 1,341      $ 2,446      $ 2,682   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 and six month periods ended April 1, 2012 and April 3, 2011 were as follows:

 

 

     Three Months      Six Months  

Pension and deferred compensation contributions

   2012      2011      2012      2011  

Contributions made during period

   $ 1,655       $ 1,925       $ 2,479       $ 2,956   

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 and six month periods ended April 1, 2012 were $573 and $1,149, respectively. Company contributions charged to operations, including discretionary amounts, for the three and six month periods ended April 3, 2011 were $1,342 and $2,753, 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.

Segment information for the three and six month periods ended April 1, 2012 and April 3, 2011 is as follows:

 

     Three Months      Six Months  
     2012      2011      2012      2011  

Net sales from external customers

           

Global Batteries & Appliances

   $ 480,069       $ 459,392       $ 1,169,249       $ 1,155,964   

Global Pet Supplies

     156,529         144,222         291,467         281,267   

Home and Garden Business

     109,687         90,271         134,340         117,721   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segments

   $ 746,285       $ 693,885       $ 1,595,056       $ 1,554,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

 

 

     Three Months     Six Months  
     2012     2011     2012      2011  

Segment profit

         

Global Batteries & Appliances

   $ 40,427      $ 41,682      $ 138,632       $ 134,982   

Global Pet Supplies

     19,248        18,472        35,309         34,711   

Home and Garden Business

     22,204        14,917        16,285         8,087   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total segments

     81,879        75,071        190,226         177,780   

Corporate expense

     14,396        15,086        23,535         26,494   

Acquisition and integration related charges

     7,751        7,588        15,351         24,043   

Restructuring and related charges

     4,269        5,147        11,994         10,712   

Interest expense

     69,273        72,431        110,483         125,525   

Other (income) expense, net

     (2,192     (287     1         602   
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income from continuing operations before income taxes

   $ (11,618   $ (24,894   $ 28,862       $ (9,596
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

 

 

     April 1, 2012      September 30, 2011  

Segment total assets

     

Global Batteries & Appliances

   $ 2,215,887       $ 2,275,076   

Global Pet Supplies

     986,099         828,202   

Home and Garden Business

     595,771         476,381   
  

 

 

    

 

 

 

Total segment assets

     3,797,757         3,579,659   

Corporate

     52,624         42,604   
  

 

 

    

 

 

 

Total assets at period end

   $ 3,850,381       $ 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 incurred by segment for the three and six month periods ended April 1, 2012 and April 3, 2011:

 

 

     Three Months      Six Months  
     2012      2011      2012      2011  

Cost of goods sold:

           

Global Batteries & Appliances

   $ 454       $ 250       $ 3,474       $ 100   

Global Pet Supplies

     1,206         1,803         2,791         2,547   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and related charges in cost of goods sold

     1,660         2,053         6,265         2,647   

Operating expenses:

           

Global Batteries & Appliances

     767         592         1,644         617   

Global Pet Supplies

     1,103         1,278         2,393         3,580   

Home and Garden Business

     627         686         971         1,336   

Corporate

     112         538         721         2,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and related charges in operating expenses

     2,609         3,094         5,729         8,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and related charges

   $ 4,269       $ 5,147       $ 11,994       $ 10,712   
  

 

 

    

 

 

    

 

 

    

 

 

 

Global Cost Reduction Initiatives Summary

During the fiscal year ended September 30, 2009, the 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. Costs associated with these initiatives, which are expected to be incurred through January 31, 2015, are projected to total approximately $83,600.

The Company recorded $4,173 and $11,302 of pretax restructuring and related charges during the three and six month periods ended April 1, 2012, respectively, and the Company recorded $4,378 and $8,107 of pretax restructuring and related charges during the three and six month periods ended April 3, 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 six month period ended April 1, 2012:

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

 

 

     Termination
Benefits
    Other
Costs
    Total  

Accrual balance at September 30, 2011

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

Provisions

     269        201        470   

Cash expenditures

     (5,733     (767     (6,500

Non-cash items

     182        (454     (272
  

 

 

   

 

 

   

 

 

 

Accrual balance at April 1, 2012

   $ 3,513      $ 2,001      $ 5,514   
  

 

 

   

 

 

   

 

 

 

Expensed as incurred (A)

   $ 3,518      $ 7,314      $ 10,832   

 

 

(A)

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

The following table summarizes the expenses incurred during the six month period ended April 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 six month period ended April 1, 2012

   $ 5,147       $ 5,184       $ 971       $ —         $ 11,302   

Restructuring and related charges since initiative inception

   $ 18,314       $ 32,046       $ 17,679       $ 7,591       $ 75,630   

Total future restructuring and related charges expected

   $ 705       $ 5,200       $ 2,016       $ —         $ 7,921   

In connection with other restructuring efforts, the Company recorded $96 and $692 of pretax restructuring and related charges during the three and six month periods ended April 1, 2012, respectively, and $769 and $2,605 of pretax restructuring and related charges during the three and six month periods ended April 3, 2011, respectively.

