SBI 06.30.2013 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 June 30, 2013
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 001-34757
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  ý    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  ý    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  ý
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  ý    No  ¨


Table of Contents

SPECTRUM BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED June 30, 2013
INDEX
 

 
 
Page
 
Part I—Financial Information
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Financial Position
June 30, 2013 and September 30, 2012
(Unaudited)
(Amounts in thousands)
 
June 30, 2013
 
September 30, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
98,904

 
$
157,872

Receivables:
 
 
 
Trade accounts receivable, net of allowances of $32,591 and $21,870, respectively
479,307

 
335,301

Other
74,943

 
40,067

Inventories
707,340

 
452,633

Deferred income taxes
21,252

 
28,143

Prepaid expenses and other
69,800

 
49,273

Total current assets
1,451,546

 
1,063,289

Property, plant and equipment, net of accumulated depreciation of $180,596 and $139,994, respectively
355,250

 
214,017

Deferred charges and other
22,389

 
27,711

Goodwill
1,470,180

 
694,245

Intangible assets, net
2,169,404

 
1,714,929

Debt issuance costs
71,903

 
39,320

Total assets
$
5,540,672

 
$
3,753,511

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
40,783

 
$
16,414

Accounts payable
427,539

 
325,023

Accrued liabilities:
 
 
 
Wages and benefits
63,623

 
82,119

Income taxes payable
29,586

 
30,272

Accrued interest
26,906

 
30,473

Other
155,410

 
124,597

Total current liabilities
743,847

 
608,898

Long-term debt, net of current maturities
3,185,271

 
1,652,886

Employee benefit obligations, net of current portion
109,340

 
89,994

Deferred income taxes
503,454

 
377,465

Other
24,845

 
31,578

Total liabilities
4,566,757

 
2,760,821

Commitments and contingencies
 
 
 
Shareholders’ equity:
 
 
 
Other capital
1,385,806

 
1,359,946

Accumulated deficit
(406,513
)
 
(333,821
)
Accumulated other comprehensive loss
(56,310
)
 
(33,435
)
Total shareholders' equity
922,983

 
992,690

Non-controlling interest
50,932

 

Total equity
973,915

 
992,690

Total liabilities and equity
$
5,540,672

 
$
3,753,511

See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).

3

Table of Contents

SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Operations
For the three and nine month periods ended June 30, 2013 and July 1, 2012
(Unaudited)
(Amounts in thousands)
 
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
2013
 
2012
 
2013
 
2012
Net sales
$
1,089,825

 
$
824,803

 
$
2,947,849

 
$
2,419,859

Cost of goods sold
706,053

 
531,069

 
1,949,332

 
1,575,803

Restructuring and related charges
1,013

 
2,038

 
4,698

 
8,303

Gross profit
382,759

 
291,696

 
993,819

 
835,753

Selling
165,178

 
129,851

 
464,961

 
391,522

General and administrative
70,057

 
50,726

 
196,077

 
157,493

Research and development
11,486

 
8,597

 
31,517

 
23,790

Acquisition and integration related charges
7,747

 
5,274

 
40,558

 
20,625

Restructuring and related charges
12,232

 
1,858

 
23,038

 
7,587

Total operating expenses
266,700

 
196,306

 
756,151

 
601,017

Operating income
116,059

 
95,390

 
237,668

 
234,736

Interest expense
61,516

 
39,686

 
185,652

 
150,169

Other expense, net
2,613

 
2,224

 
7,941

 
2,225

Income from continuing operations before income taxes
51,930

 
53,480

 
44,075

 
82,342

Income tax expense (benefit)
15,169

 
(5,371
)
 
54,928

 
38,772

Net income (loss)
36,761

 
58,851

 
(10,853
)
 
43,570

Less: Net income attributable to non-controlling interest
263

 

 
8

 

Net income (loss) attributable to controlling interest
$
36,498

 
$
58,851

 
$
(10,861
)
 
$
43,570

See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).


4

Table of Contents

SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the three and nine month periods ended June 30, 2013 and July 1, 2012
(Unaudited)
(Amounts in thousands)

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
36,761

 
$
58,851

 
$
(10,853
)
 
$
43,570

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(7,830
)
 
(34,148
)
 
(25,385
)
 
(30,538
)
Unrealized gain on derivative instruments
1,780

 
1,475

 
2,858

 
2,370

Defined benefit pension (loss) gain
(52
)
 
422

 
(348
)
 
924

Other comprehensive loss, net of tax
(6,102
)
 
(32,251
)
 
(22,875
)
 
(27,244
)
Comprehensive income (loss)
30,659

 
26,600

 
(33,728
)
 
16,326

Less: Comprehensive income attributable to non-controlling interest
263

 

 
8

 

Comprehensive income (loss) attributable to controlling interest
$
30,396

 
$
26,600

 
$
(33,736
)
 
$
16,326

See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).


