SBH 03.30.2014 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 March 30, 2014
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 Holdings, Inc.
(Exact name of registrant as specified in its charter)
 _________________________________________ 
Delaware
 
27-2166630
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
3001 Deming Way
Middleton, Wisconsin
 
53562
(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
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the Registrant’s common stock, $.01 par value, as of May 5, 2014, was 52,730,491.

Table of Contents

SPECTRUM BRANDS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED March 30, 2014
INDEX
 

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

2
Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Financial Position
March 30, 2014 and September 30, 2013
(Amounts in thousands, except per share figures)
 
March 30, 2014
 
September 30, 2013
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
93,350

 
$
207,257

Receivables:
 
 
 
Trade accounts receivable, net of allowances of $34,371 and $37,376, respectively
525,163

 
481,313

Other
66,694

 
65,620

Inventories
725,858

 
632,923

Deferred income taxes
35,709

 
32,959

Prepaid expenses and other
72,776

 
62,833

Total current assets
1,519,550

 
1,482,905

Property, plant and equipment, net of accumulated depreciation of $234,144 and $203,897, respectively
444,232

 
412,551

Deferred charges and other
30,203

 
26,050

Goodwill
1,479,624

 
1,476,672

Intangible assets, net
2,154,928

 
2,163,166

Debt issuance costs
59,041

 
65,329

Total assets
$
5,687,578

 
$
5,626,673

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
119,273

 
$
102,921

Accounts payable
380,258

 
525,519

Accrued liabilities:
 
 
 
Wages and benefits
59,884

 
82,056

Income taxes payable
37,439

 
32,613

Accrued interest
35,401

 
36,731

Other
153,763

 
172,530

Total current liabilities
786,018

 
952,370

Long-term debt, net of current maturities
3,310,239

 
3,115,942

Employee benefit obligations, net of current portion
89,808

 
96,612

Deferred income taxes
490,694

 
492,774

Other
28,019

 
28,879

Total liabilities
4,704,778

 
4,686,577

Commitments and contingencies
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $.01 par value, authorized 200,000 shares; issued 54,151 and 53,579 shares, respectively; outstanding 52,710 and 52,210 shares, respectively
541

 
535

Additional paid-in capital
1,401,863

 
1,410,738

Accumulated deficit
(377,098
)
 
(435,911
)
Accumulated other comprehensive loss
(41,372
)
 
(38,521
)
 
983,934

 
936,841

Less treasury stock, at cost, 1,441 and 1,369 shares, respectively
(44,339
)
 
(39,820
)
Total shareholders' equity
939,595

 
897,021

Non-controlling interest
43,205

 
43,075

Total equity
982,800

 
940,096

Total liabilities and equity
$
5,687,578

 
$
5,626,673

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

3
Table of Contents

SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Operations
For the three and six month periods ended March 30, 2014 and March 31, 2013
(Unaudited)
(Amounts in thousands, except per share figures)
 
 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
2014
 
2013
 
2014
 
2013
Net sales
$
1,021,688

 
$
987,756

 
$
2,122,288

 
$
1,858,024

Cost of goods sold
661,025

 
662,253

 
1,378,683

 
1,243,279

Restructuring and related charges
1,039

 
2,599

 
2,774

 
3,685

Gross profit
359,624

 
322,904

 
740,831

 
611,060

Selling
165,707

 
171,021

 
329,918

 
299,783

General and administrative
75,921

 
70,428

 
148,908

 
127,158

Research and development
12,338

 
11,861

 
23,095

 
20,031

Acquisition and integration related charges
6,281

 
11,999

 
11,784

 
32,811

Restructuring and related charges
6,770

 
5,304

 
9,527

 
10,806

Total operating expenses
267,017

 
270,613

 
523,232

 
490,589

Operating income
92,607

 
52,291

 
217,599

 
120,471

Interest expense
47,393

 
60,355

 
104,380

 
130,242

Other expense, net
784

 
3,766

 
1,629

 
5,328

Income (loss) from continuing operations before income taxes
44,430

 
(11,830
)
 
111,590

 
(15,099
)
Income tax expense
10,556

 
29,146

 
23,287

 
39,759

Net income (loss)
33,874

 
(40,976
)
 
88,303

 
(54,858
)
Less: Net income (loss) attributable to non-controlling interest
63

 
256

 
203

 
(187
)
Net income (loss) attributable to controlling interest
$
33,811

 
$
(41,232
)
 
$
88,100

 
$
(54,671
)
Basic earnings per share:
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
52,699

 
52,082

 
52,556

 
51,920

Net income (loss) per share attributable to controlling interest
$
0.64

 
$
(0.79
)
 
$
1.68

 
$
(1.05
)
Diluted earnings per share:
 
 
 
 
 
 
 