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 which may result from resolution of these matters in excess of the amounts provided of approximately $8,062, 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 the resolution of 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.

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

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 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.

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

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.

 

   

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.

 

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SPECTRUM BRANDS, INC.

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

(Amounts in thousands, except per share figures)

 

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 new accounting guidance did not have a material effect on the Company’s 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.

16 CONSOLIDATING FINANCIAL STATEMENTS

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 the 9.5% Notes under the 2018 Indenture.)

The following consolidating financial statements illustrate the components of the consolidated financial statements of the 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

April 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 
ASSETS   

Current assets:

           

Cash and cash equivalents

   $ 464      $ 2,316      $ 48,908       $ —        $ 51,688   

Receivables:

           

Trade accounts receivables, net of allowances

     39,827        126,714        203,699         —          370,240   

Intercompany receivables

     824,090        902,397        440,731         (2,165,609     1,609   

Other

     4,453        6,119        34,554         —          45,126   

Inventories

     96,768        228,185        231,377         (5,297     551,033   

Deferred income taxes

     (8,290     25,135        7,653         1,298        25,796   

Prepaid expenses and other

     19,098        11,959        29,175         59        60,291   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     976,410        1,302,825        996,097         (2,169,549     1,105,783   

Property, plant and equipment, net

     58,121        46,068        103,655         —          207,844   

Long term intercompany receivables

     141,395        134,859        114,995         (391,249     —     

Deferred charges and other

     15,043        4,532        20,504         —          40,079   

Goodwill

     67,722        438,864        190,184         —          696,770   

Intangible assets, net

     520,188        799,434        435,382         —          1,755,004   

Debt issuance costs

     44,901        —          —           —          44,901   

Investments in subsidiaries

     2,606,720        1,109,336        —           (3,716,056     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,430,500      $ 3,835,918      $ 1,860,817       $ (6,276,854   $ 3,850,381   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities:

           

Current maturities of long-term debt

   $ 5,574      $ 1,667      $ 26,665       $ —        $ 33,906   

Accounts payable

     1,412,955        511,227        258,602         (1,922,303     260,481   

Accrued liabilities:

           

Wages and benefits

     13,758        9,435        32,208         —          55,401   

Income taxes payable

     611        304        27,271         —          28,186   

Accrued interest

     32,961        —          64         —          33,025   

Other

     16,590        36,353        57,529         —          110,472   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,482,449        558,986        402,339         (1,922,303     521,471   

Long-term debt, net of current maturities

     1,822,569        468,607        191,483         (634,494     1,848,165   

Employee benefit obligations, net of current portion

     24,012        —          55,981         —          79,993   

Deferred income taxes

     93,235        201,250        82,869         —          377,354   

Other

     18,277        355        18,809         —          37,441   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     3,440,542        1,229,198        751,481         (2,556,797     2,864,424   

Shareholders’ equity:

           

Other equity

     1,345,846        1,215,858        985,194         (2,201,055     1,345,843   

Accumulated (deficit) retained earnings

     (266,166     1,466,190        115,002         (1,665,473     (350,447

Accumulated other comprehensive (deficit) income

     (89,722     (75,328     9,140         146,471        (9,439
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     989,958        2,606,720        1,109,336         (3,720,057     985,957   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 4,430,500      $ 3,835,918      $ 1,860,817       $ (6,276,854   $ 3,850,381   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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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 (deficit) income

     (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   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

Three Month Period Ended April 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Net sales

   $ 137,940      $ 298,347      $ 354,108      $ (44,110   $ 746,285   

Cost of goods sold

     101,967        203,319        222,646        (43,338     484,594   

Restructuring and related charges

     —          1,206        454        —          1,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     35,973        93,822        131,008        (772     260,031   

Operating expenses:

          