5

Table of Contents


SPECTRUM BRANDS, INC.
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended June 30, 2013 and July 1, 2012
(Unaudited)
(Amounts in thousands)
 
NINE MONTHS ENDED
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(10,853
)
 
$
43,570

Adjustments to reconcile net (loss) income to net cash used by operating activities, net of effects of acquisitions:
 
 
 
Depreciation
42,618

 
28,708

Amortization of intangibles
57,502

 
46,550

Amortization of unearned restricted stock compensation
31,830

 
15,436

Amortization of debt issuance costs
7,210

 
5,273

Non-cash increase to cost of goods sold from sale of HHI Business acquisition inventory
31,000

 

Write off unamortized discount / (premium) on retired debt
885

 
(466
)
Write off of debt issuance costs
4,600

 
2,945

Other non-cash adjustments
19,518

 
3,021

Net changes in assets and liabilities
(260,148
)
 
(212,965
)
Net cash used by operating activities
(75,838
)
 
(67,928
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(45,236
)
 
(33,117
)
Acquisition of Shaser, net of cash acquired
(42,510
)
 

Acquisition of the HHI Business, net of cash acquired
(1,351,008
)
 

Acquisition of Black Flag

 
(43,750
)
Acquisition of FURminator, net of cash acquired

 
(139,390
)
Other investing activities
(1,141
)
 
(1,627
)
Net cash used by investing activities
(1,439,895
)
 
(217,884
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Term Loan, net of discount
792,000

 

Proceeds from issuance of 6.375% Notes
520,000

 

Proceeds from issuance of 6.625% Notes
570,000

 

Proceeds from issuance of 6.75% Notes

 
300,000

Payment of 12% Notes, including tender and call premium

 
(270,431
)
Proceeds from issuance of 9.5% Notes, including premium

 
217,000

Payment of senior credit facilities, excluding ABL revolving credit facility
(406,904
)
 
(4,091
)
Debt issuance costs
(44,469
)
 
(11,163
)
Other debt financing, net
17,080

 
6,192

Reduction of other debt
(1,970
)
 
(27,992
)
ABL revolving credit facility, net
69,500

 
2,500

Capital contribution from parent
28,562

 

Cash dividends paid to parent
(61,842
)
 

Share based award tax withholding payments
(20,141
)
 
(3,936
)
Other financing activities

 
(953
)
Net cash provided by financing activities
1,461,816

 
207,126

Effect of exchange rate changes on cash and cash equivalents due to Venezuela devaluation
(1,870
)
 

Effect of exchange rate changes on cash and cash equivalents
(3,181
)
 
(1,429
)
Net decrease in cash and cash equivalents
(58,968
)
 
(80,115
)
Cash and cash equivalents, beginning of period
157,872

 
142,414

Cash and cash equivalents, end of period
$
98,904

 
$
62,299

See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).

6

Table of Contents

SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in thousands, except per share figures)

1
DESCRIPTION OF BUSINESS
Spectrum Brands, Inc., a Delaware corporation (“Spectrum Brands” or the “Company”), is a global branded consumer products company. Spectrum Brands, Inc., is a wholly owned subsidiary of Spectrum Brands Holdings, Inc. ("SB Holdings"). SB Holdings' common stock trades on the New York Stock Exchange (the “NYSE”) under the symbol “SPB.”
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.
On December 17, 2012, the Company acquired the residential hardware and home improvement business (the “HHI Business”) from Stanley Black & Decker, Inc. (“Stanley Black & Decker”), which includes (i) the equity interests of certain subsidiaries of Stanley Black & Decker engaged in the business and (ii) certain assets of Stanley Black & Decker used or held for use in connection with the business (the “Hardware Acquisition”). The HHI Business has a broad portfolio of recognized brand names, including Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister, as well as patented technologies such as Smartkey, a rekeyable lockset technology, and Smart Code Home Connect. On April 8, 2013, the Company completed the Hardware Acquisition, which included the acquisition of certain assets of Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation ("TLM Taiwan”), which is involved in the production of residential locksets. For information pertaining to the Hardware Acquisition, see Note 15, “Acquisitions.”
The Company sells its products in approximately 140 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, Dingo, Nature's Miracle, Spectracide, Cutter, Hot Shot, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator, the previously mentioned HHI Business brands 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; home and garden controls; and hardware and home improvement, which consists of the recently acquired HHI Business.
The Company manages the businesses in four 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 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”); (iii) Home and Garden Business, which consists of the Company's home and garden and insect control business (the “Home and Garden Business”); and (iv) Hardware & Home Improvement, which consists of the recently acquired HHI Business (“Hardware & Home Improvement”). Management reviews the performance of the Company based on these segments, which also reflect the manner in which the Company's management monitors performance and allocates resources. For information pertaining to our business segments, see Note 12, “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 Securities and Exchange Commission ("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 June 30, 2013, the results of operations for the three and nine month periods ended June 30, 2013 and July 1, 2012, the

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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)


comprehensive income (loss) for the three and nine month periods ended June 30, 2013 and July 1, 2012 and the cash flows for the nine month periods ended June 30, 2013 and July 1, 2012. 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, 2012.
Change in Accounting Principle: During the quarter ended June 30, 2013, the Company made a change in accounting principle to present tax withholdings for share-based payment awards paid to taxing authorities on behalf of an employee as a financing activity within its Condensed Consolidated Statement of Cash Flows. Such amounts were previously presented within operating activities in the Condensed Consolidated Statement of Cash Flows. The Company believes this change is preferable as the predominant characteristic of the transaction is a financing activity. The Company has reclassified the following amounts within its previously reported Condensed Consolidated Statements of Cash Flows on a retrospective basis to reflect this change in accounting principle:
 
Nine Months Ended
 
2013
 
2012
Net cash used by operating activities: Net changes in assets and liabilities
17,946

 
3,936

Net cash provided by financing activities: Share based award tax withholding payments
(17,946
)
 
(3,936
)

Use of Estimates: The preparation of 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.
 