Weighted average shares and equivalents outstanding
52,993

 
52,082

 
52,850

 
51,920

Net income (loss) per share attributable to controlling interest
$
0.64

 
$
(0.79
)
 
$
1.67

 
$
(1.05
)
Cash dividends declared per common share
$
0.30

 
$
0.25

 
$
0.55

 
$
0.25

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


4
Table of Contents

SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the three and six month periods ended March 30, 2014 and March 31, 2013
(Unaudited)
(Amounts in thousands)

 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
33,874

 
$
(40,976
)
 
$
88,303

 
$
(54,858
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation loss
(2,625
)
 
(20,423
)
 
(2,850
)
 
(17,555
)
Unrealized gain (loss) on derivative hedging instruments
(1,576
)
 
832

 
(110
)
 
1,078

Defined benefit pension gain (loss)
142

 
(150
)
 
109

 
(296
)
Other comprehensive loss, net of tax
(4,059
)
 
(19,741
)
 
(2,851
)
 
(16,773
)
Comprehensive income (loss)
29,815

 
(60,717
)
 
85,452

 
(71,631
)
Less: Comprehensive income (loss) attributable to non-controlling interest
214

 
256

 
431

 
(187
)
Comprehensive income (loss) attributable to controlling interest
$
29,601

 
$
(60,461
)
 
$
85,021

 
$
(71,444
)
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).


5
Table of Contents


SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
For the six month periods ended March 30, 2014 and March 31, 2013
(Unaudited)
(Amounts in thousands)
 
SIX MONTHS ENDED
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
88,303

 
$
(54,858
)
Adjustments to reconcile net income (loss) to net cash used by operating activities, net of effects of acquisitions:
 
 
 
Depreciation
36,539

 
26,297

Amortization of intangibles
40,703

 
37,157

Amortization of unearned restricted stock compensation
17,931

 
14,759

Amortization of debt issuance costs
5,216

 
4,086

Non-cash increase to cost of goods sold from sale of HHI Business acquisition inventory
—

 
31,000

Write off unamortized discount on retired debt
2,821

 
885

Write off of debt issuance costs
6,395

 
4,600

Other non-cash adjustments
3,437

 
9,641

Net changes in assets and liabilities
(356,907
)
 
(253,439
)
Net cash used by operating activities
(155,562
)
 
(179,872
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(36,759
)
 
(20,671
)
Acquisition of Liquid Fence, net of cash acquired
(25,254
)
 
—

Acquisition of Shaser, net of cash acquired
—

 
(23,919
)
Acquisition of the HHI Business, net of cash acquired
—

 
(1,266,120
)
Escrow payment - TLM Business acquisition
—

 
(100,000
)
Other investing activities
(145
)
 
32

Net cash used by investing activities
(62,158
)
 
(1,410,678
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Term Loan, net of discount
523,664

 
792,000

Proceeds from issuance of 6.375% Notes
—

 
520,000

Proceeds from issuance of 6.625% Notes
—

 
570,000

Payment of senior credit facilities, excluding ABL revolving credit facility
(530,776
)
 
(372,172
)
Debt issuance costs
(5,395
)
 
(44,163
)
Other debt financing, net
11,665

 
4,125

Reduction of other debt
(1,590
)
 
(1,486
)
ABL revolving credit facility, net
167,500

 
76,500

Cash dividends paid
(28,986
)
 
(14,042
)
Treasury stock purchases
(4,518
)
 
—

Share based award tax withholding payments
(26,548
)
 
(17,946
)
Net cash provided by financing activities
105,016

 
1,512,816

Effect of exchange rate changes on cash and cash equivalents due to Venezuela devaluation
—

 
(1,836
)
Effect of exchange rate changes on cash and cash equivalents
(1,203
)
 
(913
)
Net decrease in cash and cash equivalents
(113,907
)
 
(80,483
)
Cash and cash equivalents, beginning of period
207,257

 
157,961

Cash and cash equivalents, end of period
$
93,350

 
$
77,478

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

6
Table of Contents

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

1
DESCRIPTION OF BUSINESS
Spectrum Brands Holdings, Inc., a Delaware corporation (“SB Holdings” or the “Company”), is a diversified global branded consumer products company. 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 also designs, markets, distributes and sells certain hardware, home improvement and plumbing 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 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, Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister 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.
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, which consists of the Company's home and garden and insect control business (“Home and Garden”); and (iv) Hardware & Home Improvement, which consists of the Company's worldwide hardware, home improvement and plumbing 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 March 30, 2014, the results of operations for the three and six month periods ended March 30, 2014 and March 31, 2013, the comprehensive income (loss) for the three and six month periods ended March 30, 2014 and March 31, 2013 and the cash flows for the six month periods ended March 30, 2014 and March 31, 2013. Certain information and note 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, 2013.
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 the Condensed Consolidated Statements of Cash Flows (Unaudited). Such amounts were previously presented within operating activities in the Condensed Consolidated Statements of Cash Flows (Unaudited). The Company