Selling

     17,675        41,291        71,185        (239     129,912   

General and administrative

     16,751        21,361        18,222        4        56,338   

Research and development

     4,609        2,439        910        —          7,958   

Acquisition and integration related charges

     987        4,275        2,489        —          7,751   

Restructuring and related charges

     660        1,716        233        —          2,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     40,682        71,082        93,039        (235     204,568   

Operating (loss) income

     (4,709     22,740        37,969        (537     55,463   

Interest expense

     64,582        1,162        3,524        5        69,273   

Other (income) expense, net

     (37,456     (31,849     (1,274     68,387        (2,192
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (31,835     53,427        35,719        (68,929     (11,618

Income tax (benefit)expense

     (3,460     13,448        7,400        (555     16,833   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (28,375   $ 39,979      $ 28,319      $ (68,374   $ (28,451
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

Three Month Period Ended April 3, 2011

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 

Net sales

   $ 91,588      $ 317,344      $ 315,655       $ (30,702   $ 693,885   

Cost of goods sold

     49,800        226,669        190,210         (30,286     436,393   

Restructuring and related charges

     —          1,803        250         —          2,053   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     41,788        88,872        125,195         (416     255,439   

Operating expenses:

           

Selling

     15,916        43,567        71,041         (163     130,361   

General and administrative

     19,405        18,482        20,461         —          58,348   

Research and development

     4,775        3,215        808         —          8,798   

Acquisition and integration related charges

     1,959        2,855        2,774         —          7,588   

Restructuring and related charges

     638        1,964        492         —          3,094   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     42,693        70,083        95,576         (163     208,189   

Operating (loss)income

     (905     18,789        29,619         (253     47,250   

Interest expense

     67,385        399        4,648         (1     72,431   

Other (income) expense, net

     (61,951     (40,774     428         102,010        (287
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (6,339     59,164        24,543         (102,262     (24,894

Income tax expense

     3,000        20,603        1,515         13        25,131   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (9,339   $ 38,561      $ 23,028       $ (102,275   $ (50,025
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

Six Month Period Ended April 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Net sales

   $ 339,938      $ 553,892      $ 785,565      $ (84,339   $ 1,595,056   

Cost of goods sold

     245,005        394,329        488,195        (82,795     1,044,734   

Restructuring and related charges

     —          2,791        3,474        —          6,265   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     94,933        156,772        293,896        (1,544     544,057   

Operating expenses:

          

Selling

     37,755        75,634        148,753        (471     261,671   

General and administrative

     31,191        37,447        38,125        4       106,767   

Research and development

     8,600        4,699        1,894        —          15,193   

Acquisition and integration related charges

     6,309        5,928        3,114        —          15,351   

Restructuring and related charges

     1,456        3,161        1,112        —          5,729   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     85,311        126,869        192,998        (467     404,711   

Operating income

     9,622        29,903        100,898        (1,077     139,346   

Interest expense

     101,053        2,359        7,070        1        110,483   

Other (income) expense, net

     (84,981     (69,672     (45     154,699        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (6,450     97,216        93,873        (155,777     28,862   

Income tax expense

     8,031        16,185        20,242        (315     44,143   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (14,481   $ 81,031      $ 73,631      $ (155,462   $ (15,281
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

Six Month Period Ended April 3, 2011

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 

Net sales

   $ 210,517      $ 657,120      $ 781,950       $ (94,635   $ 1,554,952   

Cost of goods sold

     111,935        494,417        484,524         (93,249     997,627   

Restructuring and related charges

     —          2,547        100         —          2,647   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     98,582        160,156        297,326         (1,386     554,678   

Operating expenses:

           

Selling

     36,388        84,145        150,331         (283     270,581   

General and administrative

     35,883        38,511        44,699         —          119,093   

Research and development

     8,751        5,979        1,635         —          16,365   

Acquisition and integration related charges

     4,340        12,917        6,786         —          24,043   

Restructuring and related charges

     2,633        4,916        516         —          8,065   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     87,995        146,468        203,967         (283     438,147   

Operating income

     10,587        13,688        93,359         (1,103     116,531   

Interest expense

     113,940        766        10,805         14        125,525   

Other (income) expense, net

     (128,131     (72,491     250         200,974        602   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     24,778        85,413        82,304         (202,091     (9,596

Income tax expense

     21,148        19,685        19,355         (14     60,174   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 3,630      $ 65,728      $ 62,949       $ (202,077   $ (69,770
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows

Six Month Period Ended April 1, 2012

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor 
Subsidiaries
    Eliminations     Consolidated 
Total
 