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. Excess of cost over fair value of net assets acquired (goodwill) and indefinite lived trade name intangibles are not amortized. 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. Goodwill is tested for impairment 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. Indefinite lived 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.
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 $67,023 and $183,050 for the three and nine month periods ended June 30, 2013, respectively, and $48,797 and $148,383 for the three and nine month periods ended July 1, 2012, 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. Provisions 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.

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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 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 17% and 18% of the Company’s Net sales during the three and nine month periods ended June 30, 2013, respectively, and 23% of the Company’s Net sales during both the three and nine month periods ended July 1, 2012. This customer also represented approximately 10% and 13% of the Company’s Trade accounts receivable, net at June 30, 2013 and September 30, 2012, respectively.
Approximately 37% and 41% of the Company’s Net sales during the three and nine month periods ended June 30, 2013, respectively, and 40% and 44% of the Company’s Net sales during the three and nine month periods ended July 1, 2012, respectively, occurred outside the U.S. 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.
Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three and nine month periods ended June 30, 2013 was $17,673 and $31,830, respectively. Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three and nine month periods ended July 1, 2012 was $4,361 and $15,436, respectively.
The Company granted approximately 30 and 644 restricted stock units during the three and nine month periods ended June 30, 2013, respectively. Of these grants, 90 are performance-based and vest over a one year period and 554 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 $29,319.
The Company granted approximately 42 and 741 restricted stock units during the three and nine month periods ended July 1, 2012, respectively. Of these grants, 42 restricted stock units are time-based and vest over a two year period. The remaining 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 $20,293.
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 activity in the Company’s non-vested restricted stock awards and restricted stock units during the nine months ended June 30, 2013 is as follows:
Restricted Stock Awards
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Fair Value at
Grant Date
Non-vested restricted stock awards at September 30, 2012
 
13

 
$
28.00

 
$
364

Vested
 
(13
)
 
28.00

 
(364
)
Non-vested restricted stock awards at June 30, 2013
 

 
$

 
$

 
Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Fair Value
at Grant
Date
Non-vested restricted stock units at September 30, 2012
 
1,931

 
$
28.45

 
$
54,931

Granted
 
644

 
45.53

 
29,319

Forfeited
 
(290
)
 
29.78

 
(8,637
)
Vested
 
(1,116
)
 
28.21

 
(31,485
)
Non-vested restricted stock units at June 30, 2013
 
1,169

 
$
37.75

 
$
44,128

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.

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Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


The following table summarizes acquisition and integration related charges incurred by the Company during the three and nine month periods ended June 30, 2013 and July 1, 2012:
 
Three Months Ended
 
Nine Months Ended
 
2013
 
2012
 
2013
 
2012
Russell Hobbs
 
 
 
 
 
 
 
Integration costs
$
695

 
$
1,573

 
$
2,630

 
$
6,766

Employee termination charges
(35
)
 
840

 
224

 
3,356

Legal and professional fees
(78
)
 
587

 
12

 
1,508

Russell Hobbs Acquisition and integration related charges
$
582

 
$
3,000

 
$
2,866

 
$
11,630

HHI Business
 
 
 
 
 
 
 
Legal and professional fees
4,663

 

 
25,650

 

Integration costs
1,615

 

 
5,292

 

Employee termination charges
13

 

 
103

 

HHI Business Acquisition and integration related charges
$
6,291

 
$

 
$
31,045

 
$

 
 
 


 
 
 
 
Shaser
161

 

 
4,534

 

FURminator
372

 
1,738

 
1,605

 
6,337

Black Flag
52

 
95

 
90

 
1,912

Other
289

 
441

 
418

 
746

Total Acquisition and integration related charges
$
7,747

 
$
5,274

 
$
40,558

 
$
20,625



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SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


3
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation gains and losses on assets and liabilities of foreign subsidiaries, effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as a hedge of a net investment in a foreign subsidiary, deferred gains and losses on derivative financial instruments designated as cash flow hedges and amortization of deferred gains and losses associated with the Company’s pension plans. The foreign currency translation gains and losses for the three and nine month periods ended June 30, 2013 and July 1, 2012 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.
For information pertaining to the reclassification of unrealized gains and losses on derivative instruments, see Note 8, “Derivative Financial Instruments.”
The components of Other comprehensive income (loss), net of tax, for the three and nine month periods ended June 30, 2013 and July 1, 2012 are as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
2013
 
2012
 
2013
 
2012
Foreign Currency Translation Adjustments:
 
 
 
 
 
 
 
 
Gross change before reclassification adjustment
 
$
(7,830
)
 