7
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


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 (Unaudited) on a retrospective basis to reflect this change in accounting principle:
 
Six Months Ended
 
March 31, 2013
Cash flows from operating activities - Net changes in assets and liabilities:
 
As previously reported
$
(271,385
)
Reclassification of share based award tax withholding payments
17,946

As reclassified
$
(253,439
)
Cash flows from financing activities - Share based award tax withholding payments:
 
As previously reported
$
—

Reclassification of share based award tax withholding payments
(17,946
)
As reclassified
$
(17,946
)
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 $63,705 and $128,336 for the three and six month periods ended March 30, 2014, respectively, and $66,031 and $116,027 for the three and six month periods ended March 31, 2013, 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.
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 16% of the Company’s Net sales during both the three and six month periods ended March 30, 2014, and 16% and 19% of the Company’s Net sales during the three and

8
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


six month periods ended March 31, 2013, respectively. This customer also represented approximately 10% and 11% of the Company’s Trade accounts receivable, net at March 30, 2014 and September 30, 2013, respectively.
Approximately 39% and 43% of the Company’s Net sales during the three and six month periods ended March 30, 2014, respectively, and 37% and 44% of the Company’s Net sales during the three and six month periods ended March 31, 2013, 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 collectability 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 units recognized by the Company during the three and six month periods ended March 30, 2014 was $11,337 and $17,931, respectively. Total stock compensation expense associated with restricted stock units recognized by the Company during the three and six month periods ended March 31, 2013 was $11,515 and $14,759, respectively.
The Company granted approximately 22 and 436 restricted stock units during the three and six month periods ended March 30, 2014, respectively. The 436 restricted stock units granted during the six months ended March 30, 2014 consist of 90 restricted stock units that vested immediately and 53 time-based restricted stock units that vest over a one year period. The remaining 293 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 $30,086.
The Company granted approximately 62 and 636 restricted stock units during the three and six month periods ended March 31, 2013, respectively. The 636 restricted stock units granted during the six months ended March 31, 2013 consist of 22 time-based restricted stock units that vest over a one year period. Of the remaining 614 restricted stock units, 90 are performance-based and vest over a one year period and 524 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 $28,642.
The fair value of 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 units during the six months ended March 30, 2014 is as follows:

Restricted Stock Units
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Fair Value
at Grant
Date
Non-vested restricted stock units at September 30, 2013
 
1,118

 
$
39.11

 
$
43,723

Granted
 
436

 
69.00

 
30,086

Vested
 
(949
)
 
39.62

 
(37,603
)
Non-vested restricted stock units at March 30, 2014
 
605

 
$
59.84

 
$
36,206


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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SPECTRUM BRANDS HOLDINGS, 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 six month periods ended March 30, 2014 and March 31, 2013:
 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Russell Hobbs
 
 
 
 
 
 
 
Integration costs
$
—

 
$
880

 
$
—

 
$
1,935

Employee termination charges
—

 
152

 
—

 
259

Legal and professional fees
—

 
10

 
—

 
90

Russell Hobbs Acquisition and integration related charges
$
—

 
$
1,042

 
$
—

 
$
2,284

HHI Business
 
 
 
 
 
 
 
Legal and professional fees
892

 
6,489

 
1,689

 
20,986

Integration costs
3,049

 
3,563

 
6,178

 
3,677

Employee termination charges (credits)
(230
)
 
90

 
(19
)
 
90

HHI Business Acquisition and integration related charges
$
3,711

 
$
10,142

 
$
7,848

 
$
24,753

 
 
 
 
 
 
 
 
Liquid Fence
1,177

 
—

 
1,705

 
—

Shaser
205

 
153

 
578

 
4,373

FURminator
15

 
562

 
53

 
1,233

Other
1,173

 
100

 
1,600

 
168

Total Acquisition and integration related charges
$
6,281

 
$
11,999

 
$
11,784

 
$
32,811


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 six month periods ended March 30, 2014 and March 31, 2013 were principally 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.”

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


The components of Other comprehensive income (loss), net of tax, for the three and six month periods ended March 30, 2014 and March 31, 2013 are as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
2014
 
2013
 
2014
 
2013
Foreign Currency Translation Adjustments:
 
 
 
 
 
 
 
 
Gross change before reclassification adjustment
 
$
(2,625
)
 
$
(20,423
)
 
$
(2,850
)
 
$
(17,555
)
Net reclassification adjustment for (gains) losses included in earnings
 
—

 
—

 
—

 
—

Gross change after reclassification adjustment
 
(2,625
)
 
(20,423
)
 
(2,850
)
 
(17,555
)
Deferred tax effect
 
—

 
—

 
—

 
—

Deferred tax valuation allowance
 
—

 
—

 
—

 
—

Other Comprehensive Loss
 
(2,625
)
 