Net cash (used) provided by operating activities

   $ (27,616   $ 236,366     $ 53,143      $ (416,697   $ (154,804

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     (6,982     (5,597 )     (6,011     —          (18,590

Proceeds from sale of property, plant and equipment

     —          7       75        —          82   

Acquisition of Black Flag

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

Acquisition of FURminator, net of cash

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

Other investing

     —          (118 )     (1,927     —          (2,045
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (6,982     (188,848 )     (7,863     —          (203,693

Cash flows from financing activities:

          

Proceeds from 6.75% Notes

     300,000        —          —          —          300,000   

Payment of 12% Notes, including tender and call premium

     (270,431     —          —          —          (270,431

Proceeds from 9.5% Notes, including premium

     217,000        —          —          —          217,000   

Payment of senior credit facilities, excluding ABL revolving credit facility

     (2,727     —          —          —          (2,727

ABL revolving credit facility, net

     50,000        —          —          —          50,000   

Reduction of other debt

     (25,000     —          (1,371     —          (26,371

Proceeds from other debt financing

     —          —          11,866        —          11,866   

Debt issuance costs

     (9,941     —          —          —          (9,941

Other financing activities

     —          (954 )     —          —          (954

Advances related to intercompany transactions

     (223,888     (53,037 )     (139,772     416,697        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     35,013        (53,991 )     (129,277     416,697        268,442   

Effect of exchange rate changes on cash and cash equivalents

     —          —          (671     —          (671
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     415        (6,473 )     (84,668     —          (90,726

Cash and cash equivalents, beginning of period

     49        8,789       133,576        —          142,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 464      $ 2,316     $ 48,908      $ —        $ 51,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

SPECTRUM BRANDS, INC. AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows

Six Month Period Ended April 3, 2011

(Unaudited)

(Amounts in thousands)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor 
Subsidiaries
    Eliminations     Consolidated 
Total
 

Net cash provided (used) by operating activities

     72,118        (28,312 )     660,823        (826,904     (122,275

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     (8,132     (5,638 )     (4,942     —          (18,712

Proceeds from sale of property, plant and equipment

     —          82       49        —          131   

Acquisition, net of cash

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

Proceeds from sale of assets—Ningbo

     —          —          6,997        —          6,997   

Other investing

     —          (1,530 )     —          —          (1,530
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used) provided by investing activities

     (8,132     (17,364 )     2,104        —          (23,392

Cash flows from financing activities:

          

Payment of senior credit facilities, excluding ABL revolving credit facility

     (71,700     —          —          —          (71,700

ABL revolving credit facility, net

     118,000        —          —          —          118,000   

Reduction of other debt

     —          —          (367     —          (367

Proceeds from other debt financing

     22,496        —          —          —          22,496   

Debt issuance costs

     (8,648     —          —          —          (8,648

Prepayment penalty of term loan facility

     (7,500     —          —          —          (7,500

Treasury stock purchases

     (3,241     —          —          —          (3,241

(Advances related to) proceeds from intercompany transactions

     (165,634     48,471       (709,741     826,904        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used) provided by financing activities

     (116,227     48,471       (710,108     826,904        49,040   

Effect of exchange rate changes on cash and cash equivalents

     —          —          (896     —          (896
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (52,241     2,795       (48,077     —          (97,523

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 339      $ 5,518     $ 67,234      $ —        $ 73,091   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 became wholly-owned subsidiaries of SB Holdings. Russell Hobbs was subsequently merged into 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 to Spectrum Brands and its subsidiaries subsequent to the Merger and Spectrum Brands 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 (“U.S.”), 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 120 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 Results” 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 and Fiscal Six month Period Ended April 1, 2012 Compared to Fiscal Quarter and Fiscal Six month Period Ended April 3, 2011

In this Quarterly Report on Form 10-Q we refer to the three months ended April 1, 2012 as the “Fiscal 2012 Quarter,” the six month period ended April 1, 2012 as the “Fiscal 2012 Six Months,” the three month period ended April 3, 2011 as the “Fiscal 2011 Quarter” and the six month period ended April 3, 2011 as the “Fiscal 2011 Six Months.”

 

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Table of Contents

Net Sales. Net sales for the Fiscal 2012 Quarter increased $52 million to $746 million from $694 million in the Fiscal 2011 Quarter, an 8% increase. 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

   $ 694   

Increase in home and garden control products

     19   

Increase in pet supplies

     13   

Increase in consumer batteries

     12   

Increase in small appliances

     7   

Increase in electric personal care products

     5