$
(34,148
)
 
$
(25,385
)
 
$
(30,538
)
Net reclassification adjustment for (gains) losses included in earnings
 

 

 

 

Gross change after reclassification adjustment
 
(7,830
)
 
(34,148
)
 
(25,385
)
 
(30,538
)
Deferred tax effect
 

 

 

 

Deferred tax valuation allowance
 

 

 

 

Other Comprehensive Loss
 
$
(7,830
)
 
$
(34,148
)
 
$
(25,385
)
 
$
(30,538
)
 
 
 
 
 
 
 
 
 
Unrealized Gains (Losses) on Derivative Instruments:
 
 
 
 
 
 
 
 
Gross change before reclassification adjustment
 
$
3,193

 
$
3,210

 
$
4,595

 
$
391

Net reclassification adjustment for (gains) losses included in earnings
 
(507
)
 
(309
)
 
(80
)
 
3,214

Gross change after reclassification adjustment
 
2,686

 
2,901

 
4,515

 
3,605

Deferred tax effect
 
(450
)
 
(1,891
)
 
(1,566
)
 
(1,478
)
Deferred tax valuation allowance
 
(456
)
 
465

 
(91
)
 
243

Other Comprehensive Income
 
$
1,780

 
$
1,475

 
$
2,858

 
$
2,370

 
 
 
 
 
 
 
 
 
Defined Benefit Pension Plans:
 
 
 
 
 
 
 
 
Gross change before reclassification adjustment
 
$
(575
)
 
$
217

 
$
(2,164
)
 
$
539

Net reclassification adjustment for losses included in Cost of goods sold
 
326

 
152

 
979

 
320

Net reclassification adjustment for losses included in Selling expenses
 
41

 
19

 
122

 
40

Net reclassification adjustment for losses included in General and administrative expenses
 
152

 
71

 
456

 
148

Gross change after reclassification adjustment
 
(56
)
 
459

 
(607
)
 
1,047

Deferred tax effect
 
(38
)
 
(37
)
 
205

 
(94
)
Deferred tax valuation allowance
 
42

 

 
54

 
(29
)
Other Comprehensive (Loss) Income
 
$
(52
)
 
$
422

 
$
(348
)
 
$
924

 
 
 
 
 
 
 
 
 
Total Other Comprehensive Loss, net of tax
 
$
(6,102
)
 
$
(32,251
)
 
$
(22,875
)
 
$
(27,244
)


4
INVENTORIES
Inventories for the Company, which are stated at the lower of cost or market, consist of the following:
 

11

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


 
June 30, 2013
 
September 30, 2012
Raw materials
$
108,284

 
$
58,515

Work-in-process
53,461

 
23,434

Finished goods
545,595

 
370,684

 
$
707,340

 
$
452,633


5
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets of the Company consist of the following:
 
 
Global Batteries &
Appliances
 
Hardware & Home Improvement
 
Global Pet
Supplies
 
Home and
Garden
Business
 
Total
Goodwill:
 
 
 
 
 
 
 
 
 
Balance at September 30, 2012
$
268,556

 
$

 
$
237,932

 
$
187,757

 
$
694,245

Additions
65,618

 
720,890

 

 
1,179

 
787,687

Effect of translation
(5,432
)
 
(5,817
)
 
(503
)
 

 
(11,752
)
Balance at June 30, 2013
$
328,742

 
$
715,073

 
$
237,429

 
$
188,936

 
$
1,470,180

Intangible Assets:
 
 
 
 
 
 
 
 
 
Trade names Not Subject to Amortization
 
 
 
 
 
 
 
 
 
Balance at September 30, 2012
$
545,426

 
$

 
$
212,142

 
$
83,500

 
$
841,068

Additions

 
330,000

 

 

 
330,000

Effect of translation
(4,887
)
 
(157
)
 
886

 

 
(4,158
)
Balance at June 30, 2013
$
540,539

 
$
329,843

 
$
213,028

 
$
83,500

 
$
1,166,910

Intangible Assets Subject to Amortization
 
 
 
 
 
 
 
 
 
Balance at September 30, 2012, net
$
447,112

 

 
$
264,622

 
$
162,127

 
$
873,861

Additions
32,800

 
157,100

 
749

 

 
190,649

Amortization during period
(26,818
)
 
(7,565
)
 
(16,013
)
 
(7,106
)
 
(57,502
)
Effect of translation
(3,276
)
 
(698
)
 
(540
)
 

 
(4,514
)
Balance at June 30, 2013, net
$
449,818

 
$
148,837

 
$
248,818

 
$
155,021

 
$
1,002,494

Total Intangible Assets, net at June 30, 2013
$
990,357

 
$
478,680

 
$
461,846

 
$
238,521

 
$
2,169,404


Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which were recognized in connection with acquisitions and from the application of fresh-start reporting during fiscal 2009. The useful lives of the Company’s intangible assets subject to amortization are 9 to 17 years for technology assets associated with the Global Batteries & Appliances segment, 8 to 9 years for technology assets related to the Hardware & Home Improvement segment, 4 to 9 years for technology assets related to the Global Pet Supplies segment, 15 to 20 years for customer relationships of the Global Batteries & Appliances segment, 20 years for customer relationships of the Hardware & Home Improvement segment, Home and Garden Business and Global Pet Supplies segments, 1 to 12 years for trade names within the Global Batteries & Appliances segment, 5 to 8 years for trade names within the Hardware & Home Improvement segment and 3 years for a trade name within the Global Pet Supplies segment.