(20,423
)
 
(2,850
)
 
(17,555
)
Non-controlling interest
 
151

 
—

 
228

 
—

Comprehensive loss attributable to controlling interest
 
$
(2,776
)
 
$
(20,423
)
 
(3,078
)
 
(17,555
)
 
 
 
 
 
 
 
 
 
Derivative Hedging Instruments:
 
 
 
 
 
 
 
 
Gross change before reclassification adjustment
 
$
(1,814
)
 
$
1,498

 
$
(917
)
 
$
1,415

Net reclassification adjustment for (gains) losses included in earnings
 
(52
)
 
(16
)
 
883

 
427

Gross change after reclassification adjustment
 
(1,866
)
 
1,482

 
(34
)
 
1,842

Deferred tax effect
 
400

 
(1,079
)
 
(112
)
 
(1,129
)
Deferred tax valuation allowance
 
(110
)
 
429

 
36

 
365

Other Comprehensive Income (Loss)
 
$
(1,576
)
 
$
832

 
$
(110
)
 
$
1,078

 
 
 
 
 
 
 
 
 
Defined Benefit Pension Plans:
 
 
 
 
 
 
 
 
Gross change before reclassification adjustment
 
$
(186
)
 
$
(901
)
 
$
(591
)
 
$
(1,590
)
Net reclassification adjustment for losses included in Cost of goods sold
 
153

 
327

 
306

 
654

Net reclassification adjustment for losses included in Selling expenses
 
78

 
41

 
156

 
81

Net reclassification adjustment for losses included in General and administrative expenses
 
156

 
152

 
312

 
304

Gross change after reclassification adjustment
 
201

 
(381
)
 
183

 
(551
)
Deferred tax effect
 
(59
)
 
219

 
(74
)
 
243

Deferred tax valuation allowance
 
—

 
12

 
—

 
12

Other Comprehensive Income (Loss)
 
$
142

 
$
(150
)
 
$
109

 
$
(296
)
 
 
 
 
 
 
 
 
 
Total Other Comprehensive Loss, net of tax
 
$
(4,210
)
 
$
(19,741
)
 
$
(3,079
)
 
$
(16,773
)


4
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share of the Company for the three and six month periods ended March 30, 2014 and March 31, 2013 is calculated based upon the following number of shares:

 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Basic
52,699

 
52,082

 
52,556

 
51,920

Effect of common stock equivalents
294

 
—

 
294

 
—

Diluted
52,993

 
52,082

 
52,850

 
51,920



11
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


For the three and six month period ended March 31, 2013, the Company has not assumed any dilution associated with outstanding common stock equivalents as the impact would be antidilutive due to the loss reported. The dilutive impact of common stock equivalents would have been 694 shares for both the three and six month periods ended March 31, 2013, if not for the GAAP losses reported.

5
INVENTORIES
Inventories for the Company, which are stated at the lower of cost or market, consist of the following:
 
 
March 30, 2014
 
September 30, 2013
Raw materials
$
122,211

 
$
97,290

Work-in-process
42,641

 
40,626

Finished goods
561,006

 
495,007

 
$
725,858

 
$
632,923


6
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
 
Total
Goodwill:
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
$
333,500

 
$
714,724

 
$
239,077

 
$
189,371

 
$
1,476,672

Additions
—

 
3,456

 
—

 
7,046

 
10,502

Effect of translation
25

 
(8,186
)
 
611

 
—

 
(7,550
)
Balance at March 30, 2014
$
333,525

 
$
709,994

 
$
239,688

 
$
196,417

 
$
1,479,624

Intangible Assets:
 
 
 
 
 
 
 
 
 
Trade names Not Subject to Amortization
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
$
547,353

 
$
330,771

 
$
216,426

 
$
83,500

 
$
1,178,050

Additions
—

 
—

 
—

 
5,100

 
5,100

Effect of translation
3,498

 
38

 
1,541

 
—

 
5,077

Balance at March 30, 2014
$
550,851

 
$
330,809

 
$
217,967

 
$
88,600

 
$
1,188,227

Intangible Assets Subject to Amortization
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013, net
$
440,776

 
146,461

 
$
245,227

 
$
152,652

 
$
985,116

Additions
—

 
—

 
238

 
21,800

 
22,038

Amortization during period
(17,493
)
 
(7,383
)
 
(10,783
)
 
(5,044
)
 
(40,703
)
Effect of translation
696

 
(1,070
)
 
624

 
—

 
250

Balance at March 30, 2014, net
$
423,979

 
$
138,008

 
$
235,306

 
$
169,408

 
$
966,701

Total Intangible Assets, net at March 30, 2014
$
974,830

 
$
468,817

 
$
453,273

 
$
258,008

 
$
2,154,928


During the six month period ended March 30, 2014, the Company recorded an adjustment of $3,456 to goodwill to finalize the purchase accounting for the acquisition of the residential hardware and home improvement business (the "HHI Business") from Stanley Black & Decker, Inc. ("Stanley Black & Decker"). The adjustment related to changes in the valuation of working capital accounts and deferred taxes based on the final determination of fair value. These adjustments were not retrospectively applied to the opening balance sheet as the amounts were deemed immaterial.
During the six month period ended March 30, 2014, the Company recorded additions to goodwill and intangible assets related to the acquisition of Liquid Fence. See Note 15 "Acquisitions," for further information.