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

12

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


 
June 30,
2013
 
September 30,
2012
Technology Assets Subject to Amortization:
 
 
 
Gross balance
$
175,473

 
$
90,924

Accumulated amortization
(34,777
)
 
(22,768
)
Carrying value, net
$
140,696

 
$
68,156

Trade Names Subject to Amortization:
 
 
 
Gross balance
$
171,482

 
$
150,829

Accumulated amortization
(41,168
)
 
(28,347
)
Carrying value, net
$
130,314

 
$
122,482

Customer Relationships Subject to Amortization:
 
 
 
Gross balance
$
879,410

 
$
796,235

Accumulated amortization
(147,926
)
 
(113,012
)
Carrying value, net
$
731,484

 
$
683,223

Total Intangible Assets, net Subject to Amortization
$
1,002,494

 
$
873,861


Amortization expense for the three and nine month periods ended June 30, 2013 and July 1, 2012 is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
2013
 
2012
 
2013
 
2012
Proprietary technology amortization
$
4,470

 
$
2,411

 
$
12,009

 
$
6,721

Trade names amortization
4,264

 
3,509

 
12,162

 
9,788

Customer relationships amortization
11,611

 
10,181

 
33,331

 
30,041

 
$
20,345

 
$
16,101

 
$
57,502

 
$
46,550


The Company estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $78,500 per year.


13

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


6
DEBT
Debt consists of the following:
 
 
June 30, 2013
 
September 30, 2012
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan, due December 17, 2019
$
757,457

 
4.6
%
 
$

 
%
Former term loan facility

 

 
370,175

 
5.1
%
9.5% Notes, due June 15, 2018
950,000

 
9.5
%
 
950,000

 
9.5
%
6.375% Notes, due November 15, 2020
520,000

 
6.4
%
 

 
%
6.625% Notes, due November 15, 2022
570,000

 
6.6
%
 

 
%
6.75% Notes, due March 15, 2020
300,000

 
6.8
%
 
300,000

 
6.8
%
ABL Facility, expiring May 24, 2017
69,500

 
2.1
%
 

 
4.3
%
Other notes and obligations
32,966

 
8.3
%
 
18,059

 
10.9
%
Capitalized lease obligations
29,861

 
6.2
%
 
26,683

 
6.2
%
 
$
3,229,784

 
 
 
$
1,664,917

 
 
Original issuance (discounts) premiums on debt
(3,730
)
 
 
 
4,383

 
 
Less: current maturities
40,783

 
 
 
16,414

 
 
Long-term debt
$
3,185,271

 
 
 
$
1,652,886

 
 
Term Loan
On December 17, 2012, the Company entered into a senior term loan facility, maturing December 17, 2019, which provides borrowings in an aggregate principal amount of $800,000, with $100,000 in Canadian dollar equivalents (the "Term Loan") in connection with the acquisition of the HHI Business. A portion of the Term Loan proceeds were used to refinance the former term loan facility, which was scheduled to mature on June 17, 2016, and had an aggregate amount outstanding of $370,175 prior to refinancing. In connection with the refinancing, the Company recorded accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs related to the former term loan facility totaling $5,485 as an adjustment to interest expense during the nine month period ended June 30, 2013.
The Term Loan contains financial covenants with respect to debt, including, but not limited to, a fixed charge ratio. 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, its domestic subsidiaries and its Canadian subsidiaries have guaranteed their 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 issuance of the Term Loan, the Company recorded $201 and $19,328 of fees during the three and nine month periods ended June 30, 2013, respectively, of which $16,907 is classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and is being amortized as an adjustment to interest expense over the remaining life of the Term Loan, with the remainder of $2,421 reflected as an increase to interest expense during the nine month period ended June 30, 2013.
6.375% Notes and 6.625% Notes
On December 17, 2012, in connection with the acquisition of the HHI Business, Spectrum Brands assumed $520,000 aggregate principal amount of 6.375% Notes at par value, due November 15, 2020 (the "6.375% Notes"), and $570,000 aggregate principal amount of 6.625% Notes at par value, due November 15, 2022 (the "6.625% Notes"), previously issued by Spectrum Brands Escrow Corporation. The 6.375% Notes and the 6.625% Notes are unsecured and guaranteed by Spectrum Brands’ parent company, SB/RH Holdings, LLC, as well as by existing and future domestic restricted subsidiaries.


14

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


The Company may redeem all or a part of the 6.375% Notes and the 6.625% Notes, upon not less than 30 or more than 60 days notice, at specified redemption prices. Further, the indenture governing the 6.375% Notes and the 6.625% Notes (the “2020/22 Indenture”), requires the Company to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of the Company, as defined in such indenture.
The 2020/22 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 2020/22 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 2020/22 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 6.375% Notes and the 6.625% Notes. If any other event of default under the 2020/22 Indenture occurs and is continuing, the trustee for the 2020/22 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 6.375% Notes, or the 6.625% Notes, may declare the acceleration of the amounts due under those notes.
 
The Company recorded $3 and $12,906 of fees in connection with the offering of the 6.375% Notes during the three and nine month periods ended June 30, 2013, respectively, and $4 and $14,127 of fees in connection with the offering of the 6.625% Notes during the three and nine month periods ended June 30, 2013, respectively. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are being amortized as an adjustment to interest expense over the respective remaining lives of the 6.375% Notes and the 6.625% Notes.
ABL Facility
On December 17, 2012 the Company exercised its option to increase its asset based lending revolving credit facility (the "ABL Facility") from $300,000 to $400,000 and extend the maturity to May 24, 2017. In connection with the increase and extension, the Company incurred $323 of fees during the nine month period ended June 30, 2013. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are being amortized as an adjustment to interest expense over the remaining life of the ABL Facility.
On March 28, 2013, the Company amended its ABL Facility to conform certain provisions to reflect the acquisition of the HHI Business. In connection with the amendment, the Company incurred $98 and $206 of fees during the three and nine month periods ended June 30, 2013, respectively. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are being amortized as an adjustment to interest expense over the remaining life of the ABL Facility.
As a result of borrowings and payments under the ABL Facility, at June 30, 2013, the Company had aggregate borrowing availability of approximately $228,055, net of lender reserves of $7,942 and outstanding letters of credit of $38,491.

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.

15

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


Fair Value of Derivative Instruments
The Company discloses its derivative instruments and hedging activities in accordance with ASC Topic 815: “Derivatives and Hedging” (“ASC 815”).
The fair value of the Company’s outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
 
Asset Derivatives
 
 
June 30,
2013
 
September 30,
2012
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contracts
Receivables—Other
 
$
21

 
$
985

Commodity contracts
Deferred charges and other
 
16

 
1,017

Foreign exchange contracts
Receivables—Other
 
5,197

 
1,194

Foreign exchange contracts
Deferred charges and 
other
 
621

 

Total asset derivatives designated as hedging instruments under ASC 815
 
 
5,855

 
3,196

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
Foreign exchange contracts
Receivables—Other
 
24

 
41

Total asset derivatives
 
 
$
5,879

 
$
3,237


The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:
 
Liability Derivatives
 
 
June 30,
2013
 
September 30,
2012
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contracts
Accounts payable
 
$
1,174

 
$
9

Commodity contracts
Other long-term liabilities
 
79

 

Foreign exchange contracts
Accounts payable
 
126

 
3,063

Foreign exchange contracts
Other long-term  liabilities
 
13

 

Total liability derivatives designated as hedging instruments under ASC 815
 
 
$
1,392

 
$
3,072

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contract
Accounts payable
 
197

 

Foreign exchange contracts
Accounts payable
 
3,324

 
3,967

Foreign exchange contracts
Other long-term liabilities
 
1,078

 
2,926

Total liability derivatives
 
 
$
5,991

 
$
9,965

 
Changes in AOCI from Derivative Instruments

16

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


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 Accumulated Other Comprehensive Income ("AOCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 3, "Comprehensive Income (Loss)" for further information.
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended June 30, 2013, 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
Derivatives
(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
$
(930
)
 
Cost of goods sold
 
$
(321
)
 
Cost of goods sold
 
$
11

Foreign exchange contracts
89

 
Net sales
 
313

 
Net sales
 

Foreign exchange contracts
4,034

 
Cost of goods sold
 
515

 
Cost of goods sold
 

Total
$
3,193

 
 
 
$
507

 
 
 
$
11


 
 The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended June 30, 2013, 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
Derivatives
(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
$
(3,361
)
 
Cost of goods sold
 
$
(223
)
 
Cost of goods sold
 
$
(71
)
Foreign exchange contracts
755

 
Net sales
 
653

 
Net sales
 

Foreign exchange contracts
7,201

 
Cost of goods sold
 
(350
)
 
Cost of goods sold
 

Total
$
4,595

 
 
 
$
80

 
 
 
$
(71
)
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended July 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
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Amount of
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Commodity contracts
$
(2,368
)
 
Cost of goods sold
 
$
(120
)
 
Cost of goods sold
 
$
(6
)
Foreign exchange contracts
(395
)
 
Net sales
 
(129
)
 
Net sales
 

Foreign exchange contracts
5,973

 
Cost of goods sold
 
558

 
Cost of goods sold
 

Total
$
3,210

 
 
 
$
309

 
 
 
$
(6
)


17

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 nine month period ended July 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
Derivatives
(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
$
(1,989
)
 
Cost of goods sold
 
$
(675
)
 
Cost of goods sold
 
$
8

Interest rate contracts
15

 
Interest expense
 
(864
)
 
Interest expense
 

Foreign exchange contracts
(61
)
 
Net sales
 
(339
)
 
Net sales
 

Foreign exchange contracts
2,426

 
Cost of goods sold
 
(1,336
)
 
Cost of goods sold
 

Total
$
391

 
 