12
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


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; 17 years for technology assets related to the Home and Garden segment; 15 to 20 years for customer relationships of the Global Batteries & Appliances and Home and Garden segments; 20 years for customer relationships of the Hardware & Home Improvement 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:
 
 
March 30,
2014
 
September 30,
2013
Technology Assets Subject to Amortization:
 
 
 
Gross balance
$
192,180

 
$
172,105

Accumulated amortization
(48,160
)
 
(39,028
)
Carrying value, net
$
144,020

 
$
133,077

Trade Names Subject to Amortization:
 
 
 
Gross balance
$
171,362

 
$
171,572

Accumulated amortization
(52,846
)
 
(44,660
)
Carrying value, net
$
118,516

 
$
126,912

Customer Relationships Subject to Amortization:
 
 
 
Gross balance
$
888,630

 
$
885,895

Accumulated amortization
(184,465
)
 
(160,768
)
Carrying value, net
$
704,165

 
$
725,127

Total Intangible Assets, net Subject to Amortization
$
966,701

 
$
985,116


Amortization expense for the three and six month periods ended March 30, 2014 and March 31, 2013 is as follows:
 
 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Proprietary technology amortization
$
4,737

 
$
4,435

 
$
9,144

 
$
7,539

Trade names amortization
4,111

 
4,303

 
8,225

 
7,898

Customer relationships amortization
11,673

 
11,295

 
23,334

 
21,720

 
$
20,521

 
$
20,033

 
$
40,703

 
$
37,157


The Company estimates annual amortization expense of intangible assets for the next five fiscal years will approximate $82,000 per year.


13
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


7
DEBT
Debt consists of the following:
 
 
March 30, 2014
 
September 30, 2013
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan, due September 4, 2017 (Tranche A)
$
834,062

 
3.0
%
 
$
850,000

 
3.0
%
Term Loan, due September 4, 2019 (Tranche C)
513,712

 
3.6
%
 
300,000

 
3.6
%
CAD Term Loan, due December 17, 2019
75,862

 
5.0
%
 
81,397

 
5.1
%
Term Loan, due December 17, 2019 (Tranche B)
—

 
—
%
 
513,312

 
4.6
%
Euro Term Loan, due September 4, 2019
309,172

 
3.8
%
 
—

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

 
6.4
%
 
520,000

 
6.4
%
6.625% Notes, due November 15, 2022
570,000

 
6.6
%
 
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
167,500

 
2.5
%
 
—

 
5.7
%
Other notes and obligations
50,381

 
7.1
%
 
28,468

 
8.5
%
Capitalized lease obligations
97,004

 
6.2
%
 
67,402

 
6.2
%
 
$
3,437,693

 
 
 
$
3,230,579

 
 
Original issuance discounts on debt
(8,181
)
 
 
 
(11,716
)
 
 
Less: current maturities
119,273

 
 
 
102,921

 
 
Long-term debt
$
3,310,239

 
 
 
$
3,115,942

 
 
The Company has the following debt instruments outstanding at March 30, 2014: (i) a senior secured term loan pursuant to a senior credit agreement (the “Senior Credit Agreement”) which consists of $834,062 principal due September 4, 2017 (“Tranche A”), $513,712 principal due September 4, 2019 (“Tranche C”), $75,862 Canadian dollar denominated principal due December 17, 2019 ("CAD Term Loan") and $309,172 Euro denominated principal due September 4, 2019 ("Euro Term Loan") (together, the “Term Loan”); (ii) $300,000 6.75% unsecured notes (the “6.75% Notes”); (iii) $520,000 6.375% unsecured notes (the “6.375% Notes”); (iv) $570,000 6.625% unsecured notes (the “6.625% Notes”); and (v) a $400,000 asset based lending revolving credit facility (the “ABL Facility”).
Term Loan
On December 18, 2013, the Company amended the Term Loan, issuing two tranches maturing September 4, 2019 which provide for borrowings in aggregate principal amounts of $215,000 and €225,000. The proceeds from the amendment were used to refinance a portion of the Term Loan (formerly Tranche B) which was scheduled to mature December 17, 2019, in an amount outstanding of $513,312 prior to refinancing. The $215,000 additional U.S. dollar denominated portion was combined with the existing Tranche C maturing September 4, 2019. The Company recorded accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs related to the refinancing of the Term Loan totaling $9,216 as an adjustment to interest expense during the six month period ended March 30, 2014.
The additional Tranche C and Euro Term Loan debt were issued at a .125% discount and recorded net of the discount incurred. Of this discount, $510 is reflected as an adjustment to the carrying value of principal, and is being amortized with a corresponding charge to interest expense over the remaining life of the debt, and the remainder of $146 is reflected as an increase to interest expense during the six month period ended March 30, 2014. In connection with the refinancing of a portion of the Term Loan the Company recorded $553 and $7,074 of fees during the three and six month periods ended March 30, 2014, respectively, of which $5,143 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 $1,931 reflected as an increase to interest expense during the six month period ended March 30, 2014.