 
$
(3,214
)
 
 
 
$
8


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 June 30, 2013 and July 1, 2012, 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
2013
 
2012
 
Commodity contracts
$
(197
)
 
$

 
Cost of goods sold
Foreign exchange contracts
477

 
7,941

 
Other expense, net
Total
$
280

 
$
7,941

 
 
During the nine month periods ended June 30, 2013 and July 1, 2012, 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
2013
 
2012
 
Commodity contracts
$
(197
)
 
$

 
Cost of goods sold
Foreign exchange contracts
(1,834
)
 
11,734

 
Other expense, net
Total
$
(2,031
)
 
$
11,734

 
 
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 $36 and $46 at June 30, 2013 and September 30, 2012, 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 June 30, 2013 and September 30, 2012, the

18

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


Company had posted cash collateral of $450 and $50, respectively, related to such liability positions. In addition, at June 30, 2013 and September 30, 2012, the Company had no posted standby letters of credit 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
When appropriate, 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 June 30, 2013, the Company did not have any 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, Mexican Pesos, 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 June 30, 2013, the Company had a series of foreign exchange derivative contracts outstanding through September 2014 with a contract value of $228,419. The derivative net gain on these contracts recorded in AOCI by the Company at June 30, 2013 was $4,138, net of tax expense of $1,541. At June 30, 2013, the portion of derivative net gain estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $3,697, net of tax.

The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. The Company hedges a portion of the risk associated with the purchase of 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 June 30, 2013, the Company had a series of zinc swap contracts outstanding through September 2014 for 10 tons with a contract value of $20,372. At June 30, 2013, the Company had a series of brass swap contracts outstanding through September 2014 for 1 ton with a contract value of $5,609. The derivative net loss on these contracts recorded in AOCI by the Company at June 30, 2013 was $1,068, net of tax benefit of $127. At June 30, 2013, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,010, 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, Canadian 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 June 30, 2013 and September 30, 2012, the Company had $112,737 and $172,581, respectively, of notional value for such foreign exchange derivative contracts outstanding.
The Company periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in fair value of the hedge contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the hedges. The swaps effectively fix the floating price on a specified quantity of silver through a specified date. At June 30, 2013, the Company had a series of such swap contracts outstanding through April 2014 for 60 troy ounces with a contract value of $1,189.

19

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)




8
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s net derivative portfolio as of June 30, 2013, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of June 30, 2013 were as follows:
 
 
Level 1    
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Foreign exchange contracts, net
$

 
$
1,301

 
$

 
$
1,301

Total Assets, net
$

 
$
1,301

 
$

 
$
1,301

Liabilities:
 
 
 
 
 
 
 
Commodity contracts, net
$

 
$
(1,413
)
 
$

 
$
(1,413
)
Total Liabilities, net
$

 
$
(1,413
)
 
$

 
$
(1,413
)
 
The Company’s net derivative portfolio as of September 30, 2012, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of September 30, 2012 were as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Commodity contracts, net
$

 
$
1,993

 
$

 
$
1,993

Total Assets, net
$

 
$
1,993

 
$

 
$
1,993

Liabilities:
 
 
 
 
 
 
 
Foreign exchange contracts, net
$

 
$
(8,721
)
 
$

 
$
(8,721
)
Total Liabilities, net
$

 
$
(8,721
)
 
$

 
$
(8,721
)

The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and non-publicly traded debt approximate fair value. The fair values of long-term publicly traded debt are based on 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).
The carrying amounts and fair values of the Company’s financial instruments are summarized as follows ((liability)/asset):
 
 
June 30, 2013
 
September 30, 2012
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Total debt
$
(3,226,054
)
 
$
(3,395,679
)
 
$
(1,669,300
)
 
$
(1,804,831
)
Commodity swap and option agreements
(1,413
)
 
(1,413
)
 
1,993

 
1,993

Foreign exchange forward agreements
1,301

 
1,301

 
(8,721
)
 
(8,721
)

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, including the United Kingdom, the Netherlands, Germany, Guatemala, Brazil, Mexico and Taiwan. These pension plans generally provide benefits of stated amounts for each year of service.

20

Table of Contents
SPECTRUM BRANDS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


The Company’s results of operations for the three and nine month periods ended June 30, 2013 and July 1, 2012 reflect the following pension and deferred compensation benefit costs:
 
 
Three Months Ended
 
Nine Months Ended
Components of net periodic pension benefit and deferred compensation benefit cost
2013
 
2012
 
2013
 
2012
Service cost
$
867

 
$
578

 
$
2,416

 
$
1,700

Interest cost
2,498

 
2,552

 
7,326

 
7,030

Expected return on assets
(2,196
)
 
(2,051
)
 
(6,589
)
 
(5,378
)
Recognized net actuarial loss
519

 
242

 
1,557

 
508

Employee contributions
(46
)
 
(46
)
 
(137
)
 
(139
)
Net periodic benefit cost
$
1,642

 
$
1,275

 
$
4,573

 
$
3,721


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 nine month periods ended June 30, 2013 and July 1, 2012 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
Pension and deferred compensation contributions
2013
 
2012
 
2013
 
2012
Contributions made during period
$
1,188

 
$
1,289

 
$
2,890

 
$
3,767


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 nine month periods ended June 30, 2013 were $2,851 and $5,665, respectively. Company contributions charged to operations, including discretionary amounts, for the three and nine month periods ended July 1, 2012 were $545 and $1,694, respectively.