14
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


6.375% Notes and 6.625% Notes
In connection with the registration of the 6.375% Notes and the 6.625% Notes that were assumed on December 17, 2012 to finance the acquisition of the HHI Business, the Company recorded $102 and $252 of fees during the three and six month periods ended March 30, 2014, respectively. The $252 was 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 6.375% Notes and the 6.625% Notes.
ABL Facility
In connection with the December 18, 2013 amendment of the Term Loan, the Company amended the ABL Facility to obtain certain consents to the amendment of the Senior Credit Agreement. In connection with the amendment, the Company incurred fees and expenses that are included in the amounts recorded above related to the amendment of the Term Loan.
As a result of borrowings and payments under the ABL Facility, at March 30, 2014, the Company had aggregate borrowing availability of approximately $123,940, net of lender reserves of $8,559 and outstanding letters of credit of $49,942.

8
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) are as follows:
 

15
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


Asset Derivatives
 
 
March 30,
2014
 
September 30,
2013
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contracts
Receivables—Other
 
$
252

 
$
416

Commodity contracts
Deferred charges and other
 
55

 
3

Foreign exchange contracts
Receivables—Other
 
1,950

 
1,719

Foreign exchange contracts
Deferred charges and 
other
 
34

 
—

Total asset derivatives designated as hedging instruments under ASC 815
 
 
2,291

 
2,138

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
Foreign exchange contracts
Receivables—Other
 
64

 
143

Total asset derivatives
 
 
$
2,355

 
$
2,281


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
 
 
March 30,
2014
 
September 30,
2013
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contracts
Accounts payable
 
$
219

 
$
450

Foreign exchange contracts
Accounts payable
 
4,832

 
4,577

Foreign exchange contracts
Other long-term  liabilities
 
228

 
65

Total liability derivatives designated as hedging instruments under ASC 815
 
 
$
5,279

 
$
5,092

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
Commodity contract
Accounts payable
 
46

 
55

Foreign exchange contracts
Accounts payable
 
2,236

 
5,323

Total liability derivatives
 
 
$
7,561

 
$
10,470

 
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 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 March 30, 2014, pretax:
 

16
Table of Contents
SPECTRUM BRANDS HOLDINGS, 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
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
$
(999
)
 
Cost of goods sold
 
$
221

 
Cost of goods sold
 
$
(203
)
Foreign exchange contracts
(34
)
 
Net sales
 
56

 
Net sales
 
—

Foreign exchange contracts
(781
)
 
Cost of goods sold
 
(225
)
 
Cost of goods sold
 
—

Total
$
(1,814
)
 
 
 
$
52

 
 
 
$
(203
)

 The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the six month period ended March 30, 2014, 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
$
69

 
Cost of goods sold
 
$
(48
)
 
Cost of goods sold
 
$
—

Foreign exchange contracts
147

 
Net sales
 
121

 
Net sales
 
—

Foreign exchange contracts
(1,133
)
 
Cost of goods sold
 
(956
)
 
Cost of goods sold
 
—

Total
$
(917
)
 
 
 
$
(883
)
 
 
 
$
—


The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended March 31, 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
$
(2,186
)
 
Cost of goods sold
 
$
195

 
Cost of goods sold
 
$
(36
)
Foreign exchange contracts
168

 
Net sales
 
219

 
Net sales
 
—

Foreign exchange contracts
3,516

 
Cost of goods sold
 
(398
)
 
Cost of goods sold
 
—

Total
$
1,498

 
 
 
$
16

 
 
 
$
(36
)

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the six month period ended March 31, 2013, pretax:
 

17
Table of Contents
SPECTRUM BRANDS HOLDINGS, 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
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
$
(2,418
)
 
Cost of goods sold
 
$
98

 
Cost of goods sold
 
$
(82
)
Foreign exchange contracts
666

 
Net sales
 
340

 
Net sales
 
—

Foreign exchange contracts
3,167

 
Cost of goods sold
 
(865
)
 
Cost of goods sold
 
—

Total
$
1,415

 
 
 
$
(427
)
 
 
 
$
(82
)


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 March 30, 2014 and March 31, 2013, 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 (Loss)
Recognized in
Income on Derivatives
2014
 
2013
 
Commodity contracts
$
3

 
$
—

 
Cost of goods sold
Foreign exchange contracts
(148
)
 
1,788

 
Other expense, net
Total
$
(145
)
 
$
1,788

 
 
During the six month periods ended March 30, 2014 and March 31, 2013, 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 (Loss)
Recognized in
Income on Derivatives
2014
 
2013
 
Commodity contracts
$
(61
)
 
$
—

 
Cost of goods sold
Foreign exchange contracts
648

 
(2,311
)
 
Other expense, net
Total
$
587

 
$
(2,311
)
 
 
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 $5 at both March 30, 2014 and September 30, 2013.
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 March 30, 2014 and September 30, 2013, the Company had posted cash collateral of $0 and $450, respectively, related to such liability positions. In addition, at March 30, 2014 and September 30, 2013, the Company had no posted standby letters of credit related to such liability positions. The cash

18
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


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 March 30, 2014 and September 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 March 30, 2014, the Company had a series of foreign exchange derivative contracts outstanding through September 2014 with a contract value of $223,071. The derivative net loss on these contracts recorded in AOCI by the Company at March 30, 2014 was $2,389, net of tax benefit of $686. At March 30, 2014, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $2,238, 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 March 30, 2014, the Company had a series of zinc swap contracts outstanding through June 2015 for 7 tons with a contract value of $13,717. At March 30, 2014, the Company had a series of brass swap contracts outstanding through June 2015 for 1 ton with a contract value of $5,731. The derivative net gain on these contracts recorded in AOCI by the Company at March 30, 2014 was $45, net of tax expense of $36. At March 30, 2014, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $4, 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 March 30, 2014 and September 30, 2013, the Company had $120,531 and $108,480, 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 March 30, 2014, the Company had a series of such swap contracts outstanding through April 2014 for 15 troy ounces with a contract value of $295. At September 30, 2013, the Company had a series of such swap contracts outstanding through April 2014 for 45 troy ounces with a contract value of $980.

19
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)



9
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s net derivative portfolio as of March 30, 2014, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of March 30, 2014 were as follows ((liability)/asset):
 
 
Level 1    
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
307

 
$
—

 
$
307

Foreign exchange contracts
—

 
2,048

 
—

 
2,048

Total Assets
$
—

 
$
2,355

 
$
—

 
$
2,355

Liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
(265
)
 
$
—

 
$
(265
)
Foreign exchange contracts
—

 
(7,296
)
 
—

 
(7,296
)
Total Liabilities
$
—

 
$
(7,561
)
 
$
—

 
$
(7,561
)
 
The Company’s net derivative portfolio as of September 30, 2013, contains Level 2 instruments and consists of commodity and foreign exchange contracts. The fair values of these instruments as of September 30, 2013 were as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
419

 
$
—

 
$
419

Foreign exchange contracts
—

 
1,862

 
—

 
1,862

Total Assets
$
—

 
$
2,281

 
$
—

 
$
2,281

Liabilities:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
(505
)
 
$
—

 
$
(505
)
Foreign exchange contracts
—

 
(9,965
)
 
—

 
(9,965
)
Total Liabilities
$
—

 
$
(10,470
)
 
$
—

 
$
(10,470
)

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):
 
 
March 30, 2014
 
September 30, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Total debt
$
(3,429,512
)
 
$
(3,568,284
)
 
$
(3,218,863
)
 
$
(3,297,411
)
Commodity swap and option agreements
42

 
42

 
(86
)
 
(86
)
Foreign exchange forward agreements
(5,248
)
 
(5,248
)
 
(8,103
)
 
(8,103
)

10
EMPLOYEE BENEFIT PLANS
Pension Benefits

20
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


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.
The Company’s results of operations for the three and six month periods ended March 30, 2014 and March 31, 2013 reflect the following pension and deferred compensation benefit costs:
 
 
Three Months Ended
 
Six Months Ended
Components of net periodic pension benefit and deferred compensation benefit cost
2014
 
2013
 
2014
 
2013
Service cost
$
852

 
$
825

 
$
1,703

 
$
1,549

Interest cost
2,612

 
2,464

 
5,224

 
4,827

Expected return on assets
(2,456
)
 
(2,196
)
 
(4,912
)
 
(4,392
)
Amortization of prior year service cost
16

 
—

 
32

 
—

Recognized net actuarial loss
371

 
520

 
742

 
1,039

Employee contributions
(16
)
 
(46
)
 
(31
)
 
(92
)
Net periodic benefit cost
$
1,379

 
$
1,567

 
$
2,758

 
$
2,931


The Company funds its U.S. pension plans in accordance with the Internal Revenue Service 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 March 30, 2014 and March 31, 2013 were as follows:
 
 
Three Months Ended
 
Six Months Ended
Pension and deferred compensation contributions
2014
 
2013
 
2014
 
2013
Contributions made during period
$
2,107

 
$
1,095

 
$
5,439

 
$
1,702


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 March 30, 2014 were $3,142 and $7,273, respectively. Company contributions charged to operations, including discretionary amounts, for the three and six month periods ended March 31, 2013 were $1,635 and $2,814, respectively.