10
INCOME TAXES
The Company's effective tax rates for the three and nine month periods ended June 30, 2013 were 29% and 125%, respectively. The Company's effective tax rates for the three and nine month periods ended July 1, 2012 were (10)% and 47%, respectively. The Company's effective tax rates differ from the United States federal statutory rate of 35% principally due to: (i) losses in the U.S. and certain foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances that have been provided on the Company's net operating loss carryforward tax benefits and other deferred tax assets; (ii) deferred income tax expense related to the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes, and (iii) the reversal of U.S. valuation allowances of $49,291 as a result of the HHI Business acquisition during the nine months ended June 30, 2013, and $13,915 as a result of the FURminator acquisition during the nine month period ended July 1, 2012.
The Company recognizes in its consolidated financial statements the impact of a tax position if it concludes that the position is more likely than not sustainable upon audit, based on the technical merits of the position. At June 30, 2013 and September 30, 2012, the Company had $8,968 and $5,877, respectively, of unrecognized tax benefits related to uncertain tax positions. The Company also had approximately $3,787 and $3,564, respectively, of accrued interest and penalties related to the uncertain tax positions at those dates. Interest and penalties related to uncertain tax positions are reported in the consolidated financial statements as part of income tax expense.
As of June 30, 2013, certain of the Company's legal entities in various jurisdictions are undergoing income tax audits. The Company cannot predict the ultimate outcome of the examinations; however, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized.

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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)



11
SEGMENT RESULTS
The Company manages its business in four vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; (iii) Home and Garden Business; and (iv) Hardware & Home Improvement.
The results of the HHI Business operations, excluding the TLM Business, since December 17, 2012 are included in the Company's Condensed Consolidated Statement of Operations (Unaudited). The results of the TLM Business operations since April 8, 2013 are included in the Company's Condensed Consolidated Statement of Operations (Unaudited). The financial results related to the HHI Business are reported as a separate business segment, Hardware & Home Improvement.
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 from transactions with 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 nine month periods ended June 30, 2013 and July 1, 2012 is 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)


 
Three Months Ended
 
Nine Months Ended
 
2013
 
2012
 
2013
 
2012
Net sales to external customers
 
 
 
 
 
 
 
Consumer batteries
$
207,339

 
$
211,198

 
$
678,067

 
$
684,277

Small appliances
168,744

 
173,140

 
543,451

 
575,630

Electric shaving and grooming
61,742

 
62,860

 
207,978

 
214,979

Electric personal care
53,776

 
53,526

 
196,747

 
195,087

Global Batteries & Appliances
491,601

 
500,724

 
1,626,243

 
1,669,973

Global Pet Supplies
156,440

 
157,495

 
456,639

 
448,962

Home and Garden Business
156,568

 
166,584

 
289,091

 
300,924

Hardware & Home Improvement
285,216

 

 
575,876

 

Total segments
$
1,089,825

 
$
824,803

 
$
2,947,849

 
$
2,419,859

 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
2013
 
2012
 
2013
 
2012
Segment profit
 
 
 
 
 
 
 
Global Batteries & Appliances
$
44,904

 
$
47,093

 
$
181,696

 
$
185,726

Global Pet Supplies
26,560

 
22,470

 
62,833

 
57,778

Home and Garden Business
43,117

 
44,224

 
59,648

 
60,509

Hardware & Home Improvement
42,963

 

 
46,483

 

Total segments
157,544

 
113,787

 
350,660

 
304,013

Corporate expense
20,493

 
9,227

 
44,698

 
32,762

Acquisition and integration related charges
7,747

 
5,274

 
40,558

 
20,625

Restructuring and related charges
13,245

 
3,896

 
27,736

 
15,890

Interest expense
61,516

 
39,686

 
185,652

 
150,169

Other expense, net
2,613

 
2,224

 
7,941

 
2,225

Income from continuing operations before income taxes
$
51,930

 
$
53,480

 
$
44,075

 
$
82,342


On February 8, 2013, the Venezuelan government announced the formal devaluation of its currency, the Bolivar fuerte, relative to the U.S. dollar. As Venezuela continues to be considered a highly inflationary economy, the functional currency of the Company's Venezuelan subsidiary is the U.S. dollar. Therefore, the Company remeasured the local statement of financial position of its Venezuela entity as of February 8, 2013 to reflect the impact of the devaluation to the official exchange rate from 4.3 to 6.3 Bolivar fuerte per U.S. dollar. The effect of the devaluation of the Bolivar fuerte was recorded in other expense, net and resulted in a $1,953 reduction to the Company's pretax income during the nine month period ended June 30, 2013.

 
June 30, 2013
 
September 30, 2012
Segment total assets
 
 
 
Global Batteries & Appliances
$
2,213,741

 
$
2,243,472

Global Pet Supplies
959,282