11
INCOME TAXES
The Company's effective tax rates for the three and six month periods ended March 30, 2014 were 24% and 21%, respectively. The Company's effective tax rates for the three and six month periods ended March 31, 2013 were (246)% and (263)%, respectively. For the three and six month periods ended March 30, 2014, the Company's effective tax rate differs from the U.S. federal statutory rate of 35% principally due to: (i) income earned outside the U.S. that is subject to statutory rates lower than 35%; and (ii) a tax benefit recognized as a result of a Mexican tax law change. For the three and six month periods ended March 31, 2013, the Company's effective tax rate differs from the U.S. statutory rate 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 $3,359 and $49,291 as a result of the HHI Business acquisition. Additionally, in the three and six months ended March 31, 2013, the pretax consolidated income was close to break even, resulting in a higher effective tax rate.

21
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


During the six months ended March 30, 2014, the Company recorded a one-time reduction of $178,716 to its U.S. net operating loss carryforwards from actual and deemed repatriation of foreign earnings resulting from internal restructuring and external debt refinancing activities. The Company has a full valuation allowance on its U.S. net operating loss carryforwards; therefore there was no material impact on the Company’s quarterly or projected annual income tax expense.
The Company records 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 March 30, 2014 and September 30, 2013, the Company had $11,705 and $13,807, respectively, of unrecognized tax benefits related to uncertain tax positions. The Company also had approximately $3,892 and $3,671, 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 as Income tax expense.
As of March 30, 2014, 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.

12
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; and (iv) Hardware & Home Improvement.
The results of the HHI Business operations, excluding certain assets of Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation (the "TLM Business"), which was acquired on April 8, 2013, are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) since December 17, 2012. The results of the TLM Business operations are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) since April 8, 2013. The financial results related to the HHI Business are reported as a separate business segment, Hardware & Home Improvement.
The results of The Liquid Fence Company, Inc. ("Liquid Fence") since January 2, 2014 are included in the Company's Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Home and Garden segment.
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 six month periods ended March 30, 2014 and March 31, 2013 is as follows:
 

22
Table of Contents
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited) – (Continued)
(Amounts in thousands, except per share figures)


 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Net sales to external customers
 
 
 
 
 
 
 
Consumer batteries
$
211,353

 
$
199,747

 
$
475,838

 
$
470,728

Small appliances
152,487

 
154,647

 
369,269

 
374,707

Electric shaving and grooming
55,056

 
53,309

 
145,606

 
146,236

Electric personal care
61,976

 
60,929

 
149,488

 
142,972

Global Batteries & Appliances
480,872

 
468,632

 
1,140,201

 
1,134,643

Hardware & Home Improvement
266,930

 
256,677

 
545,309

 
290,659

Global Pet Supplies
159,391

 
160,436

 
288,533

 
300,199

Home and Garden
114,495

 
102,011

 
148,245

 
132,523

Total segments
$
1,021,688

 
$
987,756

 
$
2,122,288

 
$
1,858,024

 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
2014
 
2013
 
2014
 
2013
Segment profit
 
 
 
 
 
 
 
Global Batteries & Appliances
$
44,248

 
$
41,415

 
$
141,442

 
$
136,792

Hardware & Home Improvement
34,759

 
6,730

 
74,817

 
3,520

Global Pet Supplies
20,623

 
20,332

 
33,589

 
36,273

Home and Garden
23,059

 
20,792

 
21,849

 
16,531

Total segments
122,689

 
89,269

 
271,697

 
193,116

Corporate expense
15,992

 
17,076

 
30,013

 
25,343

Acquisition and integration related charges
6,281

 
11,999

 
11,784

 
32,811

Restructuring and related charges
7,809

 
7,903

 
12,301

 
14,491

Interest expense
47,393

 
60,355

 
104,380

 
130,242

Other expense, net
784

 
3,766

 
1,629

 
5,328

Income (loss) from continuing operations before income taxes
$
44,430

 
$
(11,830
)
 
$
111,590

 
$
(15,099
)

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 three and six month periods ended March 31, 2013.
 
March 30, 2014
 
September 30, 2013
Segment total assets
 
 
 
Global Batteries & Appliances
$
2,302,631

 
$
2,360,733

Hardware & Home Improvement
1,721,824

 
1,735,629

Global Pet Supplies
981,939

 
948,832

Home and Garden
615,871

 
500,559

Total segment assets
5,622,265

 
5,545,753

Corporate
65,313

 
80